Number one forex-Fundamental analysis

What is it? Fundamental analysis is the application of micro- and macro-economic theory to markets to predict future trends. Major fundamental forces are frequently one of the key drivers of FX rates. The following are a list of key US economic indicators

Balance of Trade

The trade balance reflects the difference between a nation's exports and imports of goods. A positive trade balance, or a surplus, occurs when a country's exports exceed imports. A negative trade balance, or a deficit, occurs when more goods are imported than exported. Trade balances are closely followed by players in Forex, because of the influence they can have. It is often used as an assessment of the overall economic activity in a country�s or region�s economy. Export activities not only reflect the competitive position of the country in question, but also the strength of economic activity abroad. Trends in the import activity reflect the strength of domestic economic activity. A country that runs a significant trade balance deficit tends to generally have a weak currency. However, this can be offset by substantial financial investment inflows.

Current Account

The current account is an important part of international trade data as it is the broadest measure of sales and purchased goods, services, interest payments and unilateral transfers. The trade balance is contained in the current account. In general, a Current Account deficit can weaken the currency.

Consumer Price Index

The Consumer Price Index (CPI) is a measure of inflation. It takes the average level of prices of a fixed basket of goods and services purchased by the consumers. CPI is a primary inflation indicator because consumer spending accounts for nearly two-thirds of economic activity. A rising CPI is often followed by higher short-term interest rates, which can be supportive for a currency in the short term. However, if inflation becomes a long-term problem, confidence in the currency will eventually be undermined and it will weaken.

Durable Goods Index

Durable goods orders are a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Monthly percent changes reflect the rate of change of these orders. The durable goods orders index is a major indicator of manufacturing sector trends. Rising durable goods orders are normally associated with stronger economic activity and can lead to higher short-term interest rates, which is usually supportive for a currency.

Gross Domestic Product

Gross domestic product (GDP) is the broadest measure of aggregate economic activity available. It is an indicator of the market value of all goods and services produced within a country. GDP is reported quarterly and it is followed very closely as it is the primary indicator of the strength of economic activity. The GDP report has three releases: 1) advance release (first); 2) preliminary release (1st revision); and 3) final release (2nd and last revision). These revisions usually have a substantial impact on the markets. A high GDP figure is usually followed by expectations of higher interest rates, which is mostly positive for the currency concerned at least in the short term, unless there are also inflationary pressures. In addition to the GDP figures, there are the GDP deflators, which measure the change in prices in total GDP as well as for each component. The GDP deflators are another key inflation measure beside the CPI. In contrast to the CPI, the GDP deflators have the advantage of not being a fixed basket of goods and services, which means that changes in consumption patterns or the introduction of new goods and services will be reflected in the deflators.

Housing Starts

Housing Starts measure initial construction of residential units (single-family and multi-family) each month. Housing Starts are closely watched as it gives an indicator of the general sentiment in the economy. High construction activity is usually associated with increased economic activity and confidence and can be predictive of higher short-term interest rates.

Payroll Employment

The Payroll employment (also known as the Labor Report) is currently regarded as the most important among all US economic indicators. It is usually released on the first Friday of the month. The report provides a comprehensive look of the economy and it is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the net number of new jobs created or lost during the month and it is widely followed as an important indicator of economic activity. Large increases in the payroll employment are considered signs of strong economic activity that could eventually lead to higher interest rates, which is generally supportive of the currency at least in the short term. If, however, it is estimated that an inflationary pressure is building up, this may undermine the longer term confidence in the currency.

Producer Price Index

The Producer Price Index measures the monthly change in wholesale prices and is broken down by commodity, industry, and stage of production. The PPI gives an important inflation indication as it measures price changes in the manufacturing sector � and inflation at the producer level often gets passed straight through to consumers.

What is it?

Technical analysis is another method of forecasting prices. It studies past price action in an attempt to predict the future. The technical analyst focuses exclusively on market information and works on the assumption that all fundamental information is already reflected in the price. Unlike the fundamentalist, the technician attempts to predict future price directions by searching for established patterns of price behavior that have signaled major movements in the past. Charts are the major tool in technical analysis. The following is an introduction to the most common technical analytical tools used to identify trends and recurring patterns in a volatile market.

Charts

There are three main types of charts used in technical analysis: Line Chart: The line chart is a graphical depiction of the exchange rate history of a currency pair over time. The line is constructed by connecting daily closing prices. Bar Chart: The bar chart is a depiction of the price performance of a currency pair, made up of vertical bars at set intraday time intervals (e.g. every 30 minutes). Each bar has 4 'hooks', representing the opening, closing, high and low (OCHL) exchange rates for the time interval. Candlestick Chart: The candlestick chart is a variant of the bar chart, except that the candlestick chart depicts OCHL prices as 'candlesticks' with a wick at each end. When the opening rate is higher than the closing rate the candlestick is 'solid'. When the closing rate exceeds the opening rate, the candlestick is 'hollow'.

Support & Resistance Levels

One use of technical analysis is to derive "support" and "resistance" levels. The underlying idea is that the market will tend to trade above its support levels and below its resistance levels. A support level indicates a specific price level that the currency will have difficulties crossing below. If the price repeatedly fails to move below this particular point, a straight line pattern will appear. Resistance levels on the other hand, indicates a specific price level that the currency will have difficulties crossing above. Recurring failure for the price to move above this point will produce a straight line pattern. If a support or resistance level is broken, the market is expected to follow through in that direction. These levels are determined through analysis of the chart and by assessment of where the market has encountered unbroken support or resistance in the past.

