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Forex Daily Topic Forex Price Action

Trendline Trading: A Trendline forming with a Tiny Slope

In today’s lesson, we are going to demonstrate the formation of a down-trending Trendline. A trendline can be formed with a double top or double bottom as well. However, double top’s resistance or double bottom’s support may not be horizontal. Let us find out how they may look in the chart.

The chart shows that the price heads towards the South with moderate bearish pressure. The last candle comes out as a bearish engulfing candle closing well below the last swing low. The sellers may wait for the price to consolidate or make a bullish correction to go short.

The chart produces two bullish candles. The price has a rejection from the zone where it had a rejection earlier. The last rejection does not come from horizontal support, but it looks adjacent to that. Thus, it can be considered as a double top’s resistance zone.

The price heads towards the South by making a breakout at the last swing low. It produces a bullish inside bar. If the chart produces a bearish reversal candle, the sellers may go short below the last swing low. Let us proceed to find out what happens next.

The price gets bearish by making a breakout at the last swing low. Look at the last three candles. The combination of these three candles is called Morning Star. It seems that the price may make a long bullish correction. Can you guess where the price may find its next resistance?

We can draw a down-trending trendline here by using those points of the double top. Look at the price action around the trendline’s resistance. The last candle comes out as a bullish candle with an upper shadow. A bearish reversal candle at the trendline’s resistance may drive the price towards the South again.

The trendline’s resistance produces a bearish engulfing candle. It has a long lower shadow, though. The sellers may go short below the last candle’s lowest low. Let us find out what the price does.

As expected, the price makes a strong bearish move and makes a new lower low. Thus, the sellers may wait again for the price to go towards the trendline’s resistance and get a bearish reversal candle to go short in the pair. In a word, a very valid trendline is in play in this chart. Do you remember how it has started? It has started from a point that does not seem to form a trendline. The slope has been tiny, making it difficult to spot out. However, the market often produces such a trendline with a tiny slope, which shall be taken into account by the trendline traders.

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Forex Daily Topic Forex Price Action

Double Top/Double Bottom and Intraday Trading

In today’s lesson, we are going to demonstrate an example of a double top that drives the price towards the downside in an intraday chart. The double top/double bottom usually makes the price bearish if they are formed in a major chart. However, they work in the same way in minor charts as well. Let us find out how it drives the price in an H1 chart. Let us get started.

It is an H1 chart. The chart shows that the price makes a long bearish move. The chart belongs to the sellers. The sellers may wait for the price to make a bullish correction and produce a bearish reversal candle at flipped resistance to go short in the pair.

The chart makes a strong bullish move instead, upon producing a bullish engulfing candle. The last candle comes out as a bullish engulfing candle after consolidation. It seems that the buyers are dominating the minor charts.

The price does not continue its bullish move. It has been in long consolidation. The price is roaming around the level of resistance, where it has had a bounce. A bullish breakout may attract the buyers to go long in the pair. On the other hand, a bearish reversal candle at a double top resistance may make the sellers wait to go short in the pair below the neckline.

The chart produces a long bearish candle closing below the neckline. It suggests that the Bear may dominate in the pair. The sellers are to wait for the price to consolidate and produce a bearish reversal candle to go short in the pair. Let us find out what happens.

The next candle comes out as a spinning top closing within the breakout level. It seems that the pair is getting ready to get bearish. The sellers are to keep their close eyes in the pair to get a bearish reversal candle and a breakout at the lowest low to trigger a short entry.

Here it comes. The pair produces a bearish engulfing candle. The candle’s body engulfs the last candle’s body. However, the sellers may wait for the price to make a breakout at the lowest low of the last candle (wick’s lowest low). It is very important as far as intraday trading is concerned.

The price breaches the wick’s lowest low and heads towards the South with good bearish momentum. It travels a long way by offering 1:2 risk-reward. It’s a good thing about intraday trading that it offers good risk-reward.

We have demonstrated an example of a double top driving the price towards the downside in the H1 chart. They work in any time frame from 1M to 1Month. However, it is better not to use it in too minor time frames such as the 1M, 5M, 15M.

