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To browse Academia. edu and the wider internet faster and more securely, please take a few seconds to upgrade your browser. Foreign exchange, popularly known as 'Forex' or 'FX', is the trade of a single currency for another at a decided trade price on the over-the-counter OTC marketplace. wilson putra. this is something you have looking for when making serious decision about Dollar investment stuff. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link.
Need an account? Click here to sign up. Download Free PDF. Forex for Beginners: How to Make Money in Forex Trading Currency Trading Strategies. Rajiswaran Muniandi. Continue Reading Download Free PDF. Related Papers. How To Trade Dollar. Download Free PDF View PDF. All rights reserved. Table of Contents 1. Making Money in Forex Trading 2. What is Forex Trading 3. How to Control Losses with "Stop Loss" 4. How to Use Forex for Hedging 5. Advantages of Forex Over Other Investment Assets 6.
The Basic Forex Trading Strategy 7. Forex Trading Risk Management 8. What You Need to Succeed in Forex 9. Technical Analysis As a Tool for Forex Trading Success Developing a Forex Strategy and Entry and Exit Signals Thousands of people, all over the world, are trading Forex and making tons of money. Why not you? All you need to start trading Forex is a computer and an Internet connection. You can do it from the comfort of your home, in your spare time without leaving your day job.
And you don't need a large sum of money to start, you can trade initially with a minimal sum, or better off, you can start practicing with a demo account without the need to deposit any money. Once you consider to start Forex trading, one of the first things you need to do is choose a broker, choosing a reliable broker is the single most critical factor to Forex success.
There are dozens of online brokers out there but your best bet is to go with one of the leaders. Here are 2 online brokers that are reputable and are most suitable for beginners and pros alike: 1. Forex Inc - The best broker for US residents If the link doesn't work, copy and paste the following URL into a browser: www. eToro - accepts worldwide traders except US residents If the link doesn't work, copy and paste the following URL into a browser: www.
Now I would strongly encourage you to go and visit these broker's sites right now even if you are not yet decided whether you want to go into Forex trading. because each provides tons of free education materials, videos and best of all a demo account that allows you to practice Forex trading for free without the need to deposit any money.
Simply go to each of these brokers, register for a free demo account and start "trading" - by actually practicing and experiencing it firsthand you'll be able to decide whether Forex trading is for you.
In any case, before starting to trade for real, it is advisable that you practice with a demo account. Once you build some skill and feel more comfortable with the system you can start trading gradually for real money. Now which of the two brokers you should choose? while both are reputable and reliable they do have some differences. For starter if you are a US resident you should choose Forex Inc, as eToro does not accept US residents.
Here is a summary of the specific advantages of each of them. Choose based on your personal preferences: Forex Inc www. It has several different account levels that make it easy for anyone to open an account. Forex Inc is an excellent broker suitable for beginners and pros alike. eToro www. You can also communicate with other traders including the top traders. What is Forex Trading Foreign exchange, popularly known as 'Forex' or 'FX', is the trade of a single currency for another at a decided trade price on the over-the-counter OTC marketplace.
In essence, Forex currency trading is the act of simultaneously purchasing one foreign currency whilst selling another, mainly for the purpose of speculation. Foreign currency values increase appreciate and drop depreciate towards one another as a result of variety of factors such as economics and geopolitics. The normal objective of FX traders is to make money from these types of changes in the value of one foreign currency against another by actively speculating on which way foreign exchange rates are likely to turn in the future.
In contrast to the majority of financial markets, the OTC over-the-counter currency markets does not have any physical place or main exchange and trades hours every day via a worldwide system of companies, financial institutions and individuals. Because of this, currency rates are continuously rising and falling in value towards one another, providing numerous trading choices. One of the important elements regarding Forex's popularity is the fact that currency trading markets usually are available hours a day from Sunday evening right through to Friday night.
Buying and selling follows the clock, beginning on Monday morning in Wellington, New Zealand, moving on to Asian trade spearheaded from Tokyo and Singapore, ahead of going to London and concluding on Friday evening in New York. The fact that prices are available to deal hours daily makes certain that price gapping whenever a price leaps from one level to another with no trading between is less and makes sure that traders could take a position each time they desire, irrespective of time, even though in reality there are particular 'lull' occasions when volumes tend to be below their daily average which could widen market spreads.
Forex is a leveraged or margined item, which means that you are simply required to put in a small percentage of the full value of your position to set a foreign exchange trade. Because of this, the chance of profit, or loss, from your primary money outlay is considerably greater than in conventional trading.
Currencies are designated by three letter symbols. The first currency is the base currency and the second currency is the quote currency. The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. As we see, the US dollar is represented in all currency pairs, thus, if a currency pair contains the US dollar, this pair is considered a major currency pair. Pairs which do not include the US dollar are called cross currency pairs, or cross rates.
One of the most interesting movements in the Forex market involving the British pound took place in the September 16, That day is known as Black Wednesday with the British Pound posting its biggest fall. the US dollar currency pairs. The general reasons for this "sterling crisis" are said to be the participation of Great Britain in the European currency system with fixed exchange rate corridors; recently passed parliamentary elections; a reduction in the British industrial output; the Bank of England efforts to hold the parity rate for the Deutschemark, as well as a dramatic outflow of investors.
At the same time, due to a profitability slant, the German currency market became more attractive than the British one. All in all, the speculators were rushing to sell pounds for Deutschemarks and for US dollars. As a result, the pound returned to a floating exchange rate.
Another intriguing currency pair is the US dollar vs. It is traded most actively during sessions in Asia. From the mid 80's the Yen ratings started rising actively versus the US Dollar.
In the early 90's a prosperous economic development turned into a standstill in Japan, the unemployment increased; earnings and wages slid as well as the living standards of the Japanese population. And from the beginning of the year , this caused bankruptcies of numerous financial organizations in Japan. As a consequence, the quotes on the Tokyo Stock Exchange collapsed, a Yen devaluation took place, thereafter, a new wave of bankruptcies among manufacturing companies began.
The above started an Asian crisis in the years that led a Yen crash. It resulted in a tumble of the Yen-US dollar pair from Yens for one US dollar to The global economic crisis touched almost all fields of human activities.
Forex currency market was no exception. Though, Forex participants central banks, commercial banks, investment banks, brokers and dealers, pension funds, insurance companies and transnational companies were in a difficult position, the Forex market continues to function successfully, it is a stable and profitable as never before. The financial crisis of has led to drastic changes in the world's currencies values.
During the crisis, the Yen strengthened most of all against all other currencies. Neither the US dollar, nor the euro, but the Yen proved to be the most reliable currency instrument for traders. One of the reasons for such strengthening can be attributed to the fact that traders needed to find a sanctuary amid a monetary chaos. Ask and Bid When traders want to place an order on the Forex market they should be aware of the currency pair as well as the price of this pair. A Forex market price of a currency pair is denoted by two symbols, Ask and Bid, which have specific digital notations.
Consequently, a trader sells the currency standing second. Bid price is the lowest price in the quotation of the currency pair, at which a trader sells the currency standing first in the abbreviation of the currency pair. Respectively, a trader buys the currency standing second. Seem complicated? This means that you can buy 1 euro for 1. The difference between the Bid price and the Ask price is called spread.
The spread is actually the commission of the broker. The Spreads in Forex trading are actually very small compared to currency spreads at banks. A pip is the smallest price movement of a traded currency. It is very important that you understand what a pip is in the Forex trading because you will be using pips in calculating your profits and losses.. For most currencies a pip is 0. When a currency moves from a value of 1.
There is an exception for quotations for Japanese Yen against other currencies. For currencies in relation to Japanese Yen a pip is 0. A lot is the minimal traded amount for each currency transaction.
