4.30.2009

Forex Trading - Bollinger Bands

Bollinger Bands are a tool of technical analysis which was invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. Basically, this tool provides a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. When the market is calm, the Bollinger Band lines get closer together and when the market was changing Bollinger Band line expand. The indicator consists of three bands designed to encompass the majority of a security's price action:

1. A simple moving average in the middle
2. An upper band (SMA plus 2 standard deviations)
3. A lower band (SMA minus 2 standard deviations)



Standard deviation is a statistical unit of measure that provides a good assessment of a price plot's volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of the bands.

For easier understanding, see the following chart: when the price was calm, Bollinger Band lines were close to one another, but when the price jumped up, Bollinger Band lines are spread. The same would happen if the price fell.



Calculation

Upper = Average + 2*SD = X + 2*σ
Middle = Average = X
Lower = Average - 2*SD = X - 2*σ

Bollinger Bounce

The first thing you should know about Bollinger Band is that prices strive to return to the center of the Bollinger Bands. On the following chart you can see that the price has returned back towards the middle of Bollinger Bands.



What you just saw was a classic Bollinger Bounce. The reason why this “bounce” occurs is that Bollinger Band lines act like a level of support and resistance. The larger time period that you observe in the graph (H1, H4, D1), the stronger the Bollinger Bands get. Most traders developed systems that rely on the “jumps”. This strategy is best used when the market is in the range (ranging market) and while there is no clear trend.

Bollinger Squeeze

When the Bollinger Band lines get close together, it usually means that a break out will appear. If the candlesticks start to break out above the upper Bollinger Band line it is customary that the upward trend will continue, same thing is true for the downward trend.



If you look at the chart above you can see the Bollinger Band lines shrinking. Price is just beginning to penetrate upper Bollinger Bands lines and continues to go up. This is the way a typical Bollinger Squeeze works. This strategy is designed to catch a trend as soon as possible. This situation does not happen every day, but you can probably encounter it several times a week if you observe a 15 minute chart.

Interpretation

The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.
When the bands lie close together a period of low volatility in stock price is indicated. When they are far apart a period of high volatility in price is indicated. When the bands have only a slight slope and lie approximately parallel for an extended time the price of a stock will be found to oscillate up and down between the bands as though in a channel.

As always, traders are inclined to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator like Bollinger Bands will often be coupled with a non-oscillator indicator like chart patterns or a trend line. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater evidence that what the Bands forecast is correct.

Conclusion

Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a currency. The Bollinger Bands were designed to augment other analysis techniques and indicators. By themselves, Bollinger Bands serve two primary functions:

- To identify periods of high and low volatility
- To identify periods when prices are at extreme, and possibly unsustainable, levels

As stated above, currencies can fluctuate between periods of high volatility and low volatility. Being able to identify a period of low volatility can serve as an alert to monitor the price action of a currency. Other aspects of technical analysis, such as momentum, moving averages and retracements, can then be employed to help determine the direction of the potential breakout.

Remember that buy and sell signals are not given when prices reach the upper or lower Bollinger Bands. Such levels merely indicate that prices are high or low on a relative basis. A currency can become overbought or oversold for an extended period of time. Knowing whether or not prices are high or low on a relative basis can enhance our interpretation of other indicators, and it can assist with timing issues in trading.
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Dollar Tumbles as Investors Turn to Riskier Assets

Rising equity markets continue to push investors towards riskier assets and away from safe haven currencies such as the USD and JPY. Traders today will be following the Unemployment Claims release for further signs the U.S economic recession is easing.



USD - Dollar Drops Against the Majors as Equities Rally

The Dollar recorded an extremely volatile day of trading as a variety of factors helped push up the demand for riskier assets, whilst reducing the demand for safe-haven positions. Equity markets in the U.S. rallied as many companies in the U.S. recorded far better-than-expected results. These led to major banking shares, such as Bank of America and Citigroup making remarkable gains yesterday. The market also continued to move on the better-than-expected U.S. consumer confidence figures from Tuesday. The equity market surge and Dollar decline was also owed to Tuesday's impressive U.S. Consumer Confidence figures.

The USD tumbled by more than 130 pips against the EUR in yesterday's trading to close at 133.22. This is much owed to the fall in demand for safe-haven currencies, as it seems that the U.S. recession may be bottoming out. This is despite poor U.S. GDP figures that were released yesterday. The Dollar also made losses against the GBP to end the day down 125 pips at 148.30. However, versus the JPY, the USD finished higher 0.6% or 60 pips as the demand for the safe-haven Yen plummeted in yesterday's trading. This was largely owed to news that the economic situation in Japan, China and the U.S. was starting to improve.