Categories
Forex Daily Topic Forex Price Action

Intraday Trading: Watch Out for Highest High/Lowest Low

In today’s lesson, we are going to demonstrate an intraday chart that ends up offering an entry. Intraday trading can be prolific if it is done in the right way. In today’s example, the price heads towards the North by making a good bullish move. It seems that the bull is in control. However, the price gets bearish later and ends up offering entry to the sellers. Let us find out how that happens.

It is an H1 chart. The chart shows that the price makes a good bullish move. The last candle comes out as a hanging man. The price does not make any bearish correction, so the daily candle closes without having an upper shadow. It suggests that the bull may dominate in the pair the next day.

The next day, the price makes a bullish breakout at the last day’s highest high. The pair is trading above the level. Ideally, the price above the last day’s highest high means the bull is in control. However, in this chart, the price does not make any bearish correction before making the breakout. Thus, the buyers are to wait for the price to consolidate and produce a bullish reversal candle to go long in the pair.

The next candle comes out as a bearish engulfing candle. The candle closes below the breakout level. If the level works as a level of resistance, the sellers may come into play and go short in the pair. Let us find out what happens next.

The next candle comes out as a hammer closing within the breakout level. It looks good for the sellers. The sellers may wait for the price to produce a bearish reversal candle and go short below the hammer’s lowest low.

The chart produces a bearish engulfing candle closing below the hammer’s body. The sellers may trigger a short entry below the hammer’s lower shadow. The last day’s lowest low offers the price to travel towards the North with a good reward.

One of the candles comes out as a bearish Marubozu candle closing well below the hammer’s lowest low. The entry may be triggered earlier just by using price breakout. Some traders may wait for a 15M breakout to trigger the entry, and some even wait for an H1 breakout. Ideally, a 15M breakout is good enough to trigger such entry. Traders may set their stop loss above the breakout level since it is the new resistance and Take profit with 2R. If they set the stop loss above the trend’s highest high, they may set take profit at the previous day’s lowest low. Let us find out how the entry goes.

The price heads towards the South with good bearish momentum. It hits 2R in a hurry. The way it has been going, it may hit the previous day’s lowest low soon as well.

To do intraday trading, pay attention to the last day’s highest high and lowest low, breakout, breakout confirmation, and reversal candle. Do some backtesting and then try live trading with a tiny lot at the beginning. Once you have mastered this, it can make your hand full.

Categories
Forex Daily Topic Forex Price Action

Trendline Trading: How a Trend upon a Trendline Run Longer

In today’s lesson, we are going to demonstrate an example of a chart that made a long bearish move obeying a bearish trendline. The price after forming a bearish trendline does not offer entry to the sellers. It makes a breakout at the first trendline and then produces another bearish trendline ending up offering short entries. Let us now have a look at the chart and find out how it happens.

The chart shows that it makes two swing lows trending from two swing highs. By joining those points, we can draw a trendline shown in the above chart. The sellers may wait for the price to go back at the trendline’s resistance and produce a bearish reversal candle to go short in the pair. However, the price action has been choppy around the trendline’s resistance. The last candle comes out as a bullish engulfing candle. It does not look good for the sellers.

The price makes a breakout at the trendline’s resistance. It heads towards the North and then makes a strong bearish move. Such price action may puzzle traders. Do you notice something interesting here? Have a look at the next chart.

The sellers may draw another bearish trendline by joining two swing lows. As long as the price makes new lower lows, we can draw a bearish trend line by joining two higher highs. We know what sellers are to do here. Yes, they are to wait for the price to go back to the trendline’s resistance and produce a bearish reversal candle to go short in the pair.

The chart produces a bearish inside bar. It is not a strong reversal candle. However, it is produced at a trendline’s resistance. The sellers may keep their eyes in the pair to go short according to their trading strategies. The price may find its next support at the last swing low. The chart shows that the price has enough space to travel towards the South.

The price heads towards the South at a moderate pace. It makes a long bearish wave, though, by making a breakout at the horizontal support. In the end, it comes out as an excellent trade for the sellers.

If we recap, the first drawn trendline is disobeyed by the price. It is breached, and the chart looks slightly bullish biased. It does not make any more bullish breakout but makes a long bearish move by making a breakout at the last swing low. It gives the sellers an opportunity to draw another bearish trendline, and that ends up offering an excellent entry.

