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About us Contact us What our learners say Independent Reviews Trustpilot. Introduction to Forex What is Forex? Currency pair types. Key terminologies in forex What moves currency pairs in the short and long-term. Selecting a good broker. Setting your trading software Demo vs.
Live accounts Websites to use when trading. Installing and Configuring MT4 Introduction to MetaTrader. Differences between MT4 and MT5 Downloading and installing MT4 Parts of MT4 Setting up trading charts. Chart Reading Essentials Introduction to charts in forex. Types of charts in forex. Candlestick charts reading basics. Reversal candlestick patterns Continuous candlestick patterns Support and resistance, channels, and pivot points. Forex Trading Fundamental Analysis Introduction to fundamental analysis.
Introduction to interest rates. The economic calendar Trading the news Carry trade strategies Tips for fundamental analysis. Forex Trading strategies Introduction to forex trading strategies. Fundamentals of day trading. Using technical analysis in day trading. 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. htm r Fed Beige Book released two weeks prior to Federal Open Market Committee meet- ings, eight times a year r ISM Nonmanufacturing www. cfm r Empire State Manufacturing Survey monthly report, www. html r Chicago PMI ISM Nonmanufacturing released on the third business day of the month, can be found at www.
cfm r Philadelphia Business Outlook Survey monthly, www. com and Find the Next Business or Consumer Conﬁdence Report Release Time Watch what happens upon the release to the currency pairs.
This chapter focuses on how a trader can gain an understanding about the strength and weakness of a currency.
The concept of a trade- weighted currency basket is introduced as well as how to obtain the latest trade-weighted information and data that can be directly used in trading. TRACKING CURRENCY STRENGTH: HOW STRONG IS A CURRENCY?
We can be convinced that currencies reflect world opinion about how well an economy is doing or expected to do. The next step in fundamental analysis is to be able to make a judgment about a particular currency itself. Ultimately, the question arises for the trade: How strong is the currency? In spot forex trading, the trade itself is always a paired event of one currency against another.
But when a trader makes a judgment about the strength or weakness of a currency by only comparing one currency against another usually the U. dollar , the conclusion can be misleading as to the global strength or weakness of the currency. When trading majors where the U.
dollar is part of the pair, the comparative question becomes: How strong is the U. dollar against that currency? question of how strong a particular currency is on its own terms without reference to another pair, the trade-weighted index TWI is used by economists and should also be used by currency traders.
The TWI represents how well the currency of a country is doing against a basket of other currencies. The currencies included in the TWI are those that reflect the major trading relationships with the index currency. Each currency receives a weight in the index that reflects its importance.
For example, in Table 7. We can also see that Canada and many other nations have a very small percentage compo- nent of the TWI. Each year the central bank and economists adjust the weights to reflect changing realities of international trade. As China increases its trading relationships around the world, it will receive more weight in TWIs. The point is that the TWI represents a way TABLE 7. dollar pound sterling 5. By knowing the TWIs of each currency, the forex trader can detect a strengthening and weakening of a currency and also get a sense of how a currency can be impacted by events in countries of their trading partners.
Many traders often ask the question: What do you think of the U. dollar or yen, pound, or euro? One important way of answering is from the perspective of the TWI. Each currency gains a trading personality, and knowing the TWI for each currency is very useful, because it will reflect the big picture much more accurately. Most recently, the International Index Company issued a new product line called iBoxxFX® , which are indices that are, in fact, trade weighted. They allow an average forex trader to take a snapshot of the strength of a currency without the noise of the forex market.
Table 7. Notice how each currency index reflects the varying importance of its different trading partners. We will see shortly that these trade weights are a clue to defining the fundamental personality of a currency. Before that time, it was pegged to the dollar, and before that it was pegged to the British pound. By floating its currency, the market sets the value of the currency and the cen- tral bank can avoid the necessity of intervening by buying and selling dollars to keep the currency value.
But a floating currency also permits capital to float out of a country. The fear of floating is great among totalitarian regimes and emerging countries that want to maintain control of their economy.
By looking at the aussie TWI see Table 7. The role of Australia as a global trading country makes it an attractive currency to trade. The recent years of economic expansion have created strength in this currency. The currency in had a strong upward trend, which, from a world trade perspective, re- mains intact. The Australian dollar is almost as equally sensitive to the Japanese economy as it is to the euro or the U.
Important also to consider are commodity-related events such as movements in cop- per and gold. Australia is a major producer of both of these commodities and is affected by price patterns. Figure 7.
TABLE 7. We can see how the movements are in sync, visualizing a strong correlation between commodity moves and the aussie-dollar pair. It shows that in , these commodities began to diverge down while the aussie FIGURE 7. iBoxx® is a registered trademark of International Index Company Limited.
FIGURE 7. continued strengthening. When a trader sees divergence from the traditional relation- ship, questions arise. Why would the aussie continue to be strong if copper is weak? The answer was that there was great strength in other sectors of the Australian economy, making copper less important. The fundamental personality of the aussie is that of a commodity- and trade- dependent currency.
