Wednesday, October 3, 2007
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Why Trade Forex?
Key Benefits of Forex Trading
The Forex market is becoming more attractive to traders because of some of the following:
Liquidity
The market turns over $1.8 trillion USD a day. This results in there always being a buyer and a seller. The trading volumes and trade sizes in Forex dwarf the capacity of any other market. The liquidity of Forex allows any speculator to open or close a position at will, 24 hours a day.
Access
The Forex market is open 24 hours daily, 5 days a week. Usually brokers do close over the weekend and public holidays. Check with your broker on their respective closing times. The market follows the sun around the world, with New Zealand being one of the first countries to open, typically at 8am Sydney time. The other important times to consider during the day are:
• Tokyo open – 10am Sydney time
• European Bond Market – 4pm Sydney time
• European Equity Markets – 5pm Sydney time
• London Open – 6pm Sydney time
• USA open – 10.30pm Sydney time
• London Close – 2.00am Sydney time
• USA Close – 5am Sydney time
During the day trading is on a continuous basis without any stop and resumption in trading to reflect the above opening times. Knowing these times simply allows you to know when the most liquidity is in the market. Clearly this is during Tokyo trading hours increasing to the European and USA open times. It is possible to trade at any time during the weekdays up until Friday USA close when the market does not trade over the weekend and re opens Monday morning. Usually you will only need to look for entries in the 3 hours after these market open times.
Leverage
Trading in Forex is done using contracts or “lots”. Each contract is approx. worth
$100,000 of the base currency you are trading. To trade a contract a trader does not need to physically have this amount of money in there trading account. Instead margin is applied in Forex trading and is expressed as a percentage of the $100,000.
Margin between different Forex brokers will vary but are typically 1-4%. A 1% margin means that a trader needs to allocate $1000 of the base currency per contract for each open position.
Therefore if you were to open a position with 5 contracts then physically in the market you are exposed to $500,000 of the base currency. For this exposure assuming a 1% margin requirement you would need $5000. This leverage gives gearing of 100:1 for 1% margin or 50:1 for 2% margin accounts. It is this gearing that allows traders to make large percentage returns on there capital.
Automated Stops
The Forex market is so liquid brokers can offer automated stops allowing traders to control risk. Even though in normal market trading most brokers will guarantee stop losses, there are times when physically it is not possible for them to do so. Over the weekend the market may gap when Monday morning opens and if you are in a position over the weekend with a stop loss it might happen that the market gaps through your stop loss.
If this is the case the broker may not execute your stop at the price you have, but rather where the market has gapped. Most traders will exit there position on Friday night to avoid holding positions over the weekend just in case due to geopolitical issues the market gaps. Another time where the market can gap is during the release of announcements.
When a major important announcement is released, and the result differs greatly from the expected value, you might have a large move of around 50-100 pips in the 1min announcement candle. This move will occur with gaps in it, and again if your stop loss order gets gapped you might encounter slippage.
Two Way Market
Currencies are traded in pairs, for example Dollar/Yen or Dollar/Swiss Franc. Every position involves the selling of one currency and the buying of another. If a trader believes the Swiss Franc will appreciate against the dollar, then the trader can sell dollars and buy francs. I.e. the trader is selling short the dollar against the franc. Forex trading allows profits to be taken from both rising and falling markets with the same ease. Shorting a currency is as easy as going long on the same currency.
Continuity of Price Action
Because the market is a 24-hour a day market and is open 5 days a week there are very few gaps. Thus the market does not gap through your stops. This means that risk can be controlled.
Minimal Slippage
Because the Forex market is so liquid, most trades can be executed at the current market price. In all fast moving markets, slippage is inevitable, however many brokers software reduces this problem by allowing you to get a quote just prior to execution.
You then have the option of accepting that quote and any slippage or rejecting the price.
A Forex internet trader does not have to phone a broker. All transactions are completed online. This eliminates the middleman (the broker) and therefore reduces transaction costs and makes the process of order entry much faster. It also avoids the possibility of a misunderstanding. Confirmation of trades is immediate and all trades can be printed for record keeping purposes. In the event of a temporary technical problem, brokers have a 24-hour a day dealing desk number that can be called to get in or out of a position.
Execution Costs
With most providers you will not pay commissions for the trades you enter. Again most providers will act as a market maker, not as a broker, and makes its earnings from the spreads that are embedded in the currency rates. When trading Spot and Forward transactions you may roll over your positions and then you will pay what is termed a “roll over”.
Narrow Focus
Rather than looking at the entire stock market of many thousands of securities, the
Forex trader is typically analysing just a handful of charts. These are referred to as the major currencies and some of these are listed below:
USDYEN US dollar/Japanese Yen
GBP/USD British Pound/US dollar
EUR/USD Euro/US dollar
USD/CHF US dollar/Swiss Franc
EUR/JPY Euro/US dollar
In addition to the above majors you would also look to trade the following minor
currencies:
USD/CAD US dollar/Canadian dollar
AUD/USD Australian dollar/US dollar
There are also cross rates like GBP/YEN and these can be traded, but based on liquidity it is best to stick to just the major currencies listed above. Since you are only looking at small number of charts you can better follow and understand the patterns in each chart.
Flexible Time Exposure
The trader can choose the time frame of exposure to suit his/her circumstances. Ie: trading daily charts or 5 minutes charts.
Simplicity
Forex trading is not as complicated as many other markets. These are no time decays,
implied volatilities, expiry dates, dividends, exercise prices, conversion factors, deltas, Vegas, elasticity, intrinsic values etc to deal with. Thus trading decisions are much clearer and the market is much fairer.
Identifiable Trends
The currency markets have demonstrated in the past substantial and identifiable trends. Each currency has its own personality and each offers unique historical patterns of trends, providing diversified trading opportunities within the Forex market.
Here are some examples of the EUR in various timeframes demonstrating clear movements in price action and therefore offering the opportunity of trading.
Daily Chart of EUR/USD
30-minute chart of EUR/USD
5-minute chart of EUR/USD
Diversification of an Investment Portfolio
The Forex Market is classified as a separate asset class to equities, properties and bonds. The Forex market is also highly uncorrelated with the mentioned asset classes. Therefore, investing a portion of one’s investments into the Forex market will increase the diversification of the investment portfolio.
The Forex market is becoming more attractive to traders because of some of the following:
Liquidity
The market turns over $1.8 trillion USD a day. This results in there always being a buyer and a seller. The trading volumes and trade sizes in Forex dwarf the capacity of any other market. The liquidity of Forex allows any speculator to open or close a position at will, 24 hours a day.
Access
The Forex market is open 24 hours daily, 5 days a week. Usually brokers do close over the weekend and public holidays. Check with your broker on their respective closing times. The market follows the sun around the world, with New Zealand being one of the first countries to open, typically at 8am Sydney time. The other important times to consider during the day are:
• Tokyo open – 10am Sydney time
• European Bond Market – 4pm Sydney time
• European Equity Markets – 5pm Sydney time
• London Open – 6pm Sydney time
• USA open – 10.30pm Sydney time
• London Close – 2.00am Sydney time
• USA Close – 5am Sydney time
During the day trading is on a continuous basis without any stop and resumption in trading to reflect the above opening times. Knowing these times simply allows you to know when the most liquidity is in the market. Clearly this is during Tokyo trading hours increasing to the European and USA open times. It is possible to trade at any time during the weekdays up until Friday USA close when the market does not trade over the weekend and re opens Monday morning. Usually you will only need to look for entries in the 3 hours after these market open times.
Leverage
Trading in Forex is done using contracts or “lots”. Each contract is approx. worth
$100,000 of the base currency you are trading. To trade a contract a trader does not need to physically have this amount of money in there trading account. Instead margin is applied in Forex trading and is expressed as a percentage of the $100,000.