Categories
Forex Daily Topic Forex Price Action

Trend Line Trading: The Entries to be Skipped

In today’s lesson, we are going to demonstrate an example of a chart that trends towards the North by obeying a trendline. It offers a long entry once the trendline is established. At the fourth bounce, it produces a bullish reversal candle. We find out whether the buyers should take a long entry or not upon getting the bullish reversal candle at the trendline’s support. Let us get started.

The chart shows that the price heads towards the North upon producing a bullish reversal candle. It consolidates and resumes its bullish journey. The chart looks like the buyers’ hunting ground.

The price upon producing a spinning top, it produces a long bearish candle. It consolidates with some candles and produces a bullish engulfing candle. The buyers may keep an eye in the chart to go long above the last swing high. If the price makes a bullish breakout, the buyers get two swing lows and two swing highs to draw an uptrending trend line.

Here it goes. The price makes a bullish breakout and heads towards the North further. The chart produces a bearish engulfing candle. It may make a bearish correction. As it looks, the chart belongs to the Bull without any doubt.

The price makes a bearish correction; consolidates and heads towards the North again. The breakout traders may find a long opportunity and grab some pips. The price makes a long bearish correction. In fact, it makes a breakout at a significant level of swing low. It seems that the chart is slightly bearish biased. Have a look at the chart below.

The trendline’s support holds the price and produces a bullish engulfing candle. The trendline traders may go long in the pair right after the last candle closes. The last swing high is the safest option to set take profit. It means the risk-reward ratio looks good for the trendline traders.

The price heads towards the North with good bullish momentum. However, it seems that the horizontal level of resistance is too strong to be breached. The price consolidates here with several candles. The last candle comes out as a bearish engulfing candle. The buyers may close the entry. The question is does the price come back to the trendline’s support or it makes a breakout at the highest high.  Let us proceed to the next chart and find out what happens.

The price comes back at the trendline’s support. It produces a hammer. Should the buyers go long from here as far as trendline trading is concerned? Think about it for a minute.

If your answer is ‘No’, you are right. The reason why the buyers should not go long from here is it does not make a new higher high upon getting its last bounce. In fact, traders may wait for the price to make a breakout at the trendline’s support and go short in the pair. In our forthcoming lessons, we will learn about trendline breakout and trendline breakout trading. Stay tuned.

Categories
Forex Daily Topic Forex Price Action

A Classic Example of Trading on a Double Top

Last week, in one of our lessons, we showed an example of how the price gets bullish based on the double bottom and flipped support. In today’s lesson, we are going to demonstrate an example of a double top and flipped resistance. a Double Top is the opposite of a Double Bottom, so it drives the price towards the South. It is one of the strongest bearish reversal patterns. Traders love to go short when a chart produces a double top in the Forex market. Let us now proceed and find out how it usually works.

The chart shows that the price heads towards the North and finds its resistance. It produces a bearish engulfing candle. Sellers on the minor chart may look to go short in the chart. However, the sellers in this chart may wait for either the price consolidates and makes a bearish breakout or to produce a double top.

The price finds its support and heads towards the level of resistance again. It consolidates around the level of resistance. A bearish reversal candle followed by a breakout at the last support may attract the sellers to go short in the pair since the chart would produce a double top, and the breakout would be a neckline breakout.

Here it goes. The price heads towards the South with good bearish momentum. It makes a breakout at the neckline and produces one more bearish candle. The sellers are going to wait to go short in the pair below the lowest low. However, it is best to wait for the price to consolidate around the breakout level and produce a bearish reversal candle to get a better risk-reward.

The price consolidates around the breakout level and produces a bearish engulfing candle at the breakout level. The sellers may go short below consolidation’s support by setting stop-loss above consolidation’s resistance and by setting a take-profit target with 1R at least. Please note, a double bottom/double top and consolidation around the neckline breakout level usually offers more than 1R. Let us find out how the trade goes.

