Let’s fix that. About this book The usual way Our way Time: 4 years Time: 45 minutes The popularity of the “Forex Basics & Secrets in 15 That’s why we have tried to distill all the 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 Forex Trading Manual - Free download as PDF File .pdf), Text File .txt) or read online for free FOREX TRADING MANUAL Beginners to Advance - Free download as PDF File .pdf), Text File .txt) or read online for free. FOREX TRADING MANUAL BEGINNERS TO ADVANCE This Forex Trading PDF is written in such a way that even complete beginners can understand it and learn from it. In other words, we have read tons of Forex books, opened and closed ... read more
If the close price is less than the open price this means for the particular time the value of the instrument is 4. At this level there is enough demand from buyers to keep the price from declining further. Resistance Resistance is opposite of support. It the the price level of a particular instrument where there is not enough demand from the buyer to keep the price to surpass this level. There are numerous ways to determine support and resistance.
If the price touches the support or resistance multiple time without breaking it the more strong the support or resistance becomes. A very basic strategy that traders use to trade using support and resistance is they buy at support and sell just before the resistance level.
In its basic form, traders draw a line below the price in an uptrend when the prices are moving upward in order to identify support areas valleys. Where as in downtrend when prices are moving down trader draw a line above the price to identify peaks resistance areas.
To create an ascending channel when prices are moving upward , we have to simply draw a parallel line above the price at the same angle of the upward trend line. To create a descending channel when prices are moving downward , we have to simply draw a parallel line below the price at the same angle of the downward trend line. The channel also shows the range at which the price fluctuate when in an uptrend or down trend.
Following chart shows how channel are created in an uptrend, downtrend and sideways when there is no clear trend and the prices are range bounded. Moving averages are plotted on price chart and smooth out the price action of the security on which it is plotted by simply taking average of number of periods. Moving averages are used better representation of long terms direction and filter out market noise slight fluctuations in price.
In addition moving average can be used to identify positional support and resistance levels. MACD Moving Average Convergence Divergence MACD Moving Average Convergence Divergence is an indicator which is used to indicate a new trend, either upward bullish or downward bearish. MACD chart usually have three sub-indicators which include the following The first is the faster moving average.
The second is the slower moving average of the first one. And the third is the number of bars which is used to calculate the MA of the difference between the faster and slower MA moving average. RSI Relative Strength Index RSI Relative Strength Index is an indicator which is used to identify overbought or oversold conditions of the financial instrument.
RSI chart has value from 0 to Normally, if the indicator line is below 20, this indicates oversold, while the value above 80 means overbought. Bollinger Bands Bollinger bands are indicator which is plotted on price chart and is used to measure market volatility. When the market is not trending and volatility is declining the band contracts.
When there is high volatility in the market the bands expand. Parabolic SAR Stop and Reversal Parabolic SAR Stop and Reversal is very basic indicator. It simply plots dots below the price if it is trending up or above to indicate potential reversals in price movement and vice versa. It generally believed that Parabolic SAR works better in a trending market.
This gives you edge and ensure you do not trade with trend against larger timeframe which might change trend of the shorter time frame. Once you found entry signal in you preferred timeframe it is recommended to make a strategic decision to go long or short based on the direct of the trend of upper timeframe. Follow chart shows how to incorporate multi timeframe analysis into your trading.
In simple terms it means that we study the health of the economy and if the economy seems to be in good state then its currency value will appreciate. The chief reason for this is that other counties and investors will have more trust in that country and additional capital will flow to the economy. A fundament analyst can focus on everything such as overall health of the economy, economic releases, IR interest rates , earnings, and production. According toInvestopeida. com economy could be defined as the following: "The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated.
The economy encompasses everything relating to the production and consumption of goods and services in an area. In a free market economy businesses are controlled by private sector non government including production and distribution of goods as well as services.
Moreover in free market economy prices are set by supply and demand. Free market or capitalist economy is opposite if planned or socialist economies in which manufacturing and distributions of goods and services are done as well as prices are set by the government.
Practically United States economy is blended economy as the government does handle some of the tasks which cannot be passed to private sector such as military, road building, education and law enforcement. It is important to understand that people usually prefer capitalism and free market economies therefore any move toward capitalism will generally result into market rally whereas move away from capitalism will be Fiscal Policy Fiscal policy is any policy relating to government spending and taxation.
