TRADING CONSIDERATION

Combining fundamental news analysis along with technical analysis offers the trader the best of both worlds and will minimize surprises while trading.  Some traders purposely avoid trading on days with economic releases because the market may become temporarily volatile only to settle back towards the original trend

Also, technical traders might avoid known risk events like major economic data releases since one of the key assumptions of technical analysis – “Price Discounts All” tends to breakdown during the period immediately after the announcement as the new information is assimilated into price.

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FUNDAMENTAL TRADING ANALYSIS

Fundamental analysis involves the use of news and events to predict price movements.  It focuses on the effects of economic, political, social and environmental factors on the determination of foreign exchange rates.

Some of the fundamental economic indicators are:

·         Consumer Confidence Index
·         Consumer Price Index
·         Durable Goods Orders
·         Employment
·         Gross Domestic Product
·         ISM Manufacturing Index
·         Non Farm Payroll
·         Producer Price Index
·         Interest Rate

Important Fundamental Factors

A number of key fundamental factors influence the Forex Market and can affect both a trading system as well as the success of a trader.  These factors include things like interest rates, Central Bank monetary policy, politics, inflation, measures against inflation, government fiscal policies, geopolitical events like war and terrorism, natural occurrences like earthquake, floods and the likes.

Interest Rates

Short term interest rates make up a key element in the valuation of currency against another.  If rates are increased in a country, this will make that currency’s currency more attractive against other currencies which pay lower interest rates.  Currency traders holding the currency with the higher interest rate collect interest on the long currency while paying out interest on the short currency thereby collecting the difference between the two.

Inflation

If a country is in an inflationary economic cycle as indicated by the Consumer and Producer Price Index – CPI and PPI, this would make it more likely that the Central Bank of that country would tighten interest rates in order to stem the increase in inflation.  An increase in rate would tend to make the country’s currency appreciate.

Economic Expansion

The Gross Domestic Product (GDP) is an indicator that shows the total goods and services produced in a country's economy and gives a picture of the overall well being of that country.  A higher GDP signifies a healthy economy hence will cause the currency to appreciate.

Monetary Policy

Monetary policy affects interest rates hence is an important element in the valuation of a country’s currency.  A tight monetary policy causes interest rates to rise with a consequent increasing effect on the currency rate.

Fiscal Policy

The currency of a country that indulges in fiscal irresponsibility would be less favored than the one with fiscal responsibility.

Political Situation

Political stability translates into currency stability.  The currency of a country with questionable political situation is likely to fluctuate easily hence would be less favored.

Financial Markets

The expected performance of the financial markets denominated in a particular currency will affect the valuation of the currency based on the returns produced by investments in the stock and bond markets in that country.

Geopolitical Factors and Wars

The forex markets tend to favor currencies of peaceful nations with a stable political climate to the currencies of nations that are at war or are experiencing civil unrest.

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TRADING ANALYSIS

Making trading decisions requires a trader to have a good working knowledge of what drives the market and in what direction.  Basically, one can determine where the market is going and why it is moving towards a particular path using the two main analytical tools – Technical and Fundamental Analysis.

Technical Analysis

This is the use of chart to study past behavior of currencies prices in order to forecast their future performance.  It involves the use of technical indicators found in trading charts to analyse and predict price movements.  There are three types of charts in a typical trading platform – Line Chart, Bar Chart and Candle Chart.

Line Chart

The line chart is the original type of chart.  A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.  Although any point in the day can be plotted, most traders focus on the closing price, which they perceive as the most important.  Daily line charts are useful when looking for the big picture or the major trend.  The line chart is a continuous chart hence it is impossible to chart price gaps and see the price activity for the balance of the day.  Below is an example of a line chart.

Bar Charts

A bar chart shows closing prices, while simultaneously showing opening prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid. So, the vertical bar indicates the currency pair’s trading range as a whole. The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.

Bar charts are also called “OHLC” charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here’s an example of a price bar: 

 
Bar charts as shown below have the advantage of displaying the currency range for the period selected.

Candlestick Charts

The candlestick chart is closely related to the bar chart.  The charts show the same information as a bar chart – open, high, low and close prices, but in more attractive and easier to read format. Candlestick bars still indicate the high-to-low range with a vertical line.  The candle chart is probably the most popular type of chart currently in use.  The opening and closing prices form the body of the candlestick while the wicks represent the high and low as shown in the diagram below.

   

A black or solid color real body indicates prices moved lower from the open to the close

for the period and is a bearish sign while the reverse is bullish.  Although the color of the real body generally sets the bullish (light) or bearish (dark) tone of a trading session, the wicks are also important, showing how far traders were willing to push prices during the period before coming back to close in the real body.

Below is an example of a candle chart.

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