The price heads towards the downside with extreme bearish momentum. It produces an inverted hammer. The price may make a bullish correction from here. Count the length that the price has traveled so far. It has traveled a long way offering about 6R to the sellers. One trade like this in a week may make a trader fulfilled. Thus, keep your eyes on patterns such as the Double Top/Double Bottom. Remember the procedure; wait for the price to consolidate and produce a reversal candle at the breakout level; trigger an entry below consolidation support/resistance, and manage your trade accordingly.

Categories
Forex Daily Topic Forex Price Action

The Double Bottom and the Flipped Level of Support

In today’s lesson, we are going to demonstrate an example of a double bottom, which pushes the price towards the North. The example also proves an old theory of support becomes resistance or resistance becomes support after a breakout. Let us get started.

The chart shows that the price makes a bearish move and finds its support. The level of support produces a bullish candle, which is followed by two more bullish candles. The buyers may wait for the price to consolidate and produce a bullish reversal candle to go long in the pair.

The price makes a long bearish correction. It comes back to the level of support again. A bearish breakout may attract the sellers to go short and drive the price towards the South. On the other hand, the buyers may wait to get a bullish reversal candle at its second bounce.

The chart produces a bullish engulfing candle. Since it is produced at the second bounce, the buyers in the chart may wait for the price to make a breakout at the neckline and go long.

The price heads towards the North with good bullish momentum. It makes a breakout at the neckline and trades above the level for one more candle. The buyers would love to see the price to consolidate or make a bearish correction at the breakout level and produce a bullish reversal candle to trigger a long entry.

The price makes a bearish correction and produces a bullish engulfing candle closing above the level of resistance. The buyers may trigger a long entry right after the last candle closes by setting Stop Loss below the candle’s lowest low and by setting Take Profit with 1R. Here we must notice that the neckline level becomes the level of support. This is one of the most reliable theories in the financial market.

The price heads towards the North with extreme bullish momentum. It hits 1R in a hurry and travels towards the North further. The last candle comes out as a hanging man, which is a bearish reversal candle. However, it is not a strong one. The price may keep traveling towards the North. Anyway, the buyers achieve their target with the entry, which is taken on two theories.

  1. Double Bottom- A very strong bullish reversal pattern
  2. Resistance works as a level of support after the breakout.

In the case of a double bottom and neckline breakout, we may sometimes find that the price does not come at the breakout level. It consolidates well above and makes a bullish move. In some cases, the price may not hit the target. However, if the price comes and produces a bullish reversal candle at the breakout level, the price may hit the target in most of the cases.

Categories
Forex Daily Topic Forex Price Action

Trend Line Trading and Trade Management

In today’s lesson, we are going to demonstrate an example of trendline trading and how the trade may be managed. We know that trading with a trendline is very rewarding since an established trendline often ends up offering several entries. However, things may not always go as smoothly as we like. Like other trading strategies, trendline trading may end up offering entries that may not hit the target or make traders have a loss. In today’s lesson, we are going to see an example of trendline trading, where things do not go according to traders’ expectations.

The chart shows that the price makes a strong bearish move. It may have found its support. It produces two bullish candles. The sellers may wait for the price to make a breakout at the lowest low to go short in the pair. Let us find out what happens next.

The price makes a long bullish move followed by a bearish correction. It produces a bearish engulfing candle and heads towards the South again. The chart is bearish biased, but the pair is trading around the level, where it had a bounce earlier.

The price makes a breakout at the level and trades below the level for several candles. It means the sellers have two higher highs from where the price makes two bearish breakouts. It means the sellers can draw a trendline here and wait for the price to go towards the trendline’s resistance to go short in the pair.

The price heads towards the South and produces a bearish engulfing candle. The sellers may trigger a short entry right after the last candle closes by setting take profit at the last swing low.

It looks fantastic for the sellers. The price heads towards the target in a hurry. It seems the sellers do not have to wait too long to reach the target. The way it has been going, the price may end up making a breakout at the last swing low too.

It does not. The price finds its support and produces a bullish engulfing candle. It heads towards the trendline’s resistance. The sellers must be disappointed with the entry. They may have to encounter a loss here.

