Author: Reddy Shyam Shankar

I am a professional Price Action retail trader and Speculator with expertise in Risk Management, Trade Management, and Hedging.

Categories
Forex Fundamental Analysis

The Importance of ‘Loan Growth’ as a Forex Macro Economic Indicator

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction

Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist economy, where credit and inflation primarily drive the economy forward.

What is Loan Growth?

Loan: It is a debt incurred by an individual or entity. The lender is generally a bank, financial institution, or the Government. The lender credits the borrower a sum of money. The borrower agrees to specific terms and conditions that can include finance charges, interest payments, due dates, and other conditions.

Loans can be secured or unsecured. In secured loans, the loan is given out against collateral with a financial value like a property, mortgages, or securities, etc.

Loan Growth: Loan Growth refers to the percentage increase in the number of loans issued overall by banks in a particular region over a particular time frame. The time frame can be monthly, semi-annual, or annual.

Most modern economies today we see are capitalist economies, i.e., they grow through capitalism. A capitalist economy requires money to expand and grow. Hence, credit is an inevitable fuel required for economic growth.

How can the Loan Growth numbers be used for analysis?

A healthy increase in the percentage of Loans is suitable for a stable and healthy economy. But as with any case, there is no perfect economy, and there are two sides of analysis to Loan Growth.

First Scenario

A healthy economy means it is growing at a stable rate year over year with mild inflation each year. Credit fuels economic growth in this type of economy. In this type of economy, an increase in the number of loans taken can be considered a positive sign for the economy.

Businesses can grow beyond just cash in hand. Householders can purchase homes without saving the entire cost before purchase. Governments can meet their spending needs without relying solely on tax revenues. Be it a business, householder, or a Government can smoothen out their economic activities in terms of money. They will take credit when in deficit and payback when in surplus.

An increase in Loan Growth can imply that more people are creditworthy, and more businesses are taking credit to expand and grow. Both of these scenarios are good for the GDP and is a good sign for the economy.

Second Scenario

The first scenario takes into the assumption that the economy is strong and stable. In reality, currently, most of the developed nations are struggling to maintain their economic growth. For example, the United States debt to GDP ratio is above 100%, which indicates that even if the entire GDP were given out to repay the debt, it would still be in some debt. Most of the developed nations have taken substantial credits to keep the economy from ticking over.

Keeping economic growth and global competency in mind, most countries have invested heavily in overgrowing in the short-term. By taking on more and more debts, countries may have achieved the necessary growth and needs now but have pushed their problems to the future.

Economists argue that eventually, there would be a time when countries cannot afford any more debt and would be backed into a corner. The only way out then would be at a considerable cost of losing out more than what they had made. Studies also show that rapid loan growth than the long term average also has seen an increase in underperforming or bad loans.

It is also essential to know that increase in Loan Growth should be accompanied by the fact that no bad loans are given out. Giving loans to people and businesses who do not have the eligibility but just because money is lying around is also a problem.

In the United States itself, the Government has been injecting money into the economy since the financial crisis in the form of Money Supply and Quantitative Easing programs to inflate their way out of depression or recession. Until now, the Government has not been able to reduce debt and is only taking on more debt to sustain the current growth.

An increase in loans is good or bad for the economy remains debatable for many. Without credit, sector growth is almost unimaginable in present times. For our analysis, we can use the Loan Growth rate as a litmus test to see whether the injected money from the Central Authorities has started reaching the public and businesses.

When the Central Authorities want to inflate the economy, they reduce interest rates by injecting money into the interbank market. The injected money takes time to get into the economy, and loans are one form in which this money gets circulated.

Overall, for our analysis, once Loan Growth shows increasing numbers, we can assume that the injected money is reaching the intended sectors, and consequent effects could be predicted on businesses and consumers. Loan Growth is indicative of a growing economy in general and is more prominent in developing countries.

Impact on Currency

Loan Growth is a by-product of a reduction in interest rates from the Central Banks of the country and an increase in employment and business growth. An increase in Loans indicates that money is “cheaper” to borrow. It is inflationary for the economy and is given out to induce growth (which may or may not happen).

An increase in Loan Growth depreciates currency as more money is competing against the same set of goods and services. A decrease in Loan growth appreciates the currency as the reduced liquidity forces goods and services to come at reduced prices.

Overall, Loan Growth is a low-impact indicator, as the Central Bank’s interest rates are the leading indicators, and the desired effect from increased loans can be traced from other leading indicators like Consumer and Business surveys.

Economic Reports

Since Loan Growth is not a significant economic indicator, official publications for significant countries are not explicitly published but can be obtained through reports analysis. For our reference, the Trading Economics website consolidates the Credit Growth in different sectors for data available countries on its official website. Since it is a consolidation, frequency and time of publication vary from country to country.

Sources of Loan Growth

Loan Growth consolidated available data for different countries are available here.

“The impact of bank lending on Palestine economic growth: an econometric analysis of time series data” has been referenced for this article.

How Loan Growth Affects The Price Charts

Loan growth is not a statistic. Most forex traders keep an eye when making their trades. The lack of interest is because it is considered a their-tier leading indicator. It is, however, essential to know how the release of this fundamental economic indicator affects the forex price charts.

In the EU, loan growth data is released monthly by the European Central Bank about 28 days after the month ends. It represents the change in the total value of new loans issued to consumers and businesses in the private sector. The most recent release was on July 27, 2020, 8.00 AM GMT can be accessed here. A more in-depth review of the economic news release can be accessed at the ECB website.

Below is a screengrab of the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the EUR.

As can be seen, low impact is expected on the EUR.

The screengrab below is of the most recent change in the loan growth in the EU. In June 2020, private loans grew by 3% as compared to the same period in 2019. This change represented a flat growth from the previous release. Based on our fundamental analysis, this should be positive for the EUR.

Now, let’s see how this positive news release made an impact on the Forex price charts.

EUR/USD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

From the above chart, the EUR/USD pair is trading on a neutral trend before the data release. The candles are forming around the flattening 20-period Moving Average. This trend is an indication of relative market inactivity.

EUR/USD: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

After the news release, the pair forms a 15-minute bullish candle as EUR becomes stronger as expected. However, the news release was not strong enough to cause a shift in the pair’s trend since the pair continued to trade in the previously observed neutral trend.

Now let’s see how this news release impacted other major currency pairs.

EUR/JPY: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

Before the news release, EUR/JPY traded in a similar neutral trend as observed with the EUR/USD with the candles forming around a flattening 20-period Moving Average.

EUR/JPY: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

As observed with the EUR/USD pair, EUR/JPY formed a 15-minute bullish candle after the news release as expected. The subsequent trend does now significantly shift.

EUR/CAD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

EUR/CAD: After Loan Growth release on July 27, 2020, 
8.00 AM GMT

The EUR/CAD pair shows a similar neutral trading pattern as the EUR/USD and EUR/JPY pair before the news release. After the news release, the pair forms a 15-minute bullish candle but later continued trading in the earlier observed neutral trend as the 20-period Moving Average flattens.

The release of the loan growth data has an instant short-term effect on the EUR. The data is, however, not significant enough to cause any relevant shift in the prevailing market trend.

Categories
Forex Basic Strategies

Learning To Trade The ‘Turn To Trend’ Forex Strategy

Introduction

Introduction

Introduction

Although many times before, we have stressed on trading with the direction of the market, yet most traders have a hard time trading with the trend. The observation is contrary to what is said by experts and professional traders since the majority of retail traders claim to be trading with the trend but end up trading counter-trend. While everyone talks of the idiom, “the trend is your friend,” in reality, most traders love to pick tops and bottoms and constantly violate the above rule.

Time Frame

The strategy is fixed to two-time frames. The daily time frame for trend identification and the 1-hour time frame for trade entry.

Indicators

We use the following technical indicators for the strategy:

  • 20-period SMA
  • Three standard deviations Bollinger band (3SD)
  • Two standard deviations Bollinger band (3SD)

Currency Pairs

This strategy is applicable to most of the currency pairs listed on the broker’s platform. However, exotic pairs should be avoided.

Strategy Concept

This setup recognizes the desire of most traders to buy low and sell high but does so in the predominant framework of trading with the trend. The strategy uses multiple time frames and a couple of indicators as it’s a tool for entry. First and foremost, we look at the daily chart to ascertain of the pair in a trend. For that, we use the 20-period simple moving average (SMA), which tells us the direction of the market. In technical analysis, there are numerous ways of determining the trend, but none of them is as simple and easy as the 20-period SMA.

Next, we switch to the hourly charts to find our ‘entry.’ In the ‘Turn to Trend’ Strategy, we will only trade in the direction of the market by buying highly oversold prices in an uptrend and selling highly overbought prices in a downtrend. The question arises, how do we know the market is overbought or oversold? The answer is by using Bollinger bands, which help us gauge the price action.

Bollinger bands measure price extremes by calculating the standard deviation of price from its moving average. In our case, we use the three standard deviation Bollinger band (3SD) and Bollinger band with two standard deviations (2SD). These two create a set of Bollinger band channels. When price trades in a trend, most of the price action will be contained within the Bollinger bands of 2SD and 1SD.

Trade Setup

In order to illustrate the strategy, we have considered the chart of EUR/CAD, where we will be applying the strategy to take a ‘long’ trade.

Step 1

The first step is to identify the major trend of the market. This can be done using the 20-period simple moving average (SMA). If the price is very well above the SMA, we say that the market is in an uptrend. Likewise, if the price is mostly below the SMA, we say that the market is a downtrend. For this strategy, we have to determine the trend on the daily chart of the currency pair.

In our case, we see that the market is in a strong uptrend, as shown in the below image. Hence, we will enter for a ‘long’ trade at the price retracement on the 1-hour time frame.

Step 2

Next, we have to change the time frame of the chart to 1 hour and wait for a price retracement. In order to evaluate the retracement, we plot three standard deviations (3SD) and two standard deviations (2SD) Bollinger band on the chart. After plotting the two Bollinger bands, we need to wait for the price to get into the zone of 2SD-3SD BB.

In the below image, we can see that the price breaks into the zone of 2SD-3SD BB after a lengthy ‘range’ movement.

Step 3

Once the price moves into the zone of 2SD-3SD BB, we wait for the price to bounce off from the lower band of the 3SD BB to give an indication of a reversal. In a ‘short‘ set up, the price should react off from the upper band of the 3SD BB, and give an indication of downtrend continuation. During this process, we need to make sure that the price does not break below or above the 3SD BB. Because if this happens, the ‘pullback’ is no more valid, and this could be a sign of reversal. This is a crucial aspect of the strategy.

The below image shows how the price bounces off from the lower band of the 3SD BB two candles after the price moves into the zone.

Step 4

We enter the market at the first sign of trend continuation, which was determined in the previous step. Now we need to define the stop-loss and take-profit for the strategy. Stop-loss should be placed below the lower band of the 3SD BB, in case of a ‘long’ trade and above the upper band of the 3SD BB, in a ‘short’ trade. The ‘take-profit’ is not a fixed point. Instead, we take our profit as soon as the price touches the opposite band of the 3SD BB.

In the case of EUR/CAD, the resultant risk-to-reward of the trade was a minimum of 1:2, as shown in the below image.

Strategy Roundup

The beauty of this setup is that it prevents us from guessing the turn in the market prematurely by forcing us to wait until the price action confirms a swing bottom or a swing top. If the price is in a downtrend, we watch the hourlies for a turn back to the trend. If the price continues to trade between the 3SD and 2SD BB, we stay away as long as we get confirmation from the market. We can also set our first take-profit at 1:1 risk to reward to lock in some profits.

Categories
Forex Fundamental Analysis

What Is GDP Annual Growth Rate & What Impact It Has On The Forex Price Charts?

Introduction

Introduction

Introduction

Apart from inflation, gross domestic product growth is one of the most closely monitored macroeconomic statistics. This interest in the GDP growth rate is because GDP is one of the leading indicators of economic health in any country. Therefore, apart from understanding how the GDP growth rate impacts a nation’s economy, forex traders must comprehend how it affects the exchange rate.

Understanding the GDP Annual Growth Rate

GDP: A country’s gross domestic product is the monetary measure of the entirety of goods and services that have been produced within an economy over a specific period. The formula for calculating the GDP for a country is summing up the households’ consumption expenditure, expenditure by the national government, spending by businesses, and the net value of exports. The fact that the GDP covers the entire expenditure within an economy makes it a robust leading indicator of economic health.

GDP Growth Rate: The measure of how the various components in an economy are changing over a given period is the GDP growth rate. The GDP growth rate shows how much a country’s economy has expanded or shrunk relative to the previous period. Thus, the GDP growth rate is the primary measure of how well or poorly an economy is performing.

GDP Annual Growth Rate: The GDP growth rate is calculated every quarter. However, the annual growth rate measures the change in the real GDP between a given quarter and a similar quarter in the previous calendar year. While the QoQ GDP growth rate gives a more recent picture of how the economy is fairing, the annual growth rate is necessary to indicate the longer-term trajectory of the economy.

How the GDP Annual Growth Rate is Measured

It is worth noting that the GDP annual growth rate is calculated using the “real” GDP, meaning that the GDP has been adjusted for inflation. This adjustment is made to ensure the effects of inflation do not result in a false sense of economic progression. There are two ways of determining the GDP annual growth rate.

The first one is by annualising the QoQ GDP growth rate. Annualising means converting the short term QoQ GDP growth rate into an annual rate.

Annualised GDP growth rate  = (1 + QoQ GDP)4 – 1

The second method for calculating the annual GDP growth rate is by comparing the rate of change from a given quarter with that of the same quarter in the previous year.

YoY GDP growth = (Current quarter GDP/ Similar Quarter's GDP – previous year) – 1

How the GDP Annual Growth Rate can be used for analysis

Economists track the GDP growth rate not just because it shows the current state of the economy but because it the primary objective of fiscal and monetary policy formulation. The annual GDP growth rate shows a long-term trajectory of the economy. It provides an effective measure to compare the sizes of economies of different countries.

Governments and central banks formulate their policies around the GDP growth numbers. When the YoY GDP is falling, expansionary monetary and fiscal policies that will be implemented. A falling GDP is an indicator that the economy is heading to higher levels of unemployment; reduced wages; and a general reduction in aggregate demand and supply. Therefore, to avoid recession, expansionary policies like a reduction in interest rates are introduced. These measures are reducing the cost of borrowing, which in turn leads to increased expenditure by households, businesses, and the government.

Conversely, a rapidly increasing growth rate of the annual GDP signifies that the economy is performing well. This economic prosperity translates to a higher rate of employment, higher wages; increased levels of investment and re-investments; and higher aggregate demand and supply within the economy. However, although an increasing GDP is good, a rapidly increasing annual growth rate could forebode an overheating economy.

An overheating economy is one that is experiencing an unsustainable period of prolonged economic growth. This prolonged growth risks high levels of runaway inflation in the economy due to the continually rising wages. More so, an overheating economy results in inefficient allocation of the factors of production since producers oversupply the economy to take advantage of the higher prices. These inefficiencies are likely to result in a nationwide economic recession.

To prevent the effects of an overheating economy, the government and central banks will implement contractionary monetary and fiscal policies. They include a reduction in government expenditure and increasing the interest rate. These policies will help slow down the rate of inflation and increase the cost of borrowing, effectively reducing the aggregate demand.

Therefore, the YoY GDP growth rate provides an important metric for the relevant authorities to ensure that the economy is progressing at a sustainable pace. Furthermore, it is a way for the governments and central banks to gauge the effectiveness of the policies put in place.

Impact on Currency

Forex traders keenly follow the changes in fundamental economic indicators to establish whether there will be a future hike or cut in the interest rate. A falling annual GDP growth rate is accompanied by expansionary monetary policies such as a reduction of the interest rate. This cut tends to depreciate a country’s currency. Therefore, a falling annual GDP growth rate is negative for the currency.

Conversely, an increasing annual GDP growth rate forestalls an increase in the interest rate to prevent runaway inflation. Therefore, it is expected that a rising annual GDP growth rate leads to the appreciating of the currency.

Sources of the GDP Annual Growth Rate

The statistics on global GDP annual growth rate can be accessed at Trading Economics and The World Bank.

How GDP Annual Growth Rate Data Release Affects The Forex?

This analysis will focus on the annual GDP growth rate in Australia. The most recent data release was on September 2, 2020, at 1.30 AM GMT and can be accessed at Forex Factory here. A more in-depth review of the data release can be accessed from the Australia Bureau of Statistics.

The screengrab below is of the annualised QoQ GDP growth rate from Forex Factory. On the right of the image is a legend that indicates the level of impact it has on the AUD.

As can be seen, both the annualised QoQ GDP growth rate data is expected o result in a high impact on the AUD.

In the 2nd quarter of 2020, the Australian economy contracted by an annualised rate of 7% compared to a 0.3% contraction in the first quarter. This contraction was worse than analysts’ expectation of 6%. This contraction is expected to depreciate the AUD relative to other currencies.

Let’s now analyse the impact made by this release on the Forex price charts of a few selected pairs.

AUD/USD: Before Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, Just Before 1.30 AM GMT

From the above 15-minute chart, the AUD/USD pair was trading in a neutral trend before the data release. This trend is evidenced by candles forming just around an already flat 20-period Moving Average. However, 30 minutes to the news release, the pair adopted a steep downtrend forming two long bearish candles with the 20-period MA falling.

AUD/USD: After the Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, at 1.30 AM GMT

After the data release, extreme volatility is observed. As expected, the pair forming a long 15-minute bearish candle due to the weakening AUD. The 20-period MA continued to fall steeply even though the pair started recovering from the worse than expected data release. Subsequently, the steepness of the 20-period MA subsided.

GBP/AUD: Before Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, Just Before 1.30 AM GMT

The GBP/AUD pair traded in a similar pattern as observed with the AUD/USD pair before the annualised GDP data release.

GBP/AUD: After the Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, at 1.30 AM GMT

As expected, after the news release, the pair formed a long 15-minute bullish candle due to the weakening AUD. As with the AUD/USD pair, the GBP/AUD pair underwent a period of correction with the 20-period MA flattening and the subsequent candles forming lower than the news candle.

EUR/AUD: Before Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, Just Before 1.30 AM GMT

EUR/AUD: After the Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, at 1.30 AM GMT

Like the other pairs, the EUR/AUD pair traded within a neutral trend with a significant shift in the trend immediately before the GDP data release. Like the GBP/AUD pair, the EUR/AUD pair formed a long 15-minute bullish candle after the news release due to the worse than expected data.

Bottom Line

The above analyses have shown that the GDP annual growth has a significant effect on price action. The period of relative market inactivity before the data release indicates that most forex traders avoid opening any new, significant positions until the data is released.

Categories
Forex Assets

Asset Analysis – Trading Costs Involved While Trading The CAD/AED Currency Pair

Introduction

Introduction

Introduction

CAD/AED is a Forex exotic currency pair, where CAD represents the currency of Canada, an AED is the currency of the UAE. In this exotic currency pair, CAD is the base first, and AED is the second currency.

Understanding CADAED

This pair’s price determines the value of AED, which is equivalent to one CAD. We can term it as 1 CAD per X numbers of AED. For example, if the CAD/AED pair’s value is at 2.8007; therefore, we need almost 2.8007 AED to buy one CAD.

CADAED Specification

Spread

In every financial market, Spread represents the difference between the Bid and Ask. It is usually a charge that is deducted by the forex broker. This value changes with the type of execution model.

Spread on ECN: 10 pips | Spread on STP: 15 pips

Fees

The trading fees in the forex market and stock market are the same. It is deducted from the traders’ accounts as soon as they open a new position. Note that STP accounts do not charge anything, but a few pips charges on ECN accounts.

Slippage

Slippage happens when price opens above or below the execution level. Slippage occurs because of two important reasons – market volatility and broker’s execution speed.

Trading Range in CADAED

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

CADAED Cost as a Percent of the Trading Range

The volatility values on the above table indicate how the cost varies with the change in market volatility. All we did is to get the ratio between the total cost and the volatility values and converted them into percentages.

ECN Model Account 

Spread = 10 | Slippage = 5 | Trading fee = 8

Total cost = Spread + Slippage + Trading Fee

= 10 + 5 + 8 = 23

STP Model Account

Spread = 10 | Slippage = 5 | Trading fee = 0

Total cost = Spread + Slippage + Trading Fee

= 10 + 5 + 0 = 15

The Ideal way to trade the CADAED

The CADAED is an exotic cross currency pair with higher volatility and liquidity. Because of this, traders may find it easy to trade in this pair. We can see that the percentage values above where the value did not move above 230% that represents a higher trading cost in the lower timeframe. However, when we move to the monthly timeframe, the average cost came to below 2%.

Therefore, trading intraday in this currency pair is risky due to the high trading cost. On the other hand, trading in a higher timeframe has less cost, but it requires a lot of patience and time. Overall, for every trader, it is recommended to stick on trading where the trading cost is at the average value.

Another way to reduce the cost is to place a pending order as ‘limit’ and ‘stop’ instead of ‘market.’ In that case, there will be no slippage in the calculation of the total costs. So, in our example, the overall cost will be reduced by five pips.

STP Model Account (Using limit orders) 

Spread = 10 | Slippage = 0 | Trading fee = 0

Total cost = Spread + Slippage + Trading Fee

= 10 + 0 + 0 = 10

Categories
Forex Fundamental Analysis

What is Producer Prices Change and what should you know about it?

Introduction

Introduction

Introduction

For forex traders, the producer prices change come as an afterthought. The changes in the prices of the output by domestic producers is a vital macroeconomic indicator since it is considered a leading indicator of inflation. Therefore, understanding how these changes impact the economy, the rate of inflation, and the currency can be useful to forex traders.

Understanding Producer Prices Change

Producer prices change in the United States is measured using the producer price index (PPI). The PPI is a weighted index that measures the change in the price of finished goods and services sold by producers.

The consumer price index is the most cited metric for measuring inflation. However, PPI can be used as a measure of inflation; because it tracks the changes in prices from the perspective of producers. CPI tracks price changes from the consumers’ perspective. Therefore, PPI can be used as the foremost tracker of inflation since it measures the changes in the prices of output before it is distributed to the consumers. PPI can be considered to the purest change in the prices of output since it does not include the changes caused by sales taxes and mark-ups by retailers. Hence, PPI is predictive of the CPI, as shown by the correlation in the chart below.

Source: St. Louis FRED

Since the PPI does not represent the general and final changes in the prices of goods and services in an economy, it is regarded as a weak economic indicator in the forex market.

How PPI is measured

Although the PPI is quoted as the change in the price of the producers’ output, it is measured in three distinct stages based on the level of production. They include the PPI Commodity Index, which measures the changes in the price of input materials, PPI Processing Index, which measures the changes in the price of intermediate goods, and Core PPI, which measures the finished output.

It is worth noting that the prices of food and energy are considered to be highly volatile and are therefore not included in the computation of the core PPI. This omission is justified by the fact that their prices are reliant on the short term supply and demand, which makes it difficult to compare these prices in the long-run.

As mentioned earlier, PPI is a weighted index. Weighting means the size and importance of the items sampled are used. The changes in prices compared to those of 1982 as the base year.

How can the PPI be used for analysis?

The inflation data is among the most-watched economic indicators because the rate of inflation informs the monetary and fiscal policies in a country. Being a leading indicator for the CPI, the PPI serves an important role. This role is precipitated by the fact that inflation is one of the primary drivers of monetary and fiscal policies.

Rising inflation signifies the availability of cheap money, which encourages spending and investments. The Federal Reserve then raises interest rates to reduce the amount of money in circulation. At higher interest rates, borrowing money becomes expensive hence reducing consumption. Similarly, it becomes lucrative for households to save money since they earn more. Postponing consumption tends to reduce the amount of money I circulation hence lower rates of inflation.

Inarguably, low rates of inflation result in a stagnant economy. Although inflation is good for the economy, when it gets out of hand, it results in a rapid depreciation of a country’s currency. It is for this reason that the central banks use interest rate policies to set the desired maximum and minimum inflation rate. In the US, for example, the Federal Reserve has set the country’s inflation target at an average of 2%.

An increase in the PPI signifies that the overall rate of the CPI will also increase. This increase will reduce the purchasing power of the country’s currency since the same amount of money will afford a lesser quantity of goods and services. Therefore, an increasing rate of inflation encourages consumption within an economy because savers will be afraid that their money will lose value.

This increased consumption leads to growth within an economy. Conversely, a decreasing PPI signifies that the overall inflation is likely to reduce. This reduction, in turn, encourages people to save their money hence reducing the rate of consumption in an economy.

Inflation can result in a feedback loop. Hence, rising inflation will encourage more expenditure and investment in an economy leading to further inflation. This feedback loop occurs when savers opt for consumption to avoid the depreciation of their money; this, in turn, increases the amount of money in circulation, which causes the purchasing power of money even to reduce further.

Impact on Currency

The end goal for any forex trader is to establish whether a change in any fundamental indicator will lead to an interest rate hike or cuts. This anticipation is what primarily impacts the price action in the forex market.

A rising PPI  signifies rising inflation, which would be accompanied by an increase in the interest rates. Since the increasing interest rate is good for the currency, an increase in PPI results in appreciation of the currency relative to others.

Conversely, dropping levels of PPI signifies that the overall rate of inflation will fall. Therefore, a steadily dropping PPI forestall a drop in the interest rate. Therefore, decreasing levels of PPI leads to a depreciating currency.

Sources of Producer Price Changes

The producer price changes data can be accessed from the US Bureau of Labor Statistics, along with the monthly updates. A comprehensive look into the US PPI data can also be accessed from St. Louis FRED website. Statistics on global producer price changes can be accessed at Trading Economics.

How PPI Data Release Affects The Forex Price Charts

The most recent PPI data was released on August 11, 2020, and can be seen at Forex factory here. A more in-depth review of the PPI report from the Bureau of Labor Statistics can be accessed at the BLS website.

As can be seen, both the monthly PPI and core PPI data are expected to have a high impact on the USD upon release.

The screengrab below shows the most recent changes in the MoM PPI and core PPI in the US. In July 2020, the monthly PPI increased by 0.5% compared to a 0.3% decrease in June. The core PPI increased by 0.6% in July compared to a 0.2% decrease in June. Both changes in the MoM PPI and core PPI were better than analysts’ expectations of 0.1% and 0.3% increase, respectively.

Now, let’s see how this release made an impact on the Forex price charts of a few selected pairs.

EUR/USD: Before Monthly PPI Release on August 11, 2020, 
Just Before 8.30 AM ET

As can be seen from the above 15-minute chart of EUR/USD, the pair was on a steady uptrend before the release of PPI data. This trend is evidenced by candles forming above the steeply rising 20-period MA. However, 30 minutes before the release, the steady uptrend tapered with the 20-period MA peaking.

EUR/USD: After Monthly PPI Release on August 11, 2020, 
at 8.30 AM ET

After the PPI data release, the pair formed a 15-minute bullish candle followed by a period of volatility. The pair later adopted a bearish trading pattern with the 20-period MA steadily sloping downwards, showing that the USD became stronger as expected.

Now let’s see how this news release impacted other major currency pairs.

GBP/USD: Before Monthly PPI Release on August 11, 2020, 
Just Before 8.30 AM ET

Before the news release, the GBP/USD pair showed a similar steady uptrend as observed with the EUR/USD pair. As seen above, the 20-period MA is steeply rising with candles forming above it.

GBP/USD: After Monthly PPI Release on August 11, 2020, 
at 8.30 AM ET

After the PPI release, the pair formed a 15-minute bullish “hammer” candle. As with the EUR/USD, the pair subsequently reversed the uptrend and traded in a steady downtrend, the 20-period MA sloping downwards.

AUD/USD: Before Monthly PPI Release on August 11, 2020, 
Just Before 8.30 AM ET

AUD/USD: After Monthly PPI Release on August 11, 2020, 
at 8.30 AM ET

Unlike the strong uptrend observed with the EUR/USD and GBP/USD pairs, the AUD/USD pair traded in a weak uptrend before the PPI data release. This trend is evidenced by candles forming just around the slightly rising 20-period MA. After the news release, the pair formed a 15-minute “bearish Doji” candle signifying a period of volatility. The pair subsequently reversed the trend adopting a steady bearish stance with the 20-period MA sloping downwards.

Bottom Line

Although the PPI is a relatively low impact fundamental indicator compared to the CPI, this analysis has proved that its release has a significant impact on the price action. Forex traders should avoid having any significant positions open before the release of the PPI.

Categories
Forex Fundamental Analysis

Understanding The ‘Inflation Rate MoM’ Macro Economic Indicator

Introduction

Introduction

Introduction

The GDP and Inflation rate are two of the most closely watched macroeconomic statistics by economists, business analysts, investors, traders, government officials, and the general population. The inflation rate has an impact on everyone, and no one is exempt from it. Understanding its effect on the currency, economy, living conditions, and how to use it for our analysis is paramount.

What is Inflation Rate, MoM?

Inflation: The increase in the prices of commodities over time is called inflation. It is the rise in the cost of living over time where the purchasing power of the currency depreciates. Inflation erodes the value of the currency, meaning a unit of currency can procure lesser goods and services than before.  Inflation occurs when more currency is issued than the wealth of the country.

Inflation Rate: The percentage increase in price for a basket of goods and services for a particular period is called the inflation rate. It is used to measure the general increase in the cost of goods and services. It is contrasted by deflation, which refers to the appreciation of the currency and leads to decreased prices of commodities. When more currency chases, fewer assets inflation occurs.

Inflation Rate MoM: The general measure of the inflation rate is YoY, i.e., Year-over-Year. It serves as a means to measure how currency has faired over the year against inflation. The rate tells how fastly prices increased. The inflation rates are often low and incremental over time and hence make more sense for a YoY comparison for general use. However, for traders and investors, MoM is more useful for close monitoring to trade currencies.

How can the Inflation Rate MoM numbers be used for analysis?

As inflation continues, the standard of living deteriorates. Inflation is an essential economic indicator as it concerns the standard of living. Hence, it requires much attention to understand and analyze. Inflation can occur due to the following reasons: cost-push inflation, demand-pull inflation, and in-built inflation.

Demand-pull inflation: When too few goods are chased by too much money, we get demand-pull inflation. It is the most common form of inflation. The demand for commodities is so high that people are willing to pay higher prices.

Cost-push inflation: It occurs when there is a limit or constraint on the supply side of the demand-supply equation. A limited supply of a particular commodity makes it valuable, pushing its price higher. It can also occur when the cost of manufacturing or procuring raw materials increase that forces businesses to sell at higher prices.

Built-in inflation: It occurs out of people’s adaptive expectations of future inflation. As prices surge, workers demand higher pay due to which manufacturing costs increase and form a feedback loop. It forms a wage-price spiral as one feeds of another to reach a new higher equilibrium.

Inflation mainly affects middle-class and minimum wage workers as they immediately experience the effects of inflation. Generally, the monthly inflation rates would be less than 1% or 0.00 to 0.20% in general. Such increments can be useful for currency traders to short or long currency pairs by comparing relative inflation rates.

Central authorities are committed to ensuring a low and steady inflation rate throughout. The policies are also drafted to counter inflation or deflation. The central authorities would likely intervene with a loose-monetary policy to inject money into the system and induce inflation when the economy is undergoing a slowdown or deflation. A tight monetary policy (withdrawing money from the economy) would be used to induce deflation to counter hyperinflation.

Impact on Currency

The monthly inflation rates are essential economic indicators for both equity and currency traders. It is an inversely proportional high-impact coincident indicator. An increase in the inflation rate deteriorates currency value and vice-versa. As it has a direct impact on the currency, the volatility induced as a result of significant changes in the inflation rate is also high.

Economic Reports

There are multiple indices to measure the inflation rate. The CPI, Producer Price Index (PPI), Personal Consumption Expenditures (PCE), GDP Deflators are all popular statistics used for measuring inflation in a variety of ways.