Margin between different Forex brokers will vary but are typically 1-4%. A 1% margin means that a trader needs to allocate $1000 of the base currency per contract for each open position.
Therefore if you were to open a position with 5 contracts then physically in the market you are exposed to $500,000 of the base currency. For this exposure assuming a 1% margin requirement you would need $5000. This leverage gives gearing of 100:1 for 1% margin or 50:1 for 2% margin accounts. It is this gearing that allows traders to make large percentage returns on there capital.
Automated Stops
The Forex market is so liquid brokers can offer automated stops allowing traders to control risk. Even though in normal market trading most brokers will guarantee stop losses, there are times when physically it is not possible for them to do so. Over the weekend the market may gap when Monday morning opens and if you are in a position over the weekend with a stop loss it might happen that the market gaps through your stop loss.
If this is the case the broker may not execute your stop at the price you have, but rather where the market has gapped. Most traders will exit there position on Friday night to avoid holding positions over the weekend just in case due to geopolitical issues the market gaps. Another time where the market can gap is during the release of announcements.
When a major important announcement is released, and the result differs greatly from the expected value, you might have a large move of around 50-100 pips in the 1min announcement candle. This move will occur with gaps in it, and again if your stop loss order gets gapped you might encounter slippage.
Two Way Market
Currencies are traded in pairs, for example Dollar/Yen or Dollar/Swiss Franc. Every position involves the selling of one currency and the buying of another. If a trader believes the Swiss Franc will appreciate against the dollar, then the trader can sell dollars and buy francs. I.e. the trader is selling short the dollar against the franc. Forex trading allows profits to be taken from both rising and falling markets with the same ease. Shorting a currency is as easy as going long on the same currency.
Continuity of Price Action
Because the market is a 24-hour a day market and is open 5 days a week there are very few gaps. Thus the market does not gap through your stops. This means that risk can be controlled.
Minimal Slippage
Because the Forex market is so liquid, most trades can be executed at the current market price. In all fast moving markets, slippage is inevitable, however many brokers software reduces this problem by allowing you to get a quote just prior to execution.
You then have the option of accepting that quote and any slippage or rejecting the price.
A Forex internet trader does not have to phone a broker. All transactions are completed online. This eliminates the middleman (the broker) and therefore reduces transaction costs and makes the process of order entry much faster. It also avoids the possibility of a misunderstanding. Confirmation of trades is immediate and all trades can be printed for record keeping purposes. In the event of a temporary technical problem, brokers have a 24-hour a day dealing desk number that can be called to get in or out of a position.
Execution Costs
With most providers you will not pay commissions for the trades you enter. Again most providers will act as a market maker, not as a broker, and makes its earnings from the spreads that are embedded in the currency rates. When trading Spot and Forward transactions you may roll over your positions and then you will pay what is termed a “roll over”.
Narrow Focus
Rather than looking at the entire stock market of many thousands of securities, the
Forex trader is typically analysing just a handful of charts. These are referred to as the major currencies and some of these are listed below:
USDYEN US dollar/Japanese Yen
GBP/USD British Pound/US dollar
EUR/USD Euro/US dollar
USD/CHF US dollar/Swiss Franc
EUR/JPY Euro/US dollar
In addition to the above majors you would also look to trade the following minor
currencies:
USD/CAD US dollar/Canadian dollar
AUD/USD Australian dollar/US dollar
There are also cross rates like GBP/YEN and these can be traded, but based on liquidity it is best to stick to just the major currencies listed above. Since you are only looking at small number of charts you can better follow and understand the patterns in each chart.
Flexible Time Exposure
The trader can choose the time frame of exposure to suit his/her circumstances. Ie: trading daily charts or 5 minutes charts.
Simplicity
Forex trading is not as complicated as many other markets. These are no time decays,
implied volatilities, expiry dates, dividends, exercise prices, conversion factors, deltas, Vegas, elasticity, intrinsic values etc to deal with. Thus trading decisions are much clearer and the market is much fairer.
Identifiable Trends
The currency markets have demonstrated in the past substantial and identifiable trends. Each currency has its own personality and each offers unique historical patterns of trends, providing diversified trading opportunities within the Forex market.
Here are some examples of the EUR in various timeframes demonstrating clear movements in price action and therefore offering the opportunity of trading.
Daily Chart of EUR/USD
30-minute chart of EUR/USD
5-minute chart of EUR/USD
Diversification of an Investment Portfolio
The Forex Market is classified as a separate asset class to equities, properties and bonds. The Forex market is also highly uncorrelated with the mentioned asset classes. Therefore, investing a portion of one’s investments into the Forex market will increase the diversification of the investment portfolio.
What are the Main Economic Indicators coming out of the United States?
An economic indicator (or business indicator) is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance.
Economic indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes.
Leading: Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.
Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.
Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic Product is a coincident indicator.
Now we will list the most important US economic indicators followed by traders, investors and analysts.
Now we will list the most important US economic indicators followed by traders, investors and analysts.
Non - Farm Payrolls
Description: As the names suggests this report lists the number of payroll jobs at all non-farm business establishments and governments agencies. This is the most closely watched economic release in the States. Coincident indicator of economic growth.
The greater the increase in employment, the faster the total economic growth. An increasing unemployment rates is associated with an expanding economy. The economy is considered to be at full employment when the unemployment rate is between 5.5% and 6.0 %. Average earnings are also measured in this report and if this rises sharply, it acts as a guide of potential inflationary pressures.
Release Date: 8:30 (EST); monthly, usually first Friday of every month.
ISM Manufacturing Index
Description: Based on surveys of 300 purchasing managers nationwide and represents 20 industries regarding manufacturing activity. The ISM Manufacturing index is considered to be the premier manufacturing indices. Readings of 50% or above are typically associated with an expanding manufacturing sector and healthy economy, while readings below 50 are associated with contraction.
The sub-components of the index are very important and it contains useful information about manufacturing activity. The production component is related to industrial production. The new orders to durable goods orders and employment to factory payrolls. Prices are linked to producer prices, export orders to merchandise trade exports and import orders to merchandise imports. The index is seasonally adjusted for greater accuracy.
Release Date: 10:00 (EST); monthly, first business day after reporting month.
Consumer Price Index (CPI)
Description: a consumer price index (CPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. It is also known as a cost of living index. It's important to monitor the CPI excluding food and energy prices for its monthly stability. This is referred to as "core CPI" and gives a clearer picture of the underlying inflation trend. The rate of change of the core CPI is one of the key measures of inflation for the US economy. Inflationary pressure is generated when the core CPI posts larger than expected gains.
Release Date: 8:30 AM (EST); monthly.
Retail Sales
Description: this index measures the total sales of goods by all retail establishments in the U.S. (sales of services are not included). These figures are in current dollars, that is, they are not adjusted for inflation. It is the timeliest indicator of the broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences.
Retail sales are the first picture of consumer spending for a given month. Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month. Retail sales can be quite volatile and the advance reports are subject to large revisions. Data is revised three months back every month and can be substantial.
Release Date:8:30 AM (EST); monthly, midmonth and approximately two weeks following the reporting month's end.
Trade Balance or US Trade Deficit
Description: this report measures the difference between exports and imports of US goods and services. The trade report is most widely watched for trends in the overall trade balance. This report is significant as imports and exports are important components of aggregate economic activity, representing approximately 14 and 12 percent of GDP respectively.
Changes in the trade balance with particular countries can have implications for foreign exchange and policy with that trading partner. Therefore, this report is of importance to investors who are interested in diversifying globally.
Release Date: 8:30 AM (EST); monthly.