The price finds its resistance as well. It does not go towards the trendline’s resistance, but it makes a bearish move. Look at the last candle. It comes out as a bullish engulfing candle. The entry is running with some profit, and the trendline’s resistance is still intact. What do you think the sellers do with the entry? If we follow ‘set and forget,’ we may leave it like this and wait until the price hits either the stop loss or the take profit. It is an H4 chart. Many traders look after their trades and manage their trade by taking a decision as far as price action is concerned. In this case, they may do two things.

  1. Close the whole trade
  2. Close 50% trade and let rest of the 50% run

We come across three types of trade management here. It is up to you which one you choose. Choose one that suits your trading style and stick with it.

Categories
Forex Daily Topic Forex System Design

Introduction to the Evaluation of Trading Systems

Introduction

Once the trading system has been tested and optimized, the developer must achieve its evaluation with a pre-defined set of criteria, which would allow him to decide if the strategy is viable to use or not. To develop this stage, the developer needs to identify which criteria he should use to perform this process.

Why Evaluate a Trading System?

The evaluation of the trading system is the step that the system developer uses to decide if the strategy performance fits the investor’s objectives or if it would be necessary to further optimize the strategy.

Criteria to Evaluate a Trading System

There is a broad range of indicators to evaluate a trading system and compared it with itself or with other strategies. However, the most common indicators are listed below.

Net Profit 

Net Profit is a widely used indicator in the finance world and plays an important place in financial analysis. It measures how much money returns the strategy during the test period. The Net Profit is the result of the sum of all trade results.

Net Profit = SUM ( res(i))

where res(i) are the individual results

The use of this parameter could drive the system developer toward making a biased decision without a risk level consideration, especially when comparing different trading systems. Net Profit is dependent on many factors, such as the frequency of trades and position size; therefore, this figure by itself says nothing about the system except that it is profitable.

Average Trade

The average trade measures the trading system goodness of how much money could return or lose per trade the strategy. Its calculation is the result of Net Profit divided by the number of trades N.

Average Trade = Net Profit/ N

Net Profit should also consider the slippage and commissions spent during the test period.

Percentage of Profitable Trades

This indicator shows the number of winning trades over the total trades. The developer should understand that a trend following system could produce a low percentage of profitable trades and still be a feasible system. However, the developer should weigh how the system is balanced with the average winning trade/average losing trade ratio.

The percentage of profitable trades is computed, as

Percent Profitable = 100 x(Nr of wins/ N) where N is the total number of trades.

Profit Factor

The profit factor is an indicator that measures the gross Profit in relation to gross loss. This ratio is ideal for comparing different systems or the same system compared with different markets. According to Jaekle and Tomasini, a good trading system should have a profit factor higher or better than 1.5.

The profit factor is computed as

Profit Factor = Gross Profit/ Gross loss

where Gross Profit is the total Profit of the profitable trades, and Gross Loss is the total loss of the losing trades.

Drawdown

This popular indicator measures the largest loss or capital decline of a trading system. In other words, the drawdown is the reduction of the equity level. Jaekle and Tomasini, in their work, exposes three types of drawdown identifies as follows:

  1. End trade drawdown measures how much of the open Profit the trader give back before the exit from a specific trade.
  2. Close trade drawdown corresponds to the difference between the entry and exit price without considering what is going on within the trade.
  3. Start trade drawdown tells how much the trade went against the position side after the entry and before it started to go in the direction of the trade.

For simplicity, Jaekle and Tomasini propose closing trade drawdown because they consider it the “most significant.” At the same time, the developer should be careful to use this measure because it is dependent on the trade size

The average drawdown accepted by professional traders and money managers vary from 20% to 30%. Although 10% is considered an ideal drawdown, looking for too small drawdowns may limit the growth of a trading system.

Time Averages

Time averages measure the average time spent in all completed trades during a specific test period of the strategy. The developer should weight the average time elapsed for each trade and the risk taken on each position.

Proposed Preliminary Step

To perform the evaluation properly, a fundamental step is to normalize the trade record, by transforming it to trade only one unit per trade, and also by computing the results in terms of Profit versus risk. Once this is done, the results of a trading system can be properly compared to other similarly normalized systems or its previous variations.

Conclusions

In this educational article, we presented a group of indicators that could allow the system developer to decide with objective evidence what could be the best configuration to apply in the trading strategy or if the system is unviable.

