FOREX: Fundamental Analysis

A fundamental analysis is one of the most difficult but at the same time the key analysis on the forex market. To carry out the fundamental analysis is much more complicated as one and the same factors can either exert irregular importance under different circumstances or can turn into absolutely insignificant after their being of much value. The success of the fundamental analysis lies in the clear determination of the interrelation and the influence of two different currencies on each other. Consequently it is essential to know and to understand certain political events, the relations of different countries, their development, the history of currencies’ development. Besides, it is important to be able to predict the cumulative result of different economic programs and to establish a link between the events which may seem to be absolutely unrelated.

Within the framework of the fundamental analysis specialists familiarize with various reports on the world monetary and financial development. They learn about political and economic life of not only separate countries but also the world community as a whole.

The main purpose of the fundamental analysis is to define which events can influence the development of forex and what kind of changes in the currency rates these events can lead to. The information about the work of exchange houses and large companies, discount rates by central banks, economic policies of governments, potential changes in political regimes as well as all sorts of expectations and rumors may turn out to be crucial when conducting the fundamental analysis.

The main difference between the fundamental and the technical analysis consists in the statement the fundamental analysis is based on. It implies that forex prices are the reflection of the supply and demand which, in their turn, depend on the fundamental economic factors. Those who admit the technical analysis claim that there is no need to seek the reasons for the exchange rates changes. It is enough to analyze the prices themselves. The technical analysis engages in making short term prognoses (from 1 minute to 1 week) on the forex market while the fundamental analysis deals with medium term or long term predictions. In order to be able to launch long term prognoses it is necessary to research the internal reasons for the exchange rates changes which will enable the specialists to estimate the dynamics of currencies supply and demand.

The fundamental analysis has its disadvantages. It is rather complicated and time-consuming to track the changes of all the fundamental indicators with their own causative-consecutive relations in each country which fall under observation. The other disadvantage is that the fundamental analysis is useless to practice for short term trades because it may turn out that a trader does not have enough money for current losses on open positions in several figures which are applicable while exploiting medium term trading.

Typical Forex Trading Session

FOREX (the foreign exchange market, FX, or currency market) is a worldwide financial market for the trading of currencies and the largest financial market in the world. It is a unique market and has no physical location or any central exchange unlike other markets. It is a true 24-hour market with buyers and sellers conducting business with a daily average turnover of 1 trillion US dollars.

Forex is an ideal market for active traders who want to take advantage of economic, social and political fluctuations in the world and the inability of governments to control the direction of the market.

The foreign exchange market is also unique due to its geographical dispersion: Forex trading starts in Sydney, and as the business day begins in other financial centers, moves around the globe to Tokyo, London, New York.

In simple terms, Forex is about simultaneous purchase and sale of the currency or the exchange of one country’s currency for the one of another country. As you know, the world currencies are always fluctuating being traded in the currency pairs like, for example, Euro/Dollar, Dollar/Yen etc.

Now let us look at a typical Forex transaction, and try to work out how it all works. In a typical foreign exchange transaction, currencies are always priced in pairs: a party purchases a quantity of one currency by paying a quantity of another currency. The purpose of trading is to exchange one currency for another in the expectation that the price will change so that the currency you bought has increased its value if we compare it to the one you sold. The first currency in the pair is called the base currency, and the second currency is the quote or counter currency.

The foreign exchange market is divided into levels of access. The inter-bank market is made up of the largest commercial banks and securities dealers. Central banks are also active participants in the foreign exchange market, and try to control the money supply, inflation, and interest rates and usually have official or unofficial target rates for their currencies. Central banks control currency reserves and adjust the interest investment rate in the national currency. The national central banks attempt to bring some stability to the market by using available foreign exchange reserve currencies.

Commercial companies typically trade fairly small amounts compared to those of banks or speculators. However, some multinational companies can have a great impact in case very large positions are covered.

Retail traders have an increasing influence on foreign exchange market. At present, they participate indirectly through brokers or banks. There are two main types of retail brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers.

Brokers serve as an agent of the customer in the broader Forex market. They look for the best price in the market for a retail order and deal on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market.

Dealers or market makers normally act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at, and the customer has the choice whether or not to trade at that price. The broker firms also have their fee by charging the percent out of the operation sum.

Forex market makers provide a platform for foreign currency exchange for the customer: they buy and sell to people who want to enter the market. Market makers know the current cost of investing in the market and stand ready, every second of the trading day with a firm bid and ask price. Therefore, they help customers to reduce the chances of losing money in the market. Normally, the Forex market maker is a bank or brokerage company, which ensures that the market is always functional and that the currencies in it will always fetch the market rate.

Forex trading includes a “bid” and “ask”. The “bid” is the price at which a market maker wants to buy the base currency in exchange for the counter currency. The “ask” is the price at which a market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask price is called the spread.

There are a number of different techniques market participants use to predict the changes and grasp the future course of a currency. About 70-to-90 percent of the foreign exchange transactions are speculative. The person or institution that bought or sold the currency is speculating on the movement of that particular currency.