The Bureau of Labor Statistics (BLS) of the United States releases the CPI and PPI reports on its official website every month. The GDP Deflator is published by the Bureau of Economic Analysis (BEA) every quarter. The PCE is also published by BEA every month.

Sources of Inflation Rate MoM

BLS publishes the Consumer Price Index (CPI) and Producer Price Index (PPI) on its official website. The data is available in seasonally adjusted and non-adjusted versions, as inflation is also affected by business cycles. A comprehensive and visual representation of these statistics is available on the St. Louis FRED website. The BEA releases its quarterly GDP deflator statistics and monthly Personal Consumption Expenditure (PCE) on its official website for the public. Consolidated statistics of monthly inflation reports of most countries are available on Trading Economics.

How the Monthly Inflation Rate Data Release Affects The Price Charts

For this analysis, we will use the monthly consumer price index (CPI) to measure the rate of inflation. The Bureau of Labor Statistics releases the MoM CPI data in the US. It measures the change in the price of goods and services from the perspective of the consumer. The most recent data was released on August 12, 2020, at 8.30 AM ET and can be accessed at Forex factory here. An in-depth review of the latest CPI data release can be accessed at the BLS website.

The image below shows the most recent changes in the MoM CPI in the US. In July 2020, the US CPI changed by 0.6%, the same increase as that of June.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before Monthly CPI Release on August 12, 2020, 
Just Before 8.30 AM ET

From the above 15-minute chart of the EUR/USD, the pair can be seen to be on a steady uptrend before the CPI data release. The 20-period MA in steeply rising with candles forming above it.

EUR/USD: After Monthly CPI Release on August 12, 2020, 
8.30 AM ET

After the data release, the pair formed a long 15-minute bullish candle indicating that the news release negatively impacted the USD. The pair subsequently continued trading in the previously observed uptrend.

Now let’s see how this news release impacted other major currency pairs.

AUD/USD: Before Monthly CPI Release on August 12, 2020, 
Just Before 8.30 AM ET

The AUD/USD pair traded in a subdued uptrend before the data release. The 15-minute candles are forming just around an almost flattening 20-period MA.

AUD/USD: After Monthly CPI Release on August 12, 2020, 
8.30 AM ET

Like the EUR/USD pair, the AUD/USD formed a long bullish 15-minute candle after the news release. Afterwards, the 20-period MA steeply rises as the pair adopted a steady uptrend.

NZD/USD: Before Monthly CPI Release on August 12, 2020, 
Just Before 8.30 AM ET

NZD/USD: After Monthly CPI Release on August 12, 2020, 
8.30 AM ET

Before the data release, the NZD/USD pair traded within a neutral pattern with the 15-minute candles crisscrossing an almost flattening 20-period MA. As observed with the other pairs, the NZD/USD formed a long 15-minute bullish candle after the news release. It subsequently traded in a steady uptrend with the 20-period MA steeply rising.

Bottom Line

In theory, an increasing rate of CPI should be a strong USD, but as observed in the above analyses, a high CPI resulted in a weakening USD. The CPI is often considered a leading indicator for interest rate; hence, a rising CPI is accompanied by a rising interest rate. However, since the US Fed had already indicated that it has no intention of increasing the interest rate, a high CPI implies a depreciating USD. It is, therefore, imperative that forex traders have the Fed’s decision in mind while trading with CPI data.

Categories
Forex Assets

Analyzing The CAD/DKK Forex Exotic Currency Pair

Understanding CADDKK

Understanding CADDKK

Understanding CADDKK

CADDKK is an exotic currency pair where CAD is the major currency Canada and DKK is the currency of Denmark. In this currency pair, CAD is the first currency, and DKK is the quote currency.

The price of CADDKK determines the value of DKK that is equivalent to one CAD. We can term it as 1 CAD per X amount of DKK. For example, if the CADDKK pair’s value is at 4.7712, we need almost 4.7712 DKK to buy one CAD.

CADDKK Specification

Spread

When we subtract the Bid price and the Ask price, we will find the Spread. Spread is a trading cost that is controlled by the broker. Therefore, traders don’t have to do anything with this. This value changes with the change in execution.

Spread on ECN: 19 pips | Spread on STP: 24 pips

Fees

Trading fees in the forex market is the cost that the broker takes from traders. It is automatically deducted from traders’ trading account. Note that a few pips charges on ECN accounts but there is no fee on STP.

Slippage

Spread is the difference between the execution level and the open price level when it is an excessive level of volatility in the price. Market volatility and execution speed of your broker mainly contributes to the degree of slippage.

Trading Range in CADDKK

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

CADDKK Cost as a Percent of the Trading Range

With the volatility, values provide an indication of how the cost varies with the change of volatility. We got the ratio between the cost and volatility and converted into percentages.

ECN Model Account 

Spread = 19 | Slippage = 5 | Trading fee = 8

Total cost = Spread + Slippage + Trading Fee

= 19 + 5 + 8

Total cost = 32

STP Model Account

Spread = 19 | Slippage = 5 | Trading fee = 0

Total cost = Spread + Slippage + Trading Fee

= 19 + 5 + 0

Total cost = 24

The Ideal way to trade the CADDKK

The CADDK is an exotic currency pair with stable volatility in the price. Therefore, it may provide a decent movement even in intraday trading. The percentage of values did not move above 64%. Therefore, we can say that that CADDKK is nicely tradeable even if in the lower timeframe. However, the trading risk is an essential factor that most of the traders should consider while making a trading decision.

Overall all traders should trade when the cost is at an average value. The increase in volatility is risky for the possibility of unwanted stop loss hit, while the decrease in volatility might make trading worthless. To reduce the cost, furthermore, you can place either a ‘limit’ or ‘stop’ order. In this case, there will be no slippage, and in this example, our total cost will be reduced by five pips.

STP Model Account (Using Limit Orders)

Spread = 19 | Slippage = 0 | Trading fee = 0

Total cost = Spread + Slippage + Trading Fee

= 19 + 0 + 0

Total cost = 19

Categories
Forex Fundamental Analysis

What Should You Know About Industrial Production MoM Forex Indicator?

Introduction

Introduction

Introduction

Before the Service sector dominated the Industrial sector as a significant contributor to the GDP, it was the industrial production alone that was seen as a measure of economic growth. It still holds for many developing economies. Economies like China, Japan, India, etc. all had significant industrial revolutions that helped their countries to improve their economy. The industrial sector still contributes a considerable percentage to the economy and employs millions of people.

What is Industrial Production MoM?

Industrial Production: It refers to the total output produced by the industrial sector. Here the industrial sector consists of the mining, manufacturing, electric, and gas utility sectors. It is like a mini-GDP report for the industrial sector. By definition, it must be apparent that it primarily deals with tangible commodities or physical goods. On the other hand, The Service sector comprises of non-tangible entities largely.

The Industrial Production Index goes as back as 1919 if required, and is published by the Board of Governors of the Federal Reserve System in the United States. The extended time-frame availability of data makes it a more robust, reliable economic indicator as more data points are available relative to other sectors.

The data is aggregated by combining data in different units. Some of the data may be in dollar terms, some may be in tonnes (e.g., the weight of barrels of oils and steel), or inferred by the number of hours worked. The logged-in hours are obtained from the Bureau of Labor Statistics. It is expressed as a percentage of real output relative to a base period. The base year is currently 2012. The methodology incorporated to calculate the Industrial Production is the Fisher Ideal Index, where the contribution of each sector is weighted (the higher the contribution, the higher is the weightage in the index calculation).

Industrial Production Indices comes in YoY and MoM versions comparing production size with the previous year and month, respectively. The YoY figures deem more use to analysts and government officials to analyze the performance of the industrial sector for this financial year. The MoM (Month over Month) figures are useful for closely monitoring for the expected uptrends or downtrends during business cycles. The MoM figures are more useful for investors in this regard.

How can the Industrial Production MoM numbers be used for analysis?

We have to understand the significance of this statistic historically. Before the development of the service sector, i.e., before the era of computers and the internet, the most industrialized countries were the most advanced economies. Countries that had many factories manufacturing tons of commodities were seen as highly advanced economies back in the day. Hence, it is no surprise that at such times the Industrial Production figures were a direct measure for the economy’s economic activity and growth.

The general trend in economic growth has been that underdeveloped economies have the primary sector as a significant contributor to the GDP. The developing economies have the secondary sector (industrial sector) as the primary contributor to the GDP, while the developed economies have the tertiary (or service) sector.

For the United States, the Industrial Sector now contributes less than 20% to the overall GDP, while more than 80% comes from the Service sector itself. Although it may sound like only 20%, it is only in comparison, but individually the industrial sector is in itself huge and employs millions of people. 15-20% is still a significant contribution, and that is the reason why it is still being published as well as analyzed by investors, traders, analysts frequently to infer significant economic conclusions.

With machine automation, the advancement of technologies, and the introduction of artificial intelligence, many traditional jobs in the industrial sector are getting replaced. This trend is likely to continue further down the line. As of now, the Industrial Production figures bear some relevance, though it is only a matter of time that its contribution further falls and is overlooked by investors and analysts.

(Image Credit: St. Louis FRED)

The industrial sector is more sensitive to business cycles as well as economic shocks, as evident from the historical plot. The current COVID-19 pandemic has had a more significant impact on the industrial sector than the service sector due to the nature of business.

Impact on Currency

Since the Industrial Production figures only account for a few sectors of the economy, hence it is not a macroeconomic indicator encompassing all industries into its statistics. For this reason, the relative significance of this indicator in the currency markets is less. Whereas, investors looking to invest in stocks of companies belonging to the Industrial sector use Industrial Production MoM figures to make investment decisions. Overall, it is a low-impact coincident indicator that bears no significant volatility in the currency markets but has a significant influence on the equity markets.

Economic Reports

The Board of Governors of the Federal Reserve System publishes reports of the Industrial Production statistics as part of its monthly “G.17 Industrial Production and Capacity Utilization” report on its official website. It is released around the 15th of the month for the previous month. It is a preliminary estimate and is annotated with a superscript ‘p’ in the tables. It is subject to revision in the subsequent five months as more data becomes available. The report details both seasonally adjusted and unadjusted versions for our convenience.

Sources of Industrial Production MoM

The Federal Reserve publishes Industrial Production MoM reports on its official website. The same statistics are available with more tools for analysis on the St. Louis FRED website. Similar Industrial Production MoM statistics for most countries is available on the Trading Economics website.

How the Monthly Industrial Production Data Release Affects The Price Charts

In the US, the monthly industrial production data is released by the Federal Reserve about 16 days after the month ends. It measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities. The most recent data was released on August 14, 2020, at 9.15 AM ET and can be accessed at Investing.com here. An in-depth review of the industrial production data release can be accessed at the Federal Reserve website.

The screengrab below is of the monthly industrial production from Investing.com.

As can be seen, the industrial production data is expected to have a low impact on the USD upon its release.

The screenshot below represents the most recent changes in the monthly industrial production in the US. In July 2020, the US industrial production increased by 3% down from a 5.7% increase in June. This change was in line with analysts’ expectations of a 3% change. Therefore, this is expected to be positive for the USD.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before the Monthly Industrial Production Data Release 
on August 14, 2020, Just Before 9.15 AM ET

Before the data release, the EUR/USD pair was trading in a renewed uptrend with the 15-minute candles forming above a steadily rising 20-period Moving Average. This pattern indicates that the USD was weakening against the EUR.

EUR/USD: After the Monthly Industrial Production Data Release 
on August 14, 2020, at 9.15 AM ET

As expected, the pair formed a 15-minute bearish candle after the data release indicating a  momentary strength in the USD. The data was, however, was not significant enough to bring forth a change in the trading pattern. The pair continued trading in the earlier observed uptrend with the 20-period Moving Average steadily rising.

Now let’s see how this news release impacted other major currency pairs.

NZD/USD: Before the Monthly Industrial Production Data Release 
on August 14, 2020, Just Before 9.15 AM ET

Similar to the trend observed with the EUR/USD pair, the NZD/USD was trading in an uptrend before the data release. The 20-period Moving Average can be seen to be steadily rising in the above 15-minute chart.

NZD/USD: After the Monthly Industrial Production Data Release 
on August 14, 2020, at 9.15 AM ET

After the data release, the pair formed a 15-minute bearish candle. As observed with the EUR/USD pair, NZD/USD continued trading in the earlier observed uptrend with the 20-period Moving Average steeply rising.

AUD/USD: Before the Monthly Industrial Production Data Release 
on August 14, 2020, Just Before 9.15 AM ET

AUD/USD: After the Monthly Industrial Production Data Release 
on August 14, 2020, at 9.15 AM ET

Before the data release, the AUD/USD pair was trading in a similar uptrend pattern as the EUR/USD and NZD/USD pairs. After the data release, the pair formed a 15-minute bearish candle and subsequently continued trading in the earlier observed uptrend similar to the other pairs.

Bottom Line

The monthly US industrial production data an important leading indicator of the economy’s health. From this analysis, however, while the data release affects the USD, it is not significant enough to cause a shift in the prevailing market trend.

Categories
Forex Assets

Analyzing The Costs Involved While Trading The CAD/NOK Exotic Pair

Introduction

Introduction

Introduction

CADNOK is a Forex currency pair, where CAD is the official currency of Canada, and NOK is the native currency of Norway. In this exotic pair, CAD is the base currency, and NOK is the quote currency.

Understanding CADNOK

This pair’s price determines the value of NOK, which is equivalent to one CAD. We can quote it as 1 CAD per X numbers of NOK. For example, if the CADNOK pair’s value is at 6.7135, it means we need almost 6.7135 NOK to buy one CAD.

CADNOK Specification

Spread

In forex trading, Spread indicates the difference between the Bid price and the Ask prices. Traders don’t have to do anything with this as it is deducted by the broker. This value changes with the type of execution model used for executing the trades. Below are the ECN and STP spread values of this currency pair.

Spread on ECN: 39 pips | Spread on STP: 44 pips

Fees

The trading fees that forex brokers take are similar to other financial markets. It is deducted from the traders’ accounts when they take a trade. Note that STP accounts do not take any charge, but a few pips are charged in ECN accounts.

Slippage

Slippage happens when a trader opens a trade at a price, but it opens at another price by expanding the Spread. The main reason to occur slippage is the market volatility and the broker’s execution speed.

Trading Range in CADNOK

The trading range is the representation of the minimum, average, and the maximum volatility of this pair on the 1H, 4H, 1D, 1W, and 1M timeframe. Using these values, we can assess our profit/loss margin of trade. Hence, this proves to be a helpful risk management tool for all types of traders.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

CADNOK Cost as a Percent of the Trading Range

If we look at the volatility values from the above table, we can see how the cost changes with the change in volatility. We have provided the ratio between the cost and the volatility values into percentages.

ECN Model Account 

Spread = 39 | Slippage = 5 | Trading fee = 8

Total cost = Spread + Slippage + Trading Fee

= 39 + 5 + 8

Total cost = 52

STP Model Account

Spread = 39 | Slippage = 5 | Trading fee = 0

Total cost = Spread + Slippage + Trading Fee

= 39 + 5 + 0

Total cost = 44

The Ideal way to trade the CADNOK

The CADNOK is an exotic currency pair that has enough liquidity. As a result, traders may find it easy to trade in this exotic currency pair. The percentage values from the above table did not move above 138%, which is an indication of less volatility. However, the Percentage of trading cost is lower in the higher timeframe.

Therefore, traders should be cautious to determine the price where trading is suitable. An increase in volatility is risky, while the decrease in volatility is less profitable. Therefore, the best time to trade in this pair is when the volatility remains at the average value.

Furthermore, another way to reduce the cost is to place a pending order as ‘limit’ and ‘stop’ instead of ‘market.’ In that case, the slippage will not be considered in the calculation of the total costs. So, the total cost will be reduced by five pips.

STP Account Using Limit Model Account

Spread = 39 | Slippage = 0 | Trading fee = 0

Total cost = Spread + Slippage + Trading Fee

= 39 + 0 + 0

Total cost = 39

Categories
Forex Fundamental Analysis

Importance of ‘Lending Rate’ News Announcement on the Forex market

Introduction

Introduction

Introduction

The ease with which money can be obtained within a country primarily drives the business sector and consumer spending. Consumer Spending and Businesses mostly make up the GDP of a country. Hence, understanding Lending Rates and its impact on the economy can help us build our fundamental analysis better.

What is Lending Rate?

Lending Rate: The rate at which a bank or a financial institution charges its customers for lending money. It is the fee that is to be paid by the customer for the borrowed money. Bank Lending Rate, in general, is the Bank Prime Rate.

Bank Prime Rate: It is the rate of interest that banks charge their most creditworthy customers. It is the lowest interest rate at which banks generally gives out loans. On the receiving end usually are large corporations with a good track record with the concerned bank. Generally, the loans taken are also huge.

Other forms of loans like house mortgage, vehicle loans, or personal loans, are all either partly or wholly based on the prime rate. It is also important to note that the Central Bank’s interest rates set the bank lending rate. For the United States, the Federal Reserve’s, the Federal Open Market Committee (FOMC) determines the target fed funds rate.  Fed funds rate will ultimately influence all the Bank lending rates on account of competition.

How can the Lending Rate numbers be used for analysis?

Banks and financial institutions are the primary source of money for businesses and consumers across the country. Hence, Bank Lending Rates can mainly drive business direction and influence consumer spending.

The Central Banks will influence the interest rates through their open-market operations in the inter-bank market by purchasing or selling bonds. When Central Banks buy bonds, they inject money into the economy, thereby effectively inducing inflation. It is popularly referred to as the “Dovish” approach. When the Central Bank sells bonds, it is effectively withdrawing money from the economy, making money scarce and costly to borrow. It is popularly referred to as the “Hawkish” approach.

When the Central Bank wants to deflate the economy, they will sell bonds, and when they decide to inflate, they will effectively buy bonds. In the private sector, Consumer Spending makes up about two-thirds of the United States’ GDP, and the rest is mostly by the business sector. The ease with which money is made available to people and business organisations affects the economy in a big way.

When lending rates are low, businesses can procure loans easily; they can run, maintain, and expand their current businesses. On the other hand, when the lending rates are high, only the high-end companies can procure loans. Meanwhile the rest of the business struggle to stay afloat in the deflationary environment. Businesses would be forced to keep their expansionary plans on halt when loan rates are high.

Consumers are also encouraged to take on loans when the rates are low. It promotes consumer spending, which, in turn, boosts local business. On the other hand, when interest rates are high, consumers would tend to save more spend less. When spending is less, businesses also slow down, especially sectors that do business with non-essentials like entertainment, luxury, or recreation.

On the international scale, the lending rates and deposit rates of banks from different countries also drive the flow of speculative money from international investors. When the lending rate in one country’s bank is lower than the deposit rate in another country’s bank, investors can generate revenue through a “carry.” Investors will borrow from the low-yielding currency bank and deposit in the high-yielding currency bank. The difference between these two rates is the margin they make.

The above plot shows the actual plot between the interest rates differential (AUS IR – USA IR) and the AUD USD exchange rate. As we can see, whenever the difference between the interest rates rises in favour of AUD, the exchange rate tends to follow. There is a strong correlation between both in the long run.

Since the Central Bank’s interest rates primarily determine all the lending rates (all types), investors generally calculate interest rate differentials by subtracting interest rates of two countries to see potential “carry” opportunities. Hence, when low-interest rates are prevalent, currencies lose value, on account of inflation and also outflow of money into other countries where deposit rates are higher.

Overall, the lending rates and deposit rates together move the currency markets in favour of the country’s currency, having higher deposit rates.

 Impact on Currency

The underlying Central Bank interest rates influence lending rates. The market is more sensitive to Central Bank interest rate changes than the bank lending rates. The lending rates of banks are also not as immediate as the Central Bank’s interest rate changes. Hence, although lending rates impact the economy, its effects are only apparent after about 10-12 months.

Hence, Lending rates are a low-medium impact indicator in the currency markets, as the leading indicator Central Bank interest rates take precedence over bank lending and deposit rates.

Economic Reports

The lending rates of banks can be found from the respective banks from which we would want to borrow money. For the United States, the Federal Reserve publishes Monday to Friday the daily Interest Rates in its H.15 report at 4:15 PM on its official website. Weekly, Monthly, Semi-annual, and Annual rates of the same are also available. The average Bank Prime Rates are also available in the same report.

Sources of Lending Rate

The United States Fed Fund Rates are available here. The prim Bank Loan Rate is available in a more consolidated and illustrative way for our analysis in the St. Louis FRED website. Consolidated Bank Lending Interest Rates of different countries are available here.

How Lending Rates Affects Price Charts

The lending rates can either create expansionary or contractionary effects within an economy.  Let’s now have a look at how it affects the price action in the forex market. In the US, lending rates entirely depend on the Federal Reserve’s Fund Rate. On March 4, 2020, the lending rates were cut from 4.75% to 4.25%. This cut coincided with the Federal Reserves’ interest rate cut from 1.75% to 1.25% on March 3.

On March 16, 2020, the lending rates were reduced from 4.25% to 3.25%. This cut coincided with the Federal Reserves’ interest rate cut from 1.25% to 0.25% on March 15.

For this reason, the lending rates rarely affect the price action in the forex markets.

In the US, the Bank Prime rate is published every weekday at 4.15 PM ET. Below is a screengrab from the US Federal Reserve showing the latest bank prime rates.

As can be seen, the rate has remained at 3.25% from March 16, 2020. For this analysis, we will consider if the change on March 16, 4.15 PM ET from 4.25% to 3.25% had any effect on the price action of selected currency pairs.

EUR/USD: Before Lending Rate Change on March 16, 2020, 
Just Before 4.15 PM ET

Between 10.00 AM and 4.00 PM ET, the EUR/USD pair was on a neutral trend. This neutral trend is shown on the 15-minute chart above with bullish and bearish candles forming slightly above the flattening 20-period Moving Average.

EUR/USD: After Lending Rate Change on March 16, 
2020, 4.15 PM ET

As shown by the chart above, the EUR/USD pair formed a slightly bullish 15-minute candle after the daily release of the lending rates. As earlier mentioned, the release of the lending rates is not expected to have any significant impact on the price action. This sentiment is further supported by the lack of change in the prevailing trend after the news release since the pair continued trading on a neutral stance.

GBP/USD: Before Lending Rate Change on March 16, 2020, 
Just Before 4.15 PM ET

The GBP/USD pair showed a similar neutral trading pattern as the EUR/USD pair between 1.00 PM and 4.00 PM ET. This pattern can be seen on the above 15-minute chart with candles forming on the flat 20-period Moving Average.

GBP/USD: After Lending Rate Change on March 16, 
2020, 4.15 PM ET

After the news release, the pair formed a slightly bearish 15-minute candle but continued trading in the earlier neutral trend.

NZD/USD: Before Lending Rate Change on March 16, 2020, 
Just Before 4.15 PM ET

NZD/USD: After Lending Rate Change on March 16, 
2020, 4.15 PM ET

Unlike the EUR/USD and the GBP/USD pairs, the NZD/USD pair had a steady downtrend between 12.15 PM and 4.00 PM ET. After the release of the daily lending rates, the pair formed a bullish 15-minute candle, but just like the other pairs, the news was not significant enough to change the prevailing market trend.

As we noticed earlier, the lending rates move in tandem with the Federal funds rate. Since the lending rates have always remained unchanged in the market and forex traders have anticipated this, hence the lack of volatility accompanying the news release.

Categories
Crypto Guides

Tokenized Bitcoin on Ethereum – Explained

Introduction

Introduction

Introduction

Bitcoin owns a stable use case and plays an active role in the industry as a public good. Although, it has limited features, leaving almost a very little space for future innovations encouraging Bitcoiners to explore what else can be done with Bitcoin. From this, an idea evolved that Bitcoin can be used on other blockchains. This is how we reached to tokenized Bitcoin on Ethereum. As the name suggests, Bitcoin is tokenized so that it can be used on other blockchains.   

What is Bitcoin?

Bitcoin is a reserved asset in the cryptocurrency world. It has the highest adoption rate, highest trading volume, best liquidity, and holding a superior position in the crypto capitalization market. In fact, entrepreneurs believe that Bitcoin can serve all required purposes in the market, so there is no need for any other cryptocurrency. Bitcoin with an uppercase b is a network whereas with a lowercase b is a unit of account. 

What is Bitcoin Tokenization?

The tokenization of Bitcoin means processing it to deliver a blockchain security token, specifically having real tradable value. Security tokens can refer to company shares, real estate ownership, or investment fund. These can be used as exchange units for trade in a secondary market. 

Why tokenize Bitcoin on Ethereum?

Bitcoin is designed to deal with a few things only and has inherent limitations, but we know that it is the most valuable crypto out there. Technically, we can execute smart contracts using Bitcoin, but it has limited opportunities as compared to Ethereum. Bitcoin is an amount we are holding, while Ethereum provides us with an opportunity to build something with it. 

Tokenising bitcoin in other networks can improve its utility. It can enable various functionality that the native Bitcoin doesn’t support. The security model and core functionalities of Bitcoin remain constant, with other advantages like the increased speed of transactions, high privacy, and tangibility.

DeFi was raised with a potential composability idea, which means the same public is executing the applications. It is an open-source platform with a permissionless base layer so that all the users can work together seamlessly. The composable layer of Bitcoin has introduced a new form of financial framework blocks that could enable is to implement Bitcoin in various types of applications.

You can tokenize Bitcoin on various blockchains like Ethereum. All are having different degrees of decentralization, various assumptions regarding risk factors, and trust issues. Transactions with the launch of Ethereum become cheaper and faster. But it’s quite dangerous also if the holder loses bitcoin due to any contract bug as there will be no alternative way to unlock those bitcoins on the blockchain. 

Conclusion

The prime reason behind tokenizing bitcoin on Ethereum is to enhance bitcoin’s utility. Ethereum has captured significant share in bitcoin transactions; there is an increase in the involvement of Ethereum in the global network for value transactions. Blockchain industries are developing to bridge the gap between the cryptocurrency networks.

The tokenization of bitcoin created a new financial scheme that is more efficient, vast, and democratic. Through tokenization, players in the traditional market are growing rapidly, and new contenders are showing interest in adopting the technology. 

Categories
Forex Fundamental Analysis

Everything About ‘Households Debt to Income’ as a Macro Economic Indicator

Introduction

Introduction

Introduction

Households Debt to Income is another metric that is used to assess the relative wealth and standard of living of people in the nation. It can give us hints on the spending patterns and circulation of currency and liquidity of the nation overall. Hence, Households Debt to Income ratio is beneficial for economists, investors, and also to deepen our foundation in fundamental analysis.

What is Households Debt to Income?

Debt-to-Income (DTI): The DTI is an individual financial measure that is defined as the ratio of total monthly debt payments to his monthly gross income.

Gross income refers to the income received from the employer or workplace and does not include any of the tax deductions.

The DTI is calculated using the below-given formula.

Disposable Personal Income (DPI): Disposable Personal Income, also called After-Tax Income, is the remainder of an individual’s income after all federal tax deductions. Hence, It is the amount people are able to spend, save, or invest.

Household Debt Service Ratio and Financial Obligations Ratio: The household Debt Service Ratio (DSR) is the ratio of total household debt payments to Disposable Personal Income (DPI).

Mortgage DSR: It is the total quarterly required mortgage payments divided by total quarterly Disposable Personal Income.

Consumer DSR: It is the ratio of aggregate quarterly scheduled consumer debt payments to total quarterly Disposable Personal Income (DPI). The Mortgage DSR and the Consumer DSR together form the DSR.

Financial Obligations Ratio: It is a broader measure than the Debt Service Ratio (DSR) as it takes into account rent payments, auto lease deductions, house owners’ insurance, and property tax.

How can the Households Debt to Income numbers be used for analysis?

DTI is a personal financial metric that is used by banks to determine the individual’s credit eligibility. A DTI ratio should be no more than 43% to be eligible for mortgage credit, but most banks prefer 36% as a healthy DTI ratio to lend money.

The household Debt Service Ratio & Financial Obligations Ratio is more useful, and large scale public data releases for fundamental analysis. The proportion of income that goes into servicing debt payments determines Discretionary Income, Personal Savings, and Personal Consumption Expenditures. Higher the Households Debt to Income ratio, the lesser the money available for other needs.

The Households Debt to Income measures the degree of indebtedness of Households, or in other words, it measures the burden of debt on Households people. The higher the numbers, the greater the load and lesser freedom to spend on other things. As debt burden increases, Discretionary Spending (i.e., for personal enjoyment) decreases, and the income is used entirely to meet the necessities only.

An increase in DPI or decrease in debt payment (by foreclosure or servicing all installments at once) is the two ways to reduce the Debt to Income percentage.

The Households Debt to Income is an essential metric for Government and Policymakers as dangerously high levels in these figures is what led to the financial crisis of 2008 in the United States.

Impact on Currency

High Households Debt to Income figure slows down the economy as debt durations are usually serviced for years. Higher numbers also indicate decreased spending as people spend more money to save and to maintain repayments. This cut back on expenditures results in slowing down businesses, especially those based on Discretionary items (ex: Fashion, entertainment, luxury, etc.) take a severe hit. The overall effect would be a lower print of  GDP, and in extreme cases, it can result in a recession.

Households Debt to Income is an inverse indicator, meaning lower figures are good for economy and currency. The numbers are released quarterly due to which the statistics are available only four times a year, and the limitations of the data set make it a low impact indicator for traders. It is a long-term indicator and shows more of a long-term trend. It is not capable of reflecting an immediate shift in trends due to which the number’s impact is low on volatility and serves as a useful indicator for long-term investors, economists, and policymakers.

Economic Reports

The Board of Governors of the Federal Reserve System in the United States releases the quarterly DSR and FOR reports on its official website. The data set goes back to 1980.

DSR & FOR Limitations: The limitations of current sources of data make the calculation of the ratio especially tricky. The ideal data set for such an estimate requires payments on every loan held by each household, which is not available, and hence the series is only the best estimate of the debt service ratio faced by households. Nonetheless, this estimate is beneficial over time, as it generates a time series that captures the critical changes in the household debt service burden. The series are revised as better data, or improved methods of estimation become available.

Sources of Households Debt to Income

The DSR and FOR figures are available here:

DSR & FOR – Federal Reserve

Graphical and Comprehensive summary of all the Households Debt related are available here:

St. Louis FRED – DSR & FOR

Households Debt to Income for various countries is available here:

Households DTI – TradingEconomics

How Households Debt to Income Affects The Price Charts

Within an economy, the household debt to income is vital to indicate the consumption patterns. In the forex market, however, this indicator is not expected to cause any significant impact on the price action. The household debt to income data is released quarterly in the US.

The latest release was on July 17, 2020, at 7.00 AM ET. The screengrab below is from the Federal Reserve website. It shows the latest household debt service and financial obligations ratios in the US.

The debt service ratio for the first quarter of 2020 decreased from 9.7% in the fourth quarter of 2019 to 9.67%. Theoretically, this decline in the debt to income ratio is supposed to be positive for the USD.

Let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before Households Debt to Income Release on June 17,
2020, Just Before 7.00 AM ET

Before the news release of the household debt to income, the EUR/USD pair was trading on a steady downtrend. This trend is evidenced by the 15-minute candles forming below the 20-period Moving Average, as shown in the chart above.

EUR/USD: After Households Debt to Income Release on June 17,
2020, 7.00 AM ET

After the news release, the pair formed a bullish 15-minute candle indicating that the USD had weakened. The weakening of the USD is contrary to a bearish expectation since the households’ debt to income had reduced, the USD would be stronger. The pair later continued to trade in the previously observed downtrend.

Now let’s see how this news release impacted other major currency pairs.

GBP/USD: Before Households Debt to Income Release on June 17, 
2020, Just Before 7.00 AM ET

Before the news release, the GBP/USD pair had been attempting to recover from a short-lived downtrend. This recovery is evidenced by the candles crossing above a flattening 20-period Moving Average.