At the same time, the evaluation process must weigh the potential profits with the risk involved during its execution and not make decisions based on a unique criterion, such as the Net Profit or the drawdown.

Suggested Readings

  • Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
Categories
Forex Daily Topic Forex Price Action

Trend Line Trading: It Takes at Least ‘two’ to Draw a Trend Line

In today’s lesson, we are going to demonstrate an example of trendline trading. We try to learn what steps traders need to take to trade using a trendline strategy. We are going to demonstrate a chart, which heads towards the North by obeying an up-trending trend line. With the trend line trading strategy, we must remember, “It takes at least ‘two’ lows to draw a trend line.” Let us proceed and find out how it works.

The chart shows that the price produces a double bottom and heads towards the North. The buyers may wait for the price to make a bearish correction and create a bullish reversal candle to go long in the pair. The last candle comes out as a bearish pin bar. The price may make a bearish correction from here.

The price makes a long bearish correction. It produces several Doji candles. However, it does not create any bullish momentum. It is an H4 chart. The correction takes more than six candles. The level of resistance becomes a daily resistance. Some buyers may skip eyeing on the chart to go long in the pair. Let us see what happens next.

The chart produces a bullish engulfing candle and heads towards the North by making a new higher high. Do you notice anything here? Yes, we can draw an up-trending trend line. Let us draw it.

Over here, we have two swing lows. At the second swing low, the price makes a breakout at the last swing high. It means as far as fundamentals of drawing a trend line is concerned, the chart offers the buyers to draw an up-trending trend line. We must remember that it takes at least two swing lows (price trending higher from those points) to draw a trend line. The buyers are to wait for the price to come at the level of support and produce a bullish reversal candle to go long in the pair.

The price comes at the level of support and produces a bullish pin bar. It is delivered right at the trendline’s support. The buyers may get ready to go long in the pair above the reversal candle’s highest high.

The next candle comes out like a spinning top, which breaks the reversal candle’s highest high. However, the price does not head towards the North according to the buyers’ expectations. Nevertheless, on the next day, the price makes bearish correction at intraday charts and heads towards the North. Let us proceed to the following chart to find out how the trade goes.

The price hits the first target in a hurry. It makes a breakout at the level and creates a new higher high as well. It means the buyers are going to keep their eyes on the chart to go long again from the trendline’s support, and this is the beauty of the trendline trading.

Categories
Forex Daily Topic Forex Fundamental Analysis

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

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 Daily Topic Forex Fibonacci

Fibonacci Trading: Fibonacci Levels Help Traders be Precise

Fibonacci Trading: Fibonacci Levels Help Traders be Precise

In today’s lesson, we are going to demonstrate an example of a chart where the price makes a bullish move from 78.6% Fibonacci level. The 78.6% Fibonacci level often makes the price reverse towards the trend’s direction. In today’s example, the price produces a Morning Star and heads towards the trend’s direction with good bullish momentum. Let us see how it happens.

It is an H4 chart. The price produces double bottom and heads towards the North with good bullish momentum. On its way, it produces only a single bearish candle. The buyers are to wait for the price to make a bearish correction and to get a bullish reversal candle to go long with a good risk-reward in the pair.

The chart produces a bearish inside bar. Then, it produces one more bearish candle. Look at the last candle. It comes out as a doji candle. It seems that the price may have found its support. A strong bullish reversal candle may attract the buyers to go long in the pair and push the price towards the North to make a new higher high.

The chart produces a bullish engulfing candle. The combination of the last three candles is called Morning Star. This is one of the strongest bullish reversal patterns in the Forex market. The buyers may trigger a long entry right after the last candle closes. They may set stop loss below the signal candle’s lowest low. We’ll find out the take-profit level in a minute. Let us first see how the trade goes here.

The price heads towards the trend’s direction with extreme bullish momentum. The last candle comes out as a bearish inside bar. It may make a bearish correction now. Some sellers may close their trade manually after the last candle. You may notice if they do that, they lose a few pips. How about if we knew that the price may make a bearish reversal from here before the last candle is produced. Yes, it is possible by using Fibonacci levels. Let us draw Fibonacci levels on the chart.