Due to different reasons the economy under goes repeated growth and contraction which can be broken down as the following. org Fiscal policy is an effective tool at government disposal in regulating the business cycle. Interest rate and total supply of money have great impact on economy. Monetary policy is said to be 5. Trade Flows Flow of money in and out of a country due to global trade or commerce is called trade flows.
When a state imports goods this add money of the importing country to the market and generate demand for the currency of the exporting nation. This is due to the fact that goods are usually purchased in the currency of the country where they are manufactured or produced, so the country importing the goods must exchange their currency.
Capital Flows Flow of capital money as a result of investment into and out of countries is called capital flow. As in previous topic we discussed flow of capital as a result of international trade however capital flow results due to money flow due to investments such as stock and bond market, real estate and cross boarder acquisitions and mergers.
Current Account The formula for calculating the current account for a country is as following When describing imports and exports you will often hear about current account surplus or a current account deficit.
When a value of country exports are more than they are importing is known as current account surplus. Current account deficit is opposite of current account surplus. Portfolio investment refers to investment in stocks and bonds. Whereas, other investments includes investment in loans and bank accounts. As we discussed in our lesson on capital flows, when a market in a country is outperforming the markets in other areas of the world, money will flow into the country from foreigners seeking to participate in those out sized returns.
These capital flows are reflected in the country's capital account. This is the case whether we are talking about a country's stock market, bond market, real estate market etc. Countries with aggressive inflows or outflows of funds have straight influence on its currency.
If other things are kept constant then a country with major inflows create demand for the currency resulting into the appreciation in the value of the currency. Balance of Payment In simple terms balance of payment refers to sum of all the transaction by a country with rest of the world. There are numerous economic releases that are published every day to cover each economic release will be out of the scope of the book however some basic economic are briefly touched below.
Gross Domestic Product GDP which is also referred as Gross domestic income GDI is a gauge of national income and output of any countries economy. For this reason trader and other market participants closely watch Gross Domestic Product Number GDP. High rate of growth is a good indicator for the economy but if markets anticipate that the growth is not sustainable without excess inflation, participant might reach negatively.
You can read the analysis from different sources including Bloomberg. com and dailyfx. com are best services available free of cost. Non Farm Payrolls Non Farm Payrolls NFP , economic release is public each month on first Friday at NFP is released by the Bureau of Labor Statistics in United States which is meant to show the number of jobs added or vanished in the economy over the period of one month. As the name implies NFP does not include jobs concerning to farming industry.
When business are hiring people this means they are optimist about the future health of the economy. This is expressed in form of NFP. When you believe something can be done, really believe, your mind will find the ways to do it. Money Management rules help us protecting out equity and also make us profitable in long run.
com 6. In order words he has to be twice as successful to cover his draw down. Initial Stop Loss It is important to incorporate sensible risk management into trading. This can be achieved by setting stop loss which you can afford to lose on a trade without any substantial affect on the account equity. This greatly vary from strategy that one is trading and from traders to traders.
From what I have seen most traders risk way more than this on an individual trade basis, another large contributor to the high failure rate among traders. Risk to Reward Ratio Yet another way to add to your odds of profitability is to always trade with a higher risk to reward ratio.
This means you are more likely to make 3 times more than what you are risking per trade. Position sizing strategy can be classified into two broad categories martingale and anti martingale.
Martingale is a strategy for position sizing which increases the trade size as the trade suffer draw down or after a losing trade.
Anti-martingale strategy is opposite of martingale strategy, which increases position sizing after winning trade or when the trade moves in trader favor. Using fixed position sizing has many disadvantages it does not take into account the dollar value and volatility characteristics of the instrument being traded.
Moreover fixed lot sizing does not allow a trader to trade large contract size on trades with high chances of winning and lower the trade size on lower probability of success. ATR Average True Range is an indicator which shows the volatility of any financial instrument over a period of time.
Value obtained from ATR can be used to determine your stop loss level in addition to the position size of the instrument you are trading. Many intelligent people lose large capital while trading however in their non trading careers they are very success full and has accumulated large sums of money.
The thing that separate winners from the losers in trading is not how accurately someone picks entry points. But the factors how they will manage the trade after they have taken the trade and how they stick to their money management plan once they are on the trade. Large majority of the traders do not understand that psychology plays a vital role in money management and they should conduit their emotions correctly while trading.
The Effect of Trading Losses We are taught by the environment of the importance of always being right. There is always a fear in us of not being wrong and the need to always be right. But this mentality does not go with trading.