For regular accounts one lot equals , units of the base currency. However you can also open mini and micro accounts that allow trading in smaller lots. Understanding the Pip Spread - The spread is closely associated with the pip and has a major importance for you as a trader.
As mentioned above, It is the difference between the selling and the buying price of a currency pair. It is the difference in the bid and ask price.
The ask is the price at which you buy and the bid is the price at which you sell. In this case the spread is 3 pips. The pip spread is your cost of doing business here. In the case above it means you sustain a paper loss equal to 3 pips at the moment you enter the trade. Your contract has to appreciate by 3 pips before you break even. The lower the pip spread the easier is it for you to profit. Generally the more active and bigger the market, the lower the pip spread.
Smaller and more exotic markets tend to have a higher spread. Smaller accounts will generally have higher spreads than bigger regular accounts. From the profitability point of view it is important to find a broker offering a lower pip spread, however the low spread is not everything. More important is to choose a reputable and reliable broker. Most brokers will allow leverage.
This can heighten profits and losses and should be used wisely. How to Control Losses with "Stop Loss" Stop loss is a widely used order aiming mainly at limiting the possible losses in case of negative market movements. Stop loss is used only with open positions. When the market conditions are not favorable for a trader and the price has reached the level of the "Stop loss", the deal is closed automatically.
Therefore, Stop loss helps the trader to control losses and in case of failures to keep safe at least part of his deposit. If a trader does not use Stop loss orders, the position is closed by the broker when the sum of losses is equal to the sum of the deposit.
There are 3 types of Stop loss orders: fixed Stop loss, sliding Stop loss and combined Stop loss. Fixed Stop losses are set while opening positions. They cannot be changed until the deal is closed. Sliding stop losses, on the other hand, can be modified any time depending on the price movement. Another name for sliding Stop loss is Trailing stop, that can be modified either manually or automatically based on the traders' settings.
There are many discussions on whether it is necessary to use Stop losses or not. Some traders believe that Stop loss is essential in trading, emphasizing the ability of Stop losses to prevent the loss of the whole deposit. If the price is rapidly moving in a direction which does not correspond to the forecast, a deal that has not been closed in time can result in a significant loss. The opponents of Stop loss believe that this order can limit not only losses, but profits as well. In this case the position is closed prematurely with a loss while it could develop into a profit later on.
As a rule, the decision on whether to use Stop loss or not depends on the individual strategy and preferences of a particular trader.
Trailing stop is an order which its major function is to act as an automatic maintenance of an open position with continually shifting of the stop loss level depending on the price movement. A trader may open a bullish position and sets the gap from the current price to trailing stop in pips.
When the price goes upwards, the trailing stop follows it automatically sticking to the set gap. In case that the price goes down, then the trailing stop quote remains on the spot. In this way, a trader using a trailing stop has an opportunity to derive maximal profit at an ascending price with no regard to the set Take Profit value.
Furthermore, a trailing stop is a loss limiter. Here is an example: a trader opens a buy position at the price of 1. In case that the price starts to move upwards and exceeds the mark of 1. If the price turns down, the price does not change its position. As to a sell position opening, trailing stop behaves quite in the opposite.
The trader sets it a few pips higher. At a price descending motion the trailing stop shifts according to the set size. With the up-going price, the trailing stop does not move. While applying a trailing stop in Forex operations a trader will have to remove stop loss orders manually in line with increases in the trade profit.
Trailing stop sets a stop loss level automatically at the value the trader needs. A trailing stop is mainly used by traders who run trend trading, but can't follow the price moves continually. Trailing stop usage is also feasible at intraday trades, when quick reaction to price change is required.
Please note that trailing stops work only when the trading terminal is open. Once the terminal is switched off the stop loss is fixed at its current spot.
How to Use Forex for Hedging Hedging denotes safety and security. Hedging means the protection of a client's funds from unfavorable currency rate fluctuations. Account funds are fixed at their current price through conducting trades on Forex. Thus, hedging helps to ease exposure to currency rate changes risks, which helps to prevent the risk of currency rate fluctuations. As a matter of fact, hedging presupposes using one instrument in order to lower the risk related to unfavorable market factors impact on the price of another one directly associated with it.
Hedging can also be considered as a type of investment allowing to minimize price movements risks in the market. The hedging cost should be valued with regard to the possible losses in the event of not hedging. Here's a hedging example: a trader, who imports in a foreign currency, opens a buy trade with the currency of his trading account in advance, and when the real time of the currency purchase arrives to his bank, he closes the position.
And a trader, who exports in a foreign currency, opens a sell trade with the currency on his trading account beforehand, and at a the real moment of this currency purchase in his bank, he closes it. Advantages of Forex Over Other Investment Assets 1. Simple to comprehend and master - In a Forex trade we deal with just a pair of currencies 2. Low Minimum Investment - The Forex market requires less capital to start trading than most other markets. The initial investment could go very low, depending on the leverage offered by the broker.
This is a great advantage since Forex traders are able to keep their risk investment to the lowest level. Online Forex brokers offer "mini" and "micro" trading accounts with low minimum account deposit. We're not saying you should open an account with the bare minimum, but it does make Forex trading much more accessible to the average individual who doesn't have a lot of start-up trading capital. Trading starts when the markets open in Australia on Sunday evening, and ends after markets close in New York on Friday.
High Liquidity - Liquidity is the ability of an asset to be converted into cash quickly and without any price discount. In Forex this means we can move large amounts of money into and out of foreign currency with minimal price movement. Low Transaction Cost - In Forex, typically the cost of a transaction is built into the price. It is called the spread.
The spread is the difference between the buying and selling price. Leverage - Forex Brokers allow traders to trade the market using leverage. Leverage is the ability to trade more money on the market than what is actually in the trader's account. Profit Potential from Rising and Falling Prices - The Forex market has no restrictions for directional trading. This means, if you think a currency pair is going to increase in value; you can buy it, or go long.
Similarly, if you think it could decrease in value you can sell it, or go short.. No one can corner the market - The foreign exchange market is so huge and has so many participants that no single entity can control the market price for an extended period of time. Such a huge amount of a daily volume allows for an excellent price stability in most market conditions.
This means you likely will never have to worry about slippage as you would when trading stocks or commodities. The price you see quoted on your trading screen is the price you get. Market transparency and Instant execution - Market transparency is much greater in Forex than in stocks or commodities, this means it is easier to analyze the inner workings of the market and figure out what is driving it. Instantaneous order execution is another great advantage Forex has over other markets.
Retail Forex trading is generally done over the internet on all electronic platforms. The Forex market has no central exchange and was designed to be this way to facilitate large banks and allow for instant execution of transactions, this means no delays for you and extreme ease of execution. Price movements are highly predictable in the Forex market - Due to its highly speculative nature Forex price movements tend to over shoot and then correct back to the mean.
This means there are a number of repetitive patterns that are easily recognizable to the trader who is trained in price action analysis. Forex currency pairs generally spend more time in very strong up or down trends than other markets, this is also a huge advantage because it is generally much easier to trade a strongly trending market than a chaotic and consolidating market.
Now, if you were holding a futures position over night it is entirely possible that your stop got gapped around, in which case you would get filled at the next best price, which often will be extremely damaging to your trading account. Direct participation, difficult to manipulate or influence - Forex trading operates in a decentralized online electronic market for its participants: Banks, FCMs, hedge funds, governments, retail currency conversion houses and high worth net individuals.
Investors can interact directly with the market maker for pricing on a currency pair. Access is quicker and costs are lower than in other markets. Large market liquidity makes it very difficult for any one participant to manipulate or influence it.