GBP/USD: After Households Debt to Income Release on June 17, 
2020, 7.00 AM ET

After the news release, the pair formed a 15-minute bullish “Doji star” candle. The pair traded within a neutral trend afterward with the 20-period Moving Average flattening. As observed with the EUR/USD pair, GBP/USD did not react accordingly, as theoretically expected, to the positive households’ debt to income data.

AUD/USD: Before Households Debt to Income Release on June 17, 
2020, Just Before 7.00 AM ET

AUD/USD: After Households Debt to Income Release on June 17, 
2020, 7.00 AM ET

Before the news release, the AUD/USD pair showed a similar trend as the GBP/USD pair attempting to recover from a short-lived downtrend. As can be seen, the 20-period Moving Average has already started flattening before the news release.

After the data release, the AUD/USD pair formed a 15-minute bullish candle. The pair continued trading in a neutral trend with candles forming on a flat 20-period Moving Average.

From the above analyses, the news release of the household to debt income data produced contrary effects on the USD. More so, the indicator’s impact on the currency pairs is negligible.

Categories
Crypto Daily Topic Crypto Guides

OneCoin Scam – What Should You Know?

Introduction

Introduction

Introduction

OneCoin was promoted as a blockchain-based cryptocurrency through an offshore company OneCoin Ltd. registered in Dubai and founded by Ruja Ignatova, a Bulgarian national. According to the claims made by the company, OneCoin is a cryptocurrency that works like any other digital currency system whose coins can be made through a mining process, and the coins can be used for making payments anywhere in the world.

But there is no specific clarity of the working blockchain model of OneCoin. OneCoin is also known for selling educational materials and courses for cryptocurrencies, investments, trading, and other subjects related to financial analysis. However, OneCoin has been labelled as a global Ponzi Scheme and the biggest cryptocurrency scam ever. Let’s navigate the details.

What is a Ponzi Scheme?

A Ponzi scheme is a type of financial fraud or investment scam where the investors are promised high rates of returns and profits with minimum risk. The scheme traps the investors into a false belief that the returns are generating from the sales of a product or any other means; however, they remain unaware of the fact that the source of funds is other investors. The returns for the early investors are generated by collecting the funds from the new investors. 

OneCoin: A Cryptocurrency Scam

OneCoin is an international Ponzi scheme and was created as a fake online cryptocurrency by its founders to deceive the investors. The company used the terminologies of real digital currencies to reflect a genuine and authentic impression of its business model. The target audience of OneCoin included all those people who were not aware of the cryptocurrency and technology mechanism. Even the education material and packages sold were plagiarized. 

The worst part of the entire scam is the company never had a blockchain, to begin with. The concept of ‘mining’ was fake, and the new miners were told to wait for at least three to six months before their currency can be mined. The transactions were observed without the use of blockchain technology. It was believed that they were using a centralized database to run OneCoin. Eventually, the company also revealed that the SQL database that was put into use was not capable of operating a blockchain.

OneCoin had an organizational structure similar to a pyramid scheme where everybody was actually paying to the individual above. So, there were two sections of the company. The first section was OneCoin itself responsible for marketing and spreading the platform.

In contrast, the other section of the company was composed of affiliates who were bringing in people for earning a commission. Local promoters would organize meetups to spread OneCoin, and even the webinars were also hosted. They had gathered maximum growth in Asia, particularly China, and that’s why the country was hit the hardest. OneCoin was successful in running a $2 billion cryptocurrency pyramid scheme in China. 

Conclusion

The founders of OneCoin and many other associated executives were formally charged, and the US Authorities had declared OneCoin to be a fraud. It is crucial for us to know the basics and fundamental concepts of crypto and blockchain to avoid getting affected by such scams. We should be able to identify the scams by analyzing and understanding the platforms properly before investing our money. 

Categories
Crypto Guides

What Should You Know About ERC-20 Tokens?

Introduction

Introduction

Introduction

ERC-20 tokens are dedicatedly used on the Ethereum platform. These tokens represent a wide range of digital assets and feature value and can be used as a mode of transaction. Presently, there are over 200,000 ERC-20 tokens available on the Ethereum blockchain. It is an official protocol, which extends advancements in the Ethereum network. ERC is an abbreviation for Ethereum Request for Comment, and the 20 is referred to as the proposal identifier. 

The Core ERC-20 Standard

Creating a smart contract on the Ethereum blockchain is quite simple. This allows users to create different forms of tokens. The standard basically offers core functionality to transfer and allow tokens to be authenticated so that other on-chain third parties can use them. The standard interface enables tokens on this platform to be used again by other applications.

The ERC-20 standard is basically a list of events and functions that each contract needs to integrate to adhere to the standard. The name, behaviour, supply, and ticker of the contract can differ from one another, but they need to execute the core functions of ERC-20.

Smart Contract and Ethereum

Smart contracts are leveraged to generate ERC-20 tokens. They are also used to execute transactions of these tokens and record token balance information. These contracts are written in the programming language centring on the “If-This-Then-That” approach. Once the tokens have been created, they can be traded, spent, or offered to other parties. These tokens are basically universal languages that are used by all the tokens present in the Ethereum network. The unified approach allows trading of one token with another.

How to Send and Receive ERC-20 Tokens?

When sending an ERC-20 token, you are indicating the token contract to initiate a transfer operation. To execute a contract on Ethereum blockchain will need a fraction of Gas (Ether). Considering that Ether is used during the process, it is vital to ensure that the users have sufficient Ethereum Balance. 

Moreover, people can receive ERC-20 tokens by sending their wallet address. Considering that these tokens only exist in Ethereum blockchain, users can only use Ethereum addresses. 

Benefits of ERC-20 Tokens 

There are tons of benefits that ERC-20 offer that we would not find in any other tokens. It envisions to optimise the usage of the accounts by making transactions more efficient and convenient. By amalgamating different sources, these tokens create an ideal zone for constant token creation. And when it comes to efficiency and speed, ERC-20 stands at the forefront. And this is the reason why tokens hold such a massive adoption.

Efficiency and speed are two important facets of cryptocurrency trading, and ERC20 tokens do not disappoint in this regard. Its core structure offers unparalleled speed and efficiency. This easy to use token makes it easier for traders to leverage most of the blockchain technology.

It is not challenging to acquire ERC20 tokens these days; we can even develop it ourselves. It is considered one of the best payment methods for businesses, and its streamlined process makes the transactions easier for both sender and receiver. Cheers! 

Categories
Forex Fundamental Analysis

Everything About Food Inflation & The Impact Of Its Release On The Forex Market

Introduction

Introduction

Introduction

Capitalist economies achieve economic growth using inflation as the primary fuel. Low and steady inflation rates are essential for achieving target GDP each year. Not all commodities inflate steadily and proportionally. Disproportional inflation amongst different sectors leads to over and underpricing of commodities. Food and Energy are the most basic of necessities in today’s modern society. Understanding how food inflation affects the population and the overall economy will help us better understand the inflation trends and their consequences.

What is Food Inflation?

Inflation is the typical increase in prices of commodities and a decrease in the purchasing power of money over time. Inflation is required to motivate people to work better to be able to afford it. If prices were stagnant, the necessity to grow or earn more would cease, thus halting the growth of a nation on the macro level. When that happens, people will remain in their current financial state and would not progress. Hence, inflation is the “necessary evil” or the required fuel for capitalist countries to achieve economic growth.

Food Inflation refers to the general increase in prices of food commodities. As prices inflate, our current income’s purchasing power erodes. Food and Energy are the necessities for us in this modern society. Although to some extent, Energy can be cut back on to get on with life, we cannot cut back on food.

Food is the fundamental right to every human being. Accessibility and affordability to food and water is a must for every individual regardless of their country. Food inflation monitors the affordability aspect of food within the nation; the consequences associated with it are more intricate than we might anticipate.

How can the Food Inflation numbers be used for analysis?

As people can procure fewer goods for a unit of currency over time, people can either cut back on expenses or earn more to compensate for inflation. Food expenses are mandatory expenditure part of income. High food inflation will take up a more substantial chunk out of the disposable income of individuals leaving less room for discretionary spending.

As the affordability of food decreases due to high food inflation, consumer spending is negatively affected. Consumer Spending is the primary component of GDP accounting for more than two-thirds of the nation’s GDP. In the same case, more people who are working on minimum wages find it more difficult to afford food and would be below the poverty line even when their wages are not.

Political implications would also be severe. The backlash from the public over Government’s inadequacy to control inflation would be severe and, at times, have led to strikes and bans in many countries over the years. The Government at such times faces severe criticism both from the public and the opposition parties and would likely lose the next elections.

Food inflation could also occur due to adverse weather conditions destroying crops, or mismanagement of supply and demand by the authorities, or even politically manipulating supply and demand for profit by local dealers. There have been incidents where supplies of grains were withheld to boost up the prices for better profits artificially.

In developing countries, there are incidents where Government-issued rations are also sold illegally for profit by some corrupt groups. Lack of proper support to farmers in terms of resources like electricity, water, seeds, loans could also impair them to produce a good yield. All such factors add to food inflation, whose burden falls upon the ordinary people.

It is necessary to understand that all other commodities excluding Food and Energy generally have at least some alternatives (or different brands) to choose from in case price inflates. For instance, people looking to buy clothes from a brand may switch to another brand to avoid paying the new inflated price. Food inflation effect cannot be avoided as quickly as was the previous case.

Government officials closely monitor the inflation levels and are politically committed to keeping inflation in check through fiscal and monetary levers at their dispense. Food and Energy prices are given special attention, and almost all the time, the response is quick and practical from the Government during times of disruption in the food supply.

During the COVID-19 pandemic, many countries’ governments released relief packages to make sure there is no food shortage. Despite the fact many people slipped through the cracks of these protection measures, nonetheless, Governments did everything they could to avoid starvation.

 Impact on Currency

Food inflation is part of overall consumer inflation. Consumer inflation is the primary macroeconomic indicator for currency traders to assess relative inflation amongst currency pairs. Hence, food inflation is overlooked by currency traders for the broader inflation measures like the Consumer Price Index (CPI) or Personal Consumption Expenditure (PCE).

Nonetheless, food inflation is beneficial for the government officials to keep it in check all the time and also for the economic analysts to report the same. Overall, food inflation is a low-impact coincident indicator in macroeconomic analysis for currency trading that is overlooked for broader inflation measuring statistics, as mentioned before.

Economic Reports

The Bureau of Labor Statistics publishes monthly inflation statistics as part of its Consumer Price Index report for the United States. This report has the food inflation statistics as the first criteria.

The St. Louis FRED also maintains the inflation statistics on its website and has many other tools to add to our analysis.

Sources of Food Inflation

Consumer Price Index from the US Bureau of Labor Statistics is available on its official website along with monthly updates.

We can find the same indexes along with many others with a comprehensive summary and statistics on the St. Louis FRED website.

We can find the global food inflation statistics of most countries on Trading Economics.

How Food Inflation Data Release Affects The Price Charts

In the US, the food inflation data is released simultaneously with the overall consumer price index (CPI) data. The data is released monthly about 16 days after the month ends. The most recent release was on August 12, 2020, at 8.30 AM ET and can be accessed at Investing.com here. A more in-depth review of the monthly report can be accessed at the US Bureau of Labor Statistics website.

It is worth noting that since the food inflation numbers are released together with the over CPI, it will be challenging to determine the effect it has on price action.

The screengrab below is of the monthly CPI from Investing.com. On the right, is a legend that indicates the level of impact the Fundamental Indicator has on the USD.

As can be seen, the CPI data is expected to have a medium impact on the USD upon its release.

The screengrab below shows the most recent changes in the monthly CPI data in the US. In July 2020, the monthly CPI increased by 0.6% better than analysts’ expectations of a 0.3% change. This positive change is therefore expected to make the USD stronger compared to other currencies.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before Monthly CPI Release on August 12, 2020, 
Just Before 8.30 AM ET

 

As can be seen from the above 15-minute chart, the EUR/USD pair was on a steady uptrend before the inflation news release. Bullish candles are forming above a steeply rising 20-period Moving Average, indicating the dollar was weakening before the release. Immediately before the news release, the uptrend can be seen to be weakening.

EUR/USD: After Monthly CPI Release on August 12, 
2020, 8.30 AM ET

After the news release, the pair formed a 15-minute bullish candle. Contrary to the expectations, the USD became weaker against the EUR since the pair continued to trade in the previously observed uptrend.

Now let’s see how this news release impacted other major currency pairs.

AUD/USD: Before Monthly CPI Release on August 12, 2020, Just Before 8.30 AM ET

The AUD/USD pair shows a similar trading pattern as the EUR/USD before the inflation news release. The pair is on an uptrend, which heads for a neutral trend immediately before the news release.

AUD/USD: After Monthly CPI Release on August 12, 2020, 
8.30 AM ET

As observed with the EUR/USD pair, the AUD/USD formed a bullish 15-minute candle after the news release. Afterward, the pair traded in a renewed uptrend with the 20-period Moving Average steeply rising.

NZD/USD: Before Monthly CPI Release on August 12, 2020, 
Just Before 8.30 AM ET

NZD/USD: After Monthly CPI Release on August 12, 2020, 
8.30 AM ET

Unlike the EUR/USD and the AUD/USD pairs, the NZD/USD traded within a subdued neutral trend with an observable downtrend immediately before the news release. However, after the news release, the pair formed a 15-minute bullish candle and traded in a steady uptrend, as seen with the other pairs.

Bottom Line

In theory, a positive CPI data should be followed by an appreciating USD. From the above analyses, however, the positive news release resulted in the weakening of the USD. This phenomenon can be choked to the effects of the coronavirus expectations, which have made fundamental indicators less reliable.

Categories
Forex Assets

Costs Involved While Trading The NZD/INR Forex Currency Pair

Introduction

Introduction

Introduction

The abbreviation of NZD/INR is the New Zealand Dollar paired with the Indian Rupee. Here, NZD is the official currency of New Zealand, and Indian Rupee is India’s currency. Like other currency pairs, NZD/INR provides some decent movement that allows traders to make money from the forex market.

Understanding NZD/INR

In NZD/INR currency pairs, NZD is the base currency (First Currency), and the INR is the quote currency (Second Currency). In a currency pair’s sell trade, we trade the base currency to buy the quote currency and vice versa. Therefore, if the NZD/INR pair is trading at 49.02, it means we should have 49.02 INR to buy 1 NZD.

Spread

As price and bid price is a common term in the forex market, most of the traders should know. The price represents the price in which we sell a currency pair. On the other hand, the bid price is the price at which we take a buy trade.

The difference between the asking price and the bid price is called the spread, usually a charge that the broker takes from a trader. Below are the spread values for the NZD/INR Forex pair.

ECN: 36 pips | STP: 41 pips

Fees

A Fee is a cost that traders pay to the broker as a charge to take a trade. This fee differs on the type of broker (ECN/STP) we use.

Slippage

In some cases, when we take a trade at a particular price, it might ignore the level and open the trade at another price, which is usually known as Slippage. The Slippage can occur at any price level and at any time, usually when the market remains volatile.

Trading Range in NZD/INR

Our aim as a trader is to eliminate losses and minimize trading risks. The trading range here will indicate how much we will make as a profit or loss within a timeframe. To calculate the exact value, we will use ATR is a technical indicator that suggests the price movement in a currency pair. In the lower table, we interpret the minimum, average, and maximum pip movement in a currency pair. We will assess it merely by using the ATR indicator merged with 200-period SMA.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a considerable time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.
  9. NZD/INR Cost as a Percent of the Trading Range

The price of trade differs on the type of brokers and varies based on the volatility of the market. The full cost of trade involves fees, spread, and sometimes Slippage if the volatility is higher.

ECN Model Account

Spread = 36 | Slippage = 5 |Trading fee = 8

Total cost = Slippage + Spread + Trading Fee = 5 + 36 + 8 = 49

STP Model Account

Spread = 41 | Slippage = 5 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 5 + 41 + 0 = 46

The Ideal way to trade the NZD/INR

Considering the table, we should evaluate these two factors to make trading decisions in the NZD/INR pair. The trading cost and volatility are two critical factors that trade should contemplate when trading in the currency market.

In timeframes, we can see the price movement fluctuates from the minimum volatility and the average volatility. As a trader, we aim to make a profit from this pip movement and variation. However, it often becomes challenging to make a profit if there is no sufficient variant in the pip value. As per the price mentioned above, the NZD/INR pair is profitable in swing trading and day trading.

Categories
Crypto Guides

What Should You Know About Bitcoin Options?

Introduction

Introduction

Introduction

Investing and trading cryptos is not just about buying and selling these currencies, there are other alternatives as well. Bitcoin options trading is a lucrative alternative for the same. It offers more flexibility and extensive strategies in comparison to trading on cryptocurrency exchanges. However, trading Bitcoin options is not as easy as buying Bitcoins on exchanges. In this article, let’s understand some of the basics of trading Bitcoin options. 

Bitcoin Options – An Overview 

Options are a form of derivative, which implies that they are centered on an underlying asset like cryptocurrencies, stocks, or commodities. Depending on the contract type, buyers will be provided with the opportunity to purchase or sell the asset at a particular value called the strike price within a particular time period. 

We will come across two forms of Bitcoin options, just like while trading the traditional options. And they are, Call & Put Options. Call Option holders get the chance to purchase assets at a fixed price within a specific window of time. Put Options offers the chance to sell at a particular price in a specific time frame. 

When purchasing Bitcoin options, traders have to pay a specific premium for the chance to sell or buy Bitcoin at a price set in the future. This provides a smart way to go short or long BTC, allowing investors to gain even when the market is declining, and multiply their profits.  

How Do Bitcoin Options Trading Work?

If the underlying investment is trading more than the strike price, it is considered to be in the money for a call. Investors have the right to buy Bitcoin at the lower strike price. They can later sell the same at a higher price and keep the difference. If there is a price that goes under the strike price beyond the expiration date, it will not be worth anything. But the loss investors incur is limited to the premium they have paid. 

In case of a put, the price must be under the strike price to be “in the money.” Traders have the right to sell the Bitcoin at a higher value than the strike price. To leverage it, investors need to purchase the asset at market price. In the future, they can sell them at a value higher than the strike price and keep the profit. 

Where Can Traders Bitcoin Options?

Bitcoin options are not available on the crypto exchanges. Presently, the three primary Bitcoin option trading platforms that include: 

Quedex in Gibraltar | LedgerX in New York | Deribit in Amsterdam

Why Trade with Bitcoin Options? 

The following are the reasons to trade with Bitcoin Options: 

  • They are better in comparison to futures as their loss is limited to the premium paid. 
  • Bitcoin options are extremely flexible as they can be leveraged to reflect the future pattern and use different types of strategies. 
  • You can harness volatility without bearing a directional position via delta hedging. 

It is important to understand that not all Bitcoin options work similarly. While traders can exercise the American Bitcoin option anytime they want, European options can only be exercised upon the expiry. When it comes to buying Bitcoin options, traders should select a credible platform with a proven track record.

Categories
Forex Fundamental Analysis

Impact of ‘Employment Rate’ Economic Indicator On The Forex Market

Introduction

Introduction

Introduction

Employment is crucial for consumer spending, which makes more than two-thirds of the GDP for many countries. Understanding the employment rate and the cascading effect it has on the economy is paramount for fundamental analysis. The factors affecting the employment rate and business cycle patterns all inherently impact economic growth and currency valuation. Hence, understanding employment as an economic indicator will strengthen our analysis.

What is Employment Rate?

Employment Rate:  It is defined as the ratio of employed to the total available labour force. Here the labour force is defined as the sum of employed and unemployed persons. It is also considered as a measure of the extent to which the labour force is being used.

Unemployment is a state where an individual is actively searching for employment but cannot find work.

Unemployment Rate: It is defined as the percentage of unemployed people to the available labour force. It is the other half of the employment rate. Employment and unemployment rate combined should yield results as 100% as it equals the total available labour force.

How can the Employment Rate numbers be used for analysis?

Employment and unemployment can be considered as the two sides of the same coin. We can derive our fundamental conclusions from either direction. Employment Rate is essential for our analysis because it has a direct and cascading impact on consumer spending. In the US, consumer spending accounts for about 70% of the total GDP.

A high employment rate indicates that more people in the labour force have income that they can spend on purchasing goods and services. When consumer spending is on the rise, businesses flourish, leading to better wages, or even more employment. Overall, employment in one sector has an indirect positive effect on dependent sectors and a direct positive effect on the economy.

The Government is also politically committed to ensuring a low unemployment rate; otherwise, citizens will not favour them in the next elections. By providing proper support to local businesses, the Government can increase employment in the short run.

A high unemployment rate is very damaging to the economy. As more people are unemployed, there is a direct negative effect on consumer spending. In this scenario, also the cascading effect works and makes the situation worse. It also hurts the employed people.

Increased unemployment in the economy can bring down the employed morale, making them feel guilty for being employed while their colleagues are unemployed. It can also make employed people feel less secured and discourage their spending habits, and they may end up saving for a rainy day. Employed people may feel lucky enough to have a job that inhibits them from applying for better opportunities amid high unemployment.

Employment and Unemployment rates can also help investors to keep a pulse on the health of the economy. Overall it is essential to make sure the employment rate is always high and does not take a dip. Even when the unemployment rate rises linearly, it has an exponential impact on economic growth, and hence the central authorities try to avoid it at all times.

It is also essential to understand that employment rates are sensitive to business cycles in the short run. Hence, seasonally adjusted versions of the same are more useful for analysis. In the long run, the employment rates are significantly affected by government policies on higher education and income support. Policies that focus on the employment of women and disadvantaged groups also help increase the employment rate.

Both developing and underdeveloped countries’ governments have to focus on education policies and employment opportunities for their labour force if economic growth is the primary concern. Literacy and higher education in underdeveloped and developing nations have helped the economies grow stronger year-on-year.

Employment rates are coincident indicators and can also be used to predict or confirm oncoming recessionary or recovery periods, if any. The onset of a recession is accompanied by a massive unemployment rate or decreased employment rates. Hence, despite the propaganda of the media and Government, we can use employment data actually to confirm whether the economy is growing or stagnating. Accordingly, during recovery periods, employment rates start on a recovery trajectory back to its previous normal.

Impact on Currency

As an increase in employment rate points towards a growing economy, a high employment rate is good for the GDP and the currency. Hence, the employment rate is a proportional coincident indicator. An increase or decrease in employment rate is suggestive of improving or deteriorating the economy, respectively.

The forex market watches the unemployment rate more closely than the employment rate itself. Significant changes in the employment rate or the unemployment rate tend to have a considerable impact on market volatility. Still, generally employment rate in itself is a low impact indicator compared to the unemployment rate.

Employment change, initial jobless claims also precede unemployment rates, and the desired effects are already factored into the market before the employment rates are released. Hence, overall it is a low impact indicator.

Economic Reports

In the United States, the BLS surveys and tracks monthly employment and unemployment within the country. It classifies them based on geography, sex, race, industry, etc. The Employment Situation report is also published by the BLS, and it goes as far back as the 1940s. It is released by BLS on the first Friday at 8:30 AM Eastern Standard Time every month.

Sources of Employment Rate

The US BLS publishes monthly employment and unemployment reports on its official website. We can also find the same indexes and statistics of various categories on the St. Louis FRED. We can also find employment rate statistics published by the OECD countries here. Consolidated reports of employment rates of most countries can also be found in Trading Economics.

How Employment Rate News Release Affects The Price Charts

As we have already established, an increase or decrease in the employment rate can be used to gauge whether the economy is performing well or poorly. For forex traders, it is therefore imperative to understand how the news release of this macroeconomic indicator will impact the price action on various currency pairs.

In the US, employment reports are released monthly, usually on the first Friday after the month ends. The latest, expected, and all historical figures are published on the Forex Factory website. We can find the most recent release here. Below is a screengrab of the US unemployment rate from the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

As shown, the unemployment rate is a high impact indicator. The snapshot below shows the change in the US unemployment rate as released on August 7, 2020, at 1230GMT. For July 2020, the unemployment rate declined from 11.1% to 10.2%, beating the 10.5% decline forecasted by analysts.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before Employment Data Release August 7, 2020, Just Before 1230GMT

The 30-minute EUR/USD chart above shows the market is on a downtrend from 0200 to 1200 GMT with the candles forming below the 20-period Moving Average. More so, the market was trading within a narrow price channel of between 1.1850 and 1.1810, indicating a calm market with traders waiting for the latest employment data to gauge the economic recovery.

EUR/USD: After Employment Data Release August 7, 2020, 1230GMT

As can be shown on the chart above, immediately after the news release, we can observe a sudden downward spike with a retraction. This spike indicates the market is having mixed reactions to the positive employment news hence the strong USD.

After the initial spike, the market can be seen to ‘absorb’ the positive news. The pair adopted a bearish outlook with the price breaking and staying below the earlier observed 1.1810 resistance level.

Since the pair had not shown any unexpected sudden swings before and after the new release, trading the news would have been profitable. For such a high impact economic indicator, it is advisable to open positions after the news release to avoid being caught on the losing end of the trend.

Now, let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

GBP/USD: Before Employment Data Release August 7, 2020, Just Before 1230GMT

GBP/USD: After Employment Data Release August 7, 2020, 1230GMT

The GBP/USD pair showed a similar trend as the one observed with EUR/USD. The pair can be seen to have traded within a narrow price channel of 1.3122 and 1.3071 from 0700 to 1200 GMT. After the economic data release, the pair similarly had a sudden spike. It later adopted the same bullish stand as the EUR/USD pair, with price breaking and trading below the observed resistance level.

AUD/USD: Before Employment Data Release August 7, 2020, Just Before 1230GMT

GBP/USD: After Employment Data Release August 7, 2020, 1230GMT

Similar to the EUR/USD and the GBP/USD pairs, the AUD/USD traded within a price channel of 0.7221 and 0.7196 and no unexpected spikes before the news release. After the news release, a sudden spike can be observed with an accompanying retraction, and later the pair adopted a bullish stance breaking below the observed resistance level.

From the above analysis, the subdued market volatility before the release of the employment data and the subsequent volatility, it is evident that the employment rate is high impact indicator anticipated by forex traders.

Categories
Forex Course

146. Measuring The Strength of a Breakout

Introduction

Introduction

Introduction

When you can see the momentum of the market slowing down, you can soon expect a reversal breakout in any underlying currency pair. Knowing this info will boost your confidence to pull the trigger, and to scale your positions without any hesitation.  Conversely, to trade the trend continuation breakout, knowing the strength of the breakout is also crucial.

In this course lesson, we will learn how to measure the breakout’s strength and take appropriate action according to the information which the market represents.

Using The MACD Indicator To Measure The Momentum

MACD is one of the most common momentum indicators in the Forex market. There are many different ways to use the MACD indicator, and in our case, we suggest you look at the histograms of the indicator to gauge the market strength. As the price moves, if the histograms get bigger, it is indicating that the market momentum is increasing. In this case, we can expect a breakout in the direction of the trend. Conversely, if the histogram gets smaller, it means the momentum is getting weaker, and we can soon expect a reversal in the currency pair.

Buy Example

The image below represents a buy trade in the EUR/GBP Forex pair.

Please observe the first arrow in the MACD histogram. The upsurge lines indicate the strong trend in this Forex pair. When the price action goes above the breakout line with the rising histogram bars, it is a sign of a strong breakout. After the breakout, we took a buy-entry, and the pair printed a brand new higher high.

Sell Example

The image below indicates a sell trade in the CHF/JPY Forex pair.

The image below represents the entry, exit, and stop-loss placements. The price action breaks below the significant level with the rising histogram lines. This shows the sellers are real, and they are ready to make a brand new lower low. After our entry, prices went down, making a brand new lower low. Therefore, when the breakout indicates strong strength, we must go for smaller stops and hunt significant returns.

Using The RSI Indicator To Measure Market’s Strenght

RSI stands for Relative Strength Index, and it is a popular indicator which oscillates between the 0 to 100 levels. When the indicator reaches the 70 levels, it means the market is overbought, and a reversal is expected. When it reaches the 30 levels, it means the market is oversold, and an upside reversal is expected.

In this article, we are not going to use the RSI indicator, like how it is typically used. Instead, we will use the RSI divergence to measure the strength of the trend. A divergence is when the price moves in one direction, and the indicator moves in another. Divergence shows that the indicator is not satisfied with the price action, so in this case, a reversal should be expected.

Buy Entry

  1. Find out the divergence in a downtrend.
  2. Wait for the price action to break above the significant resistance level.
  3. Wait for the hold above the breakout level to confirm the breakout.
  4. Hit Buy.
  5. Place the stop-loss below the breakout.
  6. Go for brand new higher high.

The image below indicates the buying trade in the GBP/CAD Forex pair.

The image below represents our entry, stop loss, and take profit in this Forex pair. As you can see, the trend was down, but on the other hand, the RSI indicator failed to make the higher high. This indicates that the buyers are strong, and after any breakout, we can confidently go long.

Sell Entry

  1. Find out the divergence in an uptrend.
  2. Wait for the price action to break below the significant support level.
  3. Wait for the hold below the breakout level to confirm the breakout.
  4. Hit sell.
  5. Place the stop loss above the breakout.
  6. Go for a brand new lower low.

The image below represents the selling trade in this Forex pair.

As you can see, when the price action and indicator gave the divergence, it means the indicator didn’t like the upward spiral anymore. Also, the buyers are exhausted, and we can expect a strong downward reversal. Soon after the breakout, we took short entry and exited our position when printing the brand new lower low.

[wp_quiz id=”86201″]
Categories
Forex Fundamental Analysis

Everything About Deposit Interest Rate as a Macro Economic Indicator

Introduction

Deposit Interest Rates play a crucial role in controlling the flow of money within the economy and the international market. The interest rate differentials have always directed the flow of speculative money in and out of countries, thereby affecting the currency exchange rates. Hence, it is crucial to understand Deposit rates as an economic factor in the FOREX industry.

What is Deposit Interest Rate?

Deposit Interest Rate: It is the money financial institutions pay the depositing party. The deposit account holders put some money in the bank for which the bank pays out interest. Deposit accounts can be a savings account, Certificates of Deposit (CD), and self-directed deposit retirement accounts.

Banks give loans to its customers at a higher rate than the interest they pay out on their deposit accounts. It is this spread between the lending rate and deposit rate that banks make their profit and is called Net Interest Margin.

How can the Deposit Interest Rate numbers be used for analysis?

Potentially, banks are free to set their deposit rates at whatever rate they desire, but they have to keep competition and business into account. Deposits provide financial institutions with the necessary liquidity to maintain business and give out more loans. Banks need to give out loans to make a profit, but also needs to have depositors to provide the required liquidity. Within the country, when the deposit interest rates are low, people would be more interested in investing their money in stocks or other money markets where there is a possibility of a higher return on their capital.

Conversely, banks may increase their deposit rates to attract investors to deposit their capital providing banks with the necessary liquidity to fund their loans. Investors see bank deposits as a safe bet against the risky stock or money markets where they are subjected to a potential loss. Customers are also encouraged to save more and spend less when they get a higher return on their deposits. In the international markets, investors check and compare the lending and deposit rates of major banks in different countries. When the deposit rate of a bank in one country is higher than the lending rate of a bank in another country, there is a chance of making money.

Investors, traders, or some institutions may borrow money from a low-interest rate country and deposit in another country where the rates are high. This difference in the lending and deposit rates amongst banks of different countries is called Interest Rate Differential or ‘Carry.’ For example, let us assume when the deposit rate in Australia is 5%, and the lending rate in the United States is 3.5%. The difference of 1.5% return will move the speculative or “hot” money out of the United States and into Australia. When the Australian Dollars start to flow into the country, the global FOREX market is deprived of the AUD currency, and, hence, it is appreciated.

The below plot also shows the historical difference between the interest rates differential (AUS IR – USA IR) and the AUD USD exchange rate. As we can see, whenever the difference between the interest rates rises in favour of AUD, the exchange rate tends to follow. There is a good correlation between both in the long run. Whenever the direction changes in favour of the United States, so does the exchange rate.