Personal Income and Consumption
Description: Personal Spending, also known as PCE, represents the change in the market value of all goods and services purchased by individuals. This is the largest component of GDP. Personal Income represents the income that households receive from all sources, including employment, self-employments, investments, and transfer payments. Income is the major factor in regards to spending and US consumers spend approximately 95 cents of each new dollar. Consumer spending accounts for two-thirds of the economy and greater spending stimulates corporate profits as well as benefiting the stock market.
This indicator has gained further credibility in February 2000 when the FOMC began forecasting inflation in terms of the personal consumption expenditures deflator (PCE Deflator, a component of the report). So basically the FOMC prefers the PCE Deflator rather than the CPI.
Release Date: Released first business day of the month at 8.30 am New York time.
Gross Domestic Product - GDP
Description: Gross Domestic Product (GDP) is the broadest measure of economic activity. GDP measures the dollar value of all goods and services within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing the output. Strong GDP growth is between 2.0% and 2.5%. A higher GDP growth will lead to quicker inflation, while lower growth indicates a soft economy.
Quarterly GDP reports are broken down into three announcements: advance, preliminary and final. After the final revision, GDP is not revised again until the annual benchmark revisions each July.
Release Date: 8:30 AM (EST); Figures released monthly, around the 4th week following the reported month.
Durable Goods Orders
Description: This is a government index that measures the dollar volumes of orders, shipments, and unfilled orders of durable goods. Durable goods are new or used items generally with a normal life expectancy of three years or more. The report provides information on the strength of demand for US manufactured durable goods, from both domestic and foreign sources. A rising index suggests demand is strengthening and will result is rising production and employment. A falling index suggests the opposite.
Durable Goods Orders are considered a leading indicator of manufacturing activity, and the market moves on this report despite the volatility and large revisions that make it a less than perfect indicator. Analysts usually exclude defense and transportation orders because of their volatility. The report is also one of the earliest indictors of both consumer and business demand for equipment. Increased expenditures on investment goods reduce the prospect of inflation.
Release Date: 8:30 AM (EST); monthly, 3 to 4 weeks after the reporting month.
Producer Price Index (PPI)
Description: The Producer Price Index measures prices of goods at the wholesale level. There are three broad subcategories within the PPI: industry; commodity; and stage-of-processing. At all stages of production, the market places more emphasis on the index excluding food and energy and this is referred to as core PPI. Core PPI gives a clearer picture of the underlying inflation trend. Changes in the core PPI are considered a precursor of consumer price inflation. Inflationary pressure is generated when the core PPI posts larger-than-expected gains.
The index is not revised on a monthly basis, but annual revisions to seasonal adjustment factors can produce small adjustments to past releases.
Release Date: 12:30 (GMT); monthly, 2 weeks after the reporting month.
Industrial Production and Capacity Utilisation
Description: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines and utilities. This report is combined with capacity utilization which is seen as a critical gauge of the slack available in the economy. The industrial sector of the economy represents approximately 25 percent of GDP. Changes in GDP are heavily concentrated in the industrial sector. Therefore, changes in the index of industrial production provide useful information on the current growth of GDP. Investors use the capacity utilization rate as an inflation indicator. If it gets above 85%, inflationary pressures are generated.
The data are revised monthly for the prior three months to reflect more complete information. New seasonal adjustment factors are introduced in December. The revision affects at least three years worth of data and its significance is moderate.
Release Date: 9:15 AM (EST); Monthly, approximately 15 days following the reporting
To get up to date reports and FREE live streaming news, simply register for FREE with ForexCT
Economic indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes.
Leading: Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.
Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.
Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic Product is a coincident indicator.
Now we will list the most important US economic indicators followed by traders, investors and analysts.
Now we will list the most important US economic indicators followed by traders, investors and analysts.
- Non - Farm Payrolls
- ISM Manufacturing Index
- Consumer Price Index (CPI)
- Retail Sales
- Trade Balance or US Trade Deficit
- Personal Income and Consumption
- Gross Domestic Product - GDP
- Durable Goods Orders
- Producer Price Index (PPI)
- Industrial Production and Capacity Utilization
Non - Farm Payrolls
Description: As the names suggests this report lists the number of payroll jobs at all non-farm business establishments and governments agencies. This is the most closely watched economic release in the States. Coincident indicator of economic growth.
The greater the increase in employment, the faster the total economic growth. An increasing unemployment rates is associated with an expanding economy. The economy is considered to be at full employment when the unemployment rate is between 5.5% and 6.0 %. Average earnings are also measured in this report and if this rises sharply, it acts as a guide of potential inflationary pressures.
Release Date: 8:30 (EST); monthly, usually first Friday of every month.
ISM Manufacturing Index
Description: Based on surveys of 300 purchasing managers nationwide and represents 20 industries regarding manufacturing activity. The ISM Manufacturing index is considered to be the premier manufacturing indices. Readings of 50% or above are typically associated with an expanding manufacturing sector and healthy economy, while readings below 50 are associated with contraction.
The sub-components of the index are very important and it contains useful information about manufacturing activity. The production component is related to industrial production. The new orders to durable goods orders and employment to factory payrolls. Prices are linked to producer prices, export orders to merchandise trade exports and import orders to merchandise imports. The index is seasonally adjusted for greater accuracy.
Release Date: 10:00 (EST); monthly, first business day after reporting month.
Consumer Price Index (CPI)
Description: a consumer price index (CPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. It is also known as a cost of living index. It's important to monitor the CPI excluding food and energy prices for its monthly stability. This is referred to as "core CPI" and gives a clearer picture of the underlying inflation trend. The rate of change of the core CPI is one of the key measures of inflation for the US economy. Inflationary pressure is generated when the core CPI posts larger than expected gains.
Release Date: 8:30 AM (EST); monthly.
Retail Sales
Description: this index measures the total sales of goods by all retail establishments in the U.S. (sales of services are not included). These figures are in current dollars, that is, they are not adjusted for inflation. It is the timeliest indicator of the broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences.
Retail sales are the first picture of consumer spending for a given month. Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month. Retail sales can be quite volatile and the advance reports are subject to large revisions. Data is revised three months back every month and can be substantial.
Release Date:8:30 AM (EST); monthly, midmonth and approximately two weeks following the reporting month's end.
Trade Balance or US Trade Deficit
Description: this report measures the difference between exports and imports of US goods and services. The trade report is most widely watched for trends in the overall trade balance. This report is significant as imports and exports are important components of aggregate economic activity, representing approximately 14 and 12 percent of GDP respectively.
Changes in the trade balance with particular countries can have implications for foreign exchange and policy with that trading partner. Therefore, this report is of importance to investors who are interested in diversifying globally.
Release Date: 8:30 AM (EST); monthly.
Personal Income and Consumption
Description: Personal Spending, also known as PCE, represents the change in the market value of all goods and services purchased by individuals. This is the largest component of GDP. Personal Income represents the income that households receive from all sources, including employment, self-employments, investments, and transfer payments. Income is the major factor in regards to spending and US consumers spend approximately 95 cents of each new dollar. Consumer spending accounts for two-thirds of the economy and greater spending stimulates corporate profits as well as benefiting the stock market.
This indicator has gained further credibility in February 2000 when the FOMC began forecasting inflation in terms of the personal consumption expenditures deflator (PCE Deflator, a component of the report). So basically the FOMC prefers the PCE Deflator rather than the CPI.
Release Date: Released first business day of the month at 8.30 am New York time.
Gross Domestic Product - GDP
Description: Gross Domestic Product (GDP) is the broadest measure of economic activity. GDP measures the dollar value of all goods and services within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing the output. Strong GDP growth is between 2.0% and 2.5%. A higher GDP growth will lead to quicker inflation, while lower growth indicates a soft economy.
Quarterly GDP reports are broken down into three announcements: advance, preliminary and final. After the final revision, GDP is not revised again until the annual benchmark revisions each July.
