4.03.2009

ECB Surprises the Market and Traders Anticipate Non-Farm Payrolls

A surprise 25 point basis point Interest Rate cut by the ECB is being digested by the currency markets. But traders won't have much time to pause as the high impact Non-Farm Employment numbers are released later today.



USD - USD Weakens from Negative U.S. Data and Positive EUR News

The USD experienced a rather rough day of trading yesterday, with a substantial loss to the EUR and GBP. After the European Central Bank (ECB) failed to reduce Interest Rates as deep as forecasted, there was a modest rebound in the value of the EUR against its primary currency pair, the U.S. Dollar. Ending Thursday at 1.3456 against the EUR, and 1.4731 against the GBP, the greenback has seen better days.

Two rather important currency valuating events have taken place over the previous few weeks. The first was the announcement of quantitative easing by the U.S. government, an event which dropped the value of the USD to the 1.3700 price level against the EUR. This loss was held in check, however, as most investors anticipated a similar move by the ECB. As this was not forthcoming this week, the second event was a renewed sell-off of USD in exchange for higher yielding assets on Wall Street as well as a buy-up of more unique currencies as a hedge against the perceived future weakness of the current safe-haven currencies.

As this week comes to an end, there is still room for a market shock during Friday's trading hours. With a calendar chalk full of important events, traders are highly advised to participate in the heavy news-trading day ahead of them. The U.S. government will be releasing its monthly Non-Farm Employment Change report at 12:30 GMT alongside the announcement of the U.S. unemployment rate. A disappointing payrolls report could send the EUR/USD above the 1.3500 resistance level tested in the early hours of the Japanese trading session.

Later in the day, Federal Reserve Board Chairman Ben Bernanke will be delivering a speech titled "The Fed's Balance Sheet" at the Richmond Federal Reserve Bank's Third Annual Credit Market symposium. Traders often use Bernanke's testimonies and speeches to speculate about future monetary policy decisions by the Fed, generating high market volatility during these events.

EUR - EUR Gains Strength as Risk Appetite Increases

The EUR gained momentum throughout today's trading hours as the European Central Bank (ECB) left room for future monetary policy adjustments by only reducing Interest Rates by a 25 basis points, from 1.50% to 1.25%, yesterday. Forecasts were for a reduction of half a percentage point in expectation of the ECB taking quantitative easing measures similar to those in the United States. As this was not yet forthcoming, the EUR has rebounded slightly to the 1.34 price level against the USD.

When the United States announced its plans for quantitative easing, there was a heavy sell-off of the USD, but the losses the greenback experienced to the EUR were held in check by the assumption that the ECB would follow the States with an announcement of a similar initiative. Now that the ECB has rejected the notion of deep rate cuts followed by quantitative easing, at least for the time being, the sell-off of USD, the purchase of EUR, and the increase in risk appetite have wrought havoc in the forex market in the form of heavy volatility. Those who benefited by going long on the Dollar throughout these past few months may want to consider changing tactics for the time being.

The British Pound also made moderate gains, at least against the USD, as some housing data released yesterday generated a stronger movement towards less liquid assets and a short-term rebound in confidence. Following tomorrow's release of inflationary data from Europe and Britain, traders will get a glimpse into what may be occurring at the start of next week. The Pound could continue its recent bullish run against the EUR below the 0.9100 mark.

JPY - Japanese Yen Continues to Deteriorate

The Japanese Yen has seen better days. Over the past week this island economy's currency has consistently depreciated against the majors, losing considerably against the USD and EUR. The level of this depreciation does not appear to have any stops in the making. Japan has maintained a posture of weakening its currency to boost exports, but the added weight of an unwinding of JPY safe-haven trades may have pushed its value lower than anticipated.

The resultant free-fall in the value of the JPY has begun to shake the confidence which many investors had in the island economy and expectations are now sliding further into the red for the economy's recovery. With little economic news being released by Japan, the end of this week's trading will likely see a continuation of this falling trend in JPY crosses. Against the USD, the JPY could finally settle above the 100.00 Yen level today.

OIL - Crude Oil Prices Stabilizing as Dollar Relationship becomes More Solid

The price of Crude Oil has become much more predictable this past week. With a sharp appreciation following some negative U.S. data, the value of Crude then continued to sink back below $50 a barrel. However, as the USD weakens once more, the price of Crude has once again made a jump in the direction of the mid-$50 price range. Crude Oil's value has begun to react much more realistically to the value of the Dollar; this in turn brings a level of stability to Oil trading in the commodities market, which traders can benefit from greatly.

With Crude Oil Inventories falling slightly this past month, there is a perception that demand has slightly increased in the short-term, while long-term demand remains negative. As the Dollar continues to weaken, traders will most likely see the value of Crude Oil climb back towards $55 a barrel through next week, unless the Dollar gains back its recent losses.

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US Dollar Consolidates Losses, Looks to Non Farm Payrolls for Direction Cues (Euro Open)

The US dollar traded sideways in a narrowing range in overnight hours as the markets consolidated yesterday’s intense swings following the G20 summit in London. Swiss Consumer Prices are on tap overnight, though traders are likely to look past the European data docket to focus on the US Non Farm Payrolls report due late into the session.

Key Overnight Developments

• US Dollar Consolidates Losses After G20 Boosts Risk Appetite
• Australian Service-Sector Sentiment Rebounds From Record Low

Critical Levels



The Euro traded sideways in a choppy range above 1.3425 while the British Pound oscillated in a 70-pip band above 1.47.

