Fundamental Analysis

Fundamental analysis involves examining the intrinsic value of a nation’s currency based on economic news releases that reflect the strength, or weakness, of a country’s economy. Fundamental traders follow these news announcements, known as “fundamental indicators,” because they paint a picture of a currency's strength in relation to other countries.

Fundamental indicators are reports that include statistical data on things such as employment, gross domestic product (GDP), international trade, retail sales, housing, manufacturing, and interest rates. The stability, growth, or decline in any of these sectors may have an effect – direct or indirect – on the value of a country’s currency.

Factors That Move The Forex Market
Central banks play a key role in the Forex market because they have the responsibility of changing the country’s “base” interest rate. A central bank has to find a fine balance when setting interest rates as it wants to maintain growth in the economy, but at the same time it has to be careful to curtail inflation. The bank’s decisions on whether to raise, cut, or hold the interest rate fuels speculation in the Forex market, where the value of a currency, or group of currencies, changes in real time.

In addition to information about a country’s economy, the value of a currency is connected to national and international political events, elections, and changes in government trade policies. The prices of sensitive commodities like oil and gasoline are an important fundamental indicator as high prices can hurt consumer spending and confidence, and curtail the activities of certain businesses and government services.

Natural disasters, terrorist attacks, and militarily actions in a sensitive region cause instability in the world and have a significant impact on the Forex market as they develop. These types of evens can be hard to predict in advance.

The ability to identify trends in macroeconomic indicators and reading central bank’s current and future actions is a valuable tool that comes from following financial news, watching the markets, and trading Forex.

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A Volatile Market: A Blessing or A Curse?

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Volatility is the main feature of the Forex market where trading takes place non- stop throughout the week except for the weekend. It is by far the biggest market on earth and is bigger than all the other markets combined. The daily turnover of the market stands at a figure exceeding four trillion dollars and this will give you an idea as to its trading volume.

This highly volatile market is the arena where millions of traders and investors risk their money in the hope of making a profit. If there was no volatility there would be no trading. In this sense it is truly a blessing that many traders capitalize on. Volatility is brought about by markets that trade erratically swinging between highs and lows. Where there is no market movement in currency prices you will see no volatility and thus no trading will take place in such an environment.

It is fact that the volatility in currency trading moves by pips and a closer look will tell you that this movement is indeed extremely small. This is why leverage is considered as necessary by currency traders, as well as signals. In a highly volatile market losses can be augmented by leverage and at times like this it is best to trade lesser amounts so that losses are also kept to a minimum.

Although a volatile market can be a blessing you should control your trading in such a market. This is easily by using tighter stops so that losses are cut off at the outset. The exact placing of the stop will depend upon the currency pair being traded. Volatile market conditions often tempt traders to invest more than normal in the hope of collecting profits. However, this can be dangerous as the risk faced in a volatile market is higher than at other times. A trader should stick to his planned trading at all times and during times of extreme volatility this is even more essential.

Keeping up with fundamental indicators and news in general will ensure that you know the cause for the high volatility in the Forex market. This knowledge will help you to make better trade decisions in the longer run as you face volatility in the market. When you trade carefully adjusting leverage so as to reduce any potential losses you can still win in a volatile market.

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Why It's Important to Accurately Time Your Trade

Timing is everything in forex. Time it right, you win. Get your timing wrong, your money goes up in smoke.

In a fast paced market with periods of intense volatility like the forex market, timing is essential. There is a saying that “the trend is your friend till it ends”. I will say that the “trend is your enemy if you get in too late”.

Traders are advised to “trade fundamentally, enter technically.” This implies that traders are expected to follow the direction of a high impact news item. But in doing so, traders must use their technical analysis to enter at the right time.

What happens if entries are not timed properly? These are the scenarios that could occur.

1)      Some high impact news hits the news wires and it favors a long trade. You go long, but you discover that the market has spiked by almost 80 pips about a second after news release. Your entry is still pending, waiting for the broker to fulfill it. Too late. Prices are too far gone and you are asked to “REQUOTE”. Not wanting to miss out, you re-enter the market not minding the prices, and your order is instantly fulfilled. Suddenly, the price starts to retrace wildly, and you are stopped out, just in time for the price to resume its move northwards. It’s almost like the market maker was watching you to do you in.



2)      The second scenario is a bit like the first, but instead of a requote, your order is filled at a price so far away from market price, it will take a miracle move in the trade direction to break even, let alone make a profit. Slippage sucks.