Trend Line

A trend line helps identify the trend as well as potential areas of support and resistance. A trend line is a straight line that connects at least two important peaks or troughs in the price action of an underlying tradable. No other price action must break the trend line between the two points. In this way a trend line marks a support or a resistance area where the price has turned (peaks and valleys) and has not been violated. The longer a trend line the more valid it is, especially if price has touched the line several times without penetration. The penetration of a long term trend line may be an indication that a reversal of the trend is about to occur. However, there is no guarantee that this will happen. As with all indicators of a price trend reversal, there is no proof method that predetermines where future prices will go.

Double (Triple) Bottoms and Double (Triple) Tops

A double or a triple bottom formation also provides a good level for a technical sell-stop order. Such a sell-stop order would normally be placed just below the prior lows. Likewise does a double or a triple top formation provide a good level for a technical buy-stop order just above the prior highs.

Retracements

phenomenon is known as a retracement often it presents a good opportunity to re-enter the market at more attractive levels before the underlying trend resumes. Using Fibonacci ratios is a common way of measuring retracements

FOREX GUIDE


FX Glossary

A
Appreciation: A currency appreciates when it strengthens in price. Ask Rate: Also known as the offer, this is the rate at which non-market makers can buy a particular currency. Asset Allocation: Investment practice that divides funds among different markets to achieve diversification for risk management purposes

B

Balance of Trade: The value of a country's exports minus its imports. Base Currency: The currency which is the base for quotes. For example, the euro is the base currency for EURUSD quotes, while the US dollar is the base currency for USDJPY. Bear Market: A market that is characterized by declining prices. Bid Rate: The rate at which traders can currently sell a particular currency. Bid/Offer (Ask) Spread: The difference between the bid and the ask (offer) price. Broker: An individual or a company that acts as an intermediary, handling investors' orders to buy and sell currencies. Some brokers charge commission for this service. Bull Market: A market that is characterized by rising prices.

C

Cable: Slang for the GBPUSD dollars exchange rate. Central Bank: A government or quasi-governmental organization that manages a country's monetary policy. An example is the Federal Reserve, which is the US Central Bank. Commission: A transaction fee charged by a broker. Cross Rate: An exchange rate between two currencies that does not involve the US dollar, such as EURJPY. Currency: Any form of money issued by a government or central bank and used as legal tender. Currency Risk: The probability of an adverse change in exchange rates.

D

Day Trading: Refers to positions that have been opened and closed on the same day. Deficit: A negative balance of trade or payments.

E

Economic Indicator: A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), CPI (inflation) and retail sales. European Central Bank (ECB): The Central Bank of the European Monetary Union.

F

Federal Reserve (Fed): The Central Bank of the United States. Foreign Exchange/ Forex or FX market: A market where currencies are bought and sold against each other. Fundamental analysis: Analysis of economic and political information with the objective of determining future movements in a financial market. Futures Contract: An obligation to exchange a good or an instrument at a set price on a future date. The main difference between a future and a forward is that futures are typically traded on an exchange to a fixed settlement date. Forwards are over-the-counter (OTC) contracts and the maturity date can be defined on a bespoke basis.

H

Hedge: A position or a combination of positions that reduces the risk of the trader's primary position.

I

Inflation: An economic condition whereby prices for consumer goods rise, eroding purchasing power.

L

Limit order: An order to buy at or below a specific price or to sell at or above a specific price. Liquidity: The ability of a market to accept large transaction with minimal or no impact on price stability. Long position: A market position where the client has bought a currency he did not previously have. Normally expressed in base currency terms, e.g. long Dollars (short Swiss Franc)...

M

Margin: The required equity that an investor must deposit to collateralize a position. Margin call: A request from a broker or a dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer. Alternatively the client can choose to close one or more positions. Market Maker: A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices.

E

Economic Indicator: A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), CPI (inflation) and retail sales. European Central Bank (ECB): The Central Bank of the European Monetary Union.

O

Offer: The price or rate that a trader is prepared to sell at. Open position: A deal that has not been settled by physical payment or reversed by an equal and opposite deal for the same value. Over the Counter (OTC): Used to describe any transaction that is not conducted over a regulated exchange.

P

Pips: The term used in the currency market to characterize the smallest incremental move an exchange rate can make. The value of a pip depends on the currency pair. One pip/basis point equals for instance 0.0001 for EUR/USD, GBP/USD and USD/CHF, and 0.01 for USD/JPY.

R

Resistance level: A price level at which you would expect selling to take place.

S

Short Position: An investment position that benefits from a decline in market price. Spot Price: The current market price. Settlement of spot transactions usually occurs within two business days. Spread: The difference between the bid and the offer (ask) price. Stop order: An order to sell at or below a specific price or to buy at or above a specific price. Stop loss: An order to close a position when a particular price is reached in order to minimize loss. Support Level: A price level at which you would expect buying to take place.

T

Take profit: An order to close a position when a particular price is reached to ensure a profit. Technical Analysis: An effort to forecast future market activity by analyzing market data through the use of charts, price trends, and volume.