Hence, the “carry” essentially directs the flow of “hot” money in and out of countries whenever there is an increase in interest rates differentials. The larger the difference and consistent the direction of the differential in the plot (positive or negative) more will be the inflow of money in that direction.

When the differential is near or close to zero, then the speculative money may be forced into other options to generate revenue. The interest rate differential may be prominent when paired against small and developing countries to that of developed countries in general. As most of the developed economies are struggling to maintain their growth and have been forced to keep interest rates low, it indeed is a little tricky to find currency pairs to generate a significant carry.

Impact on Currency

Deposit rates have a definite impact on the currency markets. It is one half of the money flow equation. When the lending rates and deposit rates are checked and compared, money flow starts in favour of the higher deposit rate country that appreciates the currency value and vice-versa.

Therefore, deposit rates alone do not determine currency value fluctuations. But in general, it is safe to say that higher deposit rates tend to appreciate currency’s value as the market is deprived of that currency. Conversely, low-interest rates on deposits discourage saving and thereby go into spending, which contributes to inflation and currency depreciation.

Economic Reports

The deposit interest rates of local banks can be found on the respective banks from which we would want to borrow money. But in general, the deposit rates and lending rates due to market forces are subject to be close to the country’s Central Bank’s target rate.

For the United States, it is the Fed Funds target rate, and the actual rate is called the effective Fed Funds rate. The Federal Reserve publishes Monday to Friday the daily Interest Rates in its H.15 report at 4:15 PM on its official website. Weekly, Monthly, Semi-annual and Annual rates of the same are also available.

Sources of Deposit Interest Rate

The United States Fed Rates are available here. The monthly effective Fed Funds rates are available in a more consolidated and illustrative way for our analysis in the St. Louis FRED website. Consolidated Deposit Interest Rates of different countries are available here.

How Deposit Interest Rate Affects Price Charts

For forex traders, monitoring other economic indicators is usually meant to help them predict what interest rates are going to be in the future. However, since the deposit interest rates largely depend on the federal funds rate, they rarely have any significant impact on the forex markets by itself. It is worth noting that the US FOMC only meets eight times in a year to determine the federal funds’ target rate. This explains the lack of impact by the deposit interest rate.

In the US, the Fed Funds target rate, on which deposit interest rates are based on, are published every weekday at 4.15 PM ET. Below is a screengrab of the Fed Funds target rate from August 11 to August 17, 2020.

As can be seen, the rate has remained the same at 0.1%. The screenshot below is from Forex Factory, showing that the latest FOMC decision recommended that the Fed Funds target rate remains between 0% and 0.25%.

Now that we’ve established the impact that the deposit interest rate has on the economy and the currency valuation let’s see how it impacts the price action of some select currency pairs.

EUR/USD: Before Effective Fed Funds Rate Release August 17, 
2020, Just Before 4.15 PM ET

The 15-minute EUR/USD chart above shows that the market between 10.15 AM and 4 PM ET on August 17, 2020, had no specific trend. The market has adopted an almost neutral stance with the candles forming just around the flattening 20-period Moving Average.

EUR/USD: After Effective Fed Funds Rate Release August 17, 
2020, 4.15 PM ET

As can be seen on the chart above, immediately after the daily update on the Effective Fed Funds rate, there is a slightly bullish 5-minute candle forms. The news, however, is not significant enough to the market to cause any spikes or change the prevailing market trend. As can be seen, the pair continued with its neutral trend and a flattening 20-period Moving Average.

Let’s see how this new release has impacted some of the other major Forex currency pairs.

GBP/USD: Before Effective Fed Funds Rate Release August 17,
2020, Just Before 4.15 PM ET

The neutral trend observed with the EUR/USD pair before the daily release of the Effective Fed Funds Rate can be seen on the GBP/USD chart above. The candles formed just around the flattening 20-period Moving Average.

GBP/USD: After Effective Fed Funds Rate Release August 17, 
2020, 4.15 PM ET

After the news release, a 15-minute bullish candle forms. However, the same neutral trends persist with the pair indicating that the news was not significant enough to move the markets and cause a change in the trend.

AUD/USD: Before Effective Fed Funds Rate Release August 17, 
2020, Just Before 4.15 PM ET

AUD/USD: After Effective Fed Funds Rate Release August 17,
2020, 4.15 PM ET

Unlike with the EUR/USD and the GBP/USD pairs, the AUD/USD pair had a clear uptrend before the daily release of the Effective Fed Funds Rate. This uptrend was not a steady one since the candles formed just above an almost flattening 20-period Moving Average. After the news release, a bullish 15-minute candle is formed. The news was, however, not significant enough to alter the prevailing market trend.

While the deposit interest rate is vital in determining the flow of money in an economy, it plays an almost insignificant role in moving the forex markets. Cheers.

Categories
Forex Fundamental Analysis

Impact of ‘Bankruptcies’ News Release On The Forex Assets

Introduction

Introduction

Introduction

A bankruptcy on paper and in reality differ in several meaningful ways. The short and long-term implications both have to be fully taken into the picture before forming an opinion or drawing any inference from the Bankruptcy statistics. Contrary to popular belief, it is not as bad as it sounds and is more frequent for businesses to file for bankruptcy as a means to reset their business to become profitable. Correctly understanding bankruptcy, its implications, and its statistics can help us make better trade decisions in the long run.

What is Bankruptcy?

Bankruptcy is the legal state of an individual or a company that has become insolvent. When an individual or a company is unable to repay its debt, it can file a petition for bankruptcy in the federal court. When individuals lose their income source or when a business takes on continued periods of losses are likely to file bankruptcy.

The bankruptcy process starts when a petition is filed by the debtor or the creditor, although it is more common for the debtors to file for bankruptcy. Successful processing of a bankruptcy petition can benefit the debtor to be discharged of their debts, thus giving them the freedom from the overburdening debts and restart.

When a bankruptcy petition is processed, the assets of the debtor are evaluated, and an appropriate portion may be allotted to repay the creditors. Whether all of the assets are sold off to repay debt or not depends on the types of bankruptcies filed. Many a time, creditors may need to reorganize the debt to allow the debtor to pay off the debt in smaller installments over three to five years.

How can the Bankruptcies numbers be used for analysis?

On paper, all this may seem favorable to the debtor offering immediate relief from the overwhelming debts.  The debtor may not be required to pay at all if the debtor does not have assets or income or at least greatly waive off their debt installments. Successful proceeding of a bankruptcy petition can partially or entirely waive off debts for a chance to save your home or business from going-under.

Such an exemption comes at a cost, though. As mentioned, on paper, it seems like a favorable option for the debtor in a tight spot, but in the long-run, it has far-reaching implications. If a debtor is filing bankruptcy, chances are, their credit score has already gone wrong due to failed payment dues in past months. When the bankruptcy is filed, it will stay on the record of that individual or company for ten years. In this process, the credit rating goes low, and a remark of bankruptcy on record prevents you from being eligible for future credits, loans, mortgages, or even credit cards.

When lending sources are all cut off, then it is challenging for both individuals and businesses to become profitable. Some may even end up borrowing from sources where interest rates are much higher than the standard rates, ending up in deeper trouble than before.

Filing bankruptcy is more frequent for businesses to reorganize their remaining assets and come up with a new strategy to be profitable. All the bankruptcy cases are handled in the federal courts by a bankruptcy judge. They are classified as per the bankruptcy code that details different chapters for different types of bankruptcy case scenarios.

From a macroeconomic perspective, bankruptcy filing gives both the debtors and creditors a fresh start by allowing debtors to be eligible for credit and creditors to recover some portion of the credit. Having such a system that can accommodate failures of individuals and companies is a sign of a fair and inclusive economy that embraces and tolerates both ups and downs of individuals and businesses.

From a purely business and growth perspective, increasing bankruptcy cases is just plain bad for the economy as it indicates businesses are shutting down, and people are losing jobs. Both of those scenarios do no good for the economic growth and contribute negatively to both growth and consumer & business sentiment within the nation. Filing of bankruptcy thrashes the equity market performance of corporations as investors lose confidence in the business.

Recessions, war-times, or times like global pandemic observe an increasing number of bankruptcy cases indicating that the economy is not faring well. Hence, from an economic standpoint, the “fewer the better” would be the goal for a prosperous economy.

Impact on Currency

Filing Bankruptcy is often the last resort for the debtor when all other options are closed. Hence, the bankruptcy statistics are backward-looking or a lagging indicator confirming an ongoing past trend which could have been deduced from the past poor performance. Bankruptcy statistics would then be useful for economic analysts for analysis but does not serve as a useful indicator either for the equity or the currency markets. Hence, bankruptcy figures could be overlooked for other leading macroeconomic indicators for the currency markets.

Economic Reports

The United States Courts provide historical data of the quarterly reports of bankruptcy filings in the country on its official website. The Organization for Economic Co-operation and Development (OECD) also maintains bankruptcy statistics for reporting members. Moody’s analytics also provide personal and corporate bankruptcy filings on their official website.

Sources of Bankruptcy Statistics

The US Courts maintain bankruptcy filings records on its website.

The OECD Bankruptcy statistics are also helpful for quick reference of the OECD member countries.

Global Bankruptcy statistics are available on Trading Economics.

Moody’s analytics also report personal bankruptcies.

How Bankruptcies’Data Release Affects The Price Charts

Estimating the exact impact of bankruptcies on an economy is hard to quantify. Since the bankruptcies data is released quarterly, its impact on the forex market tends to be negligible because the data is backward-looking. The most recent data was released on June 30, 2020, at 8.00 AM ET and can be accessed from the United States Courts website here. The historical bankruptcies’ data in the US can be accessed at the Trading Economics website.

The screengrab below is from the quarterly bankruptcies’ data from Trading Economics.

As can be seen, the total number of bankruptcies in the United States decreased to 22,482 companies in the second quarter of 2020 from 23,114 companies in the first quarter of 2020.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before the Quarterly Bankruptcies Data Release on August 2020, 
Just Before 8.00 AM ET

As can be seen in the above 15-minute EUR/USD chart, the pair was trading on a weak downtrend. This trend can be affirmed since the 20- period Moving Average is decreasing in the steepness of its decline with candles forming closer to it.

EUR/USD: After the Quarterly Bankruptcies Data Release on August 2020, 8.00 AM ET

After the release of the bankruptcies data, the pair formed a 15-minute “hammer” candle. This pattern indicates that the USD became weaker against the EUR. This trend is contrary to the expectations since the number of bankruptcies had declined from the previous quarter. The pair adopted a bullish stance with the candles crossing above a now rising 20-period Moving Average.

Now let’s see how this news release impacted other major currency pairs.

GBP/USD: Before the Quarterly Bankruptcies Data Release on August 2020, 
Just Before 8.00 AM ET

The GBP/USD pair showed a similar weakening downtrend trend as observed with the EUR/USD pair before the release of the bankruptcies data. The 15-minute candles can be seen, forming closer to the 20- period Moving Average, whose downward steepness is decreasing.

GBP/USD: After the Quarterly Bankruptcies Data Release on August 2020, 8.00 AM ET

After the news release, the pair formed a 15-minute bearish “Doji star” candle. Similar to the EUR/USD pair, GBP/USD  adopted a bullish stance with the candles crossing above a now rising 20-period Moving Average.

AUD/USD: Before the Quarterly Bankruptcies Data Release on August 2020, 
Just Before 8.00 AM ET

AUD/USD: After the Quarterly Bankruptcies Data Release on August 2020, 8.00 AM ET

Unlike the downtrends observed with the EUR/USD and the GBP/USD pairs, the AUD/USD traded within a subdued neutral trend before the bankruptcies data release. The 15-minute candles were forming around an already flattened 20-period MA. After the data release, the pair formed a 15-minute bullish “Doji star” candle. It later traded in the same bullish pattern as observed in the other pairs.

Bottom Line

In the current age of the coronavirus pandemic, data on bankruptcies provide a vital indicator of the economic conditions. However, in the forex market, these data do not carry much significance, as shown by the above analyses.

Categories
Forex Course

145. Trading The Triangle Pattern Breakouts

Introduction

Introduction

Introduction

Breakouts trading and trading the triangle chart pattern are two different trading tools. A breakout occurs when the price goes above or below the significant support resistance area. It indicates that the price is ready to move in the direction of the breakout, and any entry near the breakout will be fruitful. This is the reason why breakout trading is considered a leading method of trading in the industry as it helps the traders to anticipate the trend and ride the potential moves.

On the other hand, the Triangle is a technical chart pattern. The best description of the triangle chart pattern is as a horizontal continuation chart pattern, which helps the traders in finding the best entry on the price chart. At the beginning of the pattern, it is widest, and as the market continues the ranging move, the price starts to move in a limited, narrow range, and as a result, we witness the point of the Triangle on the trading chart.

The Trading Strategies

There are two types of triangle chart patterns. The first one is ascending chart pattern, and the second is the descending chart pattern.

Ascending Triangle Chart Pattern

Ascending Triangle is a bullish chart pattern that helps traders to take buy trade in an ongoing uptrend. The image below represents the formation of an Ascending Triangle chart pattern in the CAD/JPY Forex pair.

The image below represents our entry, exit, stop-loss, and take-profit in the CAD/JPY forex pair. As you can see, in an uptrend, when the price broke above the chart pattern line, it is a sign that the buyers are strengthening. Therefore, if the price is holding above the support line, it is an indication for us to go long in this pair.

Right after our entry, we can see that the price smoothly ran towards the north, and printed a brand new higher high. We can close our trade based on any nearest support area, and we also can use any indicator for the exit. The stop-loss order was placed just below the entry. In a strong trending market, the smaller stops are good enough to ride the trend.

Descending Triangle Chart Pattern

The Descending Triangle is a bearish chart pattern that helps traders in taking sell trades in an ongoing downtrend. The image below indicates the formation of a Descending Triangle pattern in the GBP/CAD Forex pair.

The below price chart of the GBP/CAD pair represents our entry, exit, and stop-loss. In a downtrend, when the price breaks below the support area, it’s a sign that the strong buyers failed to push the price higher, and any hold below the resistance line is an indication to go short. Soon after our entry, price blasted down south, printing a brand new lower low.

The descending Triangle is simple and easy to trade Forex chart pattern. Most of the time, this pattern offers excellent risk to reward entry trades. So when you see the pattern on the price chart, don’t forget to scale your position for more significant gains.

That’s about trading the ascending and descending Triangle chart pattern breakouts. Take the below quick quiz before you go. Cheers.

[wp_quiz id=”85881″]
Categories
Crypto Guides

Decentralized File Sharing – An Efficient Approach To File Transfers?

Introduction

Introduction

Introduction

An efficient file storage method, decentralized file-sharing uses multiple nodes to store files instead of using a single centralized server. With the growing complexities on the internet due to the increasing rate of web data and files communicating through HTTP, it has become highly essential to use an efficient method to store data. When the online traffic is increased, the volume of information to be transferred mounts up automatically. As a result, if we want to transfer large files, we will need more bandwidth.

What Are The Issues And How Decentralized File Sharing Helps?

Addressing all these issues, decentralized file sharing emerged as a robust solution. Torrenting was the best solution for sharing available to the general public. It is used to transfer larger audio or video files over the internet without getting hampered by the challenges of HTTP. However, there were some drawbacks to the file-sharing protocols wherein the volunteers can restrict the services and disable the nodes that can limit the transfer.

With the help of blockchain technology, the decentralized file-sharing networks can be made robust. With this file-sharing network, users are provided with incentives for their contribution. This helps in ensuring that there are enough nodes to fuel the network.

The Potentials of MultiChain File Sharing

Multichain refers to an open-source structure, which enables users to deploy private blockchain for any enterprise. MultiChain supports Mac, Linux, and Window servers and offers a streamlined API as well as Command Line Interface.

This framework addresses the issues of privacy, openness, and mining through integrated user permission management. MultiChain is essentially a permission-based private blockchain that allows nodes to join and form a network. By enabling teams to create a well-integrated and secure network, MultiChain facilitates an efficient way of file-sharing.

Security Levels of Blockchain File Sharing

In the blockchain, we get enhanced security in file sharing. This technology offers multiple levels of security, including:

  • AES key encryption with RSA enables file access to merely by the receiver. Even if the files are accessible at all blocks, only specific receivers will have access to the file.
  • Files of equal size are divided and encoded through Hex encoding, which proves to be a potential way of sending files in the streams (blocks).
  • This is the most vital, powerful, and the highest level of security. Blockchain network offers the highest level of security by ensuring the fact that a file transfer occurs when all the nodes approve it within the network.
  • All nodes can certainly see when a transaction is happening between the senders and receivers without interfering with the process. The security level offers a guarantee that merely legitimate files can be transferred via the network.

The Bottom Line

By harnessing the full potentials of decentralized file sharing, we can enjoy stress-less and efficient file transferring that is not dependent on the nodes. Blockchain technology is an emerging technology that can make the file sharing process streamlined and more efficient. The above mentioned were some key highlights of decentralized file-sharing that we need to understand.

Categories
Forex Fundamental Analysis

Understanding The Importance Of ‘Small Business Sentiment’ In The Forex Market

Introduction

Introduction

Introduction

Small Businesses and self-employed account for a large portion of the private sector. Small and medium scale businesses’ success and failure impact a large section of the country’s population. Critical economic indicators like employment rate, consumer spending, GDP are all directly affected by the performance of small scale businesses. By paying attention to small business sentiment indices, the severity of economic conditions can be assessed more accurately, helping us to form more informed investment decisions.

What is Small Business Sentiment?

Small Business

The definitions of a small business differ across corporations, regions, and countries. The Australian Bureau of Statistics (ABS) defines a small business as an independent and privately owned, managed by an individual or a small group of people, and have less than 20 employees. A business having 20-199 employees is termed a medium scale business.

Small Businesses are generally diverse, but broadly they can be segregated into a few broad categories, though. One of those sectors includes providing services to other businesses and households that can include professionals like plumbers, home doctors, electricians, etc. Another sector includes retail outlets like grocery, bars, saloons, etc. Finally, another sector that these businesses can be categorized into is the niche service and goods providers in the manufacturing, construction, and agricultural sectors.

Given the diversity, a large number of activities are taken up by these businesses. In many areas where large businesses cannot reach out due to lack of business viability, these small ones plug the gap. For instance, a remote area having a population of about 50-100 people would not be suitable for a supermarket; instead, a small private grocery shop would do the trick.

Small Business Sentiment indices try to measure the general sentiment towards the business outlook in the current and coming months. Since the sentiment is abstract, the numbers are not precisely quantifiable and differ from person to person. Still, the sentiment indices are calculated as an average of a selected sample of small businesses every month or quarter. Higher and more positive numbers indicate a positive outlook towards business prospects and indicate the economy is likely to grow and prosper. On the other hand, low and negative numbers indicate a weak business prospect, and the economy is likely to slow down.

How can the Small Business Sentiment numbers be used for analysis?

In the case of Australia, that has over two million businesses that come under the category of small businesses, which is over 95% of the entire business sector. The large and established business sectors contribute to the remaining 5%. Since the failure rate of small businesses is quite high in any economy compared to the business giants, focusing on it gives us more accurate and economy sensitive data.

While big corporations generally have their profits nearly constant with mild swings during all business cycles, the small businesses are more sensitive, and their P/L (Profit/Loss) swings quite wildly over business cycles. Small businesses are more vulnerable and take a bigger hit from economic shocks resulting in closures or filing bankruptcy. In contrast, larger businesses are more resilient and can weather economic storms.

The small businesses contribute to a large share of employment; in Australia, it accounted for 43% of total employment. Small businesses are also generally the source of innovations where the smaller size of the organization gives room for the more creative expression of employees. For instance, in the video gaming industry, some of the most innovative gameplay mechanics have come from indie studios (small remote studios) that have had humble beginnings.

Overall the small-business sentiment gives more economy-sensitive data, where the direct impact and severity of economic conditions can be easily measured. The footprint of large businesses in terms of global or nationwide presence masks the underlying weaker economic growth in particular areas. For instance, an international giant like Sony may have had poor sales in the music industry, which are not reflected in its final sales figures if they had a good sale in the electronics department.

The high failure rate of small businesses can broadly impact the employment rate, consumer spending. The large scale failure of small businesses can be in general attributed to weak economic conditions, less consumer demand, high dollar value, lack of additional or tolerant policy from the Government to support small and medium businesses.

Impact on Currency

As the currency markets deal with macroeconomic indicators, small business sentiment indicators are overlooked for the broader and more inclusive business sentiment indicators like AIG MI (Australia Industry Group Manufacturing Index). The small business sentiment is useful for a more in-depth analysis of small regional companies and is useful for equity traders focusing on small company stocks. It is also useful for the Government officials to understand and draw out any support policies to maintain employment rate, and avoid bankruptcy to small-scale businesses.

It is also worth noting that not all countries maintain sentiment indices for small businesses, which makes analysis and comparison difficult for currency traders. Currency traders generally look for economic conditions across multiple countries to decide on investing in a currency; in that case, small business indices are not useful. Overall, it is a low-impact leading economic indicator that the currency markets generally overlook due to other alternative macroeconomic leading indicators.

Economic Reports

In Australia, the National Australian Bank publishes monthly and quarterly reports on the performance of small-business and their prospects on its official website. A detailed report on how different sectors are faring during current economic conditions and probable business directions are all listed out in the reports.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is famous in the United States for reporting monthly small business sentiment on its official website.

Sources of Small Business Sentiment Indices

We can find the Small Business Sentiment indices for Australia on NAB. We can find consolidated reports of Small Business Sentiment for available countries on Trading Economics along with NFIB statistics.

How Small Business Sentiment Data Release Affects The Price Charts?

As mentioned earlier, the National Australian Bank (NAB) is the primary source of business sentiment in Australia. The bank publishes monthly, and quarterly NAB Business Sentiment reports. The most recent report was released on August 11, 2020, at 1.30 AM GMT and can be accessed at Investing.com here. A more in-depth review of the monthly business survey in Australia can be accessed at the National Australian Bank website.

The screengrab below is of the NAB Business Confidence from Investing.com. On the right, is a legend that indicates the level of impact the Fundamental Indicator has on the AUD.

As can be seen, low impact is expected on the AUD upon the release of the NAB Business Confidence report. The screengrab below shows the most recent changes in business confidence in Australia. In July 2020, the index improved from -8 to 0, showing that business sentiment in Australia improved during the survey period. Therefore, it is expected that the AUD will be stronger compared to other currencies.

Now, let’s see how this release made an impact on the Forex price charts.

AUD/USD: Before NAB BC Release on August 11, 2020, Just Before 1.30 AM GMT

As can be seen on the above 15-minute chart, the AUD/USD pair was trading on a neutral pattern before the NAB Business Confidence report release. This trend is evidenced by candles forming on a flattening 20-period Moving Average, indicating that traders were waiting for the news release.

AUD/USD: After NAB BC Release on August 11, 2020, 1.30 AM GMT

After the news release, the pair formed a 15-minute bullish candle. As expected, the AUD adopted a bullish stance and continued trading in steady uptrend afterward with a sharply rising 20-period Moving Average.

Now let’s see how this news release impacted other major currency pairs.

AUD/JPY: Before NAB BC Release on August 11, 2020, Just Before 1.30 AM GMT

Before the news release, the AUD/JPY pair was shifting its trading trend from neutral to an uptrend. Bullish candles are forming above the 20-period Moving Average.

AUD/JPY: After NAB BC Release on August 11, 2020, 1.30 AM GMT

Similar to the AUD/USD pair, the AUD/JPY pair formed a bullish 15-minute candle after the news release. The pair later continued trading in a steady uptrend.

AUD/CAD: Before NAB BC Release on August 11, 2020, Just Before 1.30  AM GMT

AUD/CAD: After NAB BC Release on August 11, 2020, 1.30 AM GMT

The AUD/CAD pair was trading in a similar neutral pattern as the AUD/USD pair before the news release. This trend is shown by candles forming on and around a flat 20-period Moving Average. After the news release, the pair formed a bullish 15-minute candle and adopted a bullish uptrend, as observed in the previous pairs.

Bottom Line

Theoretically, the small business sentiment is a low-impact indicator. However, in the age of Coronavirus afflicted economies, it has become a useful leading indicator of economic health and potential recovery. This phenomenon is what propelled the NAB Business Confidence indicator to have the observed significant impact on the AUD.

Categories
Forex Fundamental Analysis

What Is ‘Interbank Rate’ and What Impact Does It Have On The Forex Market?

Introduction

Introduction

Introduction

The Interbank rate is an essential tool used by the central authorities to control the money flow within the economy. Changes in the interbank rate can add or withdraw money from the system overall, which can stimulate growth or slow down the economy, respectively. The Interbank rate drives interest rates for bank loans, which are the significant sources of capital for businesses and the general public. The understanding of the Interbank rate is crucial for our analysis.

What is the Interbank Rate?

The interbank rate is the percentage rate at which the United States banks lend each other money. A country’s Central bank dictates the banking practices for the banks within the nation. For the United States, it is the Federal Reserve which decides the interest rates and the banking practices. The central banks, in general, demand 10% of their total deposits be held as reserves to maintain liquidity and meet withdrawal needs.

Based on the interbank rate, banks having excess cash can lend money to the banks, which are falling short of capital to meet their immediate requirements or to maintain their minimum reserves.

What is the Interbank Rate – Second Definition?

The interbank rate also refers to the rate at which banks exchange currencies in the global forex market. The forex market consists of an interbank market, which is a significant part of the forex market system overall. This interbank market consists of big players. Most of those are banks, large financial institutions, investment banks, and mutual funds corporations and do not include retail forex institutions or traders.

The interbank rate numbers are what you see when you search in Google the currency exchange rate for a particular pair, but this is not the rate at which you can trade a pair. This rate is only available for the interbank market participants who are usually big financial corporations trading in millions and billions. The price you see is a jacked-up price of the interbank rate in your platform. Your rate is the sum of interbank rate and the spread which your platform charges for trade as profit.

The minimum transaction in the interbank market is in millions; hence the retail traders will not be able to afford the interbank rate. The interbank market participants trade currencies to manage their exchange rate and control interest rate risk.

Although, you can neither control nor trade at the interbank rate, important for traders to be aware of the interbank rate to avoid getting scammed by Forex brokers who main charge way above the interbank rate. The decentralized system of Forex allows for self-regulation, and hence the interbank rates hand the actual exchange rates available to traders are competitive and self-correcting. However, novice traders who are not aware of this might lose money by paying an excessive spread to brokers.

Economic Reports

Federal Reserve determines the interbank rate, and the average of all the interbank rates in all the lending transactions between the banks in the United States is called the Fed Funds Rate.

The interbank credit system is applicable for a short period, usually ranging from overnight to a maximum of a week. Hence, the interbank rate is also called the Fed Funds Rate.

The Federal Reserve announces the Fed Funds Rate based on a variety of factors like inflation, GDP growth, recession, monetary policy, etc. On the 1st of every month, the Fed Funds Rate is released.

How can the Interbank Rate be Used for Analysis?

The Fed Funds Rate drives money in and out of the economy. The Fed Funds Rate drives the interest rate on bank loans that is available to the public and businesses.

A higher Fed Funds Rate would mean that loans are now expensive than before. To take a loan now would mean paying more interest rate. Hence the general public is discouraged from taking loans indirectly. On the other hand, now it would be more profitable to save as they receive a higher interest rate on their deposits. Both these factors can change the general public sentiment on money spending. A high-interest rate environment withdraws money from the economy, thereby slowing down economic activity as people are less willing to spend.

Conversely, a low interbank rate encourages banks to give loans at a cheaper rate, and hence more businesses and people will be able to afford loans; this will ultimately lead to the injection of money into the system overall. When more money is available to a company or an individual, the natural tendency is to increase spending, businesses may use for expansion plans. All of this will stimulate economic growth and result in printing higher levels of GDP.

Impact on Currency

Traders and investors can use the Fed Funds Rate as part of their analysis. Since Central authorities use the fed funds rate to manage the economy and money supply, a historical correlation of interest rates with GDP growth rates can help us to determine the direction of the economy and the value of its currency.  It is a proportional indicator meaning higher interbank rates relate to currency appreciating phenomenon and vice versa.

Higher Interbank rates result in banks paying out higher interest rates for deposits, which can also attract foreign investors to purchase domestic currency to make a deposit and earn better returns on their investment.  Therefore, an increase in capital flowing into the economy and decreased local currency circulation in the rest of the world, thereby increasing its demand and worth.

A low interbank rate results in increased money flow into the system, which can be inflationary, thereby depreciating the purchasing power of its currency. Conversely, a higher interbank rate results in decreased money circulation in the system, which will be deflationary for the economy, and the reduced demand for goods and services will increase the purchasing power of the currency as people would tend to save than spend.

Even though the interbank rate changes do not immediately get reflected in the macroeconomic numbers like GDP and currency value, it is a slow indicator in that sense that it takes a particular time (weeks to few months) to show its effect in actuality. It is also important to know that the authorities use the interbank rate as a response or corrective measure to the current economic situation.

It is more of a gate check for inflation or deflation. It is more of an effect to a cause and not a cause in itself. It is a passive indicator in comparison to other indicators. It reflects more the past and current economic activities than upcoming financial situations. The initial temporary volatility in the currency after the news release is typical, but the long term effect reflects after a certain number of weeks only.

Sources of Interbank Rates

We can find out the Fed Funds Rate from the official website of the Federal Reserve System of the United States: Federal Reserve System | Selected Interest Rates. We can also find a historical graphical representation of the effective fed fund rate changes in the St. Louis FRED website. For reference – Fed Fund Rate

Impact of Interbank Rate News Announcement   

The ultimate goal of any fundamental analysis is usually to determine if there will be a hike or a cut in the interest rates. As mentioned earlier, the interbank rate can also be referred to as the Federal funds rate. In the US, the Federal Reserve releases the interbank rate is determined by the FOMC which meets eight times in a year to set this rate

Below is a screengrab of the Federal Funds Rate from Forex Factory. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

The snapshot below shows the latest release of the Federal Funds Rate on July 29, 2020, at 1.00 PM ET. In the latest release, the FOMC recommended that the rate remains within the target of 0% and 0.25%. This range was within the analysts’ expectations.

It is worth noting that this year, the Federal Reserve has conducted two emergency rate cuts to combat the Coronavirus inflicted economic shocks. The first emergency rate cut was on March 3, 2020, at 10.00 AM ET, as shown by the screenshot below. The Federal funds rate was reduced to a target range of 1.00% to 1.25% from the previous range of 1.50% to 1.75%.

At another unscheduled emergency meeting on March 15, 2020, at 4.00 PM ET, the FOMC cut the federal funds rate by 1.00% to a target range of 0.00% to 0.25%.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before Interbank Rate release on July 29, 2020, Just Before 1.00 PM ET

As shown on the above 15-minute chart of the EUR/USD, the pair was on a progressing uptrend between 7.45 AM and 12.45 PM ET. This uptrend as evidenced by the subsequent bullish candles forming above the 20-period Moving Average.

EUR/USD: After Interbank Rate release on July 29, 2020, 1.00 PM ET

After the FOMC release of the Federal funds rate, there is a renewed volatility in the market. The initial market reaction was negative for USD since the FOMC kept the rate unchanged. The rate release did not result in a shift in the trend since most traders anticipate it and price in their expectations in the market.

Let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

GBP/USD: Before Interbank Rate release on July 29, 2020, Just Before 1.00 PM ET

GBP/USD: After Interbank Rate release on July 29, 2020, 1.00 PM ET

The GBP/USD pair shows similar trends, as observed with the EUR/USD. There is a steady uptrend hours before the interbank rate release. Market volatility is present after the news release but not significant enough to alter the prevailing trend.