Easier market analysis - Countries are more often stable than companies making it easier to predict their economic direction. Primary factors affecting demand and supply for Forex investment are interest rates and economic indicators such as GDP, trade balances and foreign investment.
This and other economic data released regularly determines demand and supply for currency pairs. Technology frontiers and investing - Technology enables the retail investor the ability to make better investment decisions through ready access to economic and political news events, to technical charting software and electronic trading platforms.
They also have transparent and safe access to their investment funds in segregated accounts so that the safety of their funds is guaranteed. Limited Risk - Despite the common perception about Forex being risky, it is easy to limit and reduce the risk if a trader chooses the right strategy.
In addition it should be mentioned that stops are much easier to control as well, that is why newbies have good chances to succeed even while doing their first steps as Forex investors and traders. No fees or middlemen - There are no commissions when trading on the Forex market. The retail brokers in this market are compensated through the bid-ask spread.
Businessmen can also spot currency trading which eliminates the middlemen and allows each person to trade directly with the market that is responsible for pricing on a certain currency pair. Not only does this expedite the process, it gives each trader more options and versatility.
The Basic Forex Trading Strategy The basic Forex strategy that is used by many traders of all experience levels, is Trend Following. This strategy is widely followed because of its simplicity to identify and trade and many times, strong trends can bail you out of an imperfect set of buy and sell rules.
Before we delve into the basics of Trend Following, it is important to first explain why trend trading is a popular strategy used by many new and experienced traders. Do you have the perfect Forex trading strategy? Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.
Figures 1. ISBN pbk. Foreign exchange futures. Foreign exchange market. C64 I have learned much from them about trading and about the human condition.
At the time, I am certain to have delivered a long-held admonition: 95 percent of what you read in economics will be either wrong or irrelevant. I am pleased to report that The Forex Trading Course falls into the 5 percent residual category of materials that are worth reading. In addition to satisfying those with a healthy obsession to work on improving their professional skills, The Forex Trading Course will force readers to think outside the box and to develop an appetite for the pursuit of knowledge about trading.
This, of course, is the most important aspect of the book and reminds me of an observation made by Sir Hugh Rigby, surgeon to King George V. What distinguishes a great surgeon is who knows more than other surgeons. In the interest of putting the reader a leg up, an understanding of the structure of exchange-rate regimes is essential. There are three distinct types of exchange-rate regimes—floating, fixed, and pegged—each with different characteristics and different results.
Both operate without exchange controls and are free-market mech- anisms for balance-of-payments adjustments. With a floating rate, a central bank sets a monetary policy but has no exchange-rate policy—the exchange rate is on autopilot. In consequence, the monetary base is determined domestically by a central bank. With both of these free-market, exchange-rate mechanisms, there cannot be conflicts between monetary and exchange- rate policies, and balance-of-payments crises cannot rear their ugly heads.
Indeed, under floating- and fixed-rate regimes, market forces act to automatically rebalance financial flows and avert balance-of-payments crises. Fixed and pegged rates appear to be the same. However, they are fundamentally different: pegged-rate systems often employ exchange controls and are not free-market mechanisms for international balance-of-payments adjustments. Pegged rates require a central bank to manage both the exchange rate and monetary policy. With a pegged rate, the monetary base contains both domestic and foreign components.
Unlike floating and fixed rates, pegged rates invariably result in conflicts between monetary and exchange- rate policies. Balance-of-payments crises erupt as a central bank begins to offset more and more of the reduction in the foreign component of the monetary base with domestically created base money.
When this occurs, it is only a mat- ter of time before currency speculators spot the contradictions between exchange-rate and monetary policies as they did in the Asian financial crisis of — and force a devaluation or the imposition of exchange controls.
Steve H. There are many reasons for its popularity. First, we are truly in an online revolution, powered by the globalization of the Internet.
The implications are profound. Individuals can no longer expect to work for one employer. Baby Boomers are facing the opportunity and challenge of post-retirement careers. The result has been a cacophony of information overload, instant gurus, and instant trading solu- tions that appeal to those looking for shortcuts to success.
These programs essen- tially confuse people and divert them from a realistic approach to training in forex trading. This book is written for the purpose of providing a getting started guide in forex trading.
It, however, is not only for the person new to forex, but for those who have tried to trade forex but received mixed results through trial and error. It is also for those who have experience in trading other markets and seek to apply that experience to forex. They will be able to build upon their experience and gain new insights into how to ap- proach forex.
Those who have achieved a level of initial success but seek to optimize their performance will find training strategies and tactics particularly useful.
The underlying premise of this book is that traders are not born—they evolve. Our goal is to sharpen the insights and the skills of the reader by providing both fundamental and technical knowledge that are common to successful traders. An underlying philoso- phy of this book is that successful forex trading requires a total approach that integrates fundamentals, technical analysis, and psychology. Each chapter topic is in essence a module of knowledge, which can be read individually or sequentially.
r Part I Chapters 1—9 focuses on the forces that move prices, also known as funda- mentals. The topics included in the fundamentals show the reader how to use fun- damental knowledge to arrive at trading decisions. The chapters provide insight on how currency price movements are affected by things like interest rates, interest rate differentials, trade-weighted indexes, commodities, housing data, China, and more. r Part II Chapters 10—15 focus on technical knowledge—how to read and analyze charts.
The reader will build specific knowledge about the components of technical analysis and how to evaluate price action in terms of classical and advanced tools in- cluding: support and resistance, retracement concepts, trend analysis, and volatility and momentum indicators. Nontraditional charting using renko and three-line break are featured. The final chapter includes questions that the reader should be able to answer at that point.
They are designed to help you assess how well you understand the material and guide you in finding and using valuable information for scan- ning currency conditions.
Ultimately, all knowledge needs to be actionable. It is my hope that experience of trying forex trading is enhanced by this book and that forex trading becomes a journey which is enjoyable for its enormous challenges and more profitable than it otherwise would be.
I applaud them for their courage to pursue the challenges of forex trading and I have learned much from them about how to teach forex with improved effectiveness. I must acknowledge the late Professor Aaron Wildavsky, at the Graduate School of Public Policy, who shaped my thinking skills more than 30 years ago into the tools of inquiry that allowed this book to emerge. He has conducted seminars in the United States, London, and Dubai as well as online training in all time zones. Cofnas founded www.
com in as the desk- top forex trading industry started to provide education and training in this field. com, a company providing forex education and global forex competitions. He has been in the financial service industry as an equity bro- ker, futures, and forex trader since He currently lives in Longwood, Florida, with his wife, Paula, where he conducts research on artificial intelligence programs using cellular automata and enjoys digital photography.
He has a daughter Paige, 25, and a son Paul, These forces are accepted by economists around the world as responsible for changes in the value of currencies.
The person learning to trade forex or trying to improve his or her trading will benefit from a gain of knowledge of these fundamentals. In fact, as you will see, fundamental forces act as leading indicators of currency movement. and global interest rates, economic growth, and market sentiment toward the dollar are the key ingredients that shape trading opportunities.
Part I provides basic knowledge on how these factors impact forex prices and how they can be used in se- lecting trading opportunities. The reader will learn why fundamentals are important to for- eign exchange forex traders as well as what kind of economic activity are most important in affecting price movements. These include interest rates, interest rate differentials, economic growth, and sentiment regarding the U. You have an opponent the market.
In game of chance the key feature is that everyone faces the same odds and therefore the same level of information. In these games, no player can change the odds. Playing forex, however, is not a game of odds.