The chart shows that the price trends from 78.6% level. When the level of 78.6% makes the price move, it usually makes a reversal at 138.2%. Thus, if we set our take profit at 138.2%, we do not have to wait to get a bearish reversal candle to close our trade manually. It saves our time and gets us more pips too. This is why Fibonacci (extension/ retracement) is called a magic trading tool, since it helps traders in taking and exiting with precision.

Categories
Forex Daily Topic Forex Fibonacci

Intraday Trading: How Fibonacci Levels Help You Determine Entry and Take-Profit Levels

In today’s lesson, we are going to learn an intraday trading strategy using the previous day’s highest high or lowest low. When the price makes a breakout at yesterday’s highest high or lowest low, the price usually trends towards the breakout direction. In today’s lesson, we are going to demonstrate an example of a bearish breakout. After making a bearish breakout at the previous day’s lowest low, the price consolidates and produces a bearish engulfing candle at a significant Fibonacci level. Then, it heads towards the South with good bearish momentum. We try to find out the Fibonacci level where the price trends from as well as the take profit level where the price may make a reversal. Let us proceed.

This is an H1 chart. The chart shows that the price makes a bearish move by producing an ABC pattern. The last candle closes the trading session at the lowest low of the day. The next chart shows that the price consolidates around the lowest low of the previous trading day and makes a good bearish move.

The chart suggests that it becomes intraday sellers’ territory. The sellers may look to go short in the pair. The question is how and when. Let us find these two answers.

The last candle comes out as a bullish candle. Since the chart has been bearish, the sellers may wait for the chart to produce a bearish reversal candle to go short below consolidation support. Here is another equation that they must consider. We will find that out in a minute.

The chart produces a bearish engulfing candle. The sellers may trigger a short entry right after the last candle closes. A question may be raised here that the chart produces a bearish engulfing candle earlier right at the breakout level. We have not concentrated on that to go short from there. However, we have planned to go short right after the last candle closes. What are the reasons behind this? Let us find out how the price reacts after the last candle is produced.

The price heads towards the South with good bearish momentum. The chart produces a bullish reversal candle. It may change its trend or make a bullish correction, at least. For intraday traders, they cannot afford to wait as many pips by waiting to get a bullish reversal candle. They are to close the trade right after the last bearish candle. The question is, how would they know that they should set their take profit at that level?

The answer is Fibonacci levels. Do you remember I was talking about the level for the price to resume its bearish move, we find that out by Fibonacci levels as well. See, the chart produces a bearish engulfing candle at the level of 61.8%, and it hits 161.8%. These are two levels intraday traders must count when a pair trades below the previous day’s lowest low or vice versa. Stay tuned for more lessons for intraday trading with Fibonacci levels.

Categories
Forex Daily Topic Forex Price Action

Pay Attention to the Signal Candle Along with Reversal Candle

In today’s lesson, we are going to demonstrate an example of a combination of an H1-15M chart trading strategy. The price makes a strong bullish move and makes a long bearish correction. It produces several bullish reversal candles, but the price does not react to all of them. It makes its bullish move at last. We try to find out why it reacts to that particular bullish reversal candle. Let us get started.

This is an H1 chart. The chart shows that the price produces a bullish engulfing candle and heads towards the North. The buyers are to wait for the price to make a bearish correction and produce a bullish reversal candle to go long again in the pair. The last candle comes out as a hanging man. It may make the pair make a bearish correction. Let us proceed to the next chart to find out what happens next.

The price makes a long bearish correction. It produces several bullish reversal candles. However, it does not make its bullish move. If we spot out, we find that there have been three significant bullish reversal candles. To make things clearer, have a look at the chart below.

Here are the three most significant bullish reversal candles that the chart produces. On the first two occasions, the price does not head towards the North. Let’s try to dig out what happens on the first occasion. On the first occasion, the chart produces a bullish engulfing candle. This is one of the strongest bullish reversal candles. The buyers are to flip over to the 15M chart. If the 15M chart produces a bullish continuation candle, they may trigger a long entry. Over here, the 15M chart does not produce a bullish continuation candle. Thus, the price does not head towards the North. On the second occasion, the 15M chart produces a bullish continuation candle. You can assume by the look of the next H1 candle. However, the price does not continue its move or makes a breakout at the highest high. The reason behind that is the reversal candle comes out as an Inside bar. On the third occasion, the reversal candle comes out as a bullish engulfing candle. Let us flip over to the 15M chart.