Let’s explain the two scenarios. In a high impact news trade, the news feeds are received by the institutional investors before anyone else via premium news services like Bloomberg and Reuters, who charge thousands of dollars a month for this. A team of veteran traders will be waiting to analyze the news and hit the trade buttons fast. The sheer volume of such trades sends the currency price candlesticks spiking. Sometimes the spikes happen even before the retail traders get the same news. As such, any trade entered by a retail trader at this point will most likely not be fulfilled; requotes follow. If a trader enters the trade at this time, he will meet the institutional guys offloading their positions to take profits, and he will get hit by the unavoidable retracement that follows.

The two scenarios are a case of wrong timing at work.

How Can You Accurately Time Your Trades to Avoid Losses?

For news trades, it is pretty obvious here that you should not try mixing it with the big dogs. You will get blown out by the two scenarios I painted again and again. Only enter news trades when the initial madness has died down. Soon, the market will respond in a slower and more purposeful direction to the news trade, as we see here from the Non-Farm Payroll report of June 3, 2011.

Secondly, use pivot points in addition to your other technical indicators to determine if you are still within touching distance of a profit. If a long trade is closer to a resistance than a support level, the chances of that trading making a profit is lower than if the entry was closer to the support level.

There are many tips, but hang on to these two for now.

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Multiple Time Frame Analysis

Multiple time frame analysis is a form of technical analysis which requires the traders to look at the different price changes of the same currency pair. Typically the charts are in different time frames and will allow the trader to better understand how the currency options moves with changing market conditions. Through multiple time frame analysis, traders can effectively enter positions.

In most cases, only 3 time frames are used , weekly, daily and 4-hour charts but traders may also decide to utilize shorter time frames (4-hour, 1-hour and 15 minutes). Generally, the longer time framed charts are used to get an overview of how the market is behaving while the shorter time frames are utilized to fine tune the entry and exit points. It is important for the traders to capture the big movements in the market in order to make a huge sum of profit. In this case, the traders will need to know which direction they should take and what kinds of shorter term movement can they take advantage of. Multiple time frame analysis is more than just picking out the tops and bottoms; instead, it is about looking for buying opportunities in an uptrend and selling opportunities in a downtrend which enables the trader to profit more.

Traders in the spot market typically use daily charts to identify the general trend while hourly charts determine the exact entry points. In the AUD/USD currency pair which has been trending up since the early 2002, range traders will find it difficult to trade, and will probably experience losses if they stick to the same strategies they use in normal situations. Even when certain dips in the market, the pair remained strong for the last couple of years, hence presenting very little opportunities even for medium term range traders.

In this case, it is best to adopt a position which follows the trends and to look for buying opportunities when the prices are lowest. In this case, the trader can use a level of the Fibonacci retracement as the main support level then use the daily charts to get a general idea of the direction of the trade and then hourly charts to pinpoint entry points.
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The Benefits of Liquid Investment Trading

The main benefit of investment trading in a liquid market is the flexibility of buying and selling assets.

Investment liquidity is the ability of an asset to be bought or sold without causing price movements of any significance. The most liquid asset is cash as it can be used immediately to carry out economic activities but for trading purposes the really liquid markets are forex, stocks and commodities in that order.

The Benefits of Liquid Investment Trading:

An asset is classed as liquid when it can be sold quickly without any loss in value, at any time during market hours. The crucial characteristic of a market classed as deeply liquid is that there are eager sellers and buyers available at all times and that the price of the next trade is equivalent to the preceding one.

A major benefit of trading in a liquid market is that the most liquid market, foreign exchange, is open 24 hours a day except for weekends. You can decide to trade in your own time frame, after work, before you go to work or even at work.

Liquid markets are so much more efficient in that when there is many sellers and many buyers, the price at which the trade is done is very close if not the same as the last market price. Again the most efficient market is the foreign exchange market as it has a trading volume that is over 50 times larger than the New York Stock Exchange.

Another benefit from trading in liquid markets is volatility. When a price fluctuates as it does in a liquid market more trading opportunities are available. If you buy an asset and its price doesn’t move there is little or no opportunity to make a profit. Volatility is the magnitude of the level of a price’s fluctuation and its frequency of fluctuation. Volatility is measured as the maximum return that can be generated with perfect prescience. For example the average volatility for stock is 70 but the average volatility for a currency is 500. Day traders in particular can exploit this greater volatility in the currency markets.