Most trading systems that are proved successful takes lots of small losses and then make a big gain on a few winning trades. Unfortunately most of the traders do not have mental toughness lot of losing trades and give up the trading system prematurely, and hurl a profitable trading system without giving it an adequate chance. Destroy Your Trading Account A common mistake in virtually all type of trading is holding a trade even the market continues to move against the trade.
You will find hundred of stories of traders who lose years of profits on a single trade that goes terribly wrong. The best way to avoid this is to have proper risk management and to avoid large losses. LOGIC WINS, IMPULSE KILLS Trader blew up their account more by trading impulsively than by any other mistake. More money has been lost by trading impulsively than by any other means. Trading impulsively is merely playing the game of Russian roulette.
Logical trading is extra precise than impulsive trading. Trading impulsively is simply gambling. It can be a huge rush when the trader is on a winning streak, but just one bad loss can make the trader give all of the profits and trading capital back to the market. Logical trader will know where to take profit and stop loss if trade goes against him, whereas impulsive traders are only one trade away from bankruptcy.
ADDING TO A LOSER Most of the time trader increase their position size and keep on adding to them if trade goes against them. This is a martingale technique in which traders desperately hope that a reversal will occur and their losses will convert to profit. However doing so increases the exposure while the trade goes in loss.
In such scenarios a smart trader will typically close the position and head toward next trade. NEVER LET A WINNER TURN INTO A LOSER It is not uncommon to see a trade go up by 30 pips in couple of minute and then it completely reverses to hit your stop loss at 40 pips in a short while. Traders should learn to protect their profits.
There are two easy ways to protect your capital and banking pips. You can add trailing stop to your orders. The second method is to use multiple lots and exit positions on different levels including a trailing stop. There is nothing worse than watching your trade be up 30 points one minute, only to see it completely reverse CHAPTER 8 PUTTING IT ALL TOGETHER 8. Creating a business plan give the trader a sense of direction that they are trying to reach. It set goals, and plan to execute. Most successful traders will agree that trading is not different than business and in order to be successful in trading you should have clear and written business plan.
Following are some of the things which should be included into your business plan for trading. What are your reasons for which you want to become a trader?
What do you hope to achieve from trading? Be specific here. If the possibility of making a lot of money has drawn you towards trading then list out how much money you want to make from trading and what you plan to do with that money if you make it. What are the things that are going to separate you from the large majority of traders who fail?
What are your biggest weaknesses? How do you plan to address your weaknesses and leverage your strengths? How much time can you devote towards actively following the market? Do you plan to day trade, swing trade, position trade or a combination of the three? Does your choice here reflect the time you have to devote to the markets?
What market or markets do you plan to trade and why? At what times throughout the day are you going to spend actually trading, researching trades, and then learning about the market? What is your money management strategy? How will you know if one of the pieces of your strategy stops working? After identifying that one of the pieces of your strategy has stopped working what will you do to address it?
What trading software and equipment you will use to trade and how much is it? Do you plan to add money to your account and if so where is that money going to come from? If you are profitable do you plan to reinvest profits or withdraw some or all of them? 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. Since its consumer economy is small, the fundamental char- acteristic that affects its economy is whether its exports can grow.
Therefore, interest rates and the resulting currency valuation are key to its future economic vitality. Data show only 4 percent of the New Zealand firms do any exporting.
But this level was recognized as having risks of slowing the New Zealand economy. In fact, the New Zealand Central bank intervened for the first time since and sold the New Zealand dollar on June If it tries to raise rates further to slow down inflation, it can choke off exports and cause a major contraction. The fundamentals point to a mixed situation that can go either way. As a result of this uncertainty, the kiwi offers potentially very many trading strategies, as the currency will be extremely sensitive to central bank actions as well as surprises in economic data.
The forex trader looking to trade the kiwi can explore trading the dollar pair U. dollar—New Zealand dollar USDNZD , as well as the kiwi against the aussie NZDAUD , the yen NZDJPY , or the euro NZDEUR. MEXICAN PESO The peso is a currency that offers potential for trading more than ever. The OECD projects a GDP growth in Mexico of 3. Importantly, inflation is projected to be just above 3 percent www.
Additionally, the peso is strengthened by its ability to attract capital flows. It is useful to note that those traders who sell the U. dollar and buy the Mexican new peso MXN in the USDMXN pair, receive interest rate payments.