USD/CAD: Before Interbank Rate release on July 29, 2020, Just Before 1.00 PM ET

USD/CAD: After Interbank Rate release on July 29, 2020, 1.00 PM ET

For the USD/CAD pair, a weak uptrend is observed, with candles forming just around the 20-period Moving Average. After the interbank rate release, the pair shows the same weakness for the USD as observed with the EUR/USD and the GBP/USD.

Bottom Line

The interbank rate is a high-impact fundamental indicator in the forex market. The FOMC Statement, however, dampens its impact since it is focused on the future. It is therefore advisable for traders to avoid opening significant positions before this news release. Furthermore, reading the FOMC statement will help to gauge whether the Fed is hawkish or dovish about the future.

Categories
Forex Fundamental Analysis

How The ‘Corruption Rank’ Data Impacts A Nation’s Currency

Introduction

Introduction

Introduction

Corruption can very well be defined as seeking private gain through abuse of power that one has been entrusted. The biting effects of corruptions include:

  • Erosion of confidence in the monetary and economic system;
  • Hampering economic development;
  • Increase in current account deficits; and
  • Encouraging the growth of shadow economies

So, how does this affect a country’s currency valuation? Well, through GDP, of course! This correlation is explained in detail later on in this article.

Understanding Corruption Rank

Corruption rank is the ranking of countries worldwide based on how the countries’ public sector has been corrupted. It measures the extent of corruption by politicians and other public officials. Due to its nature of illegality and secrecy, there is no single indicator that directly measures the levels and extent of corruption in each country. The best measure of corruption rank is the Corruption Perceptions Index (CPI) published by Transparency International.

The CPI is used to rate the countries based on perceived levels of corruption on a sliding scale from 0 to 100. A score of 0 is considered the most corrupt. A country with a score of 100 is considered to be clean of corruption. The CPI is constructed based on the opinions of business executives, public policy experts, financial journalists, and risk analysts globally.

The CPI is a result of 13 rigorous assessments and surveys on wide-ranging issues on corruption collated by several reputable institutions around the world, including the World Bank and African Development Bank. These assessments and surveys are conducted in the two years preceding the publication. They incorporate a combination of qualitative and quantitative analysis which captures the manifestations of corruption, including:

  • Misuse of public resources;
  • Effectiveness of the prosecution of corruption cases by the judiciary;
  • The extent of bribery by firms and individuals to secure contracts, avoid taxations and payment of duties;
  • Bureaucratic loopholes that foster corruption; and
  • The effectiveness of anti-corruption measures implemented by the government

How Corruption Rank Impacts the Economy

To better understand how the corruption rank of a country influences its currency, we first must understand how corruption impacts a country’s economy.

Corruption inherently impacts the economy negatively. A specific study by the World Bank shows that the GDP per capita in countries with low CPI is about 60% less than for countries with a higher CPI. The negative effects of corruption are:

Overreliance on debt

Corruption results in a significant leakage in the budget. A country is thus forced to rely on debt, usually denominated in foreign currency. The interest payment leads to a higher share of revenue allocated to repayment in the short term instead of economic investments. This higher share of foreign borrowing also results in the local currency crisis.

Inefficiencies in the allocation of resources

Through bribery, the allocation of tenders is usually awarded to individuals and firms who are not qualified. As a result, most public projects are not completed, and the benefits to the economy foregone.

Creation of a shadow economy

Corruption facilitates the growth of several firms that avoid official registrations. As a result, the economy experiences a deficit in terms of taxation, import, and export duties payable. Consequently resulting in low GDP.

The exit of investors

Corruption leads to investors pulling their businesses out. This exit leads to reduced economic activities and accompanied by job losses.

A lower share of foreign direct investment (FDI)

Foreign investors often shun countries with rampant corruption since they seek a fair operating environment. Donor agencies such as IMF and World Bank also reduce their total outflows into such countries. Therefore, the recipient countries’ economy fails to benefit from such investments, which would have a multiplier effect within the economy. Also, because FDI is usually denominated in foreign currency, it usually boosts the recipient countries’ currency strength.

Reduced innovation

Corrupt countries offer very little protection in terms of patents and copyright protection. The lack of legal protection framework results in massive exportation of technology from such countries, thus denying the local economies the growth benefits.

Increase in current account deficits

Corruption creates a disincentive to invest in the local manufacturing and production industries. Apart from the drop in job creations, this leads to overreliance on importation to fill the local demand.

There is a direct inverse relationship between corruption levels in a country and its currency. The inverse correlation is because countries with higher perceptions of corruption have poor economic performance, while those with lower perceptions of corruption have better economic performance.

Consequently, a change in the corruption ranking is often accompanied by a corresponding change in the country’s GDP. In 2019, Sweden dropped in ranking from position 3 to position 4; this was coincided by a 6.37% drop in its annual GDP. During the same period, Malaysia ranked position 51 from 61, a period which coincided with a 1.68% annual GDP growth.

Source: ResearchGate 

How Corruption Rank Impacts a Currency

Although it is a rarely observed indicator, forex market investors should keep an eye on the annual release of the corruption rank. Because the corruption rank is based on two years’ worth of data, it is evident that the corruption rank signifies the underlying fundamental changes in a country’s economy.

High levels of corruption typically tend to be accompanied by a deteriorating economy. It is a known fact that the strength and fluctuation of a country’s currency are tied to its economic performance. Therefore, this is accompanied by a reduction in the valuation of the currency in the forex market.

Any improvements in the rank could forebode that the economy has been performing better, which will be accompanied by a significant appreciation in the country’s currency. Conversely, a drop in the corruption rankings signifies a deterioration in the economic conditions, which will result in the long-term changes in the currency’s value.

Sources of Data

The corruption perceptions index and the corruption rank are released annually by Transparency international. The corruption perceptions index can be accessed here and the corruption rank here.

How Corruption Rank Release Affects The Forex Price Charts

The corruption rank published annually by Transparency International rarely moves the forex market. It is, however vital for the forex traders to keep an eye out for CPI rank. As we have already discussed in this article, the CPI provides crucial information about the conditions of the underlying fundamentals of a country’s economy. The corruption rank is released annually following a two-year assessment and analysis. The latest CPI data for 2019 ranking 198 countries was released on January 23, 2020. A highlight of the release can be found on the Transparency International’s website.

Below is a snapshot of the top and bottom performers. The legend indicates the level of corruption in the country.

In 209, the US fell in rankings by one position, from 22 to 23 out of the 198 countries that were ranked. The screengrab below shows this position.

EUR/USD: Before Corruption Rank release on January 23, 2020

On the above chart, we have plotted a 20-period Moving Average on the EUR/USD chart. As can be seen, the pair had been on a consistent downtrend on the four-hour candlestick pattern. This downtrend is evident since the candlesticks are trending below the 20-period Moving Average. This similar downtrend on the four-hour candlestick chart can be observed on GBP/USD and NZD/USD, as shown by the charts below.

AUD/USD: Before Corruption Rank release on January 23, 2020

NZD/USD: Before Corruption Rank release January 23, 2020

For long-term traders, the pattern offers a great opportunity to go short on the above pairs, since the prevailing downtrends would favor them. Let’s now see how the price responded to the release of the corruption rank by Transparency International.

EUR/USD: After Corruption Rank release on January 23, 2020

After the release of the corruption rank, a persistent downtrend in the EUR/USD pair can still be observed. As shown on the daily chart above, the EUR/USD pair had a bullish candle on January 23, 2020. This strength is even though the US dropped in the corruption rank. Its CPI score dropped from 71 in 2018 to a score of 69 in 2019.

However, against the AUD, the USD can be observed to have weakened momentarily. The pair later regained its bullish trends. It is worth noting that the momentary strength in the AUD is because Australia performed better in the corruption ranking by climbing one position, as shown by the snapshot below.

The chart below shows the daily price action of the AUD/USD pair after the news release.

AUD/USD: After Corruption Rank release on January 23, 2020

The USD weakened against the NZD after the release of the corruption ranking. This weakness can be attributed to the fact that New Zealand ranked first with a score of 87. This ranking is shown by the screengrab below.

As can be seen on the daily chart below, USD weakened against the NZD after the news release.

NZD/USD: After Corruption Rank release on January 23, 2020

Corruption rank can be seen to have some mild effects on the price action of the selected pairs, but not enough to alter to the trend observed before its release. Although most forex traders rarely observe it due to the annual nature of its release, corruption rank provides vital information about the underlying fundamentals of an economy. All the best!

Categories
Forex Fundamental Analysis

What Should You Know About ‘Job Vacancies’ as a Macro Economic Indicator

Introduction

Introduction

Introduction

Job vacancies are a fundamental macroeconomic indicator. This article defines in detail what job vacancies are and further shows how the job vacancies affect the economy of a given country, and consequently, its currency.

What are Job Vacancies

Job vacancies are the number of new gainful employment positions that are created within an economy at a given point in time. In order to establish the number of job vacancies, surveys are usually done on employers about their businesses, recruitment, and job openings.

Job vacancies are considered if: there is a specific open position with work available for it; the job could commence within 30 days of advertisement whether or not a suitable candidate is hired, and the employers are actively recruiting workers for that particular job.

Purpose of Job Vacancies Statistics

The job vacancies statistics are meant to provide information about the level and structure of labor demand. The job vacancies statistics indicate the unfulfilled demand for labor and the desirable skills that are sought by the employers within an economy. As such, the job vacancies statistics provide the central banks and governments with an opportunity to analyze the trends in the labor market. The statistics can also be used to assess the structural analysis of the economy in terms of business cycles.

Job Vacancies as an Economic Indicator

Employers within an economy are continually looking to hire new workers to fill positions in their organizations. As such, job vacancies are a leading macroeconomic indicator of unemployment and employment rates. Thus, the more the job vacancies are available, the more the number of people who stand a chance to be gainfully employed and thus, leading to a reduction in the unemployment rate.

Conversely, fewer job vacancies imply that fewer people seeking employment get to be gainfully employed hence low employment rate in the economy. Thus, higher job vacancies signify an expanding economy while a reduction in the job vacancies implies that the economy is contracting or heading for a full-employment level. In this case, higher job vacancies result in appreciating the strength of a country’s currency while lower than expected job vacancies result in a drop in the currency value.

The statistics on job vacancies can also be used in the analysis of business cycles. The number of job vacancies is expected to be on a constant increase during periods of expansion because businesses are hiring more workers due to increased economic activities. At peak periods, the number of job vacancies is marginally decreased and remain plateaued since most businesses have achieved optimal operations. During the periods of contraction, the number of job vacancies is expected to be on a constant decrease due to a rapid reduction in the economic activity within a country, hence lower GDP output.

Thus, the statistics on job vacancies can be accurately used to predict the periods of economic boom and recessions. During the global economic crisis, the number of job vacancies in the US decreased from 4.4 mn in the 1st quarter of 2008 to 2.45 million in the fourth quarter of 2019, a period of recession. In the recovery period, the number of job vacancies increased from 2.72 million in the first quarter of 2010 to 4.92 million in the fourth quarter of 2014.

How Job Vacancies Affect the Economy

By itself, job vacancies signify the level of economic activity within an economy. A higher and increasing number of job vacancies signify that the economic activities within a country are increasing hence the need for more workers. Similarly, a constant reduction in the number of job vacancies available implies that the economic activities in a country are cooling down, hence the need for fewer workers. More so, a reduction or plateauing in the number of job vacancies available could imply that the economy is heading for full employment.

Graph: 2019 January to December Scatter plot of US Job Vacancies and Real GDP.

Source: OECD Statistics and US BEA

As seen from the above scatter plot, from January 2019 to December 2019, there was a direct positive correlation between the change in the job vacancies in the US and the change in real GDP.

Job Vacancies and Impact on the Currency

As already discussed, job vacancies serve as a leading indicator for employment and unemployment levels. An increasing number of job vacancies implies that unemployment levels are bound to fall drastically. A steep fall in the unemployment rate, which is accompanied by a full rate of employment will result in higher inflation. The higher inflation is because the employers are competing to hire workers hence pushing up the wages at a faster rate. Increased rates of inflation will trigger the government and central banks to employ contractionary monetary policies aimed at keeping the inflation rate in check.

When the central banks increase the interest rate, it is aimed at reducing the rate of inflation by making borrowing expensive while encouraging the culture of savings. Thus, for forex market traders, they can anticipate a hike in the interest rate levels when there is a consistent increase in the number of job vacancies. The higher interest rate has the effect of increasing a country’s currency valuation.

Conversely, a constant reduction in the number of job vacancies, which comes after a period of a sustained increase in the total number of job vacancies, implies that an overheated economy is cooling down. An overheated economy is characterized by a prolonged period of positive economic development and higher levels of inflation brought about by increased wealth generation.

Thus, after the government has employed contractionary policies following the overheating of an economy, it can consequently be expected that this period will be accompanied by asset bubbles and an increase in the prices of assets. Higher wages means that most employers may not be able to hire more workers and let go of some of the existing employees, resulting in a sustained period of lower job vacancies.

The economy can be said to have plateaued and headed for a recession. For forex traders, a falling number of job vacancies could signify an impending dovish monetary policy meant to stimulate the economy and prevent excessive deflation. The dovish policies have a negative effect on a country’s currency.

How Job Vacancies News Release Affects The Price Charts

Although considered a low impact indicator, forex traders need to understand how job vacancies release impacts the price action. In the US, the job vacancies report is published by the Bureau of Labor Statistics by conducting Job Openings and Labor Turnover Survey (JOLTS).

JOLTS gives data on job openings, hires, and separations. The JOLTS report is released monthly about 40 days after the month ends. The latest, expected, and all historical figures are published on the Forex Factory website. The most recent release one can be found here. Job vacancies are advertised positions yet to be filled by the final business day of the month. A more in-depth review of the JOLTS numbers can be found at the Bureau of Labor Statistics website.

Below is a screengrab of the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

The snapshot below shows the change in the JOLTS numbers. In the latest release, the number of job openings increased on a month on month between May and June 2020 from 5.37 million to 5.89 million. The increase was more than the 5.30 million forecasted by analysts.

Now, let’s understand how this news release impacted the Forex price charts.

EUR/USD: Before JOLTS release August 10, 2020

As seen on the chart above, we have plotted a 20-period moving average on the EUR/USD chart, which shows that the pair is on a strong downtrend. The steady downtrend is also evident from the fact that the candlesticks are just below the Moving Average. On the 15 minute timeframe before the release, between 1100 and 1330 GMT, the market is on a constant uptrend. This uptrend can also be observed in AUD/USD and NZD/USD pairs, as shown by the charts below.

AUD/USD: Before JOLTS release August 10, 2020

NZD/USD: Before JOLTS release August 10, 2020

It is evident that in such a period, going “long” in the market offers the best opportunity to take advantage of this short-term uptrend. However, since the general market trend is downward, we highly recommend following this trend.

EUR/USD: After JOLTS release August 10, 2020, 1400 GMT

After the release of the better than expected JOLTS numbers, there is a consistent downtrend on the EUR/USD. The mere increase in the number of job openings triggered the USD strength against other currency pairs. It is worth noting that the release of the JOLTS numbers was strong enough to reverse the immediate uptrend seen immediately before the release.

The same reversal to a downtrend after news release can be observed for the AUD/USD and NZD/USD pairs as well. This trend is shown in the charts below.

AUD/USD: After JOLTS release August 10, 2020, 1400 GMT

NZD/USD: After JOLTS release August 10, 2020, 1400 GMT

The positive job vacancies news had a significant impact on the strength of USD against other currencies. This strength is because the better than expected job openings signify that the US economy is on a recovery path following the effects of the Coronavirus pandemic.

Categories
Forex Basic Strategies

Reliable Way To Make 30-Pips A Day In The Forex Market

Introduction

Introduction

Introduction

The 30 pips a day is a trading strategy that is based on market continuation pattern. This strategy is very profitable and has a long history of providing a substantial gain. Therefore, if you can implement this strategy well, you can make a decent profit from the forex market. This strategy is focused on a quick gain from the market; therefore, the currency pair that usually make a fast move is recommended for this strategy.

In this trading strategy, we will use the following elements:

  • 10 EMA and 26 EMA to identify the market direction. The main reason for using the Exponential Moving average over the simple moving average is that it provides the most reliable result in a short timeframe.
  • We will use 5-minute timeframe for trading as our focus is to make a quick gain from a short move.
  • We will implement the strategy in GBPJPY pair as it provides fast move in a short timeframe.

30 Pips a Day Trading System

In this trading strategy, we will consider the trend as an uptrend if the 10 EMA crosses the 26 EMA. Similarly, we will consider the trend as a downtrend if the 10 EMA crosses the 26 EMA. The reason for choosing the GBPJPY pair is that it has a higher daily movement compared to the other major currencies. GBPJPY pair can move 100-200 pips a day while most of the major currency pairs can move 60-100 pips a day.

However, our aim is not to catch every move during the day. Instead, we will focus on a little part of it, like 30 pips. That’s why the name of this trading strategy is 30 pips a day. In this trading strategy, the Potential Trading Zone is significant.

What is the Potential Trading Zone?

It is the zone where we will make trades based on our trading element. It is usually the reversal zone from where the price is likely to reverse from the current direction. Therefore, we will make the buying and selling decision at this zone depending on the current market trend.

In the above example, we can see that the major trend of the currency pair down. Despite the downtrend, the price will move up with a corrective speed, which is a minor counter-trend rally. In the 30 pips a day trading strategy, we will focus on the minor trend reversal movement and wait for the price to return to the major trend.

We can find the same market movement in the uptrend where the price will come down with a corrective speed. Later on, we will focus on the price zone from where the price is likely to resume its major trend.

Sell Setup Using the 30 Pips a Day Trading Strategy

  • Identify the major trend. If the primary trend is down, we will focus on sell trades only.
  • Find the location of price where 10 EMA crosses down the 26 EMA.
  • Do not sell immediately after the crossover. Wait for the price to make a retracement.
  • Enter the sell as soon as the candle crosses the potential trading zone halfway between the 10 and 26 EMA.
  • Stop-loss should be 15-20 pips.
  • Take profit should be 30 pips.

Example of 30 Pips a Day Sell Setup

In the above image, we can see that the 10 EMA crossed below the 26 EMA and moved up. The crossover is the first indication of sell entry. Later on, the trade setup comes as soon as price creates a bearish candle after a bullish rejection.

Buy Setup Using the 30 Pips a Day Trading Strategy

  • Identify the major trend. If the major trend is bullish, we will focus on buy trades only.
  • Find the location of price where 10 EMA crosses above the 26 EMA.
  • Do not buy immediately after the crossover. Wait for the price to make a retracement.
  • Enter the buy as soon as the candle crosses the potential trading zone halfway between the 10 and 26 EMA.
  • Stop-loss should be 15-20 pips.
  • Take profit should be 30 pips.

Example of 30 Pips a Day Buy Setup

In the above image, we can see that the 10 EMA crossed above the 26 EMA and moved down. The crossover is the first indication of buy entry. Later on, the trade setup comes as soon as price creates a bullish candle after a bearish rejection.

Alternative Trading Entry for 30 Pips a Day

  • If you don’t have enough time to manage your trade, you can simply use a pending order.
  • Once the candlestick comes back after the primary crossover, wait for a reversal candle to appear. Later on, place a buy stop or sell stop above or below the reversal candlestick.
  • You can place the stop loss above or below the candle high or low with some buffer. However, you can use the nearest swing points as a stop loss level also. Moreover, to take profit, you can set it to 30 pips.

Pros and Cons of 30 Pips a Day Trading Strategy

Like other trading strategies, 30 pips a day trading strategy has both strength and weakness.

Pros

  • As the GBPJPY pair is very volatile, it is straightforward to make 30 pips daily.
  • In a trending market, this strategy works well.
  • This strategy works well in Asian and London Session.

Cons

Summary

Let’s summarize the 30 pips a day trading strategy:

  • Identify the trending market in the GBPJPY pair.
  • Move to the 5-minute chart and identify a market where 10 EMA crosses the 26 EMA.
  • Wait for correction and enter the trade as soon as market rejects from the potential trading zone.
  • Set stop loss at 15-20 pips and take profit at 30 pips.

In every trading strategy, trade management is an important part. In the forex market, we anticipate the movement of various currency pairs and every pair moves in a different way. Therefore, if you face some consecutive losses, it is better to take a break from trading and enter the trade again as soon as the market starts to move as you expect.

Categories
Forex Course

144. Trading The Channel Breakouts In The Forex Market

Introduction

Introduction

Introduction

Breakout trading is one of the easiest and most common and smartest ways to trade the market. It doesn’t matter whether you are a scalper, intraday trader, investor, or a swing trader; you can always make money in the market if you master the breakout trading only.

Breakout trading is an attempt to enter in the market when the price action moves outside the significant price range, most of the time it takes an immense amount of power to break the significant areas, and you will always witness the spikes, fake-outs near the breakouts, this is because both of the parties tries to dominate the shows.

What is a Price Channel?

A price channel is a state of the market that connects the swing high and swing higher lows in an uptrend. Conversely, in a downtrend, it connects the swing low and lower low. The upper trend lines act as a resistance to the price action, and the lower trend lines act as a support line on the price chart. The price respects these areas by staying inside the price channel. When the opposite party becomes dominates, then we witness the breakout in a channel.

Trading Channel Breakouts

Buy Trade 1

The price chart below represents a channel breakout in the CAD/JPY forex pair.

 

As we can see, the sellers are getting weaker in the channel, and as a result, soon after the breakout price action changed its trend. So, around 81.55, the price action broke to the north and printing a brand new higher high.

Buy Trade 2

The image below represents the formation of a price channel in the CAD/JPY forex pair.

As we can see, the below price chart represents our entry-exit and stop loss in this pair. So during the downtrend, both buyers and sellers were holding equal power. Near to the 78.00 area, price action broke to the north, and after the breakout, we took a buy-entry. After our entry, the price made a brand new higher high, but the hold at the most recent higher high convinced us to close our trade at the 88.37 level.

Sell Trade 1

The image below represents the formation of a Price channel in a downward trend.

 

The image below represents our entry, stop loss, and take profit in this Forex pair. The channel is typically formed when there is no trend, or when the trend is about to end. On a lower timeframe, we can trade inside the Channel, but on this timeframe, the break below the 78.30 level indicates that the sellers stole the show, and are ready for a brand new lower low.

Sell Trade 2

The image below represents a channel breakout in the AUD/JPY Forex pair.

Right after the price action approaches the most recent support area, it just got shot down and broke below the Channel. The strong red breakout candle is an indication for us to go short in this pair and right after our entry, we have witnessed a brand new lower low.

Trading channel breakouts is this simple. But minute details like drawing channel lines accurately is crucial. Let’s learn more breakout trading techniques in the upcoming lessons. For now, don’t forget to take the quiz.

[wp_quiz id=”85204″]
Categories
Forex Fundamental Analysis

Everything About ‘Social Security Rate’ – An Important Fundamental Forex Driver

Introduction

Introduction

Introduction

During the recent Coronavirus pandemic, the whole debate about social security has taken CenterStage. At a point in life, we all grow old. Since not everyone will go through life-saving for retirement, our main worry then would be; how to pay bills on time, how to provide for our families should we lose out jobs or become incapable of working.

Social security attempts to anticipate all this and offer practical solutions. So why should forex traders care about the social security rate? This article seeks to understand what impact of social security rate has on a country’s currency. To establish this, we first need to understand what it is and what it entails.

What is Social Security?

Social security has been given several definitions. In the UK, it is considered to be any form of monetary assistance from the government towards individuals who have inadequate or no income. In the US, social security is a federal program that is meant to provide retirees, the poor and the disabled with income and health insurance.

Thus, social security is the guarantee that a government gives to its vulnerable citizens that in the event they are exposed to a specific future risk, they will be looked after. The social security program, therefore, uses public resources to provide economic support for private citizens.

What is Social Security Rate?

This rate is the percentage of earnings that is charged on both the workers and their employers. It is used to fund the social security program.

How it is Calculated

Various countries have different mechanisms of arriving at the social security rate for both the employed and self-employed.

In the US, the social security rate is 15.3%. It is a combination of a 12.4% social security tax and Medicare tax of 2.9%. In 2020, the 12.4% social security tax is applied on everyone for all income up to $137,700; any amount earned beyond this threshold is exempt from the social security tax. The social security tax is deducted on an individual’s payroll through payroll withholding by the employer. This rate is split in half between the employee and the employer.

Therefore, an individual contributes 6.2% for social security and 1.45% of their earnings while the employer matches the other half. The employer then remits the withheld amount together with their contribution to the IRS. For those that are self-employed, since they are the employee and the employer at the same time, they have to pay both halves of the social security tax. In the UK, the social security rate is 14%. A comprehensive list of current and previous social security rates for every country can be found on the Trading Economics website.

Purpose of the Social Security

Conventional taxes are meant to be a revenue source for government expenditure or meant to be punitive. The social security tax is meant to a safety net for the contributors should they fall on hard times. It also functions as an economic guarantee for the most vulnerable in society. The chart below shows the dependency on social security benefits by various household income class in the US.

Source: AARP

Some of the benefits of the social security program include:

Retirement benefits

This offers workers and their dependents a replacement income for when they choose to retire. The earliest retirement age is 62 years. For one to be eligible for retirement benefits, they need to have worked for a minimum stipulated period. This period differs depending on the country. In the US, it is for ten years. The amount of money received largely depends on one’s lifetime earnings and the cost of living.

Disability benefits

Also known as disability insurance, the Social Security and Supplemental Security Income disability is meant to provide an income for the disabled. For one to be eligible, they need to have worked for a minimum number of years, depending on the age when the disability occurred.

Medical cover

This is the health insurance coverage that covers part of medical bills for ageing workers, people with permanent health conditions and those with disability.

Survivors benefits

This is meant to help those who are bereaved to cope

Social Security Rate and the Economy

The social security program differs in every country. However, in every economy, such programs are meant to provide stability to the households by providing a replacement stream of income, hence avoiding poverty. In the US alone, close to 56 million people are recipients of social security benefits.

Source: International Labour Organization

As shown in the chart above, higher expenditure in terms of social security corresponds to a higher GDP per capita. While some might argue that a higher social security rate reduces the amount of disposable income, the multiplier effect generated by the resultant social security benefits outweighs any short term loss.

It is worth noting that the families and individual who receive these benefits use the income to purchase goods and services. In 2019, it was estimated that the social security program injected over $1 trillion into the economy. Therefore, the presence of social security helps to maintain demand in the economy in times of crises and some cases, increase the demand.

The benefits of the social security program have a powerful multiplier effect within the economy. The businesses that receive this income from the consumers use it to increase production and hire more employees. These expansions, in turn, generate more revenue for the government to use in national expenditure while the earnings by the employees serve to create more consumption and increased savings.

How Social Security Rate Impacts Currency

As we have already established above, a higher social security rate creates a multiplier effect that generates more revenue within the economy. The strength of a country’s currency is a reflection of its economy. The growth in the national economy, therefore, corresponds to the appreciation in the value of the currency.

Conversely, lowering the social security rate will reduce the multiplier effect within the economy, which leads to shrinking of the national economic growth. For forex traders, lowering the social security rate could be a foreboding of a looming reduction in the national GDP growth, prompting expansionary monetary and fiscal policies. Therefore, in the long run, a low social security rate leads to the weakening of a country’s currency against other pairs.

How Social Security Rate News Release Affects The Forex Price Charts

Forex traders rarely pay any attention to the release of the new social security rates. This inattentiveness is because as an economic indicator, the social security rate is a low impact indicator. However, it is essential nonetheless to know how the news release of the social security rate affects the price action of different pairs.

In the UK, the national government through the Department for Work and Pensions sets the social security rate and is reviewed annually. A breakdown of the UK social security rate can be found HM Revue and Customs website. It should be noted that for the past 25 years, the US government has not changed the social security rate, as can be seen here. Below is a screengrab from the Trading Economics’ website on the UK and US social security rates.

UK social security rate

US social security rate

In the latest release on April 6, 2020, around 1100 GMT, the UK government revised the social security rate upwards from 12% to 14%. Now, let’s see how this news release made an impact on the Forex price charts.

GBP/USD: Before social security rate release April 6, 2020

We plotted a 20-period Moving Average on a one-hour GBP/USD chart. As can be seen on the chart above, the pair is in recovery with the candles crossing over the 20-period Moving Average and subsequently forming above it.

For the GBP/NZD and GBP/AUD pairs, the market is in a general downtrend before the announcement of the hike in the social security rate. This trend is evidenced by the subsequent candles forming below the 20-period Moving Average, as shown in the charts below.

GBP/NZD: Before social security rate release April 6, 2020,

GBP/AUD: Before social security rate release April 6, 2020

For forex traders, going long on the GBP/USD wile short on the GBP/NZD and GBP/AUD pairs would have been an excellent trading opportunity since the prevailing market trends would favour them.

Let us now see if the release of the new social security rates changed the market trend for these pairs.

GBP/USD: After social security rate release April 6, 2020

In theory, raising the social security rate should be positive for the GBP. Bust, as can be seen in the GBP/USD one-hour chart, the news release, did not have any impact on the pair to change the market trend significantly. The lack of impact can be observed for the GBP/NZD and the GBP/AUD pairs as shown by the charts below.

GBP/NZD: After social security rate release April 6, 2020

GBP/AUD: After social security rate release April 6, 2020,

Whereas the social security rate plays a significantly important role in the overall economy and the GDP, it is apparent that its impact in the forex market is negligible.

Categories
Forex Basic Strategies

The ‘Daily High Low’ Based Forex Trading Strategy

Introduction The daily high low based forex trading strategy is a breakout trading strategy from the high and low prices in the daily timeframe. In forex trading, the daily timeframe is crucial as most of the significant market players use this time table in their trading. As a result, any trading strategy in the daily […]

Introduction The daily high low based forex trading strategy is a breakout trading strategy from the high and low prices in the daily timeframe. In forex trading, the daily timeframe is crucial as most of the significant market players use this time table in their trading. As a result, any trading strategy in the daily […]

Introduction

The daily high low based forex trading strategy is a breakout trading strategy from the high and low prices in the daily timeframe. In forex trading, the daily timeframe is crucial as most of the significant market players use this time table in their trading. As a result, any trading strategy in the daily time frame provides better trading results compared to the lower time frame.

On the other hand, when the price creates a rally by breaking the high and low price of the daily timeframe will indicate a significant market momentum. If you can avoid the range market, the high low based strategy can provide a reliable trading result. If you can implement the trading strategy well as per the rule mentioned below, you can make a decent profit from it in any currency pair.

The Daily High Low Based Trading Strategy

The daily high low based forex trading strategy has a simple concept:

  • If the price breaks below the low of yesterday’s candle, it may move further low.
  • If the price breaks above the high of yesterday’s candle, it may move further high.

It is a standard brief of this trading strategy. Let’s have a look at the image below:

In this image above, the price has made a new higher high once it breaks above the candle high in the market area. However, there is some market condition where price moves to a range and violates the movement above or below the candle high.

If you are trading the breakout of a daily candlestick that is larger than the earlier candlesticks, you might be caught by the mean reversion of the price. In the forex market, it is often difficult to predict how long a trend could stay. Almost 70% of the time, the market moves within a range; therefore, you should find a location of the price where the breakout from a daily candle would be reliable.

The basic concept of making a good profit from the forex market is to buy from low and sell from high. Therefore, any bullish breakout from a significant support level in a daily timeframe would indicate a reliable daily breakout strategy compared to a trade setup from the middle of a trend. Let’s have a look at the image below, how the price moved up once it got a breakout from a daily candle from a significant support level.

Now look at the image below and see how the price violates the daily breakout to the upside once it reached above 50% of the possible trend.

How to Trade the High Low Breakout Strategy?

This trading strategy is simple as you can make most of the trading decision a day before the movement is expected. The main of this trading strategy is to place two pending orders above or below the yesterday candle. Therefore, you can catch any movement either upside or downside from the previous day’s candle.

Timeframe

We should consider the daily timeframe to determine the high and low prices. Later on, move to the lower timeframe (usually H4) to enter the trade. However, for new traders, it is recommended to stick to the daily timeframe.

