Forex Analysis
Forex technical vs forex fundamental analysis
Forex technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments.
Forex fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument.
In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their forex trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately
Thursday, September 11, 2008
Market analysis
Market Analysis tools
ACM is an execution only foreign exchange dealer. We do not offer our own analysis to customers, however we collaborate with companies that specialise in analysis whether fundamental or technical.
The following pages contain information on technical and fundamental analysis in financial markets applied to foreign exchange but do not offer views on market direction at this time.
To find updated fundamental and technical market reports provided by ACM partners, please go to our Forex Analysis page.
ACM is the most competitive online fx broker in the world, to know why go to execution methodology. The full list of ACM advantages is available on advantages of trading forex with ACM.
See also: Forex technical vs forex fundamental analysis - Forex technical analysis - Forex technical indicators - Forex fundamental analysis
Market Analysis tools
ACM is an execution only foreign exchange dealer. We do not offer our own analysis to customers, however we collaborate with companies that specialise in analysis whether fundamental or technical.
The following pages contain information on technical and fundamental analysis in financial markets applied to foreign exchange but do not offer views on market direction at this time.
To find updated fundamental and technical market reports provided by ACM partners, please go to our Forex Analysis page.
ACM is the most competitive online fx broker in the world, to know why go to execution methodology. The full list of ACM advantages is available on advantages of trading forex with ACM.
See also: Forex technical vs forex fundamental analysis - Forex technical analysis - Forex technical indicators - Forex fundamental analysis
Phone trading
Phone trading terminology
The following page deals with how an actual currency trading conversation is dealt with over the phone.
Trader x contacts the ACM dealing desk to ask for a two-way quote for a particular currency, he must specify the size of the transaction. "I would like a dollar Swiss quote for 1 dollar please" or "I would like a quote for 1 million dollars against Swiss franc".
If the ACM dealer knows that trader x is a frequent dealer then he will most likely respond, "87-90" if not he would quote the whole figure "1.5587-90". That's because it is generally assumed that the "big figure" (that is, 1.55) is known.
Trader x has a short time to decide whether he wants to buy, sell or ask for a requote. Bear in mind that in a fast-moving market, unless he responds promptly, in a matter of seconds, the dealer cannot be held to the quote he has given. If the price changes the dealer will say "off" or "change" which means that the price quoted beforehand is no longer available. After the dealer says "off" he will immediately quote a new set of bid and ask prices. Let's assume that trader x was indecisive and consequently the dealer "offed" the price quoting a new one straight after.
The dealer quotes "89-92" and trader x chooses to sell. In this case he has several verbal alternatives at his disposal. Trader x can either say " I sell", " mine at 89" "89 sell". After a second or so the dealer will respond either "done at 89" or "you sold at 89" and will confirm the transaction by saying either "I confirm you sold 1 million dollar against Swiss franc at 1.5589" or "confirm I buy 1 dollar from you at 1.5589
Phone trading terminology
The following page deals with how an actual currency trading conversation is dealt with over the phone.
Trader x contacts the ACM dealing desk to ask for a two-way quote for a particular currency, he must specify the size of the transaction. "I would like a dollar Swiss quote for 1 dollar please" or "I would like a quote for 1 million dollars against Swiss franc".
If the ACM dealer knows that trader x is a frequent dealer then he will most likely respond, "87-90" if not he would quote the whole figure "1.5587-90". That's because it is generally assumed that the "big figure" (that is, 1.55) is known.
Trader x has a short time to decide whether he wants to buy, sell or ask for a requote. Bear in mind that in a fast-moving market, unless he responds promptly, in a matter of seconds, the dealer cannot be held to the quote he has given. If the price changes the dealer will say "off" or "change" which means that the price quoted beforehand is no longer available. After the dealer says "off" he will immediately quote a new set of bid and ask prices. Let's assume that trader x was indecisive and consequently the dealer "offed" the price quoting a new one straight after.
The dealer quotes "89-92" and trader x chooses to sell. In this case he has several verbal alternatives at his disposal. Trader x can either say " I sell", " mine at 89" "89 sell". After a second or so the dealer will respond either "done at 89" or "you sold at 89" and will confirm the transaction by saying either "I confirm you sold 1 million dollar against Swiss franc at 1.5589" or "confirm I buy 1 dollar from you at 1.5589
Forex terminology
The forex market is a specific market.
Like many other financial markets it has its own language and practices.
Throught the following pages, you will learn which word should be used in which particular situation in order to trade properly on the forex market.
The forex glossary, lists in alphabetical order all terms related to the forex market and used daily by all market participants.
The forex phone trading terminology is really specific to forex, and knowing at least the basis of it is a prerequisite in order to be able to trade forex on the phone with professional dealers
The forex market is a specific market.
Like many other financial markets it has its own language and practices.
Throught the following pages, you will learn which word should be used in which particular situation in order to trade properly on the forex market.
The forex glossary, lists in alphabetical order all terms related to the forex market and used daily by all market participants.