As of today, there are a number of important U.S. economic data releases that are set to be released. The most important of which are the Unemployment Claims, Personal Spending, and Personal Income figures that are set to be released at 12:30 GMT simultaneously. The market is likely to be very volatile on the release of these figures. Additionally, later on today, the market is likely to take into account the poor U.S. GDP figures that were released yesterday. Therefore, the USD may reverse some of the losses that it made yesterday against its major currency crosses as investors may return to the safe-haven Dollar. We could see the EUR/USD trading near the 1.3200 level by the end of the day.

EUR - EUR Soars Versus the USD

The EUR experienced a bullish day of trading yesterday, mainly due to the European Consumer Confidence figures, showing its first month on month rise in 11 months. This added to the news from across the developed economies from the U.S. to Japan that the worst of the global economic recession may be over. The bullish equity markets in the Euro-Zone and in Britain were partly due to that of the U.S., partly due to the upgrade of British banks by brokers, and the fall in demand of safe-haven currencies. The EUR made its most notable gains against the USD in Thursday's trading.

The EUR gained about 130 pips against the Dollar in Wednesday's trading as demand for safe-haven currencies plummeted as the global economy begins to pick up. The pair closed at the 1.3322 level. The EUR/JPY cross rose by an impressive 210 pips to 129.90 as demand for the most safe-haven currency of all as of late plummeted as indicators from Japan showed that her economy had improved in April. Against the Pound, the EUR did make marginal gains as fears of a prolonged European recession dissipated slightly. The pair closed up 15 pips at 0.8980.

Looking ahead to today, the Euro-Zone and Britain are set to publish a number of important data releases. These include the British Nationwide HPI at 6:00 GMT and the Euro-Zone Unemployment Rate at 21:00 GMT. These figures are likely to determine the GBP and EUR's strength going into end of week trading. Forex traders are also advised to closely follow statements coming from U.S. President Barack Obama and the U.S. Federal Reserve, as the forex market is likely to be very volatile to this.

JPY - Yen Plummets as Economy Improves

The Yen plummeted yesterday against its major currency pairs as the current economic recession in the world's second largest economy seems to be bottoming out. The JPY slid over 60 pips Yen to 97.54 Yen per Dollar as the Yen's demise was compounded by strong U.S. consumer confidence figures. Thus the most safe-haven currency as of late plummeted as a result of both improvements in Japan and America's economy. The JPY also slid against the EUR, dropping a massive 210 pips to finish the day's trading at 129.90. The Pound also made inroads into the JPY as the confidence of the U.S. equity markets swept Europe, and reduced demand for the safe-haven JPY.

As the Japanese equity markets reopened yesterday after a bank holiday, shares soared as the global economy showed signs of bottoming out. This is following good U.S. Consumer Confidence figures from Tuesday, European Consumer Confidence figures from yesterday, and positive Japanese data releases on Wednesday. The bearish JPY yesterday was compounded by impressive factory production figures, showing their first increase in 6 months. All these factors helped pour investors away from the Yen and into the riskier equity market. Today, the Household Spending and Unemployment Rate figures are likely to help determine the JPY's strength in late trading. The USD/JPY could break the 98.00 resistance level by the end of today's trading.

Crude Oil - Jumps 4%

The price of Crude Oil ascended by $2 or 4% yesterday to $51.44 a barrel. The increase comes despite the higher-than-forecasted Crude Oil Inventories data release. Much of the black gold's bullishness was owed to the weak Dollar and optimism about a quicker than anticipated global economic recovery. Data coming from the U.S., Japan, China, and the Euro-Zone in the last 2 days helped bring back investors confidence into the equity and commodity markets

As a result of the renewed optimism, investors decided to return to the Crude Oil market. Moreover, the weaker Dollar added to the effects of Crude's gains on Wednesday. What we will now have to see is can Oil maintain this bullish momentum? Maybe in the medium-term this may be possible. However, in the short-term high Oil prices are less likely, especially as the U.S. is expected to release poor Unemployment Claims data later on today. Traders may look for profit taking after yesterday's bullish trading session. Crude could drop back to the $50.50 mark.

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Higher Euro Zone Inflation Unlikely to Signal Recession is Abating (Euro Open)

The Euro Zone Consumer Price Index is expected to show that the annual pace of inflation rose to 0.7% in April. However, it is far too early to say the rebound owes to a pickup in economic activity, and even more so premature to suppose that prices will continue to rise from here.

Key Overnight Developments

• UK Consumer Confidence Rises for Fourth Month in April, Says GfK
• Japan's Manufacturing Sentiment, Industrial Production Improve as Inventories Clear
• Australian Business Confidence Fell at Slower Pace in Q1, Says NAB
• Bank of Japan Holds Interest Rates at 0.10% as Expected

Critical Levels



The Euro was little-changed in the overnight session: prices initially rose to test as high as 1.3338 but retreated back below the 1.33 level ahead of the opening bell in Europe. The British Pound trended higher, adding as much as 0.6% against the US Dollar.