The aussie will be affected by global economic growth and, in particular, Chinese growth. China is now the second largest buyer of Australian exports, making the aussie more sensitive then ever before to the direction of the Chinese economy.
A special feature of the aussie is that it has a multiple fundamental personality. It can be considered an Asian currency, reflecting Asian growth, and it can be consid- ered a currency that also is impacted by the United States and Europe. This means that the forex trader should seriously look to trade the aussie pairs such as the Australian dollar—Japanese yen AUDJPY and Australian dollar—euro AUDEUR , as well as the traditional Australian dollar—U.
dollar AUDUSD pair. Growth will, however, be held back in by the effect of a drought on the agricultural sector. The cycle of growth that the aussie is in will be certainly tested. Events in China and the commodity markets will be important factors to watch. Source: Guy Debelle, head of the International Department, Australian Foreign Exchange Market, November significant over the coming year are events in Japan. If Japan raises its interest rates, the aussie will suffer because the conditions for the carry trade will decline.
The Japanese rate of 0. If this spread changes, so will the condi- tions encouraging a stronger aussie. In recent years, it has been very rare for the aussie to depreciate against the yen. This made the risks of an unhedged carry trade very low. But the risk of carry trades providing a big decline remains very real. Domestically, the Australian economy entered with year lows in unemploy- ment at 4. The Reserve Bank of Australia increased rates to 6.
At the end of , inflation rates were at 3. The combination of domestic growth and global growth makes trading the aussie in the coming years a lot of action. dollar receives a weight of 86 percent in the trade- weighted basket. Refer to Table 7. Therefore, when the U. economy slows, the Canadian economy also suffers. When oil prices increase, the Canadian currency benefits. From a fundamental point of view, trading the Canadian dollar against the U.
pair is the most effective way to play this currency. A useful web site for tracking the Canadian economy is www. New Zealand is almost a classic example of how fundamentals can drive currency movements.
The New Zealand economy is small. 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?
By asking this question, the trader prioritizes information and analysis and separates what is useful from what is not. For example, the forex industry is filled with a great deal of information flow. We might even call it information overload. Traders have numerous chat rooms to visit; there are a number of news feeds pushing the latest headlines to the trader.
Blogs have added to the noise as well.
In the forex market, a currency pair is the value of one currency the base currency against the value of another currency the counter currency. You know nothing or very little and you want to become a pro within the next year.
We cater to both. Our primary goal here at Phantom is to take you from wherever you are currently through to confidence, consistency and funding within 12 months with us. We currently cover FX, Indices, Commodities and Cryptos. Instead, you should master the skill for yourself in order to become self sufficient. We do however provide daily trade ideas ie areas of interest that we are monitoring.
We do this to help you apply the strategy as you learn and gauge your trade ideas against ours. Capital is NOT required to start. You can begin on demo trading accounts to develop the skill. When you are confident and consistent with our strategy, the capital will be ready and available to you.
Eligible members of the Phantom community will have an opportunity to become funded traders by a third-party prop firm fund in our network OR through our own private in house fund coming in One-on-one coaching is available to all active Phantom members. Sessions can be booked directly from inside members dashboard with the coach of your choosing.
If you have any coaching related questions, feel free to reach out to us at phantomtradingfx gmail. It applies to crypto as well as indices the same way it applies to forex. We have a handful of traders inside the community who trade only crypto and do very well with it. We also have a dedicated channel inside our discord to host crypto questions, updates, chart feedback, trade ideas, etc. The majority of our students in here are currently working a job and are trading on the side.
Their goal is to make trading their full time gig as well. We are an educational company with a unique approach to trading the Foreign Exchange FX markets. Collectively we have over 50 years experience in trading. We do not use indicators and focus solely on market structure and price action, allowing you to view the market with complete clarity.
With hundreds of hours worth of video content and countless downloadable resources, there is a plethora of learning material available at your fingertips. Our charts are completely free of indicators with the exception of a session timing indicator which is completely optional. No matter where you currently reside, you are welcome to join us. We are not affiliated with any brokers however many of our students use the likes of Tio Markets, IC Markets, FXCM and Oanda.
We highly recommend you to conduct your own research and decide which broker is best for you and the country you reside in. We currently accept Visa Debit, Mastercard, American Express or PayPal. You may choose your payment type at checkout. On the main page will also be your exclusive community Discord invitation.
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Doing this assignment will help you sharpen your understanding of sentiment toward the dollar and whether that sentiment reﬂects economic fundamentals. Watch the calendar for economic releases. exports to the rest of the world rose by only 16 percent. This will enable you to gain better control over any open positions as and when they arise. Their release times are tracked in the numerous economic calendars available, and strategies for trading these economic data releases should be learned by traders. 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.last Tuesday of each month at 9 A. dollar against that currency? Table 7, forex trading curriculum. Independent Reviews Trustpilot. There is increasing pres- forex trading curriculum on China to allow the renminbi to increase in value, either through a wider managed envelope or through a full float. Wherever two foreign currencies are being traded, you can be sure that a forex market exists regardless of the time zone. The aussie will be affected by global economic growth and, in particular, Chinese growth.