Participants in forex trading do not share the same amount of information. In forex, this asymmetry of information results in advantages and disadvantages to trades. Some players have more information than the others. In forex, information about fundamental aspects of economies does not arrive simultaneously to all participants. The real important question is what kind of knowledge and information can improve trading performance. The search for an edge starts with a fundamental understanding of the nature of the forex market.
Having a foundation of knowledge in fundamentals is a first step in evolving into a winning trader. In getting acquainted with the forex market, most people start by looking only at price charts and price patterns. This is called technical analysis. moves those charts is called fundamental analysis. The goal of Part I is to identify the components of fundamental analysis in regard to forex and then provide a recipe for developing your own fundamental analysis of a currency pair. Why take time to look at forex fundamentals?
Why should fundamentals matter if a trade is done off a short-term time interval such as the 5-minute chart? The short answer is that one cannot separate the fundamentals from the technical analysis without expos- ing oneself to great distortions in understanding the forex market.
Foreign exchange is by its nature both fundamental and technical and reflect the increased globalization of the world economy. It is worthwhile to note the comments of the late, great Milton Friedman in a conversation with Dallas Fed president Richard Fisher: The really remarkable thing about the world is how people cooperate together. How somebody in China makes a little bit of your television set. Or somebody in Malaysia produces some rubber.
And that rubber is used by somebody in the United States to put on the tip of a pencil, or in some other way. What has happened has been an enormous expansion in the opportunities for cooperation.
html Consider the following: every transaction in the world settles in a currency. What makes forex fascinating as a market and as a trading vehicle is the fact that currencies provide an intimate linkage to the world economy. The cur- rency trader by putting on a currency trade becomes a participant the world economy.
The trader is participating as a speculator looking for a very short-term profit. The forex trader is riding on a global wave. Some will surf the waves, jumping on and off; oth- ers will stay in much longer and face the volatility. Forex trading becomes possible because the world is constantly assessing and reassessing the value of one currency against another. The forex currency trader is looking to tap into this stream of changing values.
The challenge is to find the right combination of tools that can assist the trader in finding high-probability profitable trades. In meeting this challenge, the first step is un- derstanding what moves currencies over time. In putting together a recipe for successful forex trading, knowing the fundamental chemistry of forex is highly recommended. Any- one who doubts this should simply look at daily headlines that evoke names and places that are part of the daily consciousness of a trader.
These names should be familiar to all traders: Bernanke, Fukui, Trichet, Xiaochuan. Mention the capitals Pyongdong, Baghdad, Tehran, and they evoke emotions of fear and crises.
These and other factors mix together and form the chemistry of forex, which results in shifts of senti- ment regarding the U. These shifts in sentiment cause price reactions and shift the balance between buyers and sellers.
They are one of the most im- portant factors that affect forex prices, as interest rates are the modern tool that central banks use as a throttle on their economies. The central banks of the world do not hesitate to use this important tool. In recent years almost all of the central banks increased inter- est rates. The European Central Bank raised interest rates eight times from December 6, , to June 13, , to a level of 4.
Interest rate increases do much more than slow down an economy; they also act as a magnet to attract capital to bonds and other interest-bearing instruments. There can be no doubt of the critical role interest rates play in forex price move- ments.
Some forex traders learned this lesson when the U. stock market sold off on February 27, It was precipitated by traders getting out of their carry trade posi- tions. Since billions of dollars were sold to be converted back into yen, equity markets were also affected because equity positions had to be sold to buy back the yen positions.
In Figure 1. dollar—Japanese yen USDJPY pair that day. FIGURE 1. Source: CQG Inc. All rights reserved worldwide. The housing sector in the United States, as well as other nations, provides a major share of wealth, consumer spending, and job creation.
Recent years have seen an international housing boom, with prices growing at more than 10 percent per year in many countries.
Canada, Norway, and Sweden shared more than 10 percent growth. The United States, in the face of a slowdown, saw prices up 7 percent.
This means that the value of homes around the world has doubled in the past 10 years, and as a result the increased wealth has fueled economic growth and consumer purchase. Closely watched are data releases that relate to housing activity.
The economic reasoning is that consumers start seeing a de- cline in housing values and restrain their consumer spending. One of the most important factors related to housing market strength in recent years has been mortgage equity with- drawals MEWs. As home prices have increased around the world, consumers take out loans against their mortgages, which stimulates consumption.
During periods of hous- ing booms, MEWs rise. MEWs have been, in fact, calculated to contribute to the growth of gross domestic product GDP. Figure 1. However, if MEWs slow down, this can portend a decline in con- sumption and a slowdown in the economy. If and when a slowdown in MEWs occurs, central bankers view it as lessening the likelihood of an interest rate increase. Source: Census Bureau, Bureau of Economic Analysis.
have fun. They may very well have used it to buy another house or not spent it at all, but added it to savings. Economists really are not certain. Carroll, an eco- nomics professor at Johns Hopkins University. The wealth effect, as the phenomenon is called, is twice as high for housing wealth as it is for stock wealth, Mr. Carroll and his associates said. At the end of , the data on MEWs showed a large decline from the year before in the United States. This was an early indicator of a slowdown in the U.
economy because it is estimated that two-thirds of the money from MEWs goes for consumption. So the forex trader seeing signs of an MEW slowdown can get ready for its effect to take place months in advance. The importance of housing data as a factor in shaping currency moves has been highlighted further by the events relating to subprime mortgages in the United States.
Economic forces ultimately worked to create mortgage delinquen- cies and a collapse in this market. For the forex trader it is a clear case where fundamen- tals affect the dollar. More housing weakness translates to weaker consumer demand and that translates to lowering the probability of interest rate increases.
HOUSING DATA AS A LEADING INDICATOR What is important to realize about fundamental analysis of housing sector data is that the trader can identify pending changes in trends and direction of the economy. By understanding housing data, one can develop a fun- damental viewpoint that leads to trading strategies before technical price patterns reflect the change. For example, in Table 1.
new housing starts. The year was a year of a high level of housing starts peaking in February at 2. After January , the data showed a decline, and by August , the decline in housing starts reached levels of The forex trader may not have picked the start of the slump by looking at this kind of data, but clearly would have seen that right after the start of new home starts were in a period of weakening.
When housing starts reached a peak and then started declining, it was difficult to be pro-dollar. In this case the new housing start data was a very reliable leading indicator that interest rates would not increase. A valuable source for assessing housing activity in the United States is the survey releases of the National Association of Housing Builders NAHB.
TABLE 1. The survey asks respon- dents to rate general economic and housing market conditions. The survey results in the summer of were at a peak on all HMI component measures. significant weakening in the housing market, which was an omen that increases in rates were increasingly not likely. At the end of , the HMI survey shows that the previous rate of decline in housing starts was slowing down.
This can be interpreted as possible bottoming out of the housing market. Using this data, those traders expecting an interest rate decrease would have to reconsider their confidence in a rate cut. The importance of housing data as an indicator for traders is reflected in the fact that new sources of data on housing are being developed for investors.
It is a bench- mark measure for housing prices. It tracks the value of single-family homes in the United States. Twenty metropolitan areas are tracked, and the index is measured monthly. The TABLE 1. last Tuesday of each month at 9 A.
is the release time of the announcement. Traders looking for leading indicators of a housing recovery will likely see it in increases in hous- ing prices tracked by this monthly index, posted at www. Detailed housing data can also be found at www. ALSO WATCH HOUSING EQUITY SECTOR STOCKS Another way for the forex trader to get a grip on housing data is to watch equities that are housing related.
For example, Lennar Homes is a leading home builder. Its stock price and earning forecasts offer good clues regarding the direction of the housing market and by inference interest rate policies Figure 1. Chart courtesy of Aspen Graphics, www. When these housing equity stocks start probing their weekly support, resistance, and trend lines, the trader will have clues as to a potential change in the housing market.