FOREX Trading

Is it possible to earn much money on the forex trading online?

The answer is YES. As a matter of fact it is not the money made by magic. Forex is a serious business. As any kind of business forex requires much time, financial and mental efforts as well as high qualification. The purpose of our website is to help you understand if this business suits you, provide you with all the necessary knowledge needed for the successful online trading on forex, save you from certain pitfalls which every trader comes across.

So, what is online forex trading?

Forex is an international currency market which was established in 1971 when the world trading changed the fixed rates for the volatile ones. Since that the value of a currency is purely determined by the market and economic conditions of a country.

Nowadays the foreign exchange market is open on a 24-hour basis on weekdays from 2 am on Monday till 2 am on Saturday. Everyday purchase and sell of different currencies like GBP (Great British Pound), EUR (European Euro), USD (US Dollar), JPY (Japanese YEN), CHF (Swiss Franc), CAD (Canadian Dollar), AUD (Australian Dollar) are conducted on the market by banks, market makers, investors, speculators or just ordinary traders. The investments in trading operations with currencies dispose the biggest potential of generating profits. The total volume of transactions closed on forex daily is estimated in 1-3 billion dollars which is 4-5 times higher than the stock market indicators. Once forex trading was handled with the help of massive terminal equipment. At present online forex trading is available to traders via the special computer programs. Online forex trading provides various opportunities to traders without leaving home.

The trading is aimed at buying a currency at the lowest price and selling a currency at the highest price possible at that very particular moment of the trading process. The purpose of a trader is to try to determine the direction of price changes and to buy a currency at an increasing price or to sell a currency at a falling price, then, having made a reverse transaction, to receive a profit.

While trading on forex it is essential to understand the quoted prices especially for beginners. As a rule, quotations are expressed by a five-digit number. For example, USD/JPY=114.90 means that 1 US dollar is estimated at 114.90 Japanese Yen. GBP/USD=2.0252 signifies that 1 British pound is equal to 2.0252 US dollars. When the quotations change, for example, from USD/JPY=114.92 to USD/JPY=114.93 or from GBP/USD=2.0254 to GBP/USD=2.0255 they say that the price had changed by 1 point. So, the yen has cheapened by 1 point but the pound had risen by 1 point.

Each forex participant plays a role of a buyer or a seller of a particular currency in a particular transaction. A seller offers a higher price of a currency like GBP/USD=2.0254 while a buyer will look for a lower price of a currency like GBP/USD=2.0250. The price of supply is called ASK while the price of demand is called BID. That is why if you suppose that GBP/USD price will be rising you will decide to buy the pound so far it is at a low price in order to sell it later at a higher price. When you buy GBP/USD you OPEN your position, when you are going to sell your pounds you CLOSE your position. OPEN and CLOSE positions are also referred to as LONG and SHORT positions. Sometimes the quotations are displayed in pairs like USD/JPY=114.88/92. This denotes a BID/ASK pair.

The difference between the bid and ask rates is called SPREAD. The spread is a means of profit to a person who exposes the quotation. Let us consider a pair USD/JPY=104.75/85 with the spread in 10 points. You sell 100 US dollars and get 100x104.75=10475 Japanese Yen. If someone is willing to buy 100 US dollars they will have to pay 100x104.85=10485 Japanese Yen. The bureau de change will earn 10485-10475=10 Japanese Yen. This is how brokers make profits on the forex market. The spread value varies for different market participants. The spread for those who make transactions in million dollars is minimal, just a few points but it can guarantee a weighty profit. For minor forex participants the spread value is much higher. So, bid rates, ask rates and spread are the key notions to comprehend for a trader when working on the forex market.

There are certain trading instruments which prevent a trader from unforeseen losses and help fix a planned profit. They are STOP and LIMIT orders. An opened position can be closed at any time when a currency rate has reached a particular value. In order to ensure yourself from significant losses while the downward movement of a currency, especially in a situation when you do not control the market or can lose the control over it, you apply to the STOP order. Thus, you indicate the price value lower than the current value under which your position must be closed without any other additional indications. In case the STOP order will be set too close to the current price value a random price change can close the position at a loss, if too far then the losses will be unnecessarily huge. LIMIT is a quotation indicated by a trader which ensures closing of the position with a profit.

How to become a trader and start an online trading on your own on forex?

One should take into consideration three steps.

• 1.To choose a suitable broker (forex trading is handled through the intermediary of a broker)
• 2.To open a personal bank account (the account will be used for the trading transactions)
• 3.To install a special computer program (it will help to carry out the trading)

Let us now take a closer look at each of these points.

First of all, it is necessary to choose a reliable brokerage company

which will offer high-quality brokerage services to conduct trading operations on the forex market via the Internet or the phone. Buy and sell transactions are made on behalf of a client of the brokerage company. Besides, the brokerage services include providing a trader with analytical information, trading strategies of high-qualified specialists, analysts’ consultation, a free access to the trading platform and so on. The client and the brokerage company shoulder a mutual responsibility and provide guarantees which are stipulated in the contract of rendering the brokerage services. One should bear in mind that the larger a brokerage company the more qualitative services it renders but to cooperate with such a company one needs to dispose a larger amount of money.