So the peso can be used as a carry trade currency pair. The second major factor is the U. Mexican exports are at a level of over 80 percent to the United States, and there is a high inflow of capital coming from Mexicans living in the United States. Oil also needs to be considered. Like Canada, Mexico is a net exporter of oil and attracts petrodollars. A major negative factor is business confidence. The Mexican busi- ness climate is often marred by inefficiencies, and the political economy generates a great deal of negative sentiment.
Another factor emerging is Asian competitiveness. If Mexican interest rates fall, the peso could weaken substantially; if the U. economy slows, Mexican growth will suffer. Based on this fundamental picture, trading the Mexican peso should be considered mainly against the dollar, and trading this pair using longer-duration charts is more advisable see Figure 7. JAPANESE YEN Japan is the second largest developed economy in the world. To understand Japan today, one has to have a sense of where the Japanese economy has come from.
In , the Nikkei Index, which is a price-weighted index of the top stocks on the Tokyo exchange, peaked around 39, In , the Nikkei Index fell by 39 per- cent, and in March , it was at the 17, mark, still quite a way from the highs of the previous era.
auction prices, and surges in sales of luxury brand bags and jewelry. The Nikkei had tripled in price in the 45 months prior to its peak. Also, metropolitan land prices tripled between and Compare this to the same period growth rate of other nations, shown in Table 7. The Japanese stagnation had many causes, but a major contributor was the Japanese consumer. Studies e. Household disposable income declined, household wealth declined, and, coupled with uncertainty about the future, the result was low confidence in prospects of strong growth.
Once the forex trader appreciates what the era of stagnation was like in Japan, he or she will have a greater understanding of why Japan today is still not on firm footing of renewed growth.
For example, household disposable income had a growth rate of only 0. Household wealth declined by an average 0. Interestingly enough, there is data showing that the proportion of people saving for old age rose from The data from Japan underscores the importance of consumer confidence. This makes it diffi- cult to stimulate growth through traditional monetary measures such as lowering inter- est rates. Another important characteristic was that prices were actually in deflationary mode, and when prices keep falling there is little incentive for consumers to purchase since they expect cheaper prices.
It was before the emergence of the retail forex market. But the era of stagnation also holds clues as to whether Japan will experience robust, uncertain growth or retreat again into stagnation. Much will depend on the interest rate decisions of the Bank of Japan and business and consumer confidence surveys because the core cause of stagnation was lack of consumer confidence and spending. Therefore, the core of recovery will be a recovery in consumer spending. But it is not easy to stimulate the Japanese consumer.
This means that the forex trader should carefully watch consumer confidence and inflation data coming out of Japan for clues as to whether Japan is overcoming deflationary fears. One such clue oc- curred in March when, for the first time in 16 years, Japanese land prices showed an increase. Other clues will be necessary before the Japanese inflation rate moves beyond its current 0.
Also important is export data on Japan. Stimulating exports becomes a critical factor in determining the ability of the Japanese economy to grow. However, any extreme level of weakening of the yen would help exports. But remember that too weak a yen against, for example, the euro may help Japanese exports but would undermine European exports. The forex trader should note that where there are beneficiaries to a currency direction, there are also losers. The Japanese finally increased interest rates to 0.
But the interest rate differential between Japan and other nations is still quite steep. Even if the Bank of Japan increases rates to 0. This uncertainty in the Japanese economy creates a great deal of increased rang- ing behavior in the currency.
Traders of the yen should almost always expect the unex- pected because economic news from Japan has a built-in greater potential to surprise us. Also important to consider is the growing impact of China on the Japanese prospects for growth. A weak yen, in contrast, stimulates Japanese export growth. Export growth data therefore becomes very important in affecting sentiment toward the yen. With regard to Japan, perhaps the best word to describe current conditions is un- certain.
The uncertainty whether the Japanese consumer economy is strong enough to grow, combined with the uncertainty of whether Japanese interest rates will rise, dom- inates trading of the yen. The complexities facing the Japanese economy also involve aging workforce and potential shortages in labor. All these factors make trading the yen more challenging than the other currency pairs. CARRY TRADE The Japanese big picture implications are profound. With interest rates at 0. This is where Japanese investors can borrow at extremely low rates and place the capital in bonds of other nations and receive a net gain in interest rates.
New Zealand and Australia have been major beneficia- ries of the carry trade. For example, New Zealand interest rates are almost the highest in the world, at 8.
It therefore is a major attraction for the low-interest-rate costs of borrowing yen. A popular way to do this is called the Uridashi bond. The total flow of such bonds is in billions more. These bonds are of short duration, most being two to three years. If the market perceived that Japanese rates will increase, the huge amount of carry trade money outflow could suddenly decline. On February 27, , this is ex- actly what happened, with a sudden sell-off of the dollar against the yen.