HOUSING DATA AND GREAT BRITAIN As discussed earlier, housing provides a strong indicator regarding interest rates throughout the world.
For example, as ended, the situation in Great Britain re- garding housing indicated a very strong housing market and therefore supported sen- timent of interest rate increases by the Bank of England.
In , housing prices in- flated by nearly 10 percent in Great Britain. Economist Diana Choyleva believed prices could rise by as much as 15 percent in In other words, expectations of an interest rate cut in Britain would require evidence of a slowdown in housing price increases.
The trader trading the British pound should watch British housing data very carefully and gain an edge in shaping trading strategy. A useful web site for staying on top of British housing data is www. SUMMARY Tracking changes in how an economy is growing is clearly an important part of gaining a sense of whether a currency will be strengthening or weakening.
The relationship of growth and currencies applies throughout the world. An increase in interest rates tends to strengthen the currency. The trader needs to go further than just knowing what the rate levels are. They trader needs to assess whether the economy is strengthening or weakening. Housing data is one of the most important areas that affect the decision to increase rates, keep rates the same, or decrease rates.
The forex trader should keep track of housing data when trading a currency. I Much progress has been made over the decades. In the period of through , inflation levels in industrialized countries were near the 7. A decade later, in , inflation levels ranged at the much lower level of 3 percent. Many central banks, in fact, announce inflation targets.
In fact, Bernard Bernanke, the successor to Alan Greenspan, has favored formal inflation targeting for the U. Central banks around the world monitor inflation and raise interest rates to try to slow down inflation. Central banks often include in their statements accompanying in- terest rate decisions that they will be vigilant over potential risks of inflation.
A fear of lingering inflation tends to generate in the market the anticipation of higher rates, and therefore works to support the buying of a currency. That is also why strong retail prices tend to undermine bond prices. Bondholders fear increased rates because they reduce the attractiveness of the bonds they hold, and the market lowers the prices of the bonds in order to equalize the yield of the old bonds with the new interest rates.
Inflation is the ever-present yet stealthy ghost that spooks the forex market and chal- lenges central banks. It is particularly difficult to track. even among the best economists on how to measure and detect inflation, and as a result there are many data sets relating to inflation. Central banks all over the world are trying to get an accurate answer to the question of what is true core inflation? This level of complexity in measuring inflation sets up the forex market for surprises when data comes along that inflation has not been contained.
Surprises can be ex- pected. For example, in December , when inflation data rose the highest in 30 years, it provided a boost in the dollar value as more traders were betting that the Fed would not decrease rates, or might even increase rates. The challenge to getting a true measure of inflation has also been a focus of recent activity in Britain.
The Office of National Statistics is introducing a new inflation calcu- lator that allows persons to calculate their own inflation measure! In other words, the other measures [such as the Retail Price Index RPI , the Retail Price Index excluding Mortgage Payments RPIX , and the Harmonized Index of Consumer Prices HCIP ] are still in force, but there is recognition that inflation needs more measures for an accurate assessment.
This confusion and debate over how to detect inflation in Great Britain un- derscores the issue is an international one. The Monetary Policy Committee of the Bank of England www. htm offers more details on this subject. D in economics to follow inflation data. There are many key measures of inflation that are tracked. But you have to check the central bank web sites.
The best way to do this is to ﬁrst check the web site of the central bank. They contain a great deal of information on inﬂation and inﬂation policy. Core inflation refers to the components of inflation that are more durable and not a result of temporary events, such as a hurricane.
Core inflation excludes food and energy prices, which vary temporarily. The PCE is now the favorite measure used by the Federal Reserve. However, in an at- tempt to be even more accurate, economists have gone further and developed a trimmed PCE, which is designed to give a truer view of inflation. Table 2. The Producer Price Index PPI is another key measure that is reported and tracked. The PPI measures what businesses charge one another for everything from iron ore and diesel fuel to cases of soda pop.
The U. Bureau of Labor Statistics generates PPI data for over different product categories, reflecting price pressures among differ- ent industries. A net PPI figure, of course, is more general in nature www.
In November , the PPI surprisingly rose 2 percent higher than the month before. The index had not risen by that much in a single month in more than 32 years, since the energy and stagflation crises of the mids. The fact that the PPI and the core infla- tion may differ adds to the uncertainty of the true condition of the economy regarding inflation. The Consumer Price Index CPI tracks consumer price changes given a fixed basket of goods and is part of the data set watched by traders in all countries.
Bureau of Labor Statistics provides comprehensive data on inflation and, in fact, tracks the vari- ous inflation rates. It conducts extensive sampling of 87 urban areas, 50, homes, and 23, retail establishments.
From time to time, the CPI basket changes to more accurately reflect new items TABLE 2. available in the economy. Tracking gold, the Commodity Research Bureau, and other commodity indexes and patterns will also help you get a handle on inflation. We look at the commodity-currency connection in Chapter 5. The main point here is that the forex trader needs to pay serious attention to inflation rates and expectations of inflation rates, because they are a key to discerning what the central banks fear, and a clue to whether they will raise interest rates.
Which Countries Have Inﬂation above the Target Rate? Take the indicators or economic data releases coming out and group them. Which are leading? Which are lagging? Which are coincident? Which countries have inﬂation rates over 2 percent? Which country has a central bank policy to increase inﬂation? Countries that are experiencing economic growth generate more jobs in their economy. Con- sumer spending therefore increases. In turn, the demand for housing increases as peo- ple have more disposable income and can better afford housing.
The transactions of a modern economy intimately involve global flows of capital as exports and imports are part and parcel of the vitality of an economy. The term economic growth is really a wide category. How is economic growth measured and tracked by the forex trader? The rate of economic growth or development of a country is mainly measured es- sentially by its gross domestic product GDP , so news about GDP becomes an essential ingredient in shaping trader sentiment about the value of a currency.
A slowdown or ex- pected slowdown in GDP translates into anticipation that interest rates will not go higher or may even decrease. The importance of economic development statistics in currency trading is evidenced by the fact that whenever an economic data release is scheduled, the currency market hes- itates in its price movements and then often moves vigorously when the news surprises the market.
In fact, one of the best times to trade is after a news release. Technical strate- gies for trading the news will be thoroughly explored in a later chapter. Traders can gain insight into economic growth and development data by following several sources that track global economic growth, such as the Organisation for Eco- nomic Co-operation and Development www.
org , the Group of Seven, www. ca , and the World Trade Organi- zation www. A growing econ- omy has new job creation and lower levels of employment. An economy that is slowing down or showing signs of slowing down has increased jobless claims, a declining rate of job creation, and higher unemployment levels. Whenever job data is released by governments, the forex markets react. There are many layers of information regarding employment data.
Manufacturing Employment Payroll Employment of Wage and Salary Workers Total Population of the United States U. Employment in Service-Producing Industries Civilian Unemployed for 15 Weeks and Over Civilian Unemployed for Less Than 5 Weeks Median Duration of Unemployment Unemployed: all civilian workers Unemployment Rate U. Employment in Construction U. Employment in Finance, Insurance, and Real Estate U. Employment in Goods-Producing Sectors U. Employment in Mining U.
Employment in Services U. Employment in Transportation and Public Utilities U. Employment in Retail Trade Industry U. Employment in Wholesale Trade Industry For more information on job data, visit the following web sites: www. com www. As long as the world is dependent on hydrocarbon-based energy, oil prices become a factor in stimu- lating or delaying economic growth.