The next issue concerns account opening for the online forex trading.

That can be done in two ways.

• 1.Via the Internet following the instructions in the website of the broker. Later the broker will send all the documents to the client via the post for the written confirmation of the contract.
• 2.The account can be activated in the broker’s office so that all the documents will be immediately signed.

The account is opened in one of the common currencies. As a rule they are dollars, euro, rubles. The trading can be made in other currencies. The currency conversion will be performed automatically with the help of the software according to the current exchange rates. The amount of money to open the account varies in different brokerage companies ranging from 1 US dollar to 100-200 US dollars.

The final item is software

provided by the broker to install in the computer and the access to the internet. The software represents a trading terminal which activates the online forex trading. The software enables a trader to receive all the forex news in due time. Each trading platform is equipped with a set of necessary functions useful for an active trader.

All of them have a similar structure and value. They are easy and fast to operate and ensure security and effectiveness. When the software is installed in the computer the trading terminal is displayed on the screen. The main purpose of the trading platform is to show the major currency pairs and exchange rates online for forex trading. Moreover, the platform gives you an opportunity for an effective buy and sell of assets, currencies and for realizing various transactions. The platform allows you to see the indicators of your personal accounts’ status, to receive the information about transactions, open positions, profits and losses. The program displays diagrams online, enables you to perform different calculations and execute buy and sell deals in no time.

Brokers offer different trading platforms, for example, MetaTrader 4, TradeMaster, Ninja Trader,DevlaniTrader 4 and many others.

An appropriate trading platform is a half way to the success. Forex traders distinguish technical andfundamental analysis which they apply to in order to predict the exchange rates directions. The technical analysis is a statistic and mathematic analysis of the previous quotation prices which enables prediction of the following prices. The initial data for the technical analysis are the highest and the lowest prices, the prices of the opened and closed positions at a particular period of time, the volume of the operations. The analysis represents itself in a number of diagrams which are displayed on the trading platform. The diagrams exactly show the direction of the prices’ movement or a so- called trend online.

The fundamental analysis is another type of analysis widely practiced on forex. Fundamental factors are the key macroeconomic indicators of a national economics state which have an impact on the forex participants and on the level of currency rates. These factors fall under the consideration of the fundamental analysis. It assesses the political, economic, financial and credit policies of countries. The analysis incorporates refinancing rates by central banks, economic policies of governments, potential political changes, all sorts of prognoses and expectations. The technical analysis is suitable to exploit for short time intervals or, on the contrary, for long terms to research the global trends. The fundamental analysis allows estimating the factors influencing the exchange rates dynamics for a period of several days till several weeks.

Any trader who engages in the online forex trading should not only be guided by the technical or fundamental analysis but also should find a trading strategy. A trading strategy is a set of rules to follow when making a transaction. Some traders work out their own strategies while others prefer already ready ones. There are 3 types of strategies depending on the time characteristics: long term, medium term and short term strategies. Those who cannot devote much time to forex should choose long or medium term strategies. Those who have much free time can rely on short term trading strategies which are more beneficial but risky as well. That is why those who once took to them change for medium or long term strategies.

The next criterion is a currency pair as for each time limited strategy there is a particular currency pair. For working out an own strategy a trader should find a particular consistent pattern, then learn it thoroughly, try to analyze it with the reference to historical data (previous exchange rates) and after that test it. In any case before putting in practice any strategy a trader should not be in a hurry and invest all his money in one strategy. Practically every broker offers to open a demo account gratis which can be used by a trader to test a strategy. When the results of testing are favorable, a trader can start employing the strategy on the real forex account.

What is Forex Trading?

How Does Forex Trading Work?

Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

 

Relative Strength Index (RSI) - Forex Trading

The Relative Strength Index (RSI) is one of the most popular Technical Indicators in oscillator charting methods. RSI is normally used to compare the currency strength and to predict currency price movements.

The RSI, developed by J. Wilder, contrasts the downtrend and uptrend prices over a period of time. The RSI gives more emphasis to the latest data and provides a better indication than what is provided by other oscillators. As the RSI is less sensitive to sharp price fluctuations, it helps to sift unwanted “noise” in the Forex market.

Mathematics calculations behind RSI charting:

RSI= 100 - 100/(1+RS) where RS = sum of positive closing prices divide by sum of negative closing prices. RSI helps traders to predict price movements and to identify market turning points. A rise in RSI will normally be followed by a rise in the currency price; and vise versa, a downtrend RSI indicates that the currency price is more likely dropping.

In addition to being a momentum indicator, Forex traders also use the RSI as a volume indicator. Because of the nature of the Forex market as an ”Over the Counter” market (OTC), real time volume reporting is not possible. The RSI has a scale from 0 to 100. Any reading that is below 30 denotes an oversold market condition while any reading above 70 denotes an overbought market condition.