3.09.2009

Forex Trading – Doing The Analysis

Analysis is very important in every human trade, although it is almost never easy to do and usually takes a lot of time. Analysis makes decision making a lot easier and the outcome is usually satisfactory. When trading on Forex, analysis is very important because you can’t rely only on the money management strategy to succeed. You can forecast the direction of the market basing on your technical and fundamental strategies to see their effectiveness.

You'll be able to make forecasts of price movements by applying the past data of the prices and graphs to the technical analysis methods. You can predict future prices with the level of accuracy dependent on your technical analysis skills using the graphs of the rates you observe. Trading with some brokers you can see technical indicators along with the graphs. You can apply it to your demo account and estimate your prediction skills necessary for planning trading decisions.

It is impossible to choose the most effective indicator among lots of various ones. Each trader has to decide for himself which indicator is best for him. You can't find any magic formula; you just see the graphs, make your forecasts and find out whether they come true seeing the values in the news later. There are a lot of technical analysis indicators available but here are the ones which are the most wide-spread: the Moving Average Convergence Divergence (MACD), the Bollinger Bands, Pivot Points, RSI, Stochastic, Fibonacci, EMA, Elliot Waves.

Fundamental analysis is another tool that maximizes your profit and minimizes your losses on the trades. There are some traders who prefer only one kind but the majority prefers both. Fundamental analysis means trading following the news, e.g. telling about the economies or unemployment rate in the countries of the currencies you trade. They can also tell about the events that can have a strong influence on the currencies' exchange rate.

Fundamental Analysis

Fundamental analysis studies the core underlying elements that influence the economy of a particular entity, like a stock or currency. It attempts to predict price action and trends by analyzing economic indicators, government policy, societal and other factors within a business cycle framework.
In other words, if a particular country has a successful economy, its currency value will grow, if the economy is going through a rough time the currency value will fall.

Things that affect economy are called economic indicators. They are snippets of financial and economic data published regularly by governmental agencies and the private sector. These statistics help market observers monitor the economy's pulse - so it's no surprise that they're religiously followed by almost everyone in the financial markets. With so many people poised to react to the same information, economic indicators have tremendous potential to generate volume and to move prices. It might seem like you need an advanced economics degree to parse all this data accurately - but in fact traders need only keep a few simple guidelines in mind to making trading decisions based on this data.

Most important economic indicators are:

1. Gross Domestic Product (GDP)
2. Industrial Production
3. Purchasing Managers Index (PMI)
4. Producer Price Index (PPI)
5. Consumer Price Index (CPI)
6. Durable Goods
7. Employment Cost Index (ECI)
8. Retail Sales
9. Housing Starts

All of these things affect economy in some way and should be taken into consideration when making fundamental analysis if you want to maximize your profit and minimize your losses on trades.

Technical Analysis

Technical analysis attempts to forecast future price movements by examining past market data. Most traders use technical analysis to get a "big picture" on an investment's price history. Even fundamental traders will glance at a chart to see if they're buying at a fair price, selling at a cyclical top or entering a choppy, sideways market. History repeats itself. The techniques which were effective in the past can be still effective to forecast future price movements.

Technical analysis predominantly uses charts to forecast future price movements. Nowadays it is not necessary to draw charts on paper as the process is automated by specially designed computer programs.

There are three sources for the technical analysis: price, volume and open interest . Price discounts everything. Price is affected by economic, political and other factors, and all information is already reflected in it. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future. Price movements are not totally random, or prices trend. The main purpose of the charts is to define a trend at an early stage and to trade in accordance with its direction.

Technical indicator types:

1. Trend
2. Strength
3. Volatility
4. Cycle
5. Support
6. Resistance
7. Momentum

Using Technical Indicators

Price charts help traders identify trade-able market trends - while technical indicators help them judge a trend's strength and sustainability.
If an indicator suggests a reversal, confirm the shift before you act. That might mean waiting for another period to confirm the same indicator's signal, or checking out another indicator. Patience will help you read the signals accurately and respond accordingly.

Charts

There are a lot of different types of charts that you can use in Forex trading. The most popular ones are line chart, bar chart and candlestick chart, so I’ll try to explain to you what these are, how they are made and what they look like.

1. Line chart

Line chart or line graph is a type of graph created by connecting a series of data points together with a line. In Forex bar charts are plotted with time on the x-axis and the currency pair on the y-axis. Each time period on our real time charts can range from a tick by tick to a weekly interval (the tick refers to each individual pip movement). This gives traders the flexibility to view currencies with closer examination while also allowing them to spot the trends most suitable for their time-sensitive trading strategy. A line chart's strength comes from its simple design; it provides an uncluttered, easy to understand view of a currency's price. Line charts display the currency's closing price. A line chart is simply a graph of the value of a currency taken at regular time intervals based on current prices.



2. Bar chart

A bar chart or bar graph is a chart with rectangular bars with lengths proportional to the values that they represent. Bar charts are used for comparing two or more values. The bars can be horizontally or vertically oriented. Sometimes a stretched graphic is used instead of a solid bar. It is a visual display used to compare the amount or frequency of occurrence of different characteristics of data and it is used to compare groups of data. Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session / time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length / height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar.



3. Candlestick chart

A candlestick chart is a style of bar-chart used primarily to describe price movements of equity over time. It is a combination of a line chart and a bar chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated. Candlestick Charts identical to a bar chart in the information conveyed, but presented in an entirely different visual context. The candlestick encapsulates the open, high, low and close of the trading period in a single candle. Candlestick charts are on record as being the oldest type of charts used for price prediction. They date back to the 1700's, when they were used for predicting rice prices. In fact, during this era in Japan, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He is said to have executed over 100 consecutive winning trades. Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. As in a standard bar chart, there are four elements necessary to construct a candlestick chart, the Open, High, Low and Closing price for a given time period. A candlestick can either be solid or transparent. Its appearance depends on the relationship between the opening and the closing price. If the close is higher than the open, the candlestick is transparent or empty. Candlestick charts are much more "visually immediate" than bar charts. Once you get accustomed to the candle chart, it is much easier to see what has happened for a specific period - be it a day, a week an hour or one minute.





Which Analysis should I use?

This is a question that many people have asked themselves. There are people that think that only the fundaments move the market and that everything you find on a chart is just a mere coincidence. On the other hand there are people who think that only the technical part is important and that you can find all you need to trade and foresee future prices by looking at the charts. The truth is that this two fulfill each other and make a perfect couple. If you master both of this analysis success will come in its time.
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!