Release Date: 8:30 AM (EST); Figures released monthly, around the 4th week following the reported month.
Durable Goods Orders
Description: This is a government index that measures the dollar volumes of orders, shipments, and unfilled orders of durable goods. Durable goods are new or used items generally with a normal life expectancy of three years or more. The report provides information on the strength of demand for US manufactured durable goods, from both domestic and foreign sources. A rising index suggests demand is strengthening and will result is rising production and employment. A falling index suggests the opposite.
Durable Goods Orders are considered a leading indicator of manufacturing activity, and the market moves on this report despite the volatility and large revisions that make it a less than perfect indicator. Analysts usually exclude defense and transportation orders because of their volatility. The report is also one of the earliest indictors of both consumer and business demand for equipment. Increased expenditures on investment goods reduce the prospect of inflation.
Release Date: 8:30 AM (EST); monthly, 3 to 4 weeks after the reporting month.
Producer Price Index (PPI)
Description: The Producer Price Index measures prices of goods at the wholesale level. There are three broad subcategories within the PPI: industry; commodity; and stage-of-processing. At all stages of production, the market places more emphasis on the index excluding food and energy and this is referred to as core PPI. Core PPI gives a clearer picture of the underlying inflation trend. Changes in the core PPI are considered a precursor of consumer price inflation. Inflationary pressure is generated when the core PPI posts larger-than-expected gains.
The index is not revised on a monthly basis, but annual revisions to seasonal adjustment factors can produce small adjustments to past releases.
Release Date: 12:30 (GMT); monthly, 2 weeks after the reporting month.
Industrial Production and Capacity Utilisation
Description: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines and utilities. This report is combined with capacity utilization which is seen as a critical gauge of the slack available in the economy. The industrial sector of the economy represents approximately 25 percent of GDP. Changes in GDP are heavily concentrated in the industrial sector. Therefore, changes in the index of industrial production provide useful information on the current growth of GDP. Investors use the capacity utilization rate as an inflation indicator. If it gets above 85%, inflationary pressures are generated.
The data are revised monthly for the prior three months to reflect more complete information. New seasonal adjustment factors are introduced in December. The revision affects at least three years worth of data and its significance is moderate.
Release Date: 9:15 AM (EST); Monthly, approximately 15 days following the reporting
To get up to date reports and FREE live streaming news, simply register for FREE with ForexCT
Forex Market Analysis
Introduction
There are two necessary methods in forecasting the currency market, fundamental analysis and technical analysis.
Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued.
Technical analysis focuses on the study of price movements.
Forex Technical Indicators
A technical indicator is a tool in the technical analyst's box. Those based on price data include any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced.
A technical indicator offers a different perspective from which to analyse the price action. Some are derived from simple formulas and the mechanics are relatively easy to understand. Others have complex formulas and require more study to fully understand and appreciate. Regardless of the complexity of the formula, technical indicators can provide unique perspective on the strength and direction of the underlying price action. Here we will list the most commonly used technical indicators and offer a brief description
- Bollinger Bands
- Moving Average Convergence Divergence
- Momentum
- Moving Averages
- Relative Strength Index (RSI).
- Stochastic Oscillator
Bollinger Bands
An indicator that allows users to compare volatility and relative price levels over a period of time. The Bollinger Bands are envelopes based on a moving average and a standard deviation which makes the bands widen or narrow relative to the current market volatility.
95% of price action will take place within the Bollinger bands and thus the Bands act as strong areas of support and resistance when the forex market is without trend. It is possible at times like this to successfully trade the price rising or falling from one Bollinger line to the other. When a trend begins and the volatility of the market increases thus the spacing of the Bollinger Bands will widen, as the trend slows down the Bollinger bands will narrow.
Moving Average Convergence Divergence
An indicator that follows the difference between a pair of moving averages. Developed by Gerald Appel, MACD (moving average convergence divergence) is a trend following momentum indicator that shows the relationship between two moving averages of prices.
Calculation
To calculate the MACD subtract the 26-day exponential moving average (EMA) from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on top of the MACD. Other lengths of average can be used, but 9-12-26 is the most common "standard" setting.
Function
MACD measures the difference between two moving averages. A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating and this would be considered bearish.
Application
There are 3 common methods to interpret the MACD:
- Crossovers - When the MACD falls below the signal line it is a signal to sell. Vice versa when the MACD rises above the signal line.
- Divergence - When the security diverges from the MACD it may signal the end of the current trend. For instance, price may continue to make higher highs while MACD makes lower highs. This is an example of bearish or negative divergence and a warning that the up trend may soon be finished.
- Overbought/Oversold - When the MACD rises dramatically (shorter moving average pulling away from longer term moving average) it is a signal the security is overbought and will soon return to normal levels.
Momentum
The impetus of a directional movement, or a technical indicator used to measure directional impetus. Also described as a style of forex trading where one looks for increased impetus as an entry signal. Momentum can refer to a number of things in regard to trading.
Firstly it can refer to 'momentum' as the impetus, or increased activity of an item - such as a stock or index. This can be referred to as gaining momentum or losing momentum
Secondly it is a type of indicator that can be added to a chart as part of technical analysis - this is a Momentum Indicator, which measures the amount of impetus or activity in a stock or index and shows it growing or waning. There are also other types of momentum indicators such as the Relative Strength Index or the Stochastic Momentum Indicator.
Third it can refer to a type of trading or investing, where traders look for an increase in the momentum of a stock or index as an entry point for their trade.
Moving Averages
An average of price, or some other data value, plotted over time. A moving average is referred as such because it is recalculated at each consecutive point in time. Moving averages are used in technical analysis The effect is to produce a line that smoothes out fluctuations in the original data.
Types of Moving Averages
Simple moving average (SMA): The unweighted mean of the previous n data points in the time series. For example, a 10-day simple moving average closing price is the mean of the previous 10 days' closing prices. The larger the value of n, the greater the smoothing effect and the more the MA line is displaced from the original data.
Weighted moving average (WMA): The weighted mean of the previous n data points in the time series. The weighting is generally (but not necessarily always) linear. That means a relative weight of 1 is assigned to time period t, with each previous period's value assigned a lower weight on down to a relative weight of 1/n assigned to time period t-n. The WMA is more responsive to recent movements than the SMA.
Exponential moving average (EMA): An exponentially weighted mean of previous data points. The parameter of a EWMA can be expressed as a proportional percentage. For example, a 10% EMA has each time period assigned a weight that is 90% of the weight assigned to the next more recent time period.
Relative Strength Index (RSI)
RSI is an extremely useful, reliable indicator which is a favourite of many forex traders.
CalculationThe RSI is generally calculated using a 14 day time period (and this is generally the default setting of many trading software packages) however other time periods can be used such a 9 day for a faster setting and 25 day for a slower setting.
The Formula is:
RSI = 100 - 100 / (1 + RS)
RS = AG / AL
AG = Average Gain over RSI Period
Gain = Price - Price.x (when Price > Price.x)
AL = Average Loss over RSI Period
Loss = Price - Price.x (when Price <>
x = Momentum Period
Application
In general terms the RSI is an overbought/oversold indicator. In practice below 30 is considered being an oversold indication and when the RSI crosses 30 to go up, this is a buy signal. At the other end of the scale a value above 70 is considered overbought and when the RSI crosses to go below this, it gives a sell signal.
It should be noted that the RSI will form chart patterns similar to those found on the main chart, such as a double top, head and shoulders etc which may not show up in the stock/indices price, but which will give and an indication as to pending change ahead.
The RSI will also form support and resistance levels, just like the main chart and it may also diverge from the main chart direction indicating change. For example, the stock/index may make a new high, but the RSI doesn't - that's a bearish indicator. Conversely the stock/index may make a drop to a new low but the RSI moves sideways or upwards - that's a bullish indication. In these cases the price will usually follow the direction the RSI has just shown.