This caused simultaneously a sell-off of the Dow Jones Industrial Index as big funds got out of equity positions to cover losses in their previous selling of yen. Even gold sold off during this crisis. Refer back to Figure 1. The big picture on Japan is one that focuses on uncertain growth and relatively low interest rates.
Preliminary edition, November During , the yen had a wide range between its index lows and highs and ended near its lows see Figure 7. Its value largely depends on what happens in the economies and the currencies of the United States and Europe. Refer back to Table 7. The first is the bet that the interest rate differences between Japan and the rest of the world will continue. An additional strategy is simply to be selling yen until the key fundamentals change and the trade-weighted index reverses toward the mean of The fact that the trader may observe that the yen is weakening, even in the face of good economic news, should not be a surprise.
Instead, the trader looking to buy yen would wait for the period of technical strengthening to run its path and then look to go long the yen. Any surprise news that is positive for the yen can just mean to be prepared for a reversal toward strengthening. The USDJPY pair and the EURJPY pairs are the best trading instruments for the yen.
A third strategy is to buy into the longer view that the Japanese economic recovery will continue and that interest rate increases are inevitable.
The trading strategy is to buy the yen sell USDJPY —of course, at the right technical locations, which we discuss in Part II. EURO The euro as a currency is the most complex in the world. The creation of the euro was a tectonic event in world economic news. Other currencies reflect one unified economy, whereas the euro reflects 13 economies comprising the Eurozone: r Belgium r Germany r Greece r Spain r France r Ireland r Italy r Luxembourg r The Netherlands r Austria r Portugal r Slovenia r Finland When combined, the Eurozone economy presents a powerful part of world trade.
Managing to control the multiple economies of the Eurozone makes the mission of the European Central Bank ECB one of the most challenging of all central banks. To succeed, the policies of the ECB need to succeed in all of the member countries.
Keep in mind that this is not easy. Each country has its own domestic policies, and its own TABLE 7. Events in any country can undermine, achieving the average inflation rate that the ECB sets. The forex trader has to expect the unexpected in regard to the euro. We can observe these trading relationships in the Trade- Weighted Index for the euro refer to Table 7.
dollar has the greatest weight, with the British pound and then the yen following. There is more than one trade-weighted index that the trader should be aware of. For example, we also have a fairly new trade- weighted index for the euro called the Dow Jones Euro Currency 5 Index Table 7. The DJEC5 places a greater weight on Japan and less weight on the United Kingdom.
It also includes Australia, which is ignored by the TWI. dollar to euro In any case, trading the euro in the absence of knowledge about which countries the euro trades with will undoubtedly lead to misjudgments about the performance of that currency.
The importance of the euro as a currency reflects the fact that its trading partners are global, and as a result the euro as a currency may become less dependent on U. economic prospects. Traders have many choices of pairs to shape the trade. The EURUSD pair is the most popular, followed by the EURJPY pair and the EURGBP pair.
The fundamental picture of euro performance at this point in time is that of sustained strength. It has been probing trade-weighted highs, which reflects strong economic per- formance in its member countries. The economic growth of the Eurozone has led to interest rate increases by the European Central Bank to contain inflation near a 2 per- cent level.
This increase in rates has served to further strengthen the demand for the currency. The ECB raised its benchmark interest rate seven consecutive times, from 2 percent in December to 4. However, the Eurozone also faces a relatively high unemployment rate of nearly 8 percent. If the currency continues to have strength against a weakening yen, the Eurozone may face a slowdown on exports, of which Japan is an important trading partner Figure 7.
The trader should carefully watch the EURJPY pair Figure 7. Fundamental forces will kick in and provide the impetus for a sell-off. BRITISH POUND CABLE Great Britain remains a vigorous part of the global economy. Consider the fact that over half of the profits coming from the Financial Times and London Stock Exchange FTSE are profits from overseas activity.
The British economy is intimately linked to global trading patterns. The TWI of the pound as tracked by iBoxx® see Table 7. This immediately suggests that in trading the pound, the EURGBP and the USDGBP pairs would be the main pairs to trade. We can see in Figure 7. In , it broke the index number of We can also see that the pound is getting close to topping out in global strength, and traders need to watch for a possible probing or trend break in its TWI, as we can see in Figure 7.