A further benefit of investing in a liquid market like the currency markets is that there are no commission fees and no transaction fees. The fees are all in the spread and there is hardly any ‘slippage’ cost. Slippage is a cost that a trader incurs when entering the market at a worse price than the price level they wanted. For low volume trades slippage is not such a problem but for high volume trades it could be.

Leverage can be a big benefit for investors who are investing in liquid markets, particularly the currency markets. Using leverage an investor can trade the equivalent of $10,000 and depending on the broker the investor is trading through, the investor only needs between $50 and $200. This makes it possible for an investor in a liquid market to profit from a small trading account.

The benefits of trading and investing in a liquid market are numerous and give the investor greater flexibility to buy or sell investment assets.

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Day Trading Strategies for Beginners

Introduction:

A day trader is a trader that buys and sells currencies many times a day and does not leave an overnight position. This means that a day trader usually trades within one time zone and does not cross into other time zones except maybe a trader in Europe where the afternoon session coincides with the American morning session. The concept of a day trader is to generate income on a daily basis using technical and fundamental analysis to facilitate this money making process.

Day trading Strategies for Beginners:

When starting out as a day trader a beginner needs to develop a simple trading strategy that enables the trader to have the opportunity to generate profits with a viable risk/reward ratio. To develop a strategy which meets these requirements the trader needs to learn about self-discipline, price charts, volume and price movements, technical analysis and fundamental analysis. In addition the day trader needs to learn about different candlestick chart patterns, volume movements and trend lines, all of which provide tools which enable the trader successfully day trade.

So the first pillar of a day trading strategy for a new forex trader is knowledge. The second pillar of a day trading strategy is an understanding of how the markets function. Elements such as when the highest volumes are traded, what type of economic data has the strongest impact on the market, what time frames are good for certain currency pairs, and the best time of day to trade?

The third pillar of a day trading strategy is to do with deciding how much loss you are comfortable with taking on individual trades. To do this you must establish the maximum loss you are willing to bear. This is something that must be done in advance and not on the fly as you trade. Before you actually make the trade you should decide on the risk/reward ratio for the trade and your loss limit. As soon as you reach your loss limit you should exit the trade. Never fall into the trap of not keeping to your strategy and stay in the trade hoping the market will turn. It invariably does not.

The next important pillar of a day trader’s strategy is the maintenance of documentation which record the day’s trades and the results of those trades. In this way you can gauge how effective your day trading strategy is and amend it accordingly. Documenting your daily trading will also enable you to repeat your successes.

The final pillar of your day trading strategy is hedging. Hedging is the act of selling and buying the same currency pair or the act of buying one currency pair and buying another currency pair which is historically inversely correlated to the original currency pair. Hedging in this way does not produce high profits but it does produce profits and reduces the likelihood of losses.

The above simple day trading strategy will enable day trading beginners to start a successful day trading career.

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Forex and World Economic Crisis

World Economic Crisis is a burning issue not only for those dealing with finance but also for all social groups as everyone, one way or another, is influenced by economic cataclysms. Some are afraid of inflation rate and reduction of wages, the others are scared to lose their jobs.
So traders here are not the exception as their work is directly connected with finance and everything that is happening in the world of currency undoubtedly affects the exchange market. That is why, probably, at least once every trader wondered what would happen on Forex if another finance crisis takes place and how the members of the foreign exchange market should react to such major events.
Indeed, the World Economic Crisis leaves its mark on Forex with both positive and negative aftereffects.
Therefore it is very important for every trader to correctly react to financial cataclysms and try to elicit all the benefits out of such situation, still getting the profit.
First of all, there is no need to panic while monitoring a huge flow of world economic news. During the crisis period the amount of such news is getting much bigger than during peaceful periods. As soon as the financial situation loses stability, the currency rates undergo great changes: plummeting of exchange rates becomes a common thing for many national currencies which belong to the countries involved into crisis. While the newspapers headlines as well as on-line publications are full of information about the new world economic events, it becomes more complicated for a trader to deal with such a great amount of information, analyze the conditions in time as well as correctly predict the behavior of currency rates.
Nevertheless, together with the right approach and substitution of emotional breakouts for rational judgments it is possible to change things for the better. A trader can easily benefit from this event and multiply his/her capital while continue working confidently.
There is no need to be afraid of the raised market volatility - better to know how to get money out of it. As Forex trade is based first and foremost on buy and sell operations, the traders risk less to lose their job during the economic crisis.
The tools and methods that exist on the foreign exchange market will always allow to get the profit. If financial crisis involves some currency exchange rates falling, the quotes of other currencies raise automatically, which in case of competent analysis gives an opportunity for a trader to consummate a transaction with a benefit.
Undoubtedly the influence of World Economic Crisis on Forex is tangible. Yet, despite the traders’ disturbing expectations, financial turmoil cannot lead the exchange market to decay.