Stochastic Oscillator
In general terms a Stochastic level below 20 would be considered oversold, where as a level above 80 would be considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A buy or sell signal can be generated by the Stochastic when the indicator passes back above the 20 level for a buy signal or below the 80 level for a sell signal.
There are different types of Stochastic Oscillator and reference may be made to a Fast Stochastic or a Slow Stochastic. These are generated by using different settings - as detailed in the calculation below. The Fast Stochastic can be useful for quick trades - made in short time frames. The Slow Stochastic is more smoothed and loses a lot of 'noise' that can lead to confusion with the Fast Stochastic.
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Fundamental Analysis
Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued.
The role of interest rates
Using the interest rates independently from the real economic environment translated into a very expensive strategy. Because foreign exchange, by definition, consists of simultaneous transactions in two currencies, then it follows that the market must focus on two respective interest rates as well.
This is the interest rate differential, a basic factor in the markets. Forex Traders react when the interest rate differential changes, not simply when the interest rates themselves change. For example, if all the G-5 countries decided to simultaneously lower their interest rates by 0.5 percent, the move would be neutral for foreign exchange, because the interest rate differentials would also be neutral. Of course, most of the time the discount rates are cut unilaterally, a move that generates changes in both the interest differential and the exchange rate. Forex Traders approach the interest rates like any other factor, trading on expectations and facts. For example, if rumor says that a discount rate will be cut, the respective currency will be sold before the fact. Once the cut occurs, it is quite possible that the currency will be bought back, or the other way around. An unexpected change in interest rates is likely to trigger a sharp currency move. Other factors affecting the trading decision are the time lag between the rumor and the fact, the reasons behind the interest rate change, and the perceived importance of the change. The market generally prices in a discount rate change that was delayed. Since it is a fait accompli, it is neutral to the market. If the discount rate was changed for political rather than economic reasons, a common practice in the European Monetary System, the markets are likely to go against the central banks, sticking to the real fundamentals rather than the political ones. This happened in both September 1992 and the summer of 1993, when the European central banks lost unprecedented amounts of money trying to prop up their currencies, despite having high interest rates. The market perceived those interest rates as artificially high and, 29 therefore, aggressively sold the respective currencies. Finally, Forex Traders deal on the perceived importance of a change in the interest rate differential.
Financial factors
Financial factors are Vital to fundamental analysis. Changes in a government's monetary or fiscal policies are bound to generate changes in the economy, and these will be reflected in the exchange rates. Financial factors should be triggered only by economic factors. When governments focus on different aspects of the economy or have additional international responsibilities, financial factors may have priority over economic factors. This was painfully true in the case of the European Monetary System (EMS) in the early 1990s. The realities of the marketplace revealed the underlying artificiality of this approach.
Political crises influence
A political crisis is commonly dangerous for the Forex because it may trigger a sharp decrease in trade volumes. Prices under critical conditions dry out quickly, and sometimes the spreads between bid and offer jump from 5 pips to 100 pips. Unlike predictable political events (parliament elections, interstate agreements conclusion etc), which generally take place in an exact time and give market the opportunity to adopt, political crises come and strike suddenly. Currency traders have a knack for responding to crises. The traders should react as fast as possible with risk management to avoid big losses. They have not much time to take decisions, often they have only seconds. Return on the market after a crisis is often problematic.
Monetary Operations by Central Banks
All central banks and the U.S. Federal Reserve System (FRS) as well, affect the foreign exchange markets changing discount rates and performing the monetary operations (as interventions and currency purchases).
For the foreign exchange operations most significant are repurchase agreements to sell the same security back at the same price at a predetermined date in the future (usually within 15 days), and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into the banking system. The impact on the foreign exchange market is that the national currency should weaken. The repurchase agreements may be either customer repos or system repos. Matched sale-purchase agreements are just the opposite of repurchase agreements. When executing a matched sale-purchase agreement, a bank or the FRS sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future (generally within 7 days). This arrangement amounts to a temporary drain of reserves. The impact on the foreign exchange market is that the national currency should strengthen.
Monetary operations include payments among central banks or to international agencies. In addition, the FRS has entered a series of currency swap arrangements with other central banks since 1962. Also, payments to the World Bank or the United Nations are executed through central banks.
Intervention in the United States foreign exchange markets by the U.S. Treasury and the FRS is geared toward restoring orderly conditions in the market or influencing the exchange rates. It is not geared toward affecting the reserves.
There are two types of foreign exchange interventions: naked intervention and sterilized Intervention. Naked intervention, or unsterilized intervention, refers to the sole foreign exchange activity. All that takes place is the intervention itself, in which the Federal Reserve either buys or sells U.S. dollars against a foreign currency. In addition to the impact on the foreign exchange market, there is also a monetary effect on the money supply. If the money supply is impacted, then consequent adjustments must be made in interest rates, in prices, and at all levels of the economy. Therefore, a naked foreign exchange intervention has a long-term effect.
Sterilized intervention neutralizes its impact on the money supply. As there are rather few central banks that want the impact of their intervention in the foreign exchange markets to affect all corners of their economy, sterilized interventions have been the tool of choice. This holds true for the FRS as well. The sterilized intervention involves an additional step to the original currency transaction. This step consists of a sale of government securities that offsets the reserve addition that occurs due to the intervention. It may be easier to visualize it if you think that the central bank will finance the sale of a currency through the sale of a number of government securities. Because a sterilized intervention only generates an impact on the supply and demand of a certain currency, its impact will tend to have a short-to medium-term effect.
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What are the Major Currencies?
US Dollar - $US
Also referred to as the dollar, greenback and buck.
The US Dollar was adopted by the Congress of the Confederation of the United States on July 6, 1785 and is the most used in international transactions. Several countries use the U.S. dollar as their official currency, and many others allow it to be used in a de facto capacity.
In 1995, over US$380 billion were in circulation, of which two-thirds was outside the United States. By 2005, those figures had doubled to nearly $760 billion with an estimated half to two-thirds being held overseas, which is an annual growth of about 7.6%. However, as of December 2006, the dollar was surpassed by the euro in terms of combined value of cash in circulation.
The value of euro notes in circulation has risen to more than € 610 billion, equivalent to US$800 billion at the exchange rates at this time.
The U.S. dollar uses the decimal system, consisting of 100 (equal) cents (symbol ¢).
The Euro - €
The euro (currency sign: €; banking code: EUR) is the official currency of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain - also known as the Eurozone - and is the single currency for more than 317 million people in Europe.
Including areas using currencies pegged to the euro, the euro affects more than 480 million people worldwide, with more than €610 billion in circulation as of December 2006. While all EU member states are eligible to join if they comply with certain monetary requirements, the euro is not used in all of the European Union as not all EU members have adopted the currency. All nations which have recently joined the EU are pledged to adopt the euro in due course, but the United Kingdom and Denmark are under no such obligation. Several small European states (The Vatican, Monaco and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro and Kosovo have adopted the euro unilaterally.
The Yen - ¥
The yen or (Japanese yen) is the currency of Japan. It is also widely used as a reserve currency after the United States dollar and euro.
The yen was introduced by the Meiji government in 1870 as a system resembling those in Europe. The yen replaced the complex monetary system of the Edo period, based on the mon.
The mon was a currency of Japan until 1870, as there were hundreds of different styles of currency throughout Japanese history, of many shapes, styles, designs, sizes, and materials, including gold, silver, bronze, etc. Even rice was once a currency, the koku.