Currency Pairs

This trading strategy works well in all currency pairs, including EURUSD, GBPUSD, USDJPY, or AUDUSD. However, sticking to the major and minor currency pairs would provide a better trading result. Moreover, you should avoid exotic pairs as there is a risk of the false move by hitting the high or low and reverse back.

Breakout Rules

  • Identify the currency pair that is moving within a trending environment. You can predict the direction of the price based on the market context or support and resistance.
  • For example, suppose the price is aggressively creating a higher high or lower low. In that case, the price will likely continue the current momentum until it reaches the next resistance or support level. Moreover, any breakout from a significant key level often creates a fresh move either upside and downside.
  • When the daily candle of the previous day closes, place a buy stop above the daily high, and a sell stop below the daily low to catch the breakout.
  • Move your stop loss at 50% of the daily candle.
  • For the take-profit level, you can consider the average price of the last three days’ movement. For example, if the daily candle of the last three days shows the movement of 100 pips, 50 pips, and 100 pips, the total movement would be 250 pips (100+50+100). Therefore, the average price of the last three days would be 83 pips (250/3).

Example of Daily High Low Based Trading Strategy

The image below represents the graphical view of the daily high low based trading strategy:

  • In the image above, we can see the price moved up from a significant support level with a daily close above it. A buy Stop is taken once the price had a bullish daily close from the key support level. A similar concept will apply to the bearish market once the price has a daily close from a significant resistance level.
  • The next day, the buy stop is taken, and the price moved to the take profit level. The take profit level is taken by calculating the average price of the last three candles.
  • The stop loss is set at 50% of the previous day’s candle. If the stop loss hit, it will indicate that the price will reverse or consolidate more. In that case, we should wait for a further breakout or move to another currency pair.

Summary

Let’s summarize the daily breakout trading strategy:

  • Identify the currency pair that is moving within a trend or likely to start a new trend.
  • Set buy stop above the candle if the price is moving up from a support level and put a sell stop if the price is moving down from a resistance level.
  • Stop-loss should be at 50% of the previous day’s candle.
  • Take profit will be the average price of the last three days’ movement.

In this trading strategy, the challenge is to avoid correction and choppy market. In that case, you should read the price action to determine the possible movement by measuring the price momentum. Moreover, to get the maximum benefit from this trading strategy, follow strong money management rules.

Categories
Crypto Guides

What Should You Know About Instant Crypto Exchanges?

Introduction Whether we need to buy, sell, or trade crypto, exchanges are the most convenient way to do so. It provides us with several functions that make the work easy. But when we need the task to be done on an immediate basis, we can opt for instant crypto exchanges. With these options, we don’t […]

Introduction Whether we need to buy, sell, or trade crypto, exchanges are the most convenient way to do so. It provides us with several functions that make the work easy. But when we need the task to be done on an immediate basis, we can opt for instant crypto exchanges. With these options, we don’t […]

Introduction

Whether we need to buy, sell, or trade crypto, exchanges are the most convenient way to do so. It provides us with several functions that make the work easy. But when we need the task to be done on an immediate basis, we can opt for instant crypto exchanges. With these options, we don’t have to go through the lengthy procedure of buying, selling, or trading crypto. Here are a few benefits that can be obtained from instant crypto exchanges over the traditional methods.

They Are Not-Custodial

In the traditional exchanges, our money will be held on the servers of the exchange. That means the exchange had our money’s custody for a while. This not only extends the transaction time but also put our money at risk. The year 2019 saw twelve crypto exchange hacks, which accounted for over $290 million of funds.

However, there are no such issues with the instant crypto exchanges. As soon as they receive the funds, these instant exchanges deposit the conversion in your wallet immediately. That means you don’t lose custody over your cryptocurrency, and there is no exchange theft associated with it.

They Are Quick

The custodial crypto exchanges require you weeks to get the account approved. By that time, you can’t buy, sell, or trade crypto. But you can do the work fast with the instant option. The name itself indicates that these are “instant” crypto exchanges. So you won’t have to waste much time in getting your currency exchanged. You will have to put only 5 to 60 minutes for each transaction to complete.

Price Aggregation

When you go for the traditional crypto exchanges, you will have to deal with an extensive interface. That is because the entire order book depth and price are shown to make the trade. However, it only includes orders from that particular exchange, and you will have to work accordingly. On the other hand, instant crypto exchanges aggregate multiple exchanges’ price. So you get access to deeper liquidity, and the risk of slippage lowers down.

Fixed/Floating Prices

While making a trade in the conventional exchange, you encounter a specific limit. The system executes a trade only when the prices are at or better than the specified limit. The feature was definitely beneficial, but the instant crypto exchanges have something better to offer. The two options available are:

Floating

When making a transaction, the floating rates get executed at the most excellent possible price. It can be either a little lower or higher than the quoted price.

Fixed

This fixes a specific rate for making the trade. That means, when that price is reached, the system automatically executes the transaction.

Ease Of Use

Last but not least, instant crypto exchanges are effortless to use. If you have already used traditional exchanges, you must be aware of their verification and registration formalities that you need to go through. When it comes to instant crypto exchanges, there are no such issues. You will get registered quickly with an email, and sometimes you can trade without any account or registration.

Examples of Instant Crypto Exchanges

As of today, there are only a few credible and reliable Instant Crypto Exchanges that we can rely on. One of the pioneers in this space would be a well-known exchange called Changelly. With this instant crypto exchange, we get to buy or exchange more than 150 cryptocurrencies. Some of the other popular instant exchanges include CoinSwitch, ChangeNow, FixedFloat, etc. All of these are instant and reliable, so you can confidently make your crypto trades with them.

Bottom line

Though it is quite clear that there are several benefits of opting for instant crypto exchanges, you still need to think twice before using them. This is because of their less sophisticated wallets and heftier exchange fees. You can look up to them and make your mind about whether you want to try them or not.

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding The Impact of ‘Sales Tax Rate’ News Release On The Forex Market

Introduction

Introduction

Introduction

The sales tax rate usually comes as an afterthought to many. But for forex traders, understanding how the rarely-talked about sales tax rate could prove useful in the long-run. This article defines what sales tax rate is and further shows how they impact a country’s economic development and, by extension, its currency.

Understanding the Sales Tax Rate

A sales tax rate is the percentage of the total cost of the goods or services being sold. Sales tax is a consumption tax that is imposed by governments or local authorities on the sale of goods and services. The sales tax rate is calculated as a percentage then added on the cost. These taxes are usually collected at the retail point of sale on behalf of the imposing authority.

As structured, any business that is offering goods or services is liable for the payment of the sales tax in a given jurisdiction. Depending on the laws, this occurs is they have a physical location within the jurisdiction, an official employee, or an affiliate.

How Sales Tax Work?

The sales tax is collected at the end of the supply chain, only after resale to the consumer has occurred. Since consumers are the ones paying the tax, businesses receive a resale certificate to show that the sales tax is not yet due. The purpose of this certificate to the resellers is to ensure that no sales tax is paid on purchases of items to be resold.

The administration for the sales tax is triggered by whether or not a particular business has a presence within the tax jurisdiction. To be eligible to collect sales tax from its customers, the business has to apply for a sales tax permit from the relevant authorities.

Depending on the jurisdiction, the goods and services that are eligible for a sales tax vary. Groceries and medications are exempt from sales tax, as are goods and services purchased by nonprofit organizations.

Sales Tax Rate as an Economic Indicator

The sales tax rate can serve as a leading indicator for the shifts in demand and supply within the economy. Higher sales tax rates reduce the purchasing power and, with it, the aggregate demand and aggregate supply. The lowered demand and supply within the economy result in reduced economic activities, which could have an unintended ripple effect throughout the economy. With lowered demand and supply, unemployment as a result of job cuts in the affected sectors is another unintended consequence of a higher sales tax rate.

On the other hand, lowering sales tax increases the purchasing power of consumers, which in turn increases the aggregate demand and aggregate supply. These increases lead to job creation in various sectors and boost a flourishing economy. With a lower sales tax rate, the GDP growth within the country is guaranteed to bring about a strengthening currency as a result of improved economic conditions.

How the Sales Tax Rate Affects the Economy

In general, the sales tax rate has a negative correlation with the GDP. This negative relationship is shown in the scatterplot graph below of the US state sales tax rate against the GDP.

Source: Georgia Tech Library

At its core, sales tax is a revenue stream for the government. Thus, it can be said that a higher sales tax rate increases government revenues. The increase in government revenues increases government expenditure, hence higher GDP. In this scenario, a conflict arises. This conflicts because sales tax is an extra cost passed on to the consumer.

Thus, in general, the sales tax rate reduces the purchasing power of the consumers.  The reduced purchasing power leads to lesser sales taxes collected by the government, hence lower GDP. As a result of the diminished purchasing power, the consumers will spend less, resulting in a reduction in the aggregate demand within the economy. This reduction in demand leads to a reduction in the economic output hence lower GDP.

On the other hand, a lower sales tax rate returns some of the purchasing power to the consumers. They will spend more of their disposable income hence increasing the aggregate demand and supply within the economy. The increase in demand and supply increase the economic output. Furthermore, spending more implies that the government is bound to collect more revenue in the form of the applicable sales tax. An increase in revenue will increase the government expenditure within the economy, thus increasing the GDP.

How Sales Tax Rate Impacts Currency

The strength of any currency is usually seen as a direct reflection of its economic performance. As already discussed, the sales tax rate is considered to be leading indicators of aggregate demand and aggregate supply within an economy, and by extension, the unemployment levels. An increase in the sales tax rate will result in a drop in the aggregate demand and aggregate supply. This drop leads to increased unemployment levels and consequently reduced GDP. Long term currency traders can take their cue from an increased sales tax rate as an impending loss of strength in the country’s currency.

This loss in the currency’s strength can be brought by the expectations that, in the long run, central banks and the government will employ the use of expansionary fiscal and monetary policies to stimulate a stagnating economy. These policies harm the currency.

On the other hand, lowering the sales tax rate signifies that in the long run, the economy will be stimulated to grow. This growth is brought about by increased demand and supply. For forex traders, a country that is lowering the sales tax rate or entirely removing the sales tax can expect its currency to strengthen. The currency strength is because the traders can anticipate that in the long run, the government and the central banks may be forced to employ deflationary monetary and fiscal policies to avoid an overheating economy. These contractionary policies are good for the country’s currency.

Therefore, it can be expected that an increase in sales tax corresponds to a weakened currency against other pairs while a decrease in the sales tax rate corresponds to the strengthening of the currency.

How Sales Tax Rate News Release Affects The Forex Price Charts

The sales tax rate is not an indicator forex traders consider when placing their trades because it is a low-impact leading indicator. However, it is useful for forex traders to know just how much the impact of this low-level indicator is on the price charts.

In the US, the national government does now impose the sales tax. However, the various local governments set their own local sales tax rates. The detailed list of the US states and the sales tax rate applicable in each state can be found on the Sales Tax Institute website. The data on annual GDP growth can be accessed from the World Bank website. A forecast of the sales tax rate through to 2020 can be found on the Trading Economics website.

Below is a screengrab of the Sales Tax Institute showing the most recent changes sales tax rate in Washington.

In the latest release, Washington state lowered the sales tax rate applicable from 8.0 % to 6.5% in an attempt to alleviate the strain on consumers as a result of the Coronavirus pandemic.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before Washington Sales tax rate release July 1, 2020

As can be seen in the chart above, we have plotted a 20-period Moving Average on a one-hour EUR/USD chart. From the chart, the pair is one a steady uptrend, represented by the candlesticks forming above the Moving Average. Before the news release at 1730GMT, the pair can be seen to be on a recovering uptrend. This uptrend can also be observed in the AUD/USD pair, as shown by the chart below.

AUD/USD: Before Washington Sales tax rate release July 1, 2020

For the NZ/USD, the pair is on a steady downtrend for hours preceding the news release. This trend is shown in the chart below.

NZD/USD: Before Washington Sales tax rate release July 1, 2020

For long-term forex traders, the pattern offers an excellent opportunity to go long on the EUR/USD and AUD/USD pairs while short on NZD/USD, since the prevailing market trends would favor them. Let us now see how the price action responded to the release of the sales tax rate in Washington State.

EUR/USD: After the sales tax rate release July 1, 2020

Lowering the sales tax rate should have a strengthening effect on the USD. However, as shown in the chart above, the news release of the sales tax rate had no impact on the EUR/USD since the uptrend continued with the same magnitude as before. The same trend can be observed on the AUD/USD and NZD/USD pairs since the previous trends were no reversed. This trend is shown in the charts below.

NZD/USD: After the sales tax rate release July 1, 2020

AUD/USD: After the sales tax rate release July 1, 2020

It is evident from the after-news charts that the release of the sales tax rate does not have any impact on the price action. Although it is has a significant impact on the GDP, it is a low-level economic indicator in the forex market. Cheers!

Categories
Forex Basic Strategies

Catch the Breakout with 34 EMA Trading Strategy!

Introduction

Introduction

Introduction

The exponential moving average (EMA) is a specialized chart indicator that tracks the value of an asset over time. It is a sort of weighted moving average (WMA) that provides more weighting or significance to ongoing valuable information. As like the simple moving average, the exponential moving average is utilized to see value patterns over time, and observing a few EMAs at one time is simple to do with moving normal rebinds.

What Is an Exponential Moving Average (EMA)?

An exponential moving normal (EMA) is a kind of moving average (MA) that puts a more noteworthy weight and sharpness on the latest information points. The exponential moving average is likewise alluded to as the exponentially weighted moving average. An exponentially weighted moving average responds more essentially to ongoing value changes than a straightforward moving average (SMA), which applies an equivalent weight to all observations in the period.

In the below image, you can see a naked chart of EURUSD

Now let’s plot the exponential moving average in the chart to see how it looks like

The Formula of Exponential Moving Average (EMA)

EMAToday = 
(ValuetToday ∗ (Smoothing / 1+Days)) + EMAyesterday * (1 - (Smoothing / 1+Days))
Where: EMA = Exponential Moving Average 

While there are numerous potential choices for the smoothing factor, the most widely recognised choice is 2

That gives the latest observation exceeding weight. In the event that the smoothing factor is expanded, later observations have more effect on the EMA.

Calculating the EMA

Calculating the EMA needs one more inspection than the SMA. Assume that you need to utilise 34 days as the number of inspections for the EMA. At that point, you should hold up until the 34th day to gain the SMA. On the 35th day, you would then be able to utilise the SMA from the earlier day as the first EMA for yesterday.

The calculation for the SMA is clear. It is essentially the entirety of the stock’s closing prices during a time span, divided by the number of inspections for that period. For instance, a 34-day SMA is only the entirety of the closing value for the previous 34 trading days, parted by 34.

34 EMA with Trendline Breakout Strategy

By combining the exponential moving average indicator with the price action context, the 34 EMA with trend line breakout forex trading strategy has established. In a decent trending market, this forex trading system is an entirely dependable trading strategy that can pull in plenty of pips effectively into your forex trading account.

To demonstrate it, simply proceed to do a little backtest on previous price history, and you will perceive what I’m discussing after you’ve learnt the trading methods and layouts which are additionally clarified underneath.

Timeframes

The 34 exponential moving average trading technique functions admirably in all timeframes from 5 minutes to weekly charts. The higher time frames can give better trading outcomes. However, it is best to stay on the 1 hour to daily chart as it can give high accuracy trades.

Currency Pair

There are no rules to utilise a currency pair. Still, it is good to utilize a forex pair that often remains in the range, for instance, EURUSD. However, all major and minor forex pairs are free to go with this trading technique.

Buy Entry 

  • First, draw a downward trend line and look for an upward breakout.
  • If the breakout has happened, then the price must be residing above the 34 EMA.
  • After the downward trend breakout has happened, look at the highs of the bullish candlestick that form.
  • The signal candle is the candle with a high that is lower than the last candle’s high. So, if the signal candle’s high is broken, at that point, enter a buy trade immediately. On the other hand, you can put in a buy stop order only a couple of pips over the high of that signal candle so if the price breaks signal candle’s high, your order will be placed.
  • If your buy stop order isn’t executed and the candles keep on making lower highs, move your buy stop order to every lower high candle that structures until the price goes up and executes your trade.
  • It’s always better to place a stop loss below the downward trend line breakout candle.

Sell Entry

  • First, draw an upward trend line and look for a downward breakout.
  • If the breakout has happened, then the price must be residing below the 34 EMA.
  • After the upward trend breakout has happened, look at the lows of the bearish candlestick that form.
  • The signal candle is the candle with a low that is higher than the last candle’s low. So, if the signal candle’s low is broken, at that point, enter a sell trade immediately. On the other hand, you can put in a sell stop order only a couple of pips over the low of that signal candle so if the price breaks signal candle’s low, your order will be placed.
  • If your sell stop order isn’t executed and the candles keep on making higher lows, move your sell stop order to every higher low candle that structures until the price goes down and executes your trade.
  • It’s always better to place a stop loss above the upward trend line breakout candle.

Limitations of the EMA

It is hazy whether or more emphasis ought to be put on the latest days in the timeframe. Numerous traders accept that new information better mirrors the current pattern of the asset. Simultaneously, others feel that overweighting current dates makes a preference that prompts to more bogus alarms.

Correspondingly, the EMA depends completely on authentic information. Numerous economists suspect that business sectors are proficient, which implies that current market value meanwhile mirrors all accessible data. If the markets are actually proficient, utilising authentic information should disclose to us nothing about the upcoming movement of security prices.

Summary

Let’s summarise the 34 exponential moving average with trendline breakout trading strategy:

  • You should look for an impulsive trendline breakout.
  • After the trendline breakout has happened, the price must be above or below the 34 EMA (depending on buy and sell entry).
  • It’s always better to put the stop loss below or above the trendline breakout candle.
  • Better money management can give you a better risk/reward ratio.

Moreover, you need to practice this trading strategy until your win ratio reaches above 60 per cent, and you must have to control your emotion and psychology for better outcomes.

Categories
Crypto Guides

What Is Crypto Arbitrage Trading?

Introduction Arbitrage is known as ARB, and this trading technique is used to facilitate the purchase and sale of similar assets simultaneously. This offers traders the opportunity to gain profits from different price levels. This form of trade acquires profit by leverage market inefficiencies. So if there is a price difference between identical securities in various […]

Introduction Arbitrage is known as ARB, and this trading technique is used to facilitate the purchase and sale of similar assets simultaneously. This offers traders the opportunity to gain profits from different price levels. This form of trade acquires profit by leverage market inefficiencies. So if there is a price difference between identical securities in various […]

Introduction

Arbitrage is known as ARB, and this trading technique is used to facilitate the purchase and sale of similar assets simultaneously. This offers traders the opportunity to gain profits from different price levels. This form of trade acquires profit by leverage market inefficiencies. So if there is a price difference between identical securities in various markets, we get winning opportunities. This is a great method to gain risk-free profit from discrepancies in prices. While this method comes to determining the ideal arbitrage opportunities and implementing it efficiently is quite challenging.

There are two types of crypto arbitrage:

Regular Arbitrage

It refers to purchasing and buying the same digital assets on various exchanges with considerable price differences.

Triangular Arbitrage

It encompasses price differences between three currencies on the same exchange. Traders to leverage the price difference through various conversions.

Although both approaches can be highly profitable, there are more challenges to identify opportunities for triangular arbitrage. Moreover, a large volume of trading on a similar exchange may qualify the trader for competitive fees, resulting in a positive impact on the profits.

Arbitrage Trading in the Crypto Market

While the concept remains the same, it involves different assets. There are hundreds of exchanges operating across the globe that allow people to purchase cryptocurrencies. Cryptocurrency prices are constantly changing across different exchanges. There are many social, political, and economic reasons that contribute to these changes. Arbitrage trading in this landscape is quite straightforward and depends on determining profitable paths.

Identifying the Right Path in Arbitrage Trading Paths

Arbitrage trading is extremely sensitive to time. Variations in the prices are temporary in nature. Potential trading profits generally stand between 1% and 6% per transaction. Therefore, traders need to leverage the right arbitrage software and tools to scan and monitor the market in real-time.

The opportunity for the cryptocurrency is calculated by determining the overlap between the lowest ask prices and the highest bid prices. So when the price of the bid is higher in one exchange than the asking price on another crypto exchange, this is designed as an arbitrage opportunity. Similar to any other method of crypto trading, there are certain risks associated with it. But people have created different strategies to mitigate the risks as much as possible.

Advantages of Crypto Arbitrage Trading

💰 With the right profit, it is a credible way to boost the capital. Similarly, it is all about speed, and you will make money quicker with regular trades.

💰 Most exchanges do not share and operate on their own. Typically, cryptocurrencies experience many rapid rises and sudden falls, resulting in price disparities and profitable arbitrage potentials.

💰 There are over 200 exchanges where you can purchase and sell cryptocurrencies. This means there are tons of profitable arbitrage opportunities.

Contrary to the market speculations, crypto arbitrage has witnessed massive success. It has proven a way to make some extra money without putting much effort. Considering that digital money is not subjected to social influences, and no-one controls them, people are highly inclined towards their potentials to increase in value in the near future.

Categories
Forex Fundamental Analysis

What Is Business Confidence & How Does Its News Release Impact The Forex Market?

Introduction Business Confidence is the most important leading indicator for economic growth that is closely watched by traders, investors, economists, and even policymakers. Business Confidence survey provides the take of the business sector on their near-term prospects that helps us understand what the oncoming quarterly conditions will be.  Business Confidence Indexes are crucial for fundamental […]

Introduction Business Confidence is the most important leading indicator for economic growth that is closely watched by traders, investors, economists, and even policymakers. Business Confidence survey provides the take of the business sector on their near-term prospects that helps us understand what the oncoming quarterly conditions will be.  Business Confidence Indexes are crucial for fundamental […]

Introduction

Business Confidence is the most important leading indicator for economic growth that is closely watched by traders, investors, economists, and even policymakers. Business Confidence survey provides the take of the business sector on their near-term prospects that helps us understand what the oncoming quarterly conditions will be.  Business Confidence Indexes are crucial for fundamental analysis.

What is Business Confidence?

The economy can be broadly categorized as the private and public sectors. The public sector involves all the government and central bank-related offices and industries. The private sector is composed of two main participants: Businesses and Consumers. In the United States, Businesses make up 34% of the private sector. The business sector is again broadly divided based on output as the Manufacturing Industry and Services Industry. The Manufacturing Sector is primarily related to industries that manufacture and sell physical goods. The Services Sector deals with the Services that are essentially non-physical and are challenging to quantify.

The Manufacturing Sector makes up 20% of the GDP, and the remainder 80% is attributed to the Services Sector. Since the business industry is the real economic wealth of the nation, it is the primary source of the Gross Domestic Product. Hence, Business Confidence Indexes can give us an excellent assessment of the upcoming economic trends in the Industry.

Business Confidence Indexes are based on surveys taken from some of the largest industries in both the manufacturing and services sector, asking them about their current business conditions and their outlook about business activity in the coming 2-3 months.

In the US, the publishing of the Manufacturing Purchasing Manager’s Index is done by the institute of supply management every month. It is a survey of about 400 largest manufacturers in the United States of America. It also publishes a Non-Manufacturing Index, which is the same index associated with the Services Industry.

Note

The approach may vary amongst the surveying companies. For example, the National Australia Bank Business Confidence Index is computed on a net balance basis.  In it, the surveyed companies are asked whether there is a positive or negative outlook. Their question would be per se, “Excluding normal seasonal changes, how do you expect business conditions of your industry to change in the next three months?”. The result is calculated as positive, less negative responses, which is the net balance.

How can Business Confidence numbers be used for analysis?

The question that is generally asked in the study is related to MOM changes in the Business Activity, New Orders, Production, Employment, Deliveries, and Inventories with equal weightage.

The Manufacturing PMI and Services NMI ratings lie within the range of 0-100. A score above 50 implies an expansion in the economic activity, and a score below 50 implies contraction. Although across the globe, different survey companies follow different metrics, like the NAB Business Confidence Index follows a zero-based scale, where a score above zero indicates positive sentiment and less than indicates a bearish sentiment.

Business Confidence or Business Sentiment is analogous to Consumer Sentiment, except that the figures are more fact-oriented, as it takes into account the business inventory count, estimates, current production levels, etc. It is asking the business owners about their outlook on the economic prospects in the short-term.

Business Confidence Surveys are very important for policymakers also. They use these statistics to intervene by fiscal and monetary policy reforms to combat deflationary threats, if any.

Impact on Currency

Historically, in the United States, PMI and NMI have predicted GDP growth with 85% accuracy 12-months ahead of time, as illustrated in the below ISM PMI plot against quarterly Real GDP growth. The correlation of business confidence with economic growth is strong, and hence, it is an important leading economic indicator.

Market volatility is sensitive to Business Confidence Indexes. Significant moves in the index cause volatility in the market. It is a high impact leading indicator. High business confidence translates to improving economic prospects, which will translate to higher GDP prints and currency appreciation.

Business Confidence Announcement – Impact due to news release

Till now, we have comprehended the Business Confidence economic indicator. It is essentially used to monitor output growth and to anticipate turning points in economic activity. Numbers above 100 suggests increased confidence in near future business performance, and numbers below 100 indicate pessimism towards future performance. Therefore, investors give a reasonable amount of importance to the data while analyzing a currency.

In today’s lesson, we will look at the NAB Business Confidence Index that is a key measure of Busines Confidence in Australia, published monthly and quarterly by National Australia Bank (NAB). The survey is that is carried out covers hundreds of Australian companies and few banks which measures business conditions in the country. A positive reading can be interpreted as good for the currency and equities, while a negative reading can be interpreted as a warning sign to the government, which leads to a build-up of bearish positions in the currency.

AUD/USD | Before the announcement

We shall start with the USD/JPY pair to observe the change in volatility due to the news release. The above price chart shows the state of the market before the news announcement, where we see the market is in a strong downtrend and the price currently is at the lowest point. We need to wait for a price retracement to the ‘resistance’ to take a ‘sell’ position in the currency pair. Until then, we will see what impact the news makes on the chart.

AUD/USD | After the announcement

After the news announcement, the price moves lower and volatility increases to the downside. The Business Confidence reading was better than last time, but it was good enough to drive the price higher. Therefore, traders sold Australian dollars soon after the release and weakened the currency. In order to take a ‘sell’ trade, as mentioned earlier, we need a price retracement before we can join the trend.

AUD/NZD | Before the announcement

AUD/NZD | After the announcement

The above images represent the AUD/NZD currency pair, where we notice a resilient move to the downside a few minutes before the news announcement. Currently, the price is at a point from where the market had reversed earlier to the upside. Thus, this could serve as a strong ‘support’ area from where we can again expect buying pressure. Depending on the change in volatility due to the news release, we will take an appropriate position.

After the news announcement, the price sharply drops, and we witness a big fall in the market. We can ascertain that the market was a much better Business Confidence reading, which is why traders went ‘short’ in the currency. However, this was immediately retracted by a bullish candle that recovered all the losses.

EUR/AUD | Before the announcement

EUR/AUD | After the announcement

The above images belong to the EUR/AUD currency pair. We can see that before the news release, the market is in a strong uptrend signifying the great amount of weakness in the Australian dollar since it is positioned at the right-hand side of the currency. Since it is an uptrend, we will look to buy the currency pair after the price retraces a ‘support’ or ‘demand’ area.

After the news release, the market continues to move higher, and the ‘news candle’ closes with some bullishness. We observe a similar impact of the Business Confidence numbers announcement on this pair as well, which initially weakens the currency but finally strengthens it. All the best!

Categories
Crypto Guides

What should we know about DEXs & its benefits?

Introduction A decentralized exchange or DEX is referred to as a platform that eliminates the middlemen and allows traders to trade with each other directly. This direct approach allows traders to control their funds instead of giving them to exchange providers where trades are performed via smart contracts. These exchanges are hosted on a collected […]

Introduction A decentralized exchange or DEX is referred to as a platform that eliminates the middlemen and allows traders to trade with each other directly. This direct approach allows traders to control their funds instead of giving them to exchange providers where trades are performed via smart contracts. These exchanges are hosted on a collected […]

Introduction

A decentralized exchange or DEX is referred to as a platform that eliminates the middlemen and allows traders to trade with each other directly. This direct approach allows traders to control their funds instead of giving them to exchange providers where trades are performed via smart contracts.

These exchanges are hosted on a collected ecosystem of distributed nodes. This not only reduces the hacking risk but also addresses the problem of downtime that limits the trading ability. These exchanges are designed to extend an open, transparent network that makes crypto trading accessible to all.

What Makes DEX Different from Centralized Exchanges?

A Centralized exchange is also an online platform where people can buy and sell digital currency, but they use a third-party to authenticate and execute the transactions. This needs the buyers and sellers to entrust their funds to exchanges and allow them to safely complete the transactions.

These exchanges are known to be easy to use and enable traders to buy digital currencies with cryptocurrencies or fiat. They offer a streamlined entry point to the market and cover the majority of cryptocurrency trading.

Benefits of DEX

Following are the reasons we should think about trading in decentralized exchanges:

Control

In centralized exchanges, traders do not tend to have full control over their funds, limiting the trading potentials. Recently, the event known as Proof of Keys was run by centralized exchanges to ensure that exchanges could generate more profits on deposits, the same way a bank works.

This limited the users’ rights to withdraw all their funds in a single day.  The open nature of DEXs implies that our money remains in our control. Users get to withdraw their amount whenever they intend to.

Security

Centralized exchanges collect a massive amount of money from investors. This makes these exchanges the prime target of cybercriminals. Bitstamp and popular exchange based on Slovenia was hacked in 2015.

The hackers got access to the hot wallet and stole 19,000 Bitcoins, which was worth $5 million. And with the increasing number of trading in cryptocurrencies, centralized exchanges are becoming more vulnerable to hackers. Decentralized exchanges offer more security and, over the years, have become more common choices for crypto trading.

Privacy

Centralized exchanges are categorized as MSPs or Money Service Providers. This implies that users have to undergo certain anti-money laundering (AML) and Know-your-customer (KYC) processes. But people are often resistant to providing their personal information to third parties. This is because they end up having no control over what will happen to the data.

Decentralized exchanges, on the other hand, are not controlled by a central authority. Therefore, we do not need to register other than having a valid wallet address. Decentralized exchanges still remain a rather new concept in this ecosystem. But traders are rapidly comprehending its advantages over centralized exchanges.

Bottom line

Many new DEXs are coming in the market with better features, security options, and ease of use. When assessing these platforms, ensure to consider important factors such as security features, trading volume, currencies available, transaction fees, sign-up process, etc.

Categories
Forex Basic Strategies

Let’s Learn Some Momentum Trading Techniques Using The Awesome Oscillator

Introduction

Introduction

Introduction

Bill Williams was the one to first developed the Awesome Oscillator, and it essentially indicates the market momentum. On the other hand, RSI (Relative Strength Index) is a trading indicator that provides an idea of the overbought and oversold zone. In the Awesome Oscillator based trading strategy, we will use the Awesome Oscillator to determine the market direction and use the RSI to increase the probability by eliminating unwanted market movements.

The Awesome Oscillator

Bill Williams has created the Awesome Oscillators to identify the market momentum of a currency pair. Besides the forex market, this trading strategy works well in all financial markets, including the stock, indices, cryptocurrencies, and commodities. The elements of this trading indicator are pointed out in the image below.

  • The first element of Awesome Oscillator is the 34 period’s simple moving average indicating the median of the last 34 candlesticks.
  • 5-period simple moving averages indicate the median of the last five candlesticks.
  • Histogram and Zero Line.

Let’s have a look at how these elements represent in a market:

  • When the Awesome Oscillator is below the zero lines, we should focus on the short term moving average. If the 5 SMA moves below the 34 SMA, it will indicate a downtrend.
  • If the position of Awesome Oscillator is above the zero lines, we can consider the trend as an uptrend.
  • If the Awesome Oscillator histogram moves to the green zone, we can consider the candlestick that moved higher than the previous candle.
  • We will consider the histogram at the red zone that is smaller than the previous candlestick.
  • The rules mentioned above are not exact buying and selling signals. Instead, it provides a trading opportunity where traders should consider other confirmations.