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Market Makers

The participants of Forex currency market are divided into two groups by their activity and influence on currency rates: market makers and market users.

Market makers are large banks and financial organizations which determine the current level of a currency rate, owing to a significant share of their operations in a total volume of the world market. Market makers exercise a constant control of different trading instruments, and they also conduct trades with them. Market makers are market members providing liquidity of particular instruments, making buy or sell orders. These are big international banks and financial institutions, which run daily currency operations of buying or selling trading instruments for more than billions of US dollars. Every market has its own market makers. Similarly, every Forex broker has its personal market makers, the quoting rates of which are exploited by it and offered to its clients further on. Among the greatest market makers such as Deutsche Bank, Mizuho Bank, Barclays Bank, PBS, Citi Bank, Chase Manhattan Bank, Union Bank of Switzerland can be named. In order to define whether the organization is a market maker it is important to consider not only the size of a bank, but also its share in market operations and its capability to influence the market by setting a price policy.

As mentioned before, for a particular market there can be own market maker. Worth pointing out that for the USD/CHF trading instrument the main market makers are Credit Suisse Bank and Union Bank of Switzerland. For trading instruments comprising the Asian currencies the major market maker is the Standard Chartered Bank. As to the rouble instruments, here the top market makers are the International Moscow Bank and the Onexim Bank. The Central Bank of Russia can also play this role being one of the most active participants in setting up the quote rates of currencies vs. the rouble, making different currency interventions, if the rouble rate exceeds the regulated currency rate limits.

Market makers determine the current currency exchange rate by conducting trades with each other as well as with smaller banks, which are also market participants. That is the market makers who introduce quote rates to small banks, organizations and individuals. Thus, another notion emerges characterizing these participants - market users.

Market users are financial organizations, broker companies, small banks and individuals, who use the quoting rate set by market makers for their operations. Market users are not aggressive market players, though a total volume of their operations in the market can be significant, but the share of each one is minor. The role of small market users consists in either acceptance or not of the rates provided by market makers. Consequently, market makers make price and market users take it.

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EUR/USD Currency Pair

The international currency market is built on principles of buying one currency and selling another. The daily market turnover is about 3 million US dollars. With the help of brokers and dealing centers one can trade almost any world currency.
In this article we consider one of the most popular currency pairs – EUR/USD. The euro-dollar currency pair appeared on April 7, 1989. The initial EUR/USD rate was 1.0445.
Statistics for 2007 confirms that 27% of all operations are executed with euro-dollar currency pair. To the present time EUR/USD pair has been the most traded and popular in the international currency market Forex. The pair is interesting both for professionals of currency speculations and absolute novices of trading. It is one of the most active pairs in the market and notable for insignificant volatility, attracting traders with different experience on Forex. EUR/USD pair movements are smooth, but during the day high activity can be noticed and used by the intraday and short-term traders for getting great profit.
Traders who actively work with the euro-dollar currency pair should be always aware of economic events in the USA and Eurozone. The pair adheres to the trend trading. Entering the market trader should estimate the current prices, draw a trend and find the historical levels of short trading prospect.
Every currency pair in the market has its own peculiarities and suffers from impact of different factors. Traders should realize these peculiarities and trade paying great attention to them.

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Risk Management Methods

When trading, a Forex investor can multiply capital, and the risks to loose not only potential earnings, but the invested money as well. The deviation from an average expected yield determines the investor’s risk in the financial market.

This kind of deviation can bring high profit as well as great loss.

Financial risk management does not guarantee a successful trading, but assembles important parts of it. Every currency operation is a risk. That is why usage of general management methods decreases potential losses.

1. Stop order setting;
2. Capital share investment;
3. Trend trading;
4. Emotion control.

Risk management methods are used after positions are opened. The main risk management method is an order setting that restrains losses.

Stop loss (literally means to stop losses) – is a point where trader goes off the market to avoid a disastrous situation. You have to set a stop loss when opening positions for preventing losses.
There are several types of stop signals:   

Initial stop signal – determines the deposit amount or interest rate that the trader is ready to lose. When the price moves toward this position and reaches it, the trader’s fixed level position closes, not exceeding the loss preset by the trader.