In the near term, higher oil prices result in reducing economic growth expectations as well. Higher hydrocarbon prices portend increases in transportation costs and the per- unit cost of outputs in the economy, and therefore become an inflationary factor in the costs of goods. One of the most important as- pects of oil prices is that the market reaction to oil price increases often tends to overem- phasize its importance, particularly for the U.
econ- omy. translates into only a 3. A quick rise in oil prices, or even just the fear of a rise, offers trading opportuni- ties. Hurricane Katrina is a good example, as we saw some countries benefit from high crude oil prices, while others did not.
The result impacts currency prices as well. Closely tracking oil is important in shaping currency-trading strategies. See Figure 3. Oil has another impact. Oil-producing countries have amassed huge sums of money, and what they do with their increasing petrodollars impacts currency values. FIGURE 3. Source: CQG, Inc. Copyright © The economies of Organization of Petroleum Exporting Coun- tries OPEC nations are accumulating current account surplus due to petrodollars that are nearing 30 percent of their GDP!
If oil producers start to shift into nondollar assets such as the euro and pound sterling, the dollar fundamentally weakens. This has already begun. OPEC and Russia data showed that the dollar holdings were cut from 67 percent to 65 percent.
It was not a coincidence that the highs of the euro coincided with the last known shift of oil producers from dollars to euros. It is also not a coincidence that the Canadian dollar strengthens when oil prices increase and weakens when oil prices decline. We can see that crude oil patterns have had wide ranges and are likely to continue to have such swings.
This will benefit the forex trader. YIELD CURVE AND ECONOMIC GROWTH As Arturo Estrella and Frederic S. Source: Federal Reserve Bank of New York. Guessing what phase of the business cycle an economy is in is a great game. Is the economy going into a recession? However, sentiment about an expected recession is not stopped by lack of data. One of the most important measures that traders track is the shape of the yield curve. The yield curve is defined as the difference between the year Treasury note and the 3-month Treasury bill.
We see here the key role that interest rates play in reflecting expectations in the market. The Federal Reserve Bank of New York published an important study of the yield curve and recessions, which included a table relating probability of recession to the yield curve Table 3. A separate study see Figure 3.
We can see that the yield curve provides an important barometer for the future GDP growth. With regard to the yield curve, what is particularly important to track for the forex trader is the shape of the yield curve.
Is it flat? Is it upward sloping? Is it inverted? These are the key patterns to observe. In normal times, people are willing to pay more for longer-term maturities and bonds. This is a natural reaction to the fact that there is more risk over a longer period of time. But a slowdown or fear of a recession causes the market to demand higher interest rates for short-term borrowing.
The yield curve becomes inverted. Short-term interest rates become greater than longer-term rates! Note: The ﬁgure plots 4-quarter GDP growth together with the quarter term spread upper panel and the 1-quarter short rate lower panel lagged 4 quarters.
common interpretation is that when the yield curve inverts, a recession is coming. An inverted yield curve situation makes it difficult for the central banks to increase rates and more likely, in fact, that rates may decrease. Such a situation becomes negative for the dollar or any currency involved.
A flat yield curve indicates uncertainty about the economy. On December 27, , the yield curve inverted for a few days for the first time in five years. Also, there is no guarantee that an inverted yield curve will always predict a recession, but when the yield curve inverts, the forex trader should be very vigilant. Strategies favoring a weaker dollar or currency pair should be considered. The formula for those who want to set up an Excel spreadsheet is www.
federal reserve. bond, the 3-month yield, and the federal funds rate at www. On March 21, according to the current model, the probability of a recession due to the relationship between the year and 3-month bond yield curve was 52 percent.
Table 3. One month later, on April 21, the data showed that the probability of a recession was even lower, at These proba- bilities are the results of models. They are not guarantees but do give insights into what the professional economists are thinking. A further visualization of the relationship between a recession and the yield curve as developed by the Federal Reserve researchers is shown in Figure 3.
Obviously, a great FIGURE 3. Federal Funds Rate for 50 Percent Probability of Recession Occurring in Next 12 Months. Source: www. deal of work is being constantly done by economists to try to pinpoint the probability of a recession. At the same time, ask yourself the question: Is the dollar getting stronger or weaker?
Doing this assignment will help you sharpen your understanding of sentiment toward the dollar and whether that sentiment reﬂects economic fundamentals. This chapter provides a review of key China developments that every trader should know about. Watching Chinese economic developments is likely to become a daily pastime for many traders all over the world.
China is impacting every region of the world and every industry. This occurred after a 21 percent increase in imports from China to the 25 countries forming the European Union Financial Times, March 23, , p. exports to China grew almost percent, while U. exports to the rest of the world rose by only 16 percent. During that period, China accounted for roughly 25 percent of total U.
Fred Bergsten, Bates Gill, Nicholas R. Lardy, and Derek Mitchell, China: The Balance Sheet: What the World Needs to Know Now about the Emerging Superpower. New York: PublicAffairs, CHINA REVALUES YUAN: A TURNING POINT? On July 21, , after more than a decade of strictly pegging the renminbi to the U. dollar at an exchange rate of 8.
This was the beginning of a long-term strategy to integrate China into the world economy by easing the abil- ity of capital to flow into and out of the country.
The ability to exchange currency is a key factor in this process of integration. The revaluation signaled that China was begin- ning to allow the strengthening of its currency.
As of March , the renminbi value was at approximately 7. This means that it takes fewer renminbi 6 percent to con- vert to one dollar since revaluation. Many economic studies believe that a free-floating Chinese currency would appreciate by 20 percent. The five currencies are the U. dollar, the yuan, the yen, the Korean won, and the pound. However, the exact weighting of these currencies in the basket is not being disclosed and there may be other currencies included. Even though the Chinese currency known as the renminbi does not float on the mar- ket, and it is tied to the dollar within a narrow price, the influence of China on global currency flows is profound.
There is increasing pres- sure on China to allow the renminbi to increase in value, either through a wider managed envelope or through a full float. A full float is highly unlikely because the Chinese gov- ernment is not interested in giving up control of its economy, which would occur in a full float.
Any increase in the value of the renminbi could result in a significant benefit to exporters in the United States and Japan. In recent years, even speculation that the Chinese were about to allow the renminbi to increase in value led to price moves that strengthened the Australian dollar and the yen. China is becoming a global economic power that impacts the economic development of the world. It is the processing plant of the world, wherein many product components are imported and then put together.
But just over 40 percent of its trade is with Asia. Federal Reserve chairman Bernard Bernanke at the Chinese Academy of Social Sciences Beijing, China, December 15, : The emergence of China as a global economic power is one of the most important developments of recent decades.
For the past twenty years, the Chinese economy has achieved a growth rate averaging nearly 10 percent per year, resulting in a quintupling of output per person [see Figure 4. Currently, however, this process is not balanced. The Chinese export more than they import, and therefore accumulate a great deal of cash. dollars will have a major impact on the direction of the U. The Chinese State Admin- istration of Foreign Exchange SAFE is the key agency on the future of these dollar reserves.
For the forex trader, following Chinese developments and intentions on global trade and currency policies can be rewarding because it can point the way for new trad- ing opportunities. One big effect could result from a possible slowdown in the China economy. RMB 12, 10, 8, 6, 4, 2, 0 60 80 90 00 70 65 75 85 95 19 19 19 20 19 19 19 19 19 FIGURE 4.
Sources: National Bureau of Statistics, China Statistical Yearbook ; National Bureau of Statistics Plan Report. cover the U. budget deficit. An economic crisis in China has the potential to raise the U. interest rates, thereby placing major additional costs on U. businesses and individual consumers and producing dislocation in the U. It could also exacerbate Chinese domestic political tensions in an unpredictable fashion.