The Bank of England BOE , in response to the hot British economy, raised rates in a surprise move in August , and raised rates again to 5. These actions of the BOE show that its policy on raising rates is very sensitive to data and that the central bank is not ideological about it.
The key factor for traders to watch will be what the BOE does on interest rates. As indicated in the section on fundamentals, housing continues to be a major com- ponent of decisions of central banks. But any data that shows a slowing of inflation would translate into a selling of the pound. Beyond the critical components of interest rates and GDP, Great Britain has unique economic challenges due to an increase in migration levels.
The surge in migration can affect inflation and employment levels in a variety of ways, and those who watch and trade the pound must not ignore these aspects of fundamentals and Great Britain. Sources: Reproduced with kind permission of Land Registry. The house prices data being used is Crown copyright and is reproduced with the permission of Land Registry under delegated authority from the Controller of HMSO.
SWISS FRANC The Swiss franc represents an interesting niche among the global floating currencies. Over the years, it has been used as a safe-haven currency because it had a link of convertibility. This link was abandoned in , but the Swiss National Bank SNB , the central bank, still holds 30 percent of its assets, about tons in gold. Even though it is more than 70 years after the global collapse of the gold standard in , there is still an association of gold and the Swiss franc.
In a speech commemorating this anniversary, John Pierre Roth, chairman of the gov- erning board of the SNB, said the following: As I said at the outset, the role of gold has faded over the years. But gold had an afterlife long after it ceased to be relevant in any form for the conduct of mone- tary policy.
The constitutional changes that severed this link took effect in , followed, within the same year, by the correspond- ing changes in the relevant law. The new law no longer includes an obligation on the part of the SNB to redeem banknotes for gold—an obligation which—in practice—had been suspended for decades.
Moreover, it has abolished the mini- mum gold coverage of the banknotes in circulation and the gold parity of the Swiss franc. With these changes, gold finally became a normal and marketable asset for the SNB. In May , the SNB began to sell part of its gold stock.
About 50 percent of the gold once owned by the SNB has now been sold. It reflects the fact that it is embedded in the European economy. From a trade-weighted point of view the most important currency impacting the franc is the euro followed by the U. dollar see Table 7. Trading this currency offers several alternative strategies. It can be used as a hedge against the EURUSD trade; it can also be used as a method for buying dollars. In fact, in trading the news, the hedge effect of the USDCHF against the EURUSD is employed to implement a trading the news strategy.
The Swiss franc also can be used as an alternative to the yen for those traders looking to construct a carry trade. They would be selling the Swiss franc, which has an associated low interest rate of 2. Finally, by understanding the state of the Swiss econ- omy and evaluating the trade-weighted index charts Figure 7. com and register. You will then be able to generate the latest TWI charts in a few simple steps. Dollar aining a fundamental understanding of the U. economy is a critical part of being G prepared fundamentally for forex trading.
economy is still the largest developed economy in the world, and therefore the U. dollar reflects this im- portance. It is true that we are in a period when the world economy is growing, particularly with the growth of Asia. This growth may mean that in the coming years, the preeminence of the U.
economy will diminish. However, as the U. economy re- mains the critical pivot point of the world economy, forex trading will continue to pay close attention to U. In particular, the forex trader, in trading a currency pair involving the dollar, is actually making a judgment or a bet about the direction of the U.
dollar with regard to the other pair. This can be a five-minute bet or one that goes substantially longer in duration. But the fundamental question the trader has to answer is whether to be bullish or bearish on the dollar for his next trade. A first approach to getting a picture of the global position of the U. dollar and gauging whether it is strong or weak is by looking at the Trade-Weighted Index TWI. In Figure 8. dollar has declined significantly.
It is probing the lows of this index, and if it breaks below 80, the world, through global trading forces, will demonstrate an unprecedented decline in dollar values. This year chart certainly provides a perspective missing from day-to-day trading, but a forex trader can zoom in on the U.
dollar performance by generating a nearer- term chart. For example, in Figure 8. Dollar Index—TWI recent patterns. The trader can use this chart and generate strategies to prepare for future moves if they occur. FIGURE 8. Source: Board of Governors of the Federal Reserve System. Dollar 71 based on a review of Figure 8. dollar is in a compressed triangle and that it is testing historic support near 80 on the TWI. Gaining insight into the strength of the U.
This index is traded at the NYBOT and is a weighted index. But the USDX is traded by major funds and is considered an important barometer of sentiment regarding the dollar. It can easily be tracked at www. STRUCTURE OF THE USDX The USDX has its own basket of currencies, just like the TWIs. The question arises of which is better?