The yen lost most of its value during and after World War II; after a period of instability, the yen was pegged at 1 US dollar = ¥360 from April 25, 1949, to until 1971 when the Bretton Woods system collapsed and the value of the yen began to float. After the Plaza Accord of 1985, the yen appreciated against the US dollar, until it reached a peak of about ¥85 per dollar in the mid 1990s. After that, the Bank of Japan adopted a weak yen policy which has held it in the range of ¥100-120 per dollar. In the last couple of years, the yen has grown weaker and weaker against not only the dollar but against nearly all other important world currencies due to a de facto zero interest rate policy which has encouraged massive yen carry trades, where speculators borrow in yen and buy bonds and other assets in currencies that charge significant interest. This can be very profitable, but is a short position on the yen, which in the absence of other factors drives the yen's value down.
The relative value of the yen is determined in foreign exchange markets by the economic forces of supply and demand. The supply of the yen in the market is governed by the desire of yen holders to exchange their yen for other currencies to purchase goods, services, or assets. The demand for the yen is governed by the desire of foreigners to buy goods and services in Japan and by their interest in investing in Japan (buying yen-denominated real and financial assets).
The Great British Pound - £
Other Names - Sterling, Cable and the Pound
The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown Dependencies. The slang term "quid" is very common in the UK.
The official full name pound sterling (plural: pounds sterling) is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name. The Sterling is the third most traded currency in the world, after the US dollar and the euro.
The Swiss Franc - CHF
The franc (ISO 4217: CHF or 756) is the currency and legal tender of Switzerland and Liechtenstein. The Italian exclave Campione d'Italia and the German exclave Büsingen also use the Swiss franc. Franc banknotes are issued by the central bank of Switzerland, the Swiss National Bank, while coins are issued by the federal mint, Swissmint.
The Swiss franc is the only version of the franc still issued in Europe. Its name in the four official languages of Switzerland is Franken (German), franc (French and Rhaeto-Romanic), and franco (Italian). The smaller denomination, which is worth a hundredth of a franc, is called Rappen (Rp.) in German, centime (c.) in French, centesimo (ct.) in Italian and rap (rp.) in Rhaeto-Romanic. Users of the currency commonly write CHF (the ISO code), though SFr. is still common. SwF has been used in some publications but is not an official abbreviation.
The current franc was introduced in 1850 at par with the French franc. It replaced the different currencies of the Swiss cantons, some of which had been using a franc (divided into 10 batzen and 100 rappen) which was worth 1½ French francs.
In 1865, France, Belgium, Italy, and Switzerland formed the Latin Monetary Union where they agreed to change their national currencies to a standard of 4.5 grams of silver or 0.290322 grams of gold. Even after the monetary union faded away in the 1920s and officially ended in 1927, the Swiss franc remained on that standard until 1967.
As of November 30, 2006, the Swiss franc was worth US$ 0.826729 or € 0.628625. Since mid-2003, its exchange rate with the Euro has been stable at a value of about 1.55 CHF per Euro, so that the Swiss Franc has risen and fallen in tandem with the Euro against the U.S. dollar and other currencies.
The Swiss franc has historically been considered a safe haven currency with virtually zero inflation and a legal requirement that a minimum 40% is backed by gold reserves. However this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following an amendment to the Swiss Constitution. The Swiss franc has suffered devaluation only once, on 27 September 1936 during the Great Depression, when the currency was devalued by 30% following the devaluations of the British pound, U.S. dollar and French franc.
The Australian Dollar
The Australian dollar (currency code AUD) has been, since 14 February 1966, the currency of the Commonwealth of Australia, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu. It is normally abbreviated with the dollar sign $. Alternatively A$ or $A, $AU or AU$ is used to distinguish it from other dollar-denominated currencies. It is sometimes affectionately called the "Aussie battler"; during a low period (relative to the U.S. dollar) around 2001 and 2002 the currency was sometimes locally called the "Pacific Peso". It is divided into 100 cents.
The Australian dollar is currently the sixth-most-traded currency in world foreign exchange markets (behind the U.S. dollar, the euro, the yen, the Pound sterling, and the Swiss franc), accounting for approximately 4-5% of worldwide foreign exchange transactions. The Australian dollar is popular with currency traders due to the relative lack of government intervention in the foreign exchange market, the general stability of the economy and government as well as the prevailing view that it offers diversification benefits in a portfolio containing the major world currencies (especially because of its greater exposure to Asian economies and the commodities cycle).
Also referred to as the dollar, greenback and buck.
The US Dollar was adopted by the Congress of the Confederation of the United States on July 6, 1785 and is the most used in international transactions. Several countries use the U.S. dollar as their official currency, and many others allow it to be used in a de facto capacity.
In 1995, over US$380 billion were in circulation, of which two-thirds was outside the United States. By 2005, those figures had doubled to nearly $760 billion with an estimated half to two-thirds being held overseas, which is an annual growth of about 7.6%. However, as of December 2006, the dollar was surpassed by the euro in terms of combined value of cash in circulation.
The value of euro notes in circulation has risen to more than € 610 billion, equivalent to US$800 billion at the exchange rates at this time.
The U.S. dollar uses the decimal system, consisting of 100 (equal) cents (symbol ¢).
The Euro - €
The euro (currency sign: €; banking code: EUR) is the official currency of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain - also known as the Eurozone - and is the single currency for more than 317 million people in Europe.
Including areas using currencies pegged to the euro, the euro affects more than 480 million people worldwide, with more than €610 billion in circulation as of December 2006. While all EU member states are eligible to join if they comply with certain monetary requirements, the euro is not used in all of the European Union as not all EU members have adopted the currency. All nations which have recently joined the EU are pledged to adopt the euro in due course, but the United Kingdom and Denmark are under no such obligation. Several small European states (The Vatican, Monaco and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro and Kosovo have adopted the euro unilaterally.
The Yen - ¥
The yen or (Japanese yen) is the currency of Japan. It is also widely used as a reserve currency after the United States dollar and euro.
The yen was introduced by the Meiji government in 1870 as a system resembling those in Europe. The yen replaced the complex monetary system of the Edo period, based on the mon.
The mon was a currency of Japan until 1870, as there were hundreds of different styles of currency throughout Japanese history, of many shapes, styles, designs, sizes, and materials, including gold, silver, bronze, etc. Even rice was once a currency, the koku.
The yen lost most of its value during and after World War II; after a period of instability, the yen was pegged at 1 US dollar = ¥360 from April 25, 1949, to until 1971 when the Bretton Woods system collapsed and the value of the yen began to float. After the Plaza Accord of 1985, the yen appreciated against the US dollar, until it reached a peak of about ¥85 per dollar in the mid 1990s. After that, the Bank of Japan adopted a weak yen policy which has held it in the range of ¥100-120 per dollar. In the last couple of years, the yen has grown weaker and weaker against not only the dollar but against nearly all other important world currencies due to a de facto zero interest rate policy which has encouraged massive yen carry trades, where speculators borrow in yen and buy bonds and other assets in currencies that charge significant interest. This can be very profitable, but is a short position on the yen, which in the absence of other factors drives the yen's value down.
The relative value of the yen is determined in foreign exchange markets by the economic forces of supply and demand. The supply of the yen in the market is governed by the desire of yen holders to exchange their yen for other currencies to purchase goods, services, or assets. The demand for the yen is governed by the desire of foreigners to buy goods and services in Japan and by their interest in investing in Japan (buying yen-denominated real and financial assets).
The Great British Pound - £
Other Names - Sterling, Cable and the Pound
The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown Dependencies. The slang term "quid" is very common in the UK.
The official full name pound sterling (plural: pounds sterling) is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name. The Sterling is the third most traded currency in the world, after the US dollar and the euro.
The Swiss Franc - CHF
The franc (ISO 4217: CHF or 756) is the currency and legal tender of Switzerland and Liechtenstein. The Italian exclave Campione d'Italia and the German exclave Büsingen also use the Swiss franc. Franc banknotes are issued by the central bank of Switzerland, the Swiss National Bank, while coins are issued by the federal mint, Swissmint.