Asia Session Highlights



UK Consumer Confidence continued to advance for the fourth consecutive month in April according to GfK, a market researcher, rising to -27 from -30 in the previous month. The news is hardly encouraging, however, even if we assume that the metric has put in a bottom despite rising unemployment. Looking at a comparable period of low consumer confidence during the 1990-91 recession, we see that the GfK metric reversed upward in March 1990 but GDP follow suit only 6 months later and did not return to positive growth for a full two years down the road. The absence of expanding output will mean that the central bank is likely to maintain a very loose monetary policy, holding the British Pound back against the currencies of countries where economic growth and by extension interest rates will head higher sooner (most notably the US Dollar).

Japan’s Nomura/JMMA Manufacturing Purchasing Manager Index rose for the fourth consecutive month in April, printing at 41.4 from 33.8 in the previous month. The reading is still below the “boom-bust” 50 level, meaning the manufacturing sector is still contracting, albeit at the slowest pace since October of last year. The improvement reflected expectations that the breakneck pace of decline in output will begin to slow as firms deplete existing stocks of products and are required to replenish. Indeed, Industrial Production rose for the first time in five months in March, rising 1.6%, while inventories shrank for the third consecutive month and the inventory-to-shipments fell -4.9% from a record high. Still, the news is far from rosy: overseas sales remain lackluster as Japan’s top trading partners suffer acute economic slowdown, so any pickup in production can be expected to be shallow. This means firms are unlikely to re-hire labor en masse, keeping the lid on spending and thereby overall economic growth for some time to come. Japan’s Trade Ministry was reasonably unimpressed, calling output “stagnant”.

Australian Business Confidence improved as expected in the first quarter from the three months to December 2008 according to National Australia Bank (NAB). Importantly, the metric continues to show contraction with a print in negative territory. Indeed, NAB chief economist Alan Oster remained cautious after seeing an uptick in the March result, saying, “While an element of fear appears to be abating, the index is still quite low [and] points to falling demand in the first quarter.”

The Bank of Japan kept interest rates on hold at 0.10% as expected. The decision was unanimous and policymakers said they will leave their current 1.8 trillion yen government bond purchasing program unchanged. The Japanese Yen was little changed after the announcement with the outcome widely priced into the exchange rate for some time.

Euro Session: What to Expect



The initial estimate of the Euro Zone Consumer Price Index are expected to show that the annual pace of inflation rose to 0.7% in April from a record low of 0.6% in the previous month. As with the analogous metric from Germany earlier this week, it is far too early to say the rebound owes to a pickup in economic activity, and even more so premature to suppose that prices will continue to rise from here. Currency depreciation may account for the increase, making imported goods comparatively more expensive for European consumers. Indeed, the Euro slipped -1.4% on average against the currencies of the regional bloc’s top trading partners to date this month. Travel and leisure spending linked to Easter may have also helped considering the holiday break fell in April this year rather than its usual time in March. The fallout in commodity prices (particularly oil) and slowing economic activity are likely to weigh on price growth in coming months. In fact, French Producer Prices are expected to fall by a record -5.3% in the year to April, suggesting lower consumer prices ahead as firms pass on lower manufacturing costs via cheaper finished products. The analogous metric in Germany also tumbled during the same period, bolstering the downside scenario for the Euro region as a whole.

If the economy is indeed showing signs of life, this likely owes to a slew of government spending packages put in place across the currency bloc. The ability of these measures to spur a sustainable return to economic growth looks questionable at best, however. Bruegel, a think tank, has estimated that European countries will spend an average of 0.9% of GDP on fiscal stimulus, as compared to 2% being spent in the US. On the monetary front, the European Central Bank seems intent on continued waffling, signaling rate cuts will end with borrowing costs at 1% and seemingly failing to reach a workable consensus on “unconventional measures” (meaning quantitative easing, a policy in place in the US, UK and Japan). This half-hearted approach means that private demand will likely be slow to step in to pick up the baton after the government’s boost is exhausted, keeping unemployment at elevated levels, holding back spending and bolstering expectations for a comparatively slower recovery. Indeed, the Unemployment Rate is expected to rise to 8.7% in March, the highest in 3 years, and is forecast to approach 10% by the end of this year. In Germany, the Euro area’s largest economy, the ranks of the unemployment are expected to jump by another 65,000 people to bring the jobless rate to 8.2%, the highest since January 2008.

Written by Ilya Spivak, Currency Analyst
Article Source - Higher Euro Zone Inflation Unlikely to Signal Recession is Abating (Euro Open)
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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!