October 30, If a possible slowdown in China worries U. assets worries them even more. dollar around the world. This is historically an extremely high level that no other country has been able to sustain for any significant period.
The danger is that the U. economy could suffer a precipitous decline if the ability of the United States to borrow ever-greater amounts should end abruptly. Inter- est rates and inflation might suddenly soar as the dollar fell and the stock market crashed. Since the Chinese growth rate of over 10 percent per year GDP generates a voracious appetite for resources such as oil, copper, steel, iron ore, cement, and Ag complex, the countries that provide these resources experience a demand for their dollars.
When China buys copper from Australia, renminbi must be converted into Australian dollars. This provides support for the Australian dollar and the Australian economy.
Since China imports major resources such as copper from Australia, the aussie would be affected by a potential Chinese slowdown. Also, Japan, a significant trading partner of China, and its currency will often weaken or strengthen on expectations of a Chinese slowdown or sustained growth.
Chinese influence has begun to extend also to Africa. For example, Chinese exports are beginning to shift to the Suez Canal, rather than going around Africa. This is causing Turkey, Italy, and other nations to invest in Egypt to tap into Chinese export to Europe. In the coming years, the trading world will focus on whether China can control its growth rate, avoid inflation, and increase its currency float.
Traders need to keep track of key per- formance parameters such as Chinese GDP and inflation projections, as well as Chinese interest rate decisions. Between and July , China increased its interest rates to reach a level of 6. Whether this will work is unknown.
But as China, which is now the seventh largest econ- omy in the world and the second largest in purchasing power parity, becomes more of a consumer economy, the status of the Chinese economy will become easier to monitor. Companies such as Home Depot, Wal-Mart, Kingfisher British , and Best Buy are en- tering the Chinese market, and many other firms are acquiring Chinese companies. As a result, the coming years will provide more reliable data on Chinese consumer spending and growth.
The Shanghai Composite Index is very sensitive to whether the ren- minbi will strengthen. Their value would increase Wall Street Journal, March 22, , p. com and ﬁnd the latest value of the renminbi in the quote table that is supplied.
It is listed as the symbol CNY as shown in Figure 4. Is it getting stronger or weaker? FIGURE 4. Commodities are key resources in world growth, and they impact global inflation. This chapter focuses on what the forex trader should know about the commodity connection to currencies.
GOLD Gold price movements are important for currency traders to understand. But gold is also a commodity on its own, adding strength or weakness to currencies of countries that produce gold. South Africa, of course, is the leading producer of gold, but its currency, the rand, is not floating, so traders can look to the Australian dollar and the Canadian dollar for trading those cur- rencies when gold patterns provide trading opportunities.
Gold price action can also be a misleading guide to the currency trader. In recent years, Gold has attracted a great deal of investment demand from exchange-traded funds ETFs. In , ETFs were buying 20 tons of gold, and this rose to tons in The trader who looks at gold prices rising may interpret it as a reaction to the dollar, when it actually can be reacting as a function of investment demand.
Figure 5. Dollar Index USDX. Central banks have an important role regarding gold. They hold gold as part of their reserves see Figure 5. FIGURE 5. the USDX. reserves, and 15 percent is in gold. The key variable that can affect currency prices is whether a central bank will increase its gold reserves and thereby decrease its reserves of dollars or another currency.
As a result, rumors of central banks increasing gold reserves can disrupt currency prices. The idea that gold is important to currency moves is sound, but needs to be qualified and put in the context of world events. Sometimes gold acts as a store of value in times of crises. But the correlations between gold moves and currency moves provide a great deal of variation.
The trader needs to be vigilant regarding what factors are moving gold. At the end of the day, in the words of Phillip M. Source: Phillip M. Hildebrand, member of the Governing Board, Swiss National Bank. For example, copper plays an important part in the industrial development of China.
As the world grows, more copper is in demand. The forex trader has to ask the question: Who benefits from copper demand? To answer this question, we should look at who produces copper. Australia is the second largest producer of copper, and since its currency is freely floating, the Australian dollar can be traded. The commodity connection with currencies is particularly strong for the Australian dollar, the New Zealand dollar, and the Canadian dollar.
A closer look is presented in our section on currency personalities. CRB INDEX Traders looking to track the commodity and currency relationships should follow the Commodity Research Bureau CRB Index. The CRB Index consists of a basket of com- modities and provides a useful measure of potential inflationary pressure. When com- modity prices rise, this price increase can spread into the economy by increasing the costs of production and goods.
This inflationary tendency is closely watched by central banks. We can see in Figure 5. EQUITIES AND FOREX The relationship between currencies and equities is an area of interest that is becoming increasingly evident and important for traders to become knowledgeable about. In all equity markets around the world, exporting sectors benefit from a weaker home currency or the expectation of one.
DaimlerChrysler, Renault, and Peugot suffer share declines when the euro surges beyond expectations. As we noted in our section on China Chapter 4 , when there is specula- tion that the renminbi will increase, many Chinese equities increase in stock value due to expectations that their assets will increase in value. housing sector equities have a direct link to forex. Dow Jones Industrial Index suffered its worst day in four years, was a direct example of the link between equities and forex.
The sell-off was precipitated by a sudden fall in the dollar against the yen. This decline caused a liquidity crisis as hedge funds needed to sell equities to release funds to buy back their positions in the yen. See Chapter 1 for a discussion of this event. As globalization increases, strong currency moves will impact equity markets as it did on February In a real sense, tracking equities where their dollar earnings are important can benefit a trader in providing leading indicators of forex price moves.
The relationship between the dollar and the equity markets is further underscored by the Dow Jones Industrial Index reaching historic highs. This occurred as the USDX entered into an extended downtrend see Figure 5.
Why has the relationship been in- verse between the equity market and the value of the dollar? A deeper look reveals the answer. As the dollar value declines versus other currencies, the companies that export to the rest of the world benefit from increased sales, as exports become more attractive to foreign buyers.
Additionally, multinational corporations having assets abroad experi- ence an increase in the dollar value of those assets. the Dow. Are any of these commodities in a channel pattern? These reports are results of extensive profes- sionally designed surveys that are conducted on a regular basis in many countries. When these survey results are released, they provide important information on expecta- tions regarding the economy of a country.
This information is seriously assessed by cen- tral banks in determining their next moves in controlling inflation. Growth in business or consumer confidence has inflationary potential, while a decline in business or consumer confidence portends economic slowdown. When these releases come out, they move the market, especially if the results are surprising.
Beyond having an impact upon their release, confidence indicators can also provide a leading indicator for the forex trader. If business confidence is at its highest in years, the market will interpret it as positive for the currency because greater confidence in- dicates expansion and growth of an economy. Where there is expectation of expansion and growth, there is the concomitant expectation of interest rates not going lower and possibly going higher.
These confidence surveys are not perfect predictors of resulting currency moves. They are one of the most important ingredients in the mix of fundamen- tal forex factors.
Some of the important confidence indicators are listed on page 42 and should be fol- lowed. Their release times are tracked in the numerous economic calendars available, and strategies for trading these economic data releases should be learned by traders. It is interesting to note that every major country has its version of investor and busi- ness confidence indicators.
These form in effect a leading indicator about currency directions. de r IFO Business Climate Survey www. de r Institute of Supply Managers www. aspx U. Sentiment Indicators r Consumer Confidence www.
Unlocks access to the leading crypto trading analysis, signals and trading tools. World class development team backed by Quant developers and VC investors. Our Forex trading PDF, it is widely believed that forex is one of the biggest and most fluid or liquid asset markets in the world. Sometimes referred to as FX, currencies are traded 24 hours per day — 7 days per week.
