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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