Asia Session Highlights



Australia’s AiG Performance of Service Index showed service-sector confidence rebounded to 35.6 in March from a record low at 32.2 in the preceding month. Importantly, the index remained below the boom-bust 50 level, suggesting activity is still shrinking but at a marginally slower pace.

With no substantial data on the economic calendar, the markets consolidated yesterday’s intense swings in overnight trading. The US Dollar traded sideways in a narrowing range having slipped -1.6% against the major currencies as risk appetite surged on seemingly promising news from the G20 summit in London, weighing on the safe-haven asset du jour.

Euro Session: What to Expect



Switzerland’s Consumer Price Index is expected to show that annual inflation has dipped into negative territory for the first time in 5 years to print at -0.1% in the year to March. Although the central bank had previously committed to a very aggressively dovish stance including quantitative easing and currency market intervention, the latter part of the plan may now be off the table considering commitments made at yesterday’s G20 summit in London. A survey of economists conducted by Bloomberg suggests that the economy will shrink -2.5% this year, the most since 1975. The downturn looks certain to weigh on prices further, threatening to foster entrenched expectation of deflation. This threatens to magnify downward pressure on economic growth as consumers and businesses perpetually put off spending and investment to wait for the best possible bargain, sinking the economy into long-term recession.

On balance, price action is likely to look past the European data docket to focus on the US Non Farm Payrolls report due late into the session. Expectations call for the world’s largest consumer market to shed 660k jobs in March, threatening to crush buoyant risk appetite boosted by the lofty promises of G20 leaders, helping the US Dollar higher at the expense of most major currencies.

Written by Ilya Spivak, Currency Analyst
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Forex Trading Methods - Elliott Waves

What is Elliott Wave?

The Elliott Wave principle is a form of technical analysis that attempts to forecast trends in the financial markets and other collective activities, named after Ralph Nelson Elliott (1871–1948), an accountant who developed the concept in the 1930s, he proposed that market prices unfold in specific patterns, which practitioners today call Elliott Waves. Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the financial market could be predicted by observing and identifying a repetitive pattern of waves. In fact, Elliott believed that all of man's activities, not just the financial market, were influenced by these identifiable series of waves.

Elliott based part of his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.

In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios.

There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.

Theory Interpretation

The Elliott Wave Theory is interpreted as follows:
- Every action is followed by a reaction.
- Five waves move in the direction of the main trend followed by three corrective waves (a 5-3 move).
- A 5-3 move completes a cycle.
- This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
- The underlying 5-3 pattern remains constant, though the time span of each may vary.
Let's have a look at the following chart made up of eight waves (five up and three down) labeled 1, 2, 3, 4, 5, A, B and C.



You can see that the three waves in the direction of the trend are impulses, so these waves also have five waves within them. The waves against the trend are corrections and are composed of three waves.

Impulse Patterns



The impulse pattern consists of five waves. The five waves can be in either direction, up or down:

Wave 1 - Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower, the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

Wave 2 - Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% of the wave one gains, and prices should fall in a three wave pattern.

Wave 3 - Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1 (also known as The Golden Ratio).

Wave 4 - Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, the most distinguishing feature of fourth waves is that they often prove very difficult to count.

Wave 5 - Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high, the indicator does not reach a new peak). At the end of a major bull market, bears may very well be ridiculed.

Corrective Patterns

Corrections are very hard to master. Most Elliott traders make money during an impulse pattern and then lose it back during the corrective phase.

Wave A - Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.

Wave B - Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

Wave C - Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

An impulse pattern consists of five waves. With the exception of the triangle, corrective patterns consist of 3 waves. An impulse pattern is always followed by a corrective pattern. Corrective patterns can be grouped into two different categories:

1. Simple Correction (Zig-Zag)

There is only one pattern in a simple correction. This pattern is called a Zig-Zag correction. A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.



2. Complex Corrections (Flat, Irregular, Triangle)

Flat Correction - In a Flat correction, the length of each wave is identical. After a five-wave impulse pattern, the market drops in Wave A. It then rallies in a Wave B to the previous high. Finally, the market drops one last time in Wave C to the previous Wave A low.



Irregular Correction - In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning of Wave A, or below it.



Triangle Correction - In addition to the three-wave correction patterns, there is another pattern that appears time and time again. It is called the Triangle pattern. Unlike other triangle studies, the Elliott Wave Triangle approach designates five sub-waves of a triangle as A, B, C, D and E in sequence. Triangles, by far, most commonly occur as fourth waves. One can sometimes see a triangle as the Wave B of a three-wave correction. Triangles are very tricky and confusing. One must study the pattern very carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift thrust. When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as Wave 3. When triangles occur in Wave B, the market thrusts out of the triangle in the same direction as the Wave A.



Conclusion

The premise that markets unfold in recognizable patterns contradicts the efficient market hypothesis, which says that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott wave principle among investors would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.

Wave prediction is a very uncertain business. It is an art to which the subjective judgment of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed. Critics also say the wave principle is too vague to be useful, since it cannot consistently identify when a wave begins or ends, and that Elliott wave forecasts are prone to subjective revision. Some who advocate technical analysis of markets have questioned the value of Elliott wave analysis.

The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story. The account is especially persuasive because Elliott Wave has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.
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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!