We can also identify the divergence between the price and the Awesome Oscillator to find a trading opportunity.

If you see the price of a currency pair to make a lower low from the left side to the right side, but the Awesome Oscillator makes the opposite, you can find a potential divergence. In divergence, the Awesome Oscillator should create two peaks above the zero lines considering the market condition.

Awesome Oscillator with RSI Trading Strategy

In this trading strategy, we will combine the Awesome Oscillator to identify the market momentum and the Relative Strength Index to get the overbought or oversold zone. If we can combine these accurately, we can make a trading strategy that can provide a good profit.

This strategy works very well in most of the currency pairs and time frames. Therefore, we can take swing trade, day trade, and even position trade. Besides the technical formation using these two indicators, we will use price action to enter the trade. Moreover, we will use stop loss and take profit as a risk management tool before taking the trading decisions.

Now let’s move to the trading strategy. In the image below, we can see the visual representation of how to trade using the Awesome Oscillator RSI trading strategy. The rules for buying and selling of a currency pair are mentioned below:

Buy Trade Setup

  • At first, the RSI should be below the 30 levels and point to an upward reversal.
  • When the RSI moves above the 30 levels, we will consider buying signals only if the Awesome Oscillator shows a green bar.
  • When the green bar appears, we can place a buy stop about 2- 5 pips above the current candlestick and allow the price to take our trade automatically.
  • Sometimes RSI might signal 1-2 candlestick later than the Awesome Oscillator. In that case, we can consider trading entry by taking a smaller lot.

Sell Trade Setup

  • At first, the RSI should be above the 70 levels and point to a downward reversal.
  • When the RSI moves below the 70 levels, we will consider selling signals only if the Awesome Oscillator shows a red bar.
  • When the red bar appears, we can place a sell stop about 2- 5 pips below the current candlestick and allow the price to take our trade automatically.
  • Sometimes RSI might signal 1-2 candlestick later than the Awesome Oscillator. In that case, we can consider trading entry by taking a smaller lot.

In this strategy, we did not consider the histogram crossing zero lines. However, suppose you want to increase the probability of your trading. You can look at the zero line cross as a further trading condition that will indicate the overbought and oversold zone.

Stop Loss And Take Profit Idea

The stop loss and take profit idea is a vital element of any trading strategy. There are many ways to set take profit and stop-loss depending on the market swing low and Sewing high. In a buy trade setup, the stop loss should be below the recent swing low with 10 to 15 pips buffer. Similarly, in a sell trade, the stop loss should be above the recent swing high with 10 to 15 pips buffer.

Another idea of a stop-loss plan is to set it at 1.5X ATR. It will indicate the actual volatility of the currency pair that you are trading. Besides the stop-loss setting, take profits can be set with a multiple-level approach. You can hold your position until the Awesome Oscillator crossed above or below the zero lines. Later on, you can monitor the momentum of the price to identify the next take profit level.

Summary

Let’s summarise the awesome oscillator and RSI trading strategy:

  • If the RSI is above the 70 levels and points downward movement, we will consider selling setups only, and if the RSI starts to move from the 30 levels, we will consider buying only.
  • To enter the trade, we can take a pending order above or below the previous candle if other conditions meet.
  • The stop loss should be below the swing low or swing high with some buffer or at 1.5 X ATR.
  • For setting take profit, you can hold the trade until the Awesome Oscillator crosses above or below the zero lines. Moreover, if the market conditions allow you to extend the take profit.

In every trading strategy, trade management is an essential tool that a trader should not ignore. In the forex market, we anticipate the price based on our technical and fundamental analysis. As we trade on probabilities, there will be conditions where the market will hit our stop loss. Therefore, strong trade management is the only way to keep your balance steady growth.

Categories
Forex Fundamental Analysis

GDP from Construction – Exploring The Fundamental Forex Driver

Introduction

Introduction

Introduction

Construction is the very first phase of an expected economic growth, which is more evident in the developing economies compared to the developed economies. New buildings, infrastructures, renovations are an indication of an expanding economy. GDP from construction is an important economic indicator to assess financial health and future economic expansion trends.

Construction

It is a part of the Secondary (Industry) Sector of an economy.  Construction refers to building and infrastructure works in all areas. The Construction Sector includes all physical making of infrastructures like bridges, transportation systems (roads, railways), dams, irrigation systems, naval ports, airports, pipelines, apartments, buildings, houses, commercial buildings, corporate structures, etc.

How can the GDP from Construction numbers be used for analysis?

The Construction Industry’s Economic Output is a significant economic indicator that is closely watched by both the private and public sectors. It is especially crucial for developing economies like China, as it is their main contributor to GDP. The GDP from Construction figures assist Central Authorities in policy reforms & economic-decisions.

Growth is essentially a process of invention of new things and discarding the old inefficient ones. Construction, in this sense, is nothing but that. It involves the erection of new buildings, renovations, expansions of the infrastructures that are currently existing. Increased GDP from Construction involves more people getting employed, better wages in the sector, and the extra demand for raw materials, etc. Hence we can say that the act of construction itself has a ripple effect on the economy.

Secondly, the GDP from the construction of corporate infrastructures or commercial structures implies that the constructed structures will be used for further economic activities. For example, a company doubling its company size is planning to double its staff and correspondingly the business that it generates. Hence, GDP from Construction figures improvement is indicative of an improvement in many other sectors.

All these improvements correlated with GDP overall also stimulate consumer confidence and encourages consumer spending, which further stimulates the economy and boosts growth. The Secondary Sector is composed of Industrial Output and Construction Output. For most countries, Industrial Output will be the dominant contributor to the GDP from the Secondary Sector.

We analyze GDP from Construction to understand the associated implications that more economic growth will be followed. For example, the construction of new power plants, or manufacturing industries, would show higher GDP from Construction this year. But the subsequent years, we will see higher GDP due to the newly added Industrial Outputs.

Hence, GDP from Construction figures can be used to assess future economic growth. Everything that is constructed is most likely to bring revenue through its usage in the future. Hence, GDP from Construction improvements can be a leading indicator for further improvements in GDP down the line.

The global Construction Industry makes up 13% of the World GDP, which is more than the Agriculture sector, which is about 7% of the World GDP. It means, overall, the global economy is improving at a rapid pace, with the Industrialization of many economies. It is forecasted to grow to 15% in 2020. China, India, and Japan are flourishing in this era with rapid Industrialization and achieving high GDP Growth Rates ranging from 5-20% in recent years.

GDP from construction can be used by investors to know which countries are transitioning from Developing Economies to Developed Economies. As GDP from Construction increases, it would be followed by GDP growth through increased Industrialization. Further down the line, the economies would transition to the services Sector as their main contributor to GDP.

Impact on Currency

The GDP from Construction is not a high impact indicator when compared to measures like GDP and GDP Growth Rates. GDP from construction does not portray the entire picture of the economy. However, it can be an essential tool for the Central Authorities to keep track of Construction Sector performance and its relative implications over the economy.

What construction is occurring can also serve as an indication of the economy type going to be built over the coming years. But, for the international currency markets, it does not serve as a useful indicator. It is a proportional and lagging indicator. Higher GDP from Construction is great for the economy and its corresponding currency, and vice-versa.

Sources of GDP from Construction

For the US, the corresponding reports are available here – GDP -BEA, GDP by Industry – BEA, and Construction – GDP. World Bank also maintains the Construction and Industrial Sector as a percentage of GDP on its official website, which can be found here – Industrial Sector (including construction) – World % of GDP. GDP from construction can also be found here – GDP Construction – World – Trading Economics.

GDP from Construction Announcement – Impact due to news release

The construction sector is one of the fastest-growing sectors today that has a great impact on the economy of any nation. Construction is one crucial sector that contributes to the economic growth of a country. The government and other regulatory authorities have always shown interest in this segment by investing significantly in various parts of the sector. Naturally, it will contribute to the GDP of a country and influence the reading released quarterly and monthly. When talking about the fundamental analysis of a currency or stock, investors make investment decisions based on the GDP and not on contributions made by individual sectors.

Now let’s analyze the impact of GDP on different pairs and witness the change in volatility due to the news release. For this purpose, we have gathered the latest GDP data of Japan, where the below image shows the fourth quarter’s GDP data released in March.

AUD/JPY | Before the announcement

We will first look at the AUD/JPY currency pair to observe the impact of GDP announcement on the Japanese Yen. In the above picture, we see the market has crashed lower due to some other news release, and currently, the price is at its lowest point. This means there is a great amount of selling pressure in the market, or sellers are dominant. In such a market situation, it is advised not to carry any position in the market before the news release.

AUD/JPY | After the announcement

After the news announcement, the price sharply moves higher and closes as a long bullish candle. This means traders sold Japanese Yen soon after the news release as it was below expectations and lower than the previous quarter. The volatility did increase to the upside for a while, but it did not sustain as the Japanese Yen was showing a lot of strength. One should trade after the market shows signs of trend continuation or reversal and not just based on the GDP data.

GBP/JPY | Before the announcement

GBP/JPY | After the announcement

The above images represent the GBP/JPY currency pair, where we see that the market has strongly moved lower as indicated by two big bearish candles before the news announcement. This means the Japanese Yen has gotten strong recently due to some other fundamental reason, and we cannot ascertain if this will continue or not. As volatility is very high, one should not take a position in the currency before the news release.

After the news announcement, volatility spikes to the upside, and the ‘news candle’ closes with a great amount of bullishness. Even though the price moves higher by a lot, it did not go above the moving average. The market has reacted adversely to the news announcement as the GDP was lower than last time and also below what was forecasted. If the price does cross moving average, this means the downtrend is still intact.

NZD/JPY | Before the announcement

NZD/JPY | After the announcement

The above pictures are that of the NZD/JPY currency pair, where we see a major crash in the market before the news announcement, which is visible in the first image. This pair also shows similar characteristics as in the above currency pairs, where the Japanese Yen has strengthened greatly. Ideally, we should be looking to sell the currency pair after a suitable price retracement.

After the news announcement, the market goes higher so much that it almost retraces the previous bearish candle, resulting in some weakness in the Japanese Yen. As the GDP data was weak, it brought disappointment in the market where traders sold the Japanese Yen and bought the base currency. Cheers!

Categories
Forex Assets

How Expensive Is It To Trade The NZD/MYR Currency Pair

Introduction

Introduction

Introduction

The abbreviation of NZD/MYR is the New Zealand Dollar paired with the Malaysian Ringgit. Here, NZD is the official currency of New Zealand and many others like the Pitcairn Islands and the Cook Islands. It is also to be the tenth most traded currency in the Foreign exchange market. MYR stands for the Malaysian Ringgit, and it is the official currency of Malaysia, which is further divided into 100 sens.

Understanding NZD/MYR

In NZD/MYR currency pairs, NZD is the base currency (First Currency), and the MYR is the quote currency (Second Currency). In the foreign exchange market, while we sell the currency pair, we always trade the base currency and simultaneously purchase the quote currency and vice versa. The market value of NZD/MYR helps us to understand the intensity of MYR against the NZD. So if the exchange value for the pair NZD/MYR is 2.7977, it means we need 2.7977 MYR to buy 1 NZD.

Spread

Foreign brokers hold two different prices for currency pairs: the ask and bid price. The ask (offer) price is the price in which we sell an asset, and bid(purchase) is the cost at which we buy it. The difference between the ask-bid price is called the spread. Below are the spread values for the NZD/MYR Forex pair.

ECN: 38 pips | STP: 43 pips

Fees

A Fee is the costs that we tradesmen pay to the broker for initiating a trade. This fee differs on the type of broker (ECN/STP) we use.

Slippage

When we want to achieve a trade at an appropriate price, but instead, if the trade gets fulfilled at a distinctive price, we call that distinction as Slippage. The Slippage can occur at any point in time, but often we can counter a volatile market.

Trading Range in NZD/MYR

As a trader, our main interest should be to prevent losses and minimize risks. The trading range here will ascertain the amount of income we will make or lose within a timeframe. ATR is a technical indicator that suggests the price movement in a currency pair. In the lower table, we have the interpretation of the minimum, average, and maximum pip movement in a currency pair. We will assess it merely by using the ATR indicator merged with 200-period SMA.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

NZD/MYR Cost as a Percent of the Trading Range

The price of trade differs on the type of brokers and varies based on the volatility of the market. The full cost of trade involves fees, spread, and sometimes Slippage if the volatility is higher.

ECN Model Account

Spread = 38 | Slippage = 5 |Trading fee = 8

Total cost = Slippage + Spread + Trading Fee = 5 + 38 + 8 = 51 

STP Model Account

Spread = 43 | Slippage = 5 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 5 + 43 + 0 = 48

The Ideal way to trade the NZD/MYR

With the assistance of the above tables, let us estimate these two factors to the trade the NZD/MYR pair. Volatility and cost are two aspects a trader must contemplate for trading any currency pair in the foreign exchange market.

In several timeframes, we can see the pip movement is tremendously elevated between the min volatility and the avg volatility. As a day trader, the objective is to attain profits from the pip variation of the market. It becomes challenging to make profits from the market if there is no variation in the pip value. Hence, trading this pair can be considered both profitable and risky. The answer to the question if trading this pair is expensive, is yes.

Trading using Limit Orders (STP Account Model)

To decline our expenses of trade, we can place the trades using limit orders as a substitute for market orders. In doing so, we can avoid the Slippage that will help lower the total cost of the trade. An instance of a Limit order is given below using the STP model.

Spread = 43 | Slippage = 0 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 0 + 43 + 0 = 43

Categories
Forex Fundamental Analysis

What Is ‘GDP from Mining’ and What Should You Know About This Economic Indicator?

Introduction

Introduction

Introduction

The tracking of GDP from Mining can give us many economic conclusions. GDP from Mining’s importance comes from the fact that the final output of Mining Production is the primary input for many industries. Therefore, it is the core part of the business activity related to many industries.

Fluctuations in the GDP from Mining data will eventually translate to all the industries that are dependent on Mined resources for their production process. This effect can be many-fold, and hence it is a vital economic indicator for investors, economists, and government authorities.

Mining Production

It refers to the entire process of searching for, extraction, beneficiation (purification), and processing of naturally occurring minerals from the Earth. Minerals that are typically mined can be Coal, metals like Copper, Iron, Zinc, or industrial minerals like limestone, potash, and other crushed rocks.

Coal is considered as one of the primary sources of energy across the world. Metals like Iron, Bauxite, and Copper have a wide range of usage in various industries. Limestone and other rocks are being used in cement industries, which contribute a lot to the construction and related industries.

How can the GDP from Mining numbers be used for analysis?

The developing economies are primarily achieving their growth through exports of essential commodities like Food, Minerals, etc. For example, Australia primarily exports Iron Ore and Coal, due to which the economic growth and currency value are tightly linked to the Mining of these natural resources. When the GDP from Mining starts to recede, currency devaluation and slowing economic growth are inevitable.

Developed economies are more resilient to changes in GDP from Mining, as their growth is tied to multiple sectors and are not heavily dependent on any individual sector. The availability of modern technology and skilled labor contribute to the GDP from Mining figures positively. Mining is a labor-intensive task. Hence, it is obvious that Mining lies at the heart of all industrial activities. A decrease in GDP from Mining can adversely affect all the dependent industries, and correspondingly the effects will pass onto unemployment, layoffs, wages, economic slowdown, etc.

Impact on Currency

The GDP from Mining is a low impact indicator, as the Mining Production reports are published monthly by the Federal Reserve in the United States that are leading indicators. It is a proportional and lagging indicator. Hence, changes in GDP from Mining would have already been priced into the market through monthly Mining Production reports.

Also, GDP from Mining numbers does not give us a complete picture of the economy. However, it can be an important tool for the Central Authorities to keep track of the performance of the Mining Sector and its implications for the economy. As established, the Mining Sector is a significant contributor, due to many industries dependent on its output.

Hence, changes in this sector widely affect the overall economic health, and all the dependent industries therein. In general, Higher GDP from Mining is good for the economy and its currency, and vice-versa.

Sources of GDP from Mining

For the US, the BEA reports are available here – GDP -BEA & GDP by Industry – BEA. For the world data below, two are useful references – Mineral Rents  – World % of GDP & GDP from Mining – Trading Economics. The monthly Mining Production statistics can be found on the official website of the Federal Reserve for the United States, which can be found here – G7 Industrial Production and Capacity Utilization

GDP from Mining Announcement – Impact due to news release

Mining is an extremely important economic activity in any country. The benefits of Mining have been widely promoted by the industry and institutions such as the World Bank. In several low and middle-income countries rich in non-fuel resources, Mining makes significant contributions to the national economic development as measured by the Mining Contribution Index (MCI-Wr).

The contribution of Mining and Minerals to GDP reached a maximum at the peak of the mining boom in 2011. Now, the figures indicate a decline in the Mining’s contribution but are still considerably higher than before. This is one of the reasons why it not a major determinant of economic growth. Thus, investors do not give importance to the mining data when it comes to investing in an economy.

In today’s lesson, we will try to examine the impact of GDP on various currency pairs and see the volatility change due to the news release. The below snapshot shows the previous, predicted, and actual GDP data of Switzerland released in the month of March. As this is the quarter on quarter GDP data, we can expect moderate to high volatility in the currency during the announcement.

GBP/CHF | Before the announcement

Let’s review the GBP/CHF currency pair to observe the impact of the news release. We see that the market has made a ‘descending triangle‘ candlestick pattern before the news announcement, which essentially is a trend continuation pattern. Depending on the impact of the news release, we will take a suitable position in the currency pair.

GBP/CHF | After the announcement:

After the news announcement, we see a sudden surge in the price indicating bullishness in the currency. The bullish ‘news candle’ suggests a negative reaction to the GDP data as it was on expected lines with no major increase or decrease. The market appears to have broken above the ‘descending triangle’ pattern, which is why we should need to wait for clear signs from the market with respect to the direction it is heading.  

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images represent the CAD/CHF currency pair, where we see that the market seems to be in a downward channel before the news announcement with the price at the bottom of the channel. Since the impact of GDP is high, there is a high chance that the news release could result in a break down if the data comes out to be weak for the economy. Therefore we need to wait for confirmation from the market before we can take a trade.

After the news release, the price moves higher and volatility increases on the upside. Since the GDP data was pretty much equal to the forecasted number, it did not result in bullishness in the currency, and it ultimately weakened the currency for a while. One who takes a ‘buy’ trade should take profits at the top of the channel and not wait for too long. 

AUD/CHF | Before the announcement

AUD/CHF | After the announcement

The above charts belong to the AUD/CHF currency pair, where we see that before the news announcement, the market is moving within a ‘range.’ This means the price is not moving in any single direction, which can make trading a bit challenging in such an environment. The news release can effectively move the market in any direction, which is why we need to wait for the announcement to happen in order to get clarity.

After the news release, the price moves lower, but this gets immediately bought, and the ‘news candle’ closes with a wick on the bottom. We witness buying pressure in the market soon after the news release. we to be cautious before taking a ‘long’ position since the price is at the top of the ‘range.’ All the best!

Categories
Forex Basic Strategies

Forex Momentum Trading With The Help of RSI & MA Indicators

Introduction

Introduction

Introduction

If you are a trader, you should have some good ideas about the forex market. After having the basic knowledge and related stuff, you, as a trader, need to find a profitable forex strategy. After that, you need to find a proven track record of your strategy.

Therefore, you can easily implement it and start earning through your trades within a short time. However, it would help if you kept in mind that the forex is an uncertain and unstable trading market. Therefore, you must have a profitable and excellent trading strategy if you want to sustain here.

If you search on the internet, you will find thousands of proven strategies out there. The good thing is that experienced traders or mathematicians have created most of the strategies. You have to choose the best one for you.

However, the momentum-based strategy is profitable and famous too. Lots of traders are using this one as their primary trading strategy. However, if you find another suitable strategy, you can go for it besides the momentum trading strategy to boost your probability.

What is The Momentum Trading Strategy?

Momentum is a term that refers to buying a currency pair when it goes up and selling when it goes down. It is a very popular trading strategy among most professional traders.

When a big volume starts a movement, it creates a reliable market trend. Therefore, market momentum will be towards the trend that we can identify by reading the chart. In a strong bullish momentum, the price will aggressively create higher highs with a constant speed.

Similarly, in a strong bearish momentum, the price will create lower lows. After identifying the market momentum, we will move to one timeframe lower to take the trade.

However, forex trading always has an uncertain environment. No one can guarantee a 100% movement of price. However, when the market is in a trend, we can make a decent profit by using the momentum-based trading strategy.

Momentum Trading Strategy

Here is the most important part that you are looking for passionately. You will find the best momentum trading strategy for both the newbie and experienced traders. This guideline will answer all your queries.

Let’s have a look at the step by step approach of the momentum trading strategy.

Select the Currency Pair

First, you need to determine the price change from the last three months of some selected currency pairs. Also, don’t forget to do this calculation for the weekend. Once you find the last three months’ price changes, you need to research the last 13 weeks’ price movement.

In terms of currency pair, there is no clear indication of how much pair you should choose. Nevertheless, the ideal and wise option is to go through seven major currency pairs and cross pairs. It is better to put less importance on exotic pairs as they are risky because of their volatility.

After calculating the last three months’ price changes, it’s time to select the currency pair that moved much more than the others. As it is a proven profitable trading strategy, a currency pair can provide a 17% average annual profit. As per the last seven years of market observation, three months’ price has become a reliable factor while selecting the momentum-based strategy.

Entry

As we have a predetermined trend, you need to implement a trend continuation trading strategy to improve your overall trading result better. Moreover, many trend continuation strategies are there for you; you need to select a suitable one. In this trading strategy, we will use 20 Dynamic Exponential Moving Average (EMA) as a trend continuation indicator.

You should enter the trade towards the direction based on market momentum once the price rejects the 20 EMA with its body. Moreover, there is a good and effective solution for determining the trends’ strength: RSI. RSI is a good indicator, as well.

RSI stands for the Relative Strength Index. It has a 0-100 levels indicator. If the price goes below 30 levels, the price is likely to reverse towards the upside. On the other hand, if the price moves above the 70 RSI, it is likely to move down.

For a sell trade follow the following condition:

  • The price is moving towards the direction set in the market momentum.
  • The RSI is moving down from the 70 or 80 levels.
  • Price rejects the 20 EMA with a reversal candlestick formation.

Similarly, for a buy trade follow the following condition:

  • The price is moving towards the direction set in the market momentum.
  • The RSI is moving up from the 20 to 30 levels.
  • Price rejects the 20 EMA with a reversal candlestick formation.

Later on, enter the trade as soon as the candle closes above or below the dynamic level.

Stop Loss and Take Profit

After taking a trade, you need to determine the strength of the trend. You can set the stop loss 15 pips above or below the reversal candle or 20 days Average True Range (ATR).

To set the take profit, you need to determine how strong the running trend is. Moreover, impulsive pressure will indicate that the price may break the near-term support or resistance level. In that case, you can increase your take profit level. Alternatively, you can book some profit once you see the price stalling at the support or resistance levels.

Summary

In a nutshell, the summary of the entire guideline is here-

  • Find out the direction by calculating the last 13 weeks of market momentum.
  • Follow the market direction using a dynamic and hourly candle level of 20 EMA with a proper candlestick pattern.
  • According to the price action or ATR, set your stop-loss.
  • Following the market movement, you can set your take profit.

In this momentum trading strategy, trade management is the most challenging part as it requires to follow the market trend strongly. Since we know the forex market is uncertain, we should follow the market trend robustly. Moreover, you should follow an appropriate money management system that goes with your personality, and for each trade, it is wise to take less than 2% risk.

Categories
Forex Basic Strategies

Combining Moving Averages with Parabolic SAR To Generate Accurate Trading Signals

Introduction

Introduction

Introduction

Trend trading is a great way to earn money from the forex market. Any retail trading strategy based on a trend continuation pattern works well when it moves within a trend.  Therefore, in this trading strategy, we will take trades from minor corrections using the parabolic SAR towards the trend.

Furthermore, we will use a 100-period exponential moving average to determine the trend. If the price is trading above the 100 exponential moving average, we will consider the trend as an uptrend. If the price is trading below the 100-period exponential moving average, it will consider it a downtrend. We will follow a simple logic by considering buying trades when the market moves up and considering sell trades when the market is moving to drown.

However, there are no specific rules about the period of your moving average. Some traders are comfortable with 100 EMA, while some traders are compatible with 20 EMA or SMA. Therefore, if you’re trading in a lower timeframe, you can use any moving average from 20 to 100 periods. However, we will focus on 100 EMA as it provides good profitability based on swing trading ideas.

Why Should We Use Parabolic SAR?

Parabolic SAR is a forex trading indicator that stands for “stand and reverses.” This trading indicator was devised by J Welles, represented by some dots below and above the candlestick. In an uptrend, dots remain below the price and indicates a bullish pressure once the price is rejected from these dots. Similarly, in a downtrend, the dots form above the price, and the price starts to move once it gets rejected from the parabolic SAR.

In the image below, we can see a clear chart of the candlestick pattern.

Let’s plot the parabolic SAR in the price chart and see how it looks like.

It is visible that in an uptrend, Parabolic SAR is below the price, and in a downtrend, the parabolic SAR is above the price. This is why the parabolic SAR is considered as a stop and reverse indicator.

Furthermore, the parabolic SAR has a built-in stop-loss function. Once the price moves up or down with a new candle, the parabolic SAR changes with the price. Therefore, you can move your stop loss once the price creates a new higher or lower low. Furthermore, you can edit the primary parameter of Parabolic SAR from the indicator’s setting, but in this trading strategy, we will use the default format.

Moving Average with Parabolic SAR

If we use a 100-period exponential moving average, we can catch the major trend direction from the minor correction. The forex market Moves Like a zigzag. Therefore, there is a minor correction in a major bullish trend and minor bullish correction in a major downtrend. If we know the major trend, we can quickly enter the trade from a correction to get the maximum reward from the minimum risk.

In the forex market, parabolic SAR usually provides trading signals earlier than expected, which might create a negative impact on your trading result. Overall, any trend following indicator does not provide a good result when the price moves within a range. In most of the cases, markets follow the trend of about 35% of the time. Therefore, it is essential to filter out the conditions where the market is moving within a range.

We can eliminate the unexpected market behavior by using the 100 moving average as it will provide a more significant trend that will prevent over-trading. In the image below, we can see how the parabolic SAR provides false trading signals when the market moves within a range.

In the ranging market, it would be difficult to make a profit using this trading strategy. Therefore, it is better to use the 100 moving average to get the overall direction of the trend.

Moving Average With Parabolic SAR Trading Rules

Every trading strategy has its unique rules. In the moving average with the Parabolic SAR trading strategy, our main aim is to follow the trend towards the direction of 100 EMA.

Overall, we will follow simple rules as Complex trading rules make it challenging to implement it on the chart. You can make good profits with a simple trading strategy if you can utilize it well with appropriate trade management and money management rules.

Timeframe

The moving average with the Parabolic SAR trading strategy works well in all timeframes from 5 minutes to weekly charts. The longer timeframe will provide better trading results. However, it is better to stick to the 1 hour to daily chart as it can cover fresh moves driven by banks and financial institutes.

Currency Pair

There is no obligation to use a currency pair. However, it is better to use a currency pair that does not remain within a range for a long time like EURCHF. Therefore, all major and minor pairs are good to go with this trading strategy.

Buy Entry (Inverse for Sell Entry)

  • Identify the price above the 100 periods moving average. If the price is choppy at the 100 EMA, Ignore the price chart, and move to another market.
  • Identify the parabolic SAR to point dots below the candlestick, which will be a buy signal (above the candlestick is a sell signal).
  • Later on, place a buy stop order above the candlestick high.
  • Put your stop loss below the printed dot with some buffer.

Example of Parabolic SAR Strategy

At the image below and see how parabolic SAR provided a buy trade setup.

  • Notice that the price is moving in a range at the 100 EMA area with a violation. The blue horizontal line represents the support and resistance level, where the price is consolidating. In this consolidation, we will not take any trade.
  • If you look at the price structure, you can see the price is moving within a range from their resistance to support. On the price move above the 100 exponential moving average, you should put a pending order above the range, projecting that it will break out from the resistance level and create an impulsive bullish pressure.

Stop Loss and Take Profit Set

When you put the pending order above the resistance level, you should put a stop loss below red dots that have appeared below the candlestick. While setting the stop-loss, make sure to use some buffer of 10 to 15 pips.

Later on, hold the price until it points red dots above the price. The red dot above the price will indicate that sellers are entering the market, and there is a possibility to create a new lower low. Furthermore, while sitting the stop loss and take profit, you should follow the basic rules of price action, including the breakout and pullback.

Summary

Let’s summarize the moving average with the Parabolic SAR trading strategy:

  • You should look for a fresh trending movement above or below 100 exponential moving average.
  • Parabolic dots below the price will provide buy-entry, and parabolic dots above the price will indicate sell-entry.
  • You should avoid ranging markets where the price might violate parabolic dots.

Moreover, trade management and good trading psychology are mandatory for every trading strategy. You cannot make a decent profit until you know how to minimize the risk to get the maximum benefit from trade.

Categories
Forex Basic Strategies

Trading The Forex Market Using ‘Price Action With Context’ Strategy

Introduction

Introduction

Introduction

Price action with context is a process to predict a currency pair’s movement by reading the chart. The key price driver of a currency pair is fundamental events, but we can predict the future movement based on the present and past activity of the chart.

Central banks and financial institutes drive the forex market. Therefore, when they make the price move, they left some signs of their activity. As a price action trader, we will read their activity and anticipate what they might do in the future.

What is Price Action?

Price action is a process to inquiry about a currency pair’s price development. The main aim of the price action trading is to understand buyers’ and sellers’ sentiment in the price and predict future movement based on these. The price action trading is based on the combination of several trading indicators and price behaviors. Therefore, you might have to use multiple trading tools as a price action weapon.

The price of a currency pair moves based on the sentiment of buyers’ and sellers’. Therefore, using price action is logical that can provide accurate trading signals. In the price action with context trading strategy, we will identify a market direction by reading the chart and then enter a trade from the correction to get the maximum return with a minimum risk.

What are Price Action Weapons?

There are many parts in the price action trading that a trader should know, like- candlestick, support and resistance, trend, market flow, event level, key Level, and market context.

Candlestick

Candlestick represents the price movement of a currency pair for a specific timeframe. The four major parts of candlestick trading are- opening price, closing price, high price, and low price. Candlestick represents both continuation and reversal price direction based on the opening, closing, high and low. There are many candlestick patterns in the market, but in this trading strategy, we will focus on reversal candlesticks only.

Example of reversal candlestick – Pinbar, Engulfing Bar, and Two Bar, etc.

Support & Resistance

Support and resistance are a price zone from where the price is likely to change the direction. When the price is moving up, it will reverse as soon as it finds resistance. On the other hand, the price will stop moving down as soon as it finds a support level. There is more to know about the support and resistance in this trading strategy-

Event Level – Event level is a price zone that works as both support and resistance. It is the most important Level as both buyers and sellers put attention to it.

Key Level – key levels are a significant level in the daily or weekly timeframe to understand the price’s top and bottom.

Dynamic Level – Dynamic levels move with the price rather than a specific horizontal zone. In this trading strategy, we will use 20 Exponential Moving Average as the dynamic Level.

Market Context

Market context is a process to identify the nature of a trend. It has four elements:

Impulsive – When the price aggressively creates new highs and lows, it is considered as an impulsive trend. It indicates that the price will continue the current trend.

Corrective – In a corrective market structure, price barely creates new higher highs or lower lows. It is an indication of market reversal.

Volatile Trend – In volatile trends, the market follows the corrective structure and indicates a market reversal.