The Swiss franc is the only version of the franc still issued in Europe. Its name in the four official languages of Switzerland is Franken (German), franc (French and Rhaeto-Romanic), and franco (Italian). The smaller denomination, which is worth a hundredth of a franc, is called Rappen (Rp.) in German, centime (c.) in French, centesimo (ct.) in Italian and rap (rp.) in Rhaeto-Romanic. Users of the currency commonly write CHF (the ISO code), though SFr. is still common. SwF has been used in some publications but is not an official abbreviation.
The current franc was introduced in 1850 at par with the French franc. It replaced the different currencies of the Swiss cantons, some of which had been using a franc (divided into 10 batzen and 100 rappen) which was worth 1½ French francs.
In 1865, France, Belgium, Italy, and Switzerland formed the Latin Monetary Union where they agreed to change their national currencies to a standard of 4.5 grams of silver or 0.290322 grams of gold. Even after the monetary union faded away in the 1920s and officially ended in 1927, the Swiss franc remained on that standard until 1967.
As of November 30, 2006, the Swiss franc was worth US$ 0.826729 or € 0.628625. Since mid-2003, its exchange rate with the Euro has been stable at a value of about 1.55 CHF per Euro, so that the Swiss Franc has risen and fallen in tandem with the Euro against the U.S. dollar and other currencies.
The Swiss franc has historically been considered a safe haven currency with virtually zero inflation and a legal requirement that a minimum 40% is backed by gold reserves. However this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following an amendment to the Swiss Constitution. The Swiss franc has suffered devaluation only once, on 27 September 1936 during the Great Depression, when the currency was devalued by 30% following the devaluations of the British pound, U.S. dollar and French franc.
The Australian Dollar
The Australian dollar (currency code AUD) has been, since 14 February 1966, the currency of the Commonwealth of Australia, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu. It is normally abbreviated with the dollar sign $. Alternatively A$ or $A, $AU or AU$ is used to distinguish it from other dollar-denominated currencies. It is sometimes affectionately called the "Aussie battler"; during a low period (relative to the U.S. dollar) around 2001 and 2002 the currency was sometimes locally called the "Pacific Peso". It is divided into 100 cents.
The Australian dollar is currently the sixth-most-traded currency in world foreign exchange markets (behind the U.S. dollar, the euro, the yen, the Pound sterling, and the Swiss franc), accounting for approximately 4-5% of worldwide foreign exchange transactions. The Australian dollar is popular with currency traders due to the relative lack of government intervention in the foreign exchange market, the general stability of the economy and government as well as the prevailing view that it offers diversification benefits in a portfolio containing the major world currencies (especially because of its greater exposure to Asian economies and the commodities cycle).
Who Trades Forex?
Central Banks
A Central Bank will intervene to buy or sell currencies if they believe it is substantially under or overvalued and that it is having a negative effect on the economy. The national central banks play a key role in the foreign exchange markets as many central banks have very substantial foreign exchange reserves, thus their intervention power is significant
Commercial Banks
Banks are licensed deposit taking institutions, they also support a variety of other services including foreign exchange. These banks will trade currencies among themselves as part of the system of balancing accounts. While exchange rates for their largest customers are extremely competitive, small and medium sized enterprises and individuals will typically pay a large premium when transacting foreign exchange with their local branch. The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis.
Non Banking Corporations
This group comprises of companies who are involved in the 'goods' market, conducting international transactions for the purchase or sale of merchandise. Exporters are made up of a diverse range of companies exporting goods and services. Generally, exporters have a positive impact on the value of a country's currency. Importers use the foreign exchange markets to purchase foreign currency to make payments for the goods and services they have bought in other countries. They generally have a negative impact on the value of a country's currency. Their trade sizes are most often inconsequential to affect immediate moves in the market, given the large volume traded daily on the Forex market. However since a major key factor for long term trend of currency movements is the balance of trade, if taken as a whole the capital flows arising from these corporations end up having a significant impact.
Hedge Funds
Their influence has increased significantly in the last few years thanks to the overall growth in their industry and abundance of funds at their disposal; however the net effect of this group depends on the investment decisions they make. With the growth of the FX industry they have been, where possible, investing heavily in foreign securities and other foreign financial instruments.
Brokers
They can be classified into Interbank and Client brokers with the influence of the former declining in the last few years due o the shift of businesses to electronic trading systems. The advent of online pricing systems has revolutionized the operational capabilities of this market and changed the traditional role of brokers. But even in the past, most banks were unable to service the needs of small to medium sized organizations as well as commercial & private clients with large corporations their main targeted market. Thus keeping in mind the client's needs ability to invest a certain amount of minimum margin and still be able to trade on competitive spreads led to the advent of Online Broking Companies and ForexCT.com belongs to this group.
Investors/Speculators
Given that the Forex market has high liquidity, a large amount of leverage and the 24/7 operational nature of the market, it has been an attractive playing field for speculators. The service provided by speculators to a market is primarily that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs.
You can trade Forex too!
A Central Bank will intervene to buy or sell currencies if they believe it is substantially under or overvalued and that it is having a negative effect on the economy. The national central banks play a key role in the foreign exchange markets as many central banks have very substantial foreign exchange reserves, thus their intervention power is significant
Commercial Banks
Banks are licensed deposit taking institutions, they also support a variety of other services including foreign exchange. These banks will trade currencies among themselves as part of the system of balancing accounts. While exchange rates for their largest customers are extremely competitive, small and medium sized enterprises and individuals will typically pay a large premium when transacting foreign exchange with their local branch. The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis.
Non Banking Corporations
This group comprises of companies who are involved in the 'goods' market, conducting international transactions for the purchase or sale of merchandise. Exporters are made up of a diverse range of companies exporting goods and services. Generally, exporters have a positive impact on the value of a country's currency. Importers use the foreign exchange markets to purchase foreign currency to make payments for the goods and services they have bought in other countries. They generally have a negative impact on the value of a country's currency. Their trade sizes are most often inconsequential to affect immediate moves in the market, given the large volume traded daily on the Forex market. However since a major key factor for long term trend of currency movements is the balance of trade, if taken as a whole the capital flows arising from these corporations end up having a significant impact.
Hedge Funds
Their influence has increased significantly in the last few years thanks to the overall growth in their industry and abundance of funds at their disposal; however the net effect of this group depends on the investment decisions they make. With the growth of the FX industry they have been, where possible, investing heavily in foreign securities and other foreign financial instruments.
Brokers
They can be classified into Interbank and Client brokers with the influence of the former declining in the last few years due o the shift of businesses to electronic trading systems. The advent of online pricing systems has revolutionized the operational capabilities of this market and changed the traditional role of brokers. But even in the past, most banks were unable to service the needs of small to medium sized organizations as well as commercial & private clients with large corporations their main targeted market. Thus keeping in mind the client's needs ability to invest a certain amount of minimum margin and still be able to trade on competitive spreads led to the advent of Online Broking Companies and ForexCT.com belongs to this group.
Investors/Speculators
Given that the Forex market has high liquidity, a large amount of leverage and the 24/7 operational nature of the market, it has been an attractive playing field for speculators. The service provided by speculators to a market is primarily that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs.
You can trade Forex too!
History of Retail Forex
Retail trading, is more structured than the Forex market as a whole. While Forex has been traded since the beginning of financial markets, modern retail trading has only been around since about 1996. Prior to this time, retail investors were limited in their options for entering the Forex market. They could create multiple bank accounts, each one denominated in a different currency, and transfer funds from one account to another in order to profit from fluctuating exchange rate. This was troublesome, however, because the transaction costs incurred were large due to the small quantity of funds being converted relative to the size of the market. This transaction type was at the very bottom of the Forex pyramid.