Trailing stop signal – is when price moves towards a position and stop signal is set right after it, according to trader preferences. In case the direction changes, the price reaches that signal and the trader goes off the market, potentially having earned profit (depending on when the price started moving).

Profit raising – is when a net profit has been earned and position is closed.
Stop signals at times – is when the market is not able to provide the necessary yield rate in the course of time and the position closes.

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Difference between Winners and Losers

A trader going deeply into Forex should realize that currency trades imply a certain risk: you can open profitable positions one by one, but any wrong step may bring you a total loss in the blink of an eye.
Your success does not entirely depend on your trading experience and professionalism. Every novice and professional should understand that the risk is always there, so it is better to keep an eye out. In order to trade on Forex and gain profit, you have to follow a constructive approach, be attentive and analyze every factor which may affect trends.
Below we are going to deal with 9 factors underpinning a successful trading strategy:
1. Traders who decided to work in a short-term period are initially in a risk group, which brings them closer to failure. The main reason for failure of short-term traders is a lack of training and a strict trading plan to follow, not the time limits they set. Lack of experience and knowledge does not allow even a tiny mistake, which can result in a loss of deposit. At the same time, such traders often do not have a lot of money on their accounts. More successful traders work in medium- and long-term periods. Statistically, medium- and long-term trading is more successful. The same can be referred to the funds invested, a capability to stay on the market depends much on the starting capital.
2. Losing traders often spend a lot of time on analysis of where the market will be tomorrow, while more successful ones decide how to behave in the current situation and apply their strategy in accordance with their conclusions. If a trader can foresee the reaction of crowd, he/she will definitely achieve success. The probability of deriving profit would be much higher if a trader can respond to irrational buying and selling of the crowd by a rational action plan. Therefore, it is much more difficult to be a successful analyst than such trader. An analyst has to perform more complicated work, as they have to predict the market movement and recommend how to earn a maximum profit while a successful trader just follows the market.
3. Successful traders pay attention to losing trades and to correlation of profit and loss, while losers only concentrate on their successful trades. It is much more important to track your risks than your profit or loss. Professional traders always estimate how much they can earn and how much they can lose.
4. As a rule, those traders who cannot control their emotions are never successful. Professional and experienced traders analyze the market putting their emotions aside. In case a trader opens and closes positions based on emotions only, this approach cannot be considerate or logical. However, complete ignorance to one's emotions is wrong too. Sometimes excessive stress may lead to mental disease and loss of all trading skills. The best way is to track each emotion and consider if the reasons for one or another decision still remain.
5. All unexperienced traders are concerned about their rightness, while professionals admit their emotions being able to master temper. Successful traders only acknowledge those factors that may help or prevent from obtaining profit. It is very important to stay aware of processes on the market; however, it is necessary to separate private life from trading. Considerable exertion may result in mental disorders and physical exhaustion. Professional traders promptly react to market processes, as it is the only way to earn money for them.
6. After losing money while trading a loser starts buying new books or trading systems and following their concepts. In the meantime, a professional analyses the incident and edits his methods with a regard to the analysis results. More successful trader does not switch to another trading system at once; he/she rather does it after realizing that the old one does not work properly. Successful traders always stick to their developed system using only a few trading strategies usually.
7. Traders without a considerable trading experience often try to repeat trading techniques of famous traders. At the same time, professionals consider all possible strategies, including ones of famous traders, but use them only in case they suit their trading style. Trader's individuality, a knowledge about the market and own trading system are much more relevant than the achievements of famous market players.
8. Often inexperienced traders do not notice numerous factors that could help them to derive profit. Profit of each trader determines the amount of funds in circulation, that is clearly realized by all experienced traders. The amount of money flowing into Forex must exceed the one flowing out, and this is what every trader has to take into account.
9. As a rule, all beginning traders losing any opportunity to get profit really take it too hard, while more successful traders take it easy. Trading is a pleasure for them; however, they take it absolutely seriously. Psychiatrists argue that an excessive seriousness makes person more vulnerable to diseases.
Both successful and losing traders take Forex trading as some sort of a game.
If we compare trading with a game, for example, bowling, newbies realized that strikes thrown by experienced professionals without any visible effort are results of much time spent outside the "big game". As in sports, trading implies numerous internal and external factors. You should be extremely serious about each of your trades. The difference between a professional and a beginner is that the former follows an accurate trading strategy and the latter takes trading as a game.

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