In simple terms, refers to the process of exchanging one currency to another — and generally speaking, this will be for tourism, commerce, trading and many other reasons. In this forex trading PDF we are going to talk about what forex trading is and some of the commonly used terminology in the industry.
Essentially, it is the action of selling or buying foreign currencies. Of course, these are all used by banks, corporations and investors for a variety of reasons like profit, making a trade, exchanging foreign currencies and tourism. One of the major benefits with forex trading is that after opening a position, traders are able to put in place an automatic stop loss as well as at profit levels this closes the trade.
The forex market is a place to buy or sell against each other a variety of national currencies, globally. Wherever two foreign currencies are being traded, you can be sure that a forex market exists regardless of the time zone. In this section of our forex trading PDF, we are going to run through some of the most commonly used forex trading terminologies in the industry.
The pip represents the smallest amount possible a currency quote can alter. For instance, 0. The differentiation between the sale price and the purchase price of a currency pair is known as the spread. The least popular least commonly used currency pairs usually have a low spread.
In some cases, this can be even less than a pip. When trading the most commonly used currency pairs the spread is often at its lowest. The total value of the currency pair needs to surpass the spread in order for the forex trade to become profitable. In order for forex brokers to increase the number of trades available to its customers, they need to provide capital in the way of leverage. Before you can trade using leverage, you must sign up to a forex broker and open a margin account.
Contingent on the broker and the size of the position, leverage is usually capped at if you are a retail client non-professional trader. Some offshore forex brokers will offer much more than this if you are seeking higher limits. It is because of the aforementioned example that you should exercise caution when using leverage.
Should the worst possible scenario happen and your account falls below 0, you should contact your forex broker and ask for its policy on negative balance protection. The good news is that all forex brokers which are regulated by ESMA the European Securities and Markets Authority will be able to provide you with this extra level of protection, ensuring that you never become in debt with your broker.
Margins are a good way for traders to build up their exposure. Put simply, in order for a trader to maintain position and place a trade, the trader needs to put forward a specific amount of money first — this is the margin. Rather than being a transaction cost, the margin can be compared to a security deposit.
This will be held by the broker during an open forex trade. It is commonplace for forex brokers to give their customers access to leverage see above. In order for you to lower your risk of exposure and offset your balance, you might consider hedging. This is a procedure which involves traders selling and buying financial instruments.
When there are movements in currencies, a hedging strategy can reduce the risk of disadvantageous price shifts. The protection of this technique is often a short term solution. Traders often turn to hedge in a panic as a result of the financial media reporting volatility in currency markets. This is usually down to huge events like geopolitical turmoil conflict in the middle east , global health crisis COVID and of course the great financial crisis of To counteract negative price movements, market players will tactically take advantage of attainable financial instruments in the market.
This is hedging against risk in its truest form. Hedging will give you some flexibility when it comes to enhancing your forex trading experience, but there are still no guarantees that you will be totally protected from any losses or risks.
While it can take some time to get your head around heading in the forex markets, the overarching concept is that it presents both outcomes. That is to say, irrespective of which way the markets move, you will remain at the break-even point less some trading commissions. More specifically, the spot trade is a spot transaction, with reference to the sale or the purchase of a currency.
Essentially, spot forex is to both sell and buy foreign currencies. A good example of this is if you were to purchase a certain amount of South African rands ZAR , and exchange that for US dollars USD.
If the value of the ZAR increases, you are able to exchange your USD back to ZAR, meaning you get more money back in comparison to the amount you originally paid. CFD is basically a contract which portrays the price movement of financial instruments. So, without having to own the asset, you can still make the most of price movements, whilst also avoiding the need to sell or buy vast amounts of currency.
CFDs are also accessible in bonds, commodities , cryptocurrencies, stocks, indices and of course — forex. With a CFD you are able to trade in price movements, cutting out the need to buy them at all.
This section of our forex trading PDF is all about forex charts. When it comes to a MetaTrader platform, traders can use bar charts, line charts and candlestick charts. You can usually toggle between the different charts, depending on your preferences, fairly easily. The first record of the now-famous candlestick chart was used in Japan during the s and proved invaluable for rice traders.
These days, this price chart is without a doubt one the most popular amongst traders all over the world. Much like the OHLC bar chart see below , candlestick charts provide low, high, open and close values for a predetermined time frame.
Live forex traders love this chart due to its visual appearance and the range of price action patterns utilised. This allows you to gain a better understanding of how live trading works before you take any big financial risks in the market. As the title suggests, this one is a bar chart, and each time frame a trader is looking at will be displayed as a bar. In other words, if you are viewing a daily chart you will see that every bar equates to a full trading day. With this price chart, traders are able to establish who is controlling the market, whether it be sellers or buyers.
OHLC analysis was the starting block for the creation of the ever-popular candlestick charts please further down. It is a great tool for looking at the bigger picture when it comes to trends. The line chart arranges the close prices at the end of that time frame; so in this case, at the end of the day, the line will connect the closing price of that day.
In this section of our forex trading PDF, we are going to talk about the different ways in which you can sell and buy a forex position as well as things to look out for. When it comes to forex trading you can trade both short and long, but always make sure you have a good understanding of forex trading before embarking on trades. After all, forex trading can be a bit complex to begin with, especially when mixing long and short trades.
In a nutshell, going long is usually a term used for buying. So, when traders expect the price of an asset to rise, they will go long. When forex traders expect the price of an asset to fall, they will go short. This means benefiting from buying at a lesser value.
To achieve this, you simply need to place a sell order. The current exchange rate of a forex pair is always based on market forces. This will change on a second-by-second basis. As we noted earlier, you also need to take the spread into account, so there will always be a slight variation in pricing. For instance, if you exchange 1 USD for 17 ZAR, the sale and purchase price offered by your forex broker will be either side of that figure.
The currency pairs with the most notable supply and demand attached to them will be considered the most liquid in the forex market. The supply and demand aspect is thanks to the investment of importers, exporters, banks and traders — to name a few.
The most liquid currency pairs are therefore the ones in high demand. When you feel you are ready to take the plunge and begin live trading, you need to select a forex trading system. There is a vast amount of trading strategies for you to pick from. This is because investors, speculators, corporations and banks have been trading for decades.
In this part of the forex trading PDF, we are going to explain a few of the strategies available to you. If you want to buy and sell currency pairs from the comfort of your home or even via your mobile device , you will need to use a trading platform.
Otherwise referred to as a forex broker, there are literally hundreds of trading platforms active in the online space. This makes it extremely difficult to know which broker to sign up with. In the below sections of our forex trading PDF, we explain some of the considerations that you need to make.
You should also look out for analysis tools available to you. In some cases, this might be embedded, while some offer tools such as technical analysis and fundamental analysis. This is because it will save you a lot of leg work having to move between different sites and sources of information.
Some of the fastest and easiest trading platforms are MetaTrader 5 MT5 and MetaTrader 4 MT4. Crucially, both MT4 and MT5 are fast and receptive trading platforms, both providing live market data and access to sophisticated charts. It is essential before you begin trading seriously that you fully trust the trading platform you intend on using. This is especially the case if you intend on using a scalping strategy, for example.
However, if you like to trade, it is vital for your peace of mind and your finances that you are fully confident with the fast execution of data transfer.
This is also the case with the precision of quoted prices, and the speed of order processing. All of these things are going to help you to have a successful forex trading experience. To enable you to make the most of new opportunities, the ideal forex broker will be available to you 24 hours a day and 7 days a week, in line with the forex market opening hours.
To save you from having to request that your broker takes action for you, your forex broker should enable you to manage your account and your trades separately.
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