The answer really depends on how you use it. The USDX is more popular and provides a trader an accepted way to track dollar sen- timent, though it is less accurate from an economic point of view.
When the USDX is showing a dollar decline, it may be exaggerating the real decline from a global trading point of view. The USDX chart provides a good way of checking dollar sentiment. It should be clear that there are many ways to evaluate the dollar.
In fact, new mea- sures are always being introduced. Citigroup recently introduced its own dollar index called the Citigroup Flow-Weighted Index. This index scrutinizes international capital flows, which have become an important influence on forex.
Dollar Index Currency Weight European euro 0. Morgan Dollar Index, which looks at the dollar in terms of a basket of 18 curren- cies. The bottom line is that the forex trader has now an improved ability to answer the question of how well the dollar is doing in terms of its fundamentals by looking at the different TWIs of the dollar.
FOREIGN DEBT AND WHO BUYS U. ASSETS One of the fundamental variables that affect sentiment regarding the U. dollar is the fact that as a nation the United States has huge foreign debt. For example, economist David Levy said recently: The current account deficit measures the difference between what U.
residents spend abroad and what they earn abroad in a year. It now stands at almost six percent of GDP; total net foreign liabilities are approaching a quarter of GDP. Sudden unwillingness by investors abroad to continue adding to their already large dollar assets, in this scenario, would set off a panic, causing the dollar to tank, interest rates to skyrocket, and the U.
economy to descend into crisis, dragging the rest of the world down with it www. Another way to look at the current account deficit is that it reflects the excess of im- ports over exports. The question is: Why is there a current account deficit in the United States, and why do nations such as China have a current account surplus? The answer is that the fundamental personality of the U.
The fear is that if foreign investors of U. Treasury notes suddenly became unwilling to buy these notes, the U. economy would suffer. Here is what happened in Foreign ownership of U. Treasury securities has often been the subject of con- siderable public debate. Discussion of this issue arises particularly at times of uncertainty about either the outlook for the exchange value of the dollar or the need for cash in countries holding large stocks of Treasury assets. In June of , for example, there was a flurry of activity in the U.
financial markets when the Prime Minister of Japan, Ryutaro Hashimoto, suggested that Japan might find it necessary to sell some of its large Treasury holdings.
On the day following Mr. Dollar 73 falloff on October 19, financial markets to sudden decisions by foreign holders of U. debt to undertake large-scale sales of their dollar assets.
Laurence H. pdf The U. Trea- sury Securities www. The fear that someday foreign own- ership of U. Treasury securities will stop and cause interest rates to increase and destabilize the U. The trader will find that this fear continues to resurface in newspaper headlines and will likely become part of the U.
national political dialogue. When the U. Treasury report comes out, it can move the forex market. securities see Table 8. From a fundamental view, this is supportive of the dollar. We can see that the Organization of Petroleum Exporting Countries OPEC accumulates dollar surpluses from its petrodollars. It also purchased more U. Monitoring the levels of foreign owners of U.
securities is an important part of sensing the true dollar sentiment in the world. Forex dollar bulls can point to the fact that essentially a consistent stream of buyers of U.
treasuries has provided a floor against a steep and quick fall of the U. Major Foreign Holders of Treasury TABLE 8. Economists are in agreement that the effect of foreign purchasers of U. Treasury securities is to lower interest rates. Without such purchases, U. rates might be nearly 1 percent more. Here is how analysts at the U. Treasury Department portrayed risks to the United States related to foreign ownership of U. r The trade balance has been weaker.
r Econometric evidence suggests that recent heavy central bank buying has helped keep interest rates low. investors would increase exposure to foreign securities. r A decline in the role of the dollar, were it to occur, would likely be gradual. r Central banks are very conservative by nature. r The institutional structure of global trade payment system would change gradu- ally.
and thus does not present a risk of a sharp or destabilizing financial market event www. In the long run, evidence exists that there is a trend toward diversification of foreign holders away from dollar assets. As other economies grow, the incentives to reallocate reserves away from U.
dollar assets to more local assets will rise. Even rumors of such diversification lead to selling U. dollars in the market by traders who do not want to risk holding dollars. This has an effect of weakening support for the dollar. Treasury Securities Go towww. txt and answer these questions: r Has there been a change in the trend of foreign holders of U.
Treasury securities? r When is the next Treasury International Capital System report coming out? The Internet provides unprecedented access T to information and data—perhaps too much information. A good technique to use that provides an efficient way to pull information out of the World Wide Web is to use the search engines and input the right terms.