By 1996, new market makers took advantage of developments in web-based technology that made retail Forex trading practical. The new companies felt that there was enough liquidity in the Forex market, and eventually within their own customer base, to guarantee markets under all but the most unusual market conditions. These companies also created online trading platforms that provided a quick and easy way for individuals to buy and sell on the Forex Spot market. In addition, the companies realized that by pooling many retail traders together, they had the size to enter the upper echelons of the Forex market, which reduced the size of the spread. As the business grew, the market makers were given better prices, which they then passed on to the customer.
By 1996, new market makers took advantage of developments in web-based technology that made retail Forex trading practical. The new companies felt that there was enough liquidity in the Forex market, and eventually within their own customer base, to guarantee markets under all but the most unusual market conditions. These companies also created online trading platforms that provided a quick and easy way for individuals to buy and sell on the Forex Spot market. In addition, the companies realized that by pooling many retail traders together, they had the size to enter the upper echelons of the Forex market, which reduced the size of the spread. As the business grew, the market makers were given better prices, which they then passed on to the customer.
Forex Market History
Prior to 1971 an agreement called the Bretton Woods Agreement prevented speculation in the currency markets. The Bretton Woods Agreement was set up in 1945 with the aim of stabilizing international currencies and preventing money fleeing across nations. This agreement fixed all national currencies against the dollar and set the dollar at a rate of $35 per ounce of gold. Prior to this agreement the gold exchange standard had been used since 1876. The gold standard used gold to back each currency and thus prevented kings and rulers from arbitrarily debasing money and triggering inflation. Institutions like the Federal Reserve System of the United States have this kind of power.
The gold exchange standard had its own problems however. As an economy grew it would import goods from overseas until it ran its gold reserves down. As a result the country's money supply would shrink resulting in interest rates rising and a slowing of economic activity to the extent that a recession would occur.
Eventually the recession would cause prices of goods to fall so low that they appeared attractive to other nations. This in turn led to an inflow of gold back into the economy and the resulting increase in money supply saw interest rates fall and the economy strengthen. These boom-bust patterns prevailed throughout the world during the gold exchange standard years until the outbreak of World War 1 which interrupted the free flow of trade and thus the movement of gold.
After the war the Bretton Woods Agreement was established, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar. A rate was also used to value the dollar in relation to gold. Countries were prohibited from devaluing their currency to improve their trade position by more than 10%. Following World War II international trade expanded rapidly due to post-war construction and this resulted in massive movements of capital. This destabilized the foreign exchange rates that had been set-up by the Bretton Woods Agreement.
The agreement was finally abandoned in 1971, and the US dollar was no longer convertible to gold. By 1973, currencies of the major industrialized nations became more freely floating, controlled mainly by the forces of supply and demand. Prices were set, with volumes, speed and price volatility all increasing during the 1970's. This led to new financial instruments, market deregulation and open trade. It also led to a rise in the power of speculators.
In the 1980's the movement of money across borders accelerated with the advent of computers and the market became a continuum, trading through the Asian, European and American time zones. Large banks created dealing rooms where hundreds of millions of dollars, pounds, euros and yen were exchanged in a matter on minutes. Today electronic brokers trade daily in the forex market, in London for example, single trades for tens of millions of dollars are priced in seconds. The market has changed dramatically with most international financial transactions being carried out not to buy and sell goods but to speculate on the market with the aim of most dealers to make money out of money.
London has grown to become the world's leading international financial center and is the world's largest forex market. This arose not only due to its location, operating during the Asian and American markets, but also due to the creation of the Eurodollar market. The Eurodollar market was created during the 1950's when Russia's oil revenue, all in US dollars, was deposited outside the US in fear of being frozen by US authorities. This created a large pool of US dollars that were outside the control of the US. These vast cash reserves were very attractive to foreign investors as they had far less regulations and offered higher yields.
Today London continues to grow as more and more American and European banks come to the city to establish their regional headquaters. The sizes dealt with in these markets are huge and the smaller banks, commercial hedgers and private investors hardly ever have direct access to this liquid and competitive market, either because they fail to meet credit criteria or because their transaction sizes are too small. But today market makers are allowed to break down the large inter-bank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).
To read more about the history of the Forex market, go to www.forexct.com
The gold exchange standard had its own problems however. As an economy grew it would import goods from overseas until it ran its gold reserves down. As a result the country's money supply would shrink resulting in interest rates rising and a slowing of economic activity to the extent that a recession would occur.
Eventually the recession would cause prices of goods to fall so low that they appeared attractive to other nations. This in turn led to an inflow of gold back into the economy and the resulting increase in money supply saw interest rates fall and the economy strengthen. These boom-bust patterns prevailed throughout the world during the gold exchange standard years until the outbreak of World War 1 which interrupted the free flow of trade and thus the movement of gold.
After the war the Bretton Woods Agreement was established, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar. A rate was also used to value the dollar in relation to gold. Countries were prohibited from devaluing their currency to improve their trade position by more than 10%. Following World War II international trade expanded rapidly due to post-war construction and this resulted in massive movements of capital. This destabilized the foreign exchange rates that had been set-up by the Bretton Woods Agreement.
The agreement was finally abandoned in 1971, and the US dollar was no longer convertible to gold. By 1973, currencies of the major industrialized nations became more freely floating, controlled mainly by the forces of supply and demand. Prices were set, with volumes, speed and price volatility all increasing during the 1970's. This led to new financial instruments, market deregulation and open trade. It also led to a rise in the power of speculators.
In the 1980's the movement of money across borders accelerated with the advent of computers and the market became a continuum, trading through the Asian, European and American time zones. Large banks created dealing rooms where hundreds of millions of dollars, pounds, euros and yen were exchanged in a matter on minutes. Today electronic brokers trade daily in the forex market, in London for example, single trades for tens of millions of dollars are priced in seconds. The market has changed dramatically with most international financial transactions being carried out not to buy and sell goods but to speculate on the market with the aim of most dealers to make money out of money.
London has grown to become the world's leading international financial center and is the world's largest forex market. This arose not only due to its location, operating during the Asian and American markets, but also due to the creation of the Eurodollar market. The Eurodollar market was created during the 1950's when Russia's oil revenue, all in US dollars, was deposited outside the US in fear of being frozen by US authorities. This created a large pool of US dollars that were outside the control of the US. These vast cash reserves were very attractive to foreign investors as they had far less regulations and offered higher yields.
Today London continues to grow as more and more American and European banks come to the city to establish their regional headquaters. The sizes dealt with in these markets are huge and the smaller banks, commercial hedgers and private investors hardly ever have direct access to this liquid and competitive market, either because they fail to meet credit criteria or because their transaction sizes are too small. But today market makers are allowed to break down the large inter-bank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).
To read more about the history of the Forex market, go to www.forexct.com
What is the Forex Market?
The Forex market (Foreign exchange Market) is the market in which currencies are bought and sold. For example, a market participant is able to receive Australian dollars by paying a specified amount of US dollars. In effect the trader has bought Australian dollars and sold US dollars. The prices of currencies that are set in the market are determined by the amounts that buyers and sellers are willing to pay. For example if there are more participants in the market that want to buy Australian dollars than want to sell Australian dollars at a specific price than the price of the Australian dollar will rise until it reaches a price where there is an equal amount of participants willing to buy and sell at the same price. Profits can be made in the Forex market due to moves in the prices of currencies. The idea is; if you were to buy a currency at a lower price than you sell it for, you have made a profit equal to the difference in the two prices. This is made possible by the simple fact that the price of the currency has changed. If the prices of currencies are changing by large amounts and are doing so often, ie. the market is volatile, than there exists greater potential for higher profits to be made. The Forex market is recognized as one of the most volatile markets in the world.
To find out more, go to www.forexct.com
To find out more, go to www.forexct.com
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