The forex phone trading terminology is really specific to forex, and knowing at least the basis of it is a prerequisite in order to be able to trade forex on the phone with professional dealers
Speculation VS investment - Day trading VS occasional position
It is very important that the individual wanting to trade foreign exchange be aware of the very marked difference between speculation and investment. Forex trading is by nature a speculative occupation. Foreign exchange markets are amongst the most volatile markets in the world. When traded on a margined basis they effectively become the most volatile in the world.
Day trading
Day trading in foreign exchange can be extremely profitable and high-risk profile traders can generate huge percentage returns even overnight. Day trading is however a mentally and psychologically challenging activity and is by no means meant for everyone. Day trading is essentially speculation and day traders essentially only do that: day trading. Most people who trade foreign exchange are not professional day traders however.
Day trading alternative
Often the contractors of foreign exchange brokerage services are professionals in some capacity or other. These people do not day trade but take the occasional position from time to time. This is also speculation and should not be confused with making an investment.
Conclusion
The conclusion here is that the nature of foreign exchange trading not lend itself as much to investment as it does to speculation and hedging (hedging may be performed in forward instruments). It is possible in a sense to make an investment in foreign exchange over a long-term period but this necessitates a large account value and low leveraging.
It is very important that the individual wanting to trade foreign exchange be aware of the very marked difference between speculation and investment. Forex trading is by nature a speculative occupation. Foreign exchange markets are amongst the most volatile markets in the world. When traded on a margined basis they effectively become the most volatile in the world.
Day trading
Day trading in foreign exchange can be extremely profitable and high-risk profile traders can generate huge percentage returns even overnight. Day trading is however a mentally and psychologically challenging activity and is by no means meant for everyone. Day trading is essentially speculation and day traders essentially only do that: day trading. Most people who trade foreign exchange are not professional day traders however.
Day trading alternative
Often the contractors of foreign exchange brokerage services are professionals in some capacity or other. These people do not day trade but take the occasional position from time to time. This is also speculation and should not be confused with making an investment.
Conclusion
The conclusion here is that the nature of foreign exchange trading not lend itself as much to investment as it does to speculation and hedging (hedging may be performed in forward instruments). It is possible in a sense to make an investment in foreign exchange over a long-term period but this necessitates a large account value and low leveraging.
Forex trading strategy
Trading successfully is by no means a simple matter. It requires time, market knowledge, market understanding, trading strategy and a large amount of self restraint. ACM does not manage accounts, nor does it give market advice, that is the job of money managers and introducing brokers. As market professionals, we can however point the novice in the right direction and indicate what are correct trading tactics and considerations and what is total nonsense.
Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of online currency trading by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend b or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a b trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is b or weak.
Market expectation:
Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
Trading successfully is by no means a simple matter. It requires time, market knowledge, market understanding, trading strategy and a large amount of self restraint. ACM does not manage accounts, nor does it give market advice, that is the job of money managers and introducing brokers. As market professionals, we can however point the novice in the right direction and indicate what are correct trading tactics and considerations and what is total nonsense.
Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of online currency trading by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend b or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a b trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is b or weak.
Market expectation:
Market expection relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
Forex tutorial
Forex trading example
Trader x has an account of USD 50'000.
He buys EUR/USD 500'000 @ 1.1500 at the market and places a stop loss order at 1.1460.
At this point his maximum risk is USD 2'000 and his margin utilisation is 10%, well above the minimum.
During the day the forex market fluctuates and initially moves down to 1.1480.
At this point trader x has an unrealised loss of USD 1'000 and his margin utilisation has fallen to 9.60% reflecting the effect of the downward move on his margin capacity.
Later still the price moves back up to 1.1550 and trader x decides to take profit. He sells at 1.1550 making a USD 2'500 profit which represents a 5% return on his account value. Note that trader x took only a risk of USD 2'000 and made a return of USD 2'500 this equates to a risk/reward ratio of 1.25. A high risk reward ratio is what every trader should be aiming for.
The viewer should note that the example above is a random case scenario and in no way is meant to allude that the potential for profit is greater than the potential for loss in foreign exchange trading
Forex trading example
Trader x has an account of USD 50'000.
He buys EUR/USD 500'000 @ 1.1500 at the market and places a stop loss order at 1.1460.
At this point his maximum risk is USD 2'000 and his margin utilisation is 10%, well above the minimum.
During the day the forex market fluctuates and initially moves down to 1.1480.
At this point trader x has an unrealised loss of USD 1'000 and his margin utilisation has fallen to 9.60% reflecting the effect of the downward move on his margin capacity.
Later still the price moves back up to 1.1550 and trader x decides to take profit. He sells at 1.1550 making a USD 2'500 profit which represents a 5% return on his account value. Note that trader x took only a risk of USD 2'000 and made a return of USD 2'500 this equates to a risk/reward ratio of 1.25. A high risk reward ratio is what every trader should be aiming for.
The viewer should note that the example above is a random case scenario and in no way is meant to allude that the potential for profit is greater than the potential for loss in foreign exchange trading
Subscribe to:
Posts (Atom)