For example, as the trader prepares to evaluate a currency to trade, he or she should also scan the latest news. Here is how to do it: 1. Go to Google, click on the News link and then click on Sort by Date.
Input search terms U. dollar, Australian economy, etc. For example, if you input the term Australian interest rates, the results will quickly point to the latest article on it.
Using Google or any other search engine effectively will depend on which terms are entered. The trader should enter a variety of terms to maximize the items retrieved. Here are some useful terms to start with: U.
dollar U. economy U. interest rates Bloomberg on U. German interest rates Bernanke Trichet Zhou Xiaochuan Bank of China Fukui Australian interest rates Australian economy Canadian economy Canadian interest rates Governor Dodge Bank of Japan The idea is to search for the latest analysis while you are scanning the charts, which will help you gain an understanding of what forces are moving the charts while you trading.
When you first begin trading, the focus tends to be on technique and tactics because learning how to put on the trades and how to read the charts is the most important task at hand.
But as a forex trader develops an understanding of the fundamentals, he or she will eventually ask the following two questions: 1. What currency pairs should I be trading? What direction is my next trade? It is helpful to be able to group currencies by their fundamental personalities.
We can see that some currencies are stronger than others and that some currencies are fun- damentally at extremes; those groups become more interesting to trade. A fundamental view leads to the understanding that the major causes of change in the relative value of currencies are real or perceived changes in interest rates, inflation, or economic growth between their economies. The relationship between fundamentals and forex prices is not a direct relationship; rather, it is more akin to fuzzy logic or a chemistry of forex.
By forming a fundamental view of currencies, the trader is able to get in line with the powerful economic forces that currencies ultimately reflect. To guide traders in conducting their own fundamental analysis, they need to have their own fundamental forex checklist and action plan.
The purpose of the fundamental forex checklist is to make sure you have the information to make some trade strategy decisions. Fundamental Forex Checklist and Action Plan 1. Scan and list current global data on gross domestic product GDP , interest rates, and inflation levels.
Scan price patterns in commodities such as oil, gold, copper. Review the Trade-Weighted Index TWI of each currency to determine if any are probing key support or resistance. Check the U. Dollar Index USDX at www. com and compare it to the TWI of the U. Scan global interest rates and try to group currencies by: a. Countries expected to raise rates b. Countries expected to keep rates the same c. Countries expected to lower rates 6.
Choose which currency pairs to trade. Choose the preferred direction of your next trade. If you do not have a preferred direction, that means you are choosing to trade in either direction.
Watch the calendar for economic releases. Send it to learn4x earthlink. net will be reviewed, and you will receive advice on how to improve it. The central bank has indicated 1 a bias toward increasing interest rates; 2 a neutral stance on interest rates; 3 concern on slowdown of the economy. The Trade-Weighted Index has shown a trend up or down. The biggest risk factor for this currency pair is: 1. Unexpected rise in inﬂation 2.
Further slowdown in housing 3. Direction of oil prices, etc. Technical analysis supplies the tools for answering that question, but there is no single answer. There is no single technical indicator that can be exclusively relied on to produce winning outcomes, because the markets are too complex. No one, to date, has produced a consistently reliable technical trading system for any market, let alone forex. This is because technical indicators can never capture all of the vari- ables that influence price movements.
Yet none can replace the seasoned experienced trader. The reason should be obvious—technical analysis provides a snapshot of market moves that have already occurred. The resulting snapshot is a picture that is always lagging and limited in reso- lution. In contrast, the smart trader has evolved a successful mixture of analytical tools that sense repeatable patterns in the market. Whatever analysis techniques are used, the single most important question that the forex trader has to ask and answer is: Where is my next trade?
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There are numerous economic releases that are published every day to cover each economic release will be out of the scope of the book however some basic economic are briefly touched below. Some content that appears in print may not be available in electronic books. These proba- bilities are the results of models. Learn 2 Trade Free Signals Service. Export growth data therefore becomes very important in affecting sentiment toward the yen.The fundamental picture of euro performance at this point in time is that of sustained strength. Government Required Disclaimer — CFTC RULE 4, forex trading manual pdf. To guide traders in conducting their own fundamental analysis, they need to have their own fundamental forex checklist and action plan. Laurence H. volatility forex trading manual pdf undoubtedly help traders improve their investment utility due to better capital allocation. When a value of country exports are more than they are importing is known as current account surplus.