Non Volatile Trend – Non-volatile trend appears with the impulsive market momentum when the price tries to continue the current movement.

Bullish Price Action Trade Setups

Find the market in an impulsive bullish pressure in H4 or daily timeframe. Identify the Key support level and consider buy trades only as soon as the price is trading above it.

Entry

To enter the trade, you have to wait until the price comes down towards an event level with a corrective structure in 1 Hour timeframe. Enter the trade as soon as the price rejects and closes above the event level with a reversal candlestick.

Stop Loss

Put the stop loss below the recent swing low with 10-15 pips buffer. Here the buffer means you should put the stop loss 15 pips below the swing low.

Take Profit

The primary target of the take profit would be the next event level. However, if the bullish trend remains impulsive, you can extend the take profit. On the other hand, you can close earlier if the price barely creates new higher highs.

In the example below, we can see a visual representation of how to take the entry with stop loss and take profit level.

Bearish Price Action Trade Setups

Find the market in an impulsive bearish pressure in H4 or daily timeframe. Identify the key resistance level and consider sell trades only as soon as the price is trading below it.

Entry

To enter the trade, you have to wait until the price comes down towards an event level with a corrective structure in 1 Hour timeframe. Enter the trade as soon as the price rejects and closes below the event level with a bullish reversal candlestick.

Stop Loss & Take Profit

Put the stop loss above the recent swing high with 10-15 pips buffer. Here the buffer means you should put the stop loss 15 pips above the swing high.

The primary target of the take profit would be the next event level. However, if the bearish trend remains impulsive, you extend the take profit. On the other hand, you can close earlier if the price barely creates new Lower lows.

In the example below, we can see a visual representation of how to take the sell entry with stop loss and take profit level.

Final Thoughts – Trade Management Idea

In the above section, we have seen how to trade using the price action with context. In this trading strategy, buy and sell trades come after filtering out unusual market movements from the volatile market conditions.

However, no forex trading strategy in the world can guarantee a 100% profit, so your trades might go wrong even if you strictly followed all rules. If you want to grow your account with a consistent profit, you should follow strong trade management tools, as mentioned below:

  • Ensure that you are not taking over a 2% risk per trade of your trading balance.
  • Move your stop loss at breakeven as soon as the price creates a new higher high or lower low.
  • If you face a 3 or 4 consecutive losses, take a break and observe the market until it follows the trend accurately.
  • Make sure to keep your mind free from any bias while you are analyzing the market.

Overall, price action is the core element of trading that every trader should know. There are many trading strategies combining price action and other trading tools. The strategy we have seen above has a good history of providing profitable trades. Therefore, if you can implement it properly, you can consistently grow your trading account.

Categories
Forex Basic Strategies

Trading The Most Popular ‘Head and Shoulders’ Pattern Forex Strategy

Introduction

Introduction

Introduction

Head and shoulder is a famous market reversal pattern. Most of the new and experienced traders use this pattern to identify the potential market reversal trade. Traders can use this pattern in every market, including forex, cryptocurrency, stock, indices, and commodities.

In this pattern, there is an indication that the price is trying to make a new higher but cannot do it. In the forex market, it is essential to understand the sentiment of buyers and sellers. In that sense, head and shoulder is a prominent price pattern indicating what buyers and sellers are doing in the market and how buyers got rejected from a potential zone.

What is the Head and Shoulder Pattern?

Head and shoulder is a price pattern that usually appears in an uptrend and indicates a price zone from where buyers are going to lose their momentum. A complete head and shoulder pattern indicates the start of a bearish trend. Therefore, if you want to join the bearish trend as early as possible, you should take trading decisions based on this pattern to have a better risk: reward ratio.

The head and shoulder pattern has three elements, as marked in the below chart.

The left shoulder is the ordinary swing high of a bullish trend. Later on, the head indicates another swing high indicating the continuation of the bullish trend. However, the right shoulder indicates that the price is unable to make another high above the head, which is an indication that buyers are losing their momentum.

On the other hand, the inverse head and shoulder are like the head and shoulder pattern that appears after a bearish trend. It indicates a potential market reversal from a bearish trend to the upside.

In the image below, we can see how an inverse head and shoulder looks like.

How to Identify the Head and Shoulder Pattern?

The head and shoulder pattern is prevalent in the chart that does not require any effort to see. You can easily spot it with the naked eye. Moreover, there are some Expert Advisors (EAs) or trading indicators that automatically show the head and shoulder pattern.

You can draw the head and shoulder pattern using the trendline (without ray) despite the automotive process. Later on, we should focus on the location of the pattern. If the head and shoulder pattern appears near any significant support level, it might not work well due to the lack of space for further price decline.

Overall, the head and shoulder pattern from a significant resistance level or key resistance level can provide a potential market reversal opportunity. Furthermore, head and shoulder patterns with significant economic events often make the level important among traders.

Head and Shoulder Pattern Trading Strategy

If you have read the above section, you would know that it is not difficult to find the price’s head and shoulder pattern. The profitability ratio of this pattern is very high, based on the previous trading result. There are several ways to make trades based on the head and shoulder trading strategy. However, the most reliable way to take the trade is from the neckline breakout.

Timeframe

The head and shoulder price pattern in a daily chart is more reliable than the head and shoulder pattern in a 5 minutes timeframe. The accuracy of this trading strategy increases if you move to a higher timeframe. However, it is often difficult for traders to take trades based on a weekly or monthly timeframe as it requires a lot of time and balance. Based on the retail and institutional traders, any time frame from 1 hour to a daily chart is perfect for this trading strategy.

Currency Pair

The head and shoulder trading strategy works well in all financial markets, including forex, cryptocurrency, stocks, indices, and commodities. Therefore, there is no barrier to use it on specific currency pairs. However, it is recommended to trade in major currency pairs as there is enough liquidity to provide a substantial movement without any unnecessary spike.

Entry

After forming the head and shoulder pattern, it is crucial to measure the price action at the neckline area. The neckline is a support level based on the lowest swing point of two shoulders and one head. In this trading strategy, you should wait for the price to break below the neckline with a big candle breakout. The strength of the breakout will indicate how reliable the upcoming bearish pressure is.

Later on, wait for the price to correct towards the neckline again with a corrective speed and enter the trade as soon as the price rejects the neckline with a bullish reversal candlestick.

Stop Loss

The stop loss will depend on two categories. If you are an aggressive trader, you can put the stop loss above the reversal candlestick with 10-15 pips buffer. In case the market moves above the neckline and hits your stop loss, it would indicate that the price made a false break below the neckline. However, the conservative approach is to put the stop loss above the left shoulder with some buffer. It would save your trading balance from the unusual market noise.

Take Profit

The first take profit level should be based on the 1:1 risk: reward ratio. You can close 50% of the position at the first take profit level and wait for the 100% of neckline to head for the final take profit.

Moreover, you should be more cautious in setting the take profit level by considering the near-term support and resistance levels. In the example below, we can see how the price broke below the neckline and retested it again to create a trading opportunity. Moreover, this image refers to how to set the stop loss and take profit levels.

Conclusion

The forex market is the world’s biggest financial market, which is very uncertain. Therefore, no trading strategy can guarantee a 100% profit. There is some possibility that your trade might hit the stop loss after taking the entry, instead of moving down. In that case, you should take the loss and wait for further trading opportunities.

The best way to keep yourself profitable in the market is to use appropriate money management and trade management rules for trading. Therefore, if you take 1% or 2% risk per trade, any unusual stop loss might not affect the overall balance.

Categories
Forex Fundamental Analysis

Understanding ‘GDP from Services’ As A Macro Economic Indicator

Introduction

Introduction

Introduction

The different proportion of contribution to GDP from the three sectors (primary, secondary, tertiary) can tell us a lot about the economic development stage a country is at the moment. GDP from Services can help us gauge the transition of countries from developing to developed status efficiently. Hence, it is useful for Central Authorities and business people to understand the growth of the Service Sector.

What is GDP from Services? 

Service Sector

It refers to the production of intangible goods, services to be exact, that are not goods. Services are intangible, non-quantifiable, and formless. The result of service may or may not produce a physical good. For example, a construction service would give the client a building, whereas a lawnmowing service would not. It is the largest sector in the global economy and bears high significance in advanced economies.

How can the GDP from Services numbers be used for analysis?

The three different sectors of an economy are associated with different activities. The primary sector is mainly associated with dealing with agriculture, farming. It answers the basic needs. The secondary sector deals with industrialization, where livelihood, employment are answered through the production of goods.

The tertiary sector comes into picture when the basic needs like food, employment, security are taken care of. The tertiary sector consists mainly of services. Countries that have Service Sector as their main contributor to GDP are generally considered the more advanced economies. Indeed, the underdeveloped nations will primarily struggle for food and water, where Agriculture would be the primary need to feed the population.

The industrialization growth will be associated with low-cost wage labors working in factories for mass production to compete in the global market. Whereas, the service sector will be associated with high-cost services generally to provide “good-to-have” commodities.

For example, a vegetable is cheaper than an industrial product. Likewise, an industry product would be cheaper than a service sector like antivirus software. The cost of a 1kg of potato is about 2.50 US dollars, whereas 1kg of potato chips from a company like lays would cost 10 US dollars, whereas a Netflix subscription (service) would cost around 10-15 dollars a month.

It is a general trend where a software employee (service sector) gets paid more than a factory worker (industrial sector). A factory worker generally gets paid more than a farmer (agricultural sector). It is easily observed the wealth generated from the Service Sector far outpaces that of the Industrial Sector and essentially the Agricultural Sector.

In general, countries start to grow from underdeveloped to developing nations through industrialization. China and Japan would be good examples of industrialization-led growth. Once a country has firmly established its primary and secondary sectors, it can reach the status of a developed economy through the service sector only. India and China would be good examples of developing economies, increasing their service sector to generate higher wealth.

Hence, GDP from Service is essential to assess the status of a country transitioning from an emerging or developing economy status to a developed economy. As the contribution of Service Sector to GDP increases, it implies that more percentage of people are engaged in higher revenue-generating activities, and have crossed the stages of addressing basic survival needs.

It is also essential to understand that GDP from Service can increase only when the country is firmly established and stable in the primary and secondary sectors. Because when primary and secondary needs are not answered, people will first engage in meeting primary needs and not providing services.

The developed economies have substantial contributions to GDP from Service Sector. For example, the United States and the United Kingdom, have about 80% of their GDP contributed from the Service Sector. Developing economies like India and China have over 50% of their GDP from Service Sector. Underdeveloped nations like Uganda have only 24% of the Service Sector.

Impact on Currency

Leading indicators like Services PMI or NMI already forecast the GDP from Service, which would mean the increases from GDP from Services is already priced into the market. It is a proportional and lagging indicator.

Also, GDP from Services does not paint the full picture of the economy. Still, it can be an essential tool for the Central Authorities to keep track of Service Sector performance and its relative implications to the economy. As established, the Service Sector is a significant contributor to the GDP in developing and developed economies.

Hence, Service Sector GDP improvements bring more prosperity to a nation than an equivalent improvement in Agriculture or Industrial GDP. Service Sector GDP increase brings wealth to a nation and improves the standard of living of its people better than any other sector. A country can become a developed nation only when its Service Sector GDP increases to 70-80% of its GDP.

In general, Higher GDP from Services is good for the economy and its currency, and vice-versa.

Sources of GDP from Services

For the United States, the BEA reports are available here – GDP -BEA & GDP by Industry – BEA. World Bank also maintains the Service Sector’s contribution as a percentage of GDP on its official website – Service Sector – World % of GDP & GDP from Services – Trading Economics.

GDP from Services Announcement – Impact due to the news release

In the previous section of the article, we saw the contribution made by the service sector to the GDP, and it’s importance in the growth of the economy. But when it comes to fundamental analysis of a currency, the service sector’s contribution alone is not of great importance to investors as it represents only a small portion of the whole GDP.

Therefore, traders and investors look at a broader figure, which is essentially the GDP itself, and take a currency position based on the GDP of a country. So an increase or decrease in the contribution of ‘Services’ to GDP does not have any impact on the currency.

Now, let’s analyze the impact of GDP on different currency pairs and observe the change in volatility due to the news release. The below image shows the latest quarter on quarter GDP data of New Zealand released in March.

NZD/JPY - Before the announcement

We will start with the NZD/JPY currency pair to examine the impact of GDP on the New Zealand dollar. The above chart shows the state of the market before the news announcement, where we see that the price was in a downtrend with the least number of retracements. Depending on the impact of the news release, we will position ourselves accordingly in the market. However, we should be looking to take a ‘short’ trade since the major trend of the market is down.

NZD/JPY - After the announcement

After the news announcement, the market moves lower by a little where the price closes, forming a bearish ‘news candle.’ The GDP data in the fourth quarter was lower than last time, which drove the price below the moving average. However, it did not cause a major crash in the market where the volatility slightly increased to the downside soon after the news release. One should wait for a price retracement before a ‘short’ trade.

NZD/CAD - Before the announcement

NZD/CAD - After the announcement:

The above images represent the NZD/CAD currency pair where we see in the first image the price violently moved lower, and few minutes before the news release, it has reversed from the ‘lows.’ Until the reversal is confirmed, we should be looking to sell the currency pair since the down move is very strong. Since a major news event is due, one should wait for its release and take a position based on the change in volatility.

After the news announcement, volatility expands on the downside, and the ‘news candle’ closes, forming a trend continuation pattern. The market reacted negatively to the GDP data since there was a decrease in the GDP by 0.3% in the fourth quarter. This can be taken as an opportunity for joining the downtrend where one can take a ‘short’ position with a stop loss above the ‘news candle.’

EUR/NZD - Before the announcement

EUR/NZD - After the announcement

The above images are that of the EUR/NZD currency pair, where the market is in an uptrend, and the price is currently at its highest point. The chart signifies weakness in the New Zealand dollar before the news announcement with no signs of strength. Technically, we will be looking to buy the currency pair after a pullback to a key technical level.

After the news announcement, the price moves higher and volatility expands on the upside, thereby further weakening the New Zealand dollar since it is on the right-hand side of the pair. At this point, one should be cautious by not taking a ‘long’ position as it would imply chasing the market. Cheers!

Categories
Crypto Guides

The Basics of Cryptocurrency Lending And Staking

Introduction

Introduction

Introduction

Crypto trading has become one of the hot topics of the market. With the security of cryptography and interesting rates of the currency, everyone wants to get their share of the pie. That is why more people are looking for opportunities to generate some income with the help of cryptocurrency. Two best methods you can opt for making money through cryptocurrency are lending and staking. Let’s dive into the two techniques and see which one can be beneficial for you.

Crypto Lending

The concept of crypto lending can be understood as a simple cryptocurrency collateralized loan. A borrower can utilize their crypto assets for getting a stablecoin or fiat loan. In exchange for this, the lender gets a fixed (agreed-upon) interest rate. Alternatively, the borrower can also use their stablecoins as collateral for borrowing crypto assets.

The whole process raises the cryptocurrency’s productivity by reallocating it to people who are in immediate need (borrowers) from those who are not (lenders). That is why crypto lending proves to be a powerful financial primitive in the crypto market that traditionally had only two options: trade and HODL.

The only drawback to crypto lending is that you got to have some capital or assets at your disposal to get the loan. That means they are over collateralized and don’t offer all advantages of true credit.

Crypto Staking

You may find people talking about staking as just holding some crypto and earning rewards in exchange for it. However, there is more to this concept. Staking involves the Proof-of-Stake mechanism, where new blocks get produced and verified through staking.

So unlike mining, you don’t need special computers to solve problems here. But you do need to follow some conditions to become a new block validator, such as:

  • Your cryptocurrency wallet must hold a minimum amount.
  • Your wallet must remain online throughout the day and every day.
  • Your wallet should support crypto staking.

Other than these, different blockchains may apply different rules. So you need to check with the blockchain for how you can stake. Plus, staking is not supported by every cryptocurrency, and you have to choose only from the provided options.

In exchange for holding these staking processes, you get a fixed percentage of rewards per year. You can also opt for a pool, where multiple holders keep their coins together. This increases the overall chances of validating a block and getting higher revenues.

Lending vs. Staking: Which One To Opt?

It would be wrong to state that either of them is better than the other. They both have pros and cons. Your choice majorly depends on the type of investor you are. In case you need instant stable coins with the help of assets, lending would be more beneficial for you. On the other hand, you can opt for staking if you want to generate a significant amount of money by holding the crypto coins in your wallet.

The crucial point here is to keep an eye on the blockchain in which you are investing. You need to look through all the aspects before putting money in a particular investment method.

Categories
Forex Fundamental Analysis

Everything About GDP From Transport & Its Impact On The Forex Price Charts

Introduction

Introduction

Introduction

The Transportation Industry’s contribution to GDP is both direct and indirect. The real contribution of Transportation to overall economic growth goes beyond what the GDP can measure. Hence, Understanding the Role of Transportation in economic activity and its underlying importance that is both visible and subtle is essential for our overall fundamental analysis.

What is GDP from Transport?

Transportation

Transportation includes the types of services that are provided through operating vehicles, moving goods, or people over public transport systems like roads, railways, waterways, airways, etc.

The supply side of the Transportation system is called the Transportation Industry. It is also essential to note that the Standard Industrial Classification (SIC) and North American Industrial Classification System (NAIC) both consider Transportation as a separate industry. They do so through a standard set of definitions and criteria. Hence, not all Transportation services come under the Transportation Industry.

The Transportation services’ contribution to GDP can be measured in the following ways:

Final Demand: It is calculated by adding all the expenditures by households, private firms, and the government on Transportation related goods and services.

Value Added: It is calculated as the GDP contribution by the Transportation services overall. Transportation Value Added is a gauge of the transportation sector’s contribution to GDP. It is based on the difference between transportation services sold value and the goods and services used to produce Transportation.

The Bureau of Economic Analysis (BEA) takes industry value added to be a measure of an industry’s contribution to GDP.

From measurement viewpoint, three types of transportation operations can be distinguished:

  • For-hire operations: It includes those services conducted by transportation industries on a fee basis. A trucking company’s trucking operations is an instance of for-hire operations. 
  • In-house operations: also called, own-account operations, is conducted by non-transportation industries for their use. For instance, the Coca-cola company may transport its beverages to its local warehouse for storage through its trucks. 
  • Final user operations: Final users include the general population (end consumers) and the government who purchase transportation services like cars, trucks for their use.

Transportation Satellite Accounts: The Satellite industry segregates data by focusing on types of economic activity. Hence, the TSAs depict the contribution of for-hire, in-house, and household transportation services as they all form part of the Transportation Industry.

How can the GDP from Transport numbers be used for analysis?

The Transportation-related Final Demand metric is useful to compare the expenditures incurred on other industries like healthcare or housing. For sector-wise, growth analysis, investors can use this to gauge, which industries are experiencing increasing demand that can help them to invest accordingly.

On the other hand, it is not an accurate metric to measure the Transportation needed to support and sustain economic activity. For instance, if the investment into Transportation infrastructure is underfunded, then correspondingly, it will underestimate the final demand due to low economic output. The Transportation industry’s contribution in the year 2019 and 2018 has stayed around 3.2% of GDP as per BEA.

The value-added contribution of Transportation Industry to GDP is, however, understated for the following two reasons:

  • It only includes the contribution of for-hire transportation services. Many industries use transportation services for their use. In-house services do not contribute to GDP.
  • The extent to which industries depend on Transportation is not depicted in these figures. Mobility and interconnectivity between industries, states, and countries are critical factors in business growth in today’s interconnected international markets.

Accessibility to resources, end consumers are all enabled through Transportation and are heavily impacted with poor transportation infrastructure. The US Department of Transportation – Bureau of Transportation Statistics accounts for the TSA reports, and they, by far, depict the contribution of the Transportation industry better than other measures published.

Impact on Currency

GDP from transport does not paint the full picture of the economy but tells us the direct contribution of the Transport industry to the overall GDP. Still, for the International Markets, it does not serve as a useful indicator. It is a proportional and lagging indicator. Higher GDP from Transport is good for the economy and its corresponding currency, and vice-versa.

Sources of GDP from Transport

For the United States, the BEA reports are available here – GDP -BEA

We can use the GDP by Industry to get the transport’s contribution to GDP here –

GDP by Industry – BEA & Transportation Statistics –Annual Report – BTS

Transportation’s contribution to GDP for the world can be found here –

GDP from Transportation – Trading Economics

GDP from Transport Announcement – Impact due to news release

The main role of transport is to provide access to different locations to individuals and businesses. Transport facilitates a wider range of social and economic transactions than would otherwise be possible. Transport is an important sector in its own weight. Transport infrastructure and transport operations together account for more than 5% of the country’s GDP. In developed countries, further investment in that infrastructure will not only result in economic growth but also improve the quality of life, lower costs to access resources and markets, and improve safety.

Therefore, the transport sector is an important sector of the economy that many long-term benefits associated with it. Fundamentally speaking, investors would not invest based on a currency based on the contribution made by the transport sector alone, as its direct influence on the GDP is less. The transport industry indirectly helps in boosting the GDP by assisting in all business activities.

In today’s article, we will observe the impact of GDP on various currency pairs and observe the change in volatility because of its news announcement. For illustration, we have collected the latest GDP data of Switzerland, which was released in March. The below image shows that the GDP in the fourth quarter was slightly better than expectations and higher than the previous quarter.

USD/CHF | Before the announcement

Let us start with the USD/JPY currency pair in order to analyze the impact of GDP on the Swiss Franc. In the above Forex price chart, we see that the overall trend of the market is down where recently the price is moving in a ‘range.’ After the occurrence of a trend continuation pattern, a ‘sell’ trade can be taken with less risk. Conservative traders should wait for news releases and trade after the volatility settles down.

USD/CHF | After the announcement

After the news announcement, the price marginally increases that takes the market higher by just a few pips. We can argue that the GDP data had the least impact on the currency pair and did not induce any volatility in the market. As the data was as expected, it did not turn the market downside, and it moves as usual.

EUR/CHF | Before the announcement

EUR/CHF | After the announcement

The above images represent the EUR/CHF currency pair, it is clear that before the news release, the market is in an uptrend, and few minutes before the release, the price has been moving within a ‘range.’ This means the news event could either result in a continuation of the trend or a reversal of the trend.

Hence it is recommended to wait for the news announcement to watch the impact it makes on the price chart. After the news announcement, there is a slight increase in volatility to the downside after the close of news candle resulting in strengthening of the Swiss Franc. However, the ‘news candle’ itself appears to be impact-less, where there is hardly any change in price during the announcement.

NZD/CHF | Before the announcement

NZD/CHF | After the announcement

The above images are related to the NZD/CHF currency pair, where we see that the market is moving sideways before the news announcement. Just before the release, the price is close to the bottom of the ‘range.’ As the impact of these numbers is less, aggressive traders can take ‘long’ positions when technically the location is supporting for a ‘buy.’

After the news announcement, the market moves higher, and there is an increase in volatility to the upside. Since the GDP was not extremely bullish or bearish, the market did not react violently to the news release. Therefore, in such times we need to look at the charts from a technical angle. All the best!

Categories
Forex Basic Strategies

Dynamic Channel Trading Using The Concepts Of Price Action!

Introduction

Introduction

Introduction

In forex, the dynamic channel trading is a profitable strategy that forms with standard trendlines. It indicates a potential move to identify the market direction both to the downside and upside. On the other hand, price action is a method to identify the price direction based on price behavior. Therefore, we can create a profitable trading strategy by reading the price action from any channel support and resistance level.

In general, traders use price channel as a technical analysis tool that helps to identify the potential market movement. The dynamic channel moves like a zigzag by creating lower lows and higher highs. In Forex trading, we usually have two types of dynamic channels:

  • An upward or ascending channel
  • Downward or descending channel

Dynamic Channel Identification

We can easily identify the dynamic channel by connecting the swing lows or swings highs they create. In an upwards dynamic channel, it will move with the price with a higher high formation.

Similarly, in a downward dynamic channel, it will move with the price by creating lower lows.

In the image above, we can see that the higher highs and the lower lows connected through straight lines. The dynamic price channel shows a significant movement from down to upside in the trend line. The trendline below the price may work as a dynamic support level, and the trendline above the price may work as a dynamic resistance level.

Besides the dynamic channel, we will use the concept of price action by measuring what buyers and sellers are doing in the market. Any slower and corrective movement from the dynamic channel support and resistance would indicate a possibility of a potential market reversal.

Later on, we will use the appropriate reversal candlestick from that area to enter a trade. In this trading strategy, we can make a profit when the price is trading within the channel, or it breaks out from the channel. However, we will filter out the unusual false movement by reading the price action.

Bullish Dynamic Channel Trading Strategy

In the bullish channel continuation trade setup, we will identify the price that is moving upside within the channel.

Identify the Price Location

Central banks and big financial institutes drive the price of a currency pair. Therefore, institutional traders focus on long timeframes mostly, as it provides the most reliable price direction. Therefore, we will move to the daily or weekly timeframe and identify the location of the price. We will consider channels that only meets the following condition:

⚠️ An upward channel should move within an uptrend above a key support level.

Entry

In an upside movement of a price channel, there will be new higher highs. Therefore, we need to identify a price channel where the price moves down towards channel support with a corrective speed. We will enter the trade as soon as the price rejects the channel support with a reversal candlestick formation.

Stop Loss

In a bullish channel trading, the stop loss would be below the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary aim of the taking profit would be the immediate channel resistance. However, we have to read the price action to make a trading decision regarding the take profit.

If the price starts to move with an impulsive bullish pressure, it can go beyond the channel resistance. In that case, we can take some partial closing 10-15 pips below the channel resistance and wait for the price to test any event level.

Bearish Dynamic Channel Trading Strategy

In the bearish channel continuation trade setup, we will identify the price that is moving downside within the channel.

Identify the Price Location

Based on the price action context, we will move to the daily or weekly timeframe and identify the price’s location. We will consider channels that only meets the following conditions:

⚠️ A downward channel should move within a downtrend from a key resistance level.
Entry

In the downward price channel, there will be lower lows. Therefore, we need to identify a price channel where the price is moving down towards a channel resistance with a corrective speed. Therefore, we will read the price action and enter the trade as soon as it rejects the channel resistance with a reversal candlestick pattern.

Stop Loss

In the bearish channel trading, the stop loss would be above the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary aim of the taking profit would be the immediate channel support. However, we have to read the price action to make a trading decision regarding the take profit.

If the price starts to move with an impulsive bearish pressure, it can go beyond the channel support. In that case, we can take some partial closing 10-15 pips above the channel support and close the rest of the amount at the next event level.

Channel Breakout Trading Strategy

In forex trading, when the price crossed (above or below) the channel, there is a profitable trading strategy. For making the trade sustainable, we need to identify the speed of the breakout. When institutions or banks enter the market, we see such massive breakout from the channel support or resistance.

Entry

After a massive breakout from a dynamic channel, we will wait for a correction. The correction indicates that the massive breakout would be strong. We will wait until the price moves to the channel support or resistance level with a corrective speed and enter the trade as soon as it rejects the level with a reversal candlestick formation.

Stop Loss

Setting a stop loss is similar to the channel continuation trade setup. You can put your stop loss above or below the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary target of the channel breakout is the immediate event level. However, you can extend the take profit by reading the price action. If the power of the breakout is strong, the price may move beyond the immediate event level.

Conclusion

The Forex market is a competitive trading market where trade management is a key element for a forex trader. No trading strategy can assure you a confirmed profit. Therefore, it is recommended to use not more than 2% risk per trade and move the stop-loss at breakeven as soon as the price creates new lows or highs.

Categories
Forex Basic Strategies

You Must Know This ‘7-Day Period’ Forex Trading Strategy!

Introduction

Introduction

Introduction

Trying to pick the top or bottom is one of the favorite things a trader likes to do. We tried to do that using the ‘Dolphin Strategy.’ We did that with no indicator support. We are again going to unveil a strategy that does pick a top or bottom with no indicator support. This strategy is called the 7-Day period strategy. Let us take a step back and think, indicators are nothing but a mathematical representation of prices, which are calculated in different ways.

Therefore, sometimes it is important to look at prices alone. The 7-day period strategy is based on the idea that after every seven days of consecutive strength, a currency pair’s move is due for a retracement. The question arises, why seven days? This number is derived after constantly watching the market for years. Often, a new trend emerges at the beginning of the week, and if the trend is strong, it can last for several days with no retracement.

Many psychologists believe that human beings have the best retention rates on numbers that are in groups of seven or less. This is one of the reasons why phone numbers in the U.S. only have seven digits, aside from the area code. We have seen that the seven-day reversal pattern is more accurate in a trending market. We gave occasionally seen those periods when the market continues to move in the same direction after seven days of the exhaustive movement, i.e., from the 8th day onwards. Even though the setup is rare, when it does occur, it is significant.

Time Frame

As the name of the strategy suggests, it can be traded only in the daily time frame.

Indicators

In this strategy, no indicators are used. Simple Moving Average (SMA) can put on the chart to get a clear idea of the trend.

Currency Pairs

This strategy can be applied to all the currencies in the forex market. Exotic pairs should be avoided.

Strategy Concept 

The basic idea of the strategy is that when the market is strongly trending on the hourly chart, the retracement does not last more than seven days and changes its direction at the sixth or seventh day. This retracement is considered to over-extended, which leads to a strong reversal in the pair.

If the sixth or seventh candle coincides with a key technical level, the ‘move’ may very well stall at that level and continue its major trend. To implement the strategy effectively, we need to know trends and trend retracement. Since this strategy is based on fixed rules and price action, it is not necessary to know about technical indicators. However, SMA and ATR can be used for trend identification and measuring the momentum of the market.

Trade Setup

In order to understand how the strategy works, we will apply it on the USD/CAD currency pair and execute a ‘short’ trade using the strategy.

Step 1

The first step is to identify the direction of the market. As this is a trend trading strategy, we should be able to identify the major direction of the market. If the market is making higher highs and higher lows, it is an uptrend, or if the market is making lower lows and lower highs, it is a downtrend. A trend can also be determined using the Simple Moving Average (SMA) indicator. Very simply, if the price is below SMA, we say that the market is in a downtrend, and if the price is above the SMA, the market is said to be in an uptrend.

In the example we have considered, from the below image, it is clear that the market is in a strong downtrend.

Step 2

Next, wait for a retracement from the highest or the lowest point, which we will be evaluated based on our strategy rules. The retracement should be such that there are seven consecutive candles of the same color. One or two candles of the opposite color are okay, but we need to make sure that it does not impact the structure of the retracement. These seven candles represent an extended pullback, which can lead to reversal any moment.

In the below image, we can see seven days of the up movement, which is exactly the kind of retracement which we need for the strategy.

Step 3

In this step, we need to check the position of the price after seven straight days of the movement. The strategy works best if the price coincides with a key technical level of support and resistance. This is because, in these areas, the price action is very strong, and market moves as per expectations. But it is important to make sure that no step of the strategy is used individually. All of them need to be used collectively.

We enter the market once we get confirmation after the 7-day period. The confirmation is nothing but a bullish candle in case of a ‘long’ setup and a bearish candle in case of a ‘short’ setup.

In our example, we see that the price has approached the previous ‘lower high’ of the downtrend. This is an area where we can expect sellers to get active and take the price lower.

Step 4

Finally, we need to determine the ‘stop-loss’ and ‘take-profit‘ for the strategy. We place the stop-loss a little higher than the bullish candle when entering for a ‘long’ and little lower the bearish candle if entering for a ‘short.’ We take profit at two places in this strategy. The first take-profit is set at the previous higher high or lower low, while the second take-profit is set at 1:2 risk to reward.

Strategy Roundup

As there are many conditions associated with the strategy, the setup might be rare, but when it does occur, it is significant. We have seen trends where the retracement occurs for just a few days before it starts moving in the direction of the major trend. But these setups are not reliable. The most important condition of this setup is the continuous appearance of bullish or bearish candles for seven days.