Look at the arrowed candle. This is what comes out after the bullish engulfing candle. The buyers have been waiting to get a candle like this after a strong H1 bullish reversal candle. They may trigger a long entry right after the candle closes (15M). Let us find out how the price moves now.

It moves towards the North with good bullish momentum. We must notice that when two factors come together, the price reacts vigorously. We may find that sometimes the price moves on the case of the second occasion as well. However, when it meets two of them together (H1 bullish engulfing and 15M bullish continuation and vice versa), most likely, it goes towards the trend and helps traders make money.

Categories
Forex Daily Topic Forex Fibonacci

Fibonacci Trading: A Reversal Candle is to be Followed by a Good Signal Candle

In today’s lesson, we are going to demonstrate an example of an H1-15M chart, which made a good bullish move upon producing a bullish reversal candle at a key Fibonacci level. The H1 chart produces an H1 bullish engulfing candle earlier, but the price does not head towards the North. It takes time then produces another bullish reversal candle. It then heads towards the North with good bullish momentum. We try to find out why it does not make a bullish move at the first attempt but makes it at the second.

This is an H1 chart. The chart shows that the price makes a good bullish move and then makes a bearish correction. It consolidates for a while at a level of support and produces a bullish engulfing candle. The H1-15M combination traders may flip over to the 15M chart to trigger entry upon getting a 15M bullish candle. Let us find out what happens next.

This is the H1 chart too. The chart shows that the price produces a bearish engulfing candle instead. We have not flipped over to the 15M chart yet. Let us find out how the 15M chart looks.

This is the 15M chart. The chart shows that the price does not produce any bullish candle closing ahead of the H1 bullish reversal candle. Thus, the price heads towards the South. The last candle comes out as a bearish engulfing candle in the 15M chart. It does not look good for the buyers anymore.

The price consolidates with more candles. The last candle comes out as a bullish engulfing candle again. The chart produces the candle at the same level. The combination traders may flip over to the 15M chart again to look for entry. Let us find out what the 15M chart produces this time.

This is how the 15M chart looks. The buyers may wait for a 15M candle to close above the last H1 candle’s close. The chart suggests that the level of support is a strong one, which may push the price towards the North with good bullish momentum.

The last candle comes out as a bullish candle closing above the last H1 candle’s resistance. The buyers may trigger a long entry right after the candle closes by setting stop loss below the level of support. We find out the level take profit with the help of Fibonacci levels.

See how the price moves towards the North. The price makes a bullish move and makes a new higher high. It makes a bearish correction and then heads towards the North again. Let us draw the Fibonacci extension on the chart.

The Fibonacci level shows that the price hits 161.8%. It goes even further up. It makes a bearish correction before producing the last wave. The level of 100% works as a level of support.

We have seen how important it is that the 15M chart produces a bullish continuation candle to offer an entry. At the first reversal, the price does not head towards the North since the chart does not produce any 15M bullish continuation. On the second occasion, it produces  a bullish continuation, and the buyers find an opportunity to go long and push the price towards the magic Fibonacci level of 161.8%

 

Categories
Forex Daily Topic Forex Price Action

It Often Makes You Wait Longer Than You Want

In today’s lesson, we are going to demonstrate an example of a daily-H4 chart combination entry. The daily char produces a bearish engulfing candle at a significant level of resistance. It makes the daily-H4 chart combination traders flip over to the H4 chart to look for a potential entry. The H4 chart shows that the chart creates a double top. Simply, an ideal combination for the traders to go short on that chart. However, things do not go as smoothly as traders expect it to go in the Forex market. Let us find out what happens.

This is the daily chart. The chart shows that the price, after being bullish, has a rejection at the level of resistance marked with the red line. The price comes down and makes a bullish move again. If it makes a breakout, the buyers may push the price further up. On the other hand, sellers are to wait for the price to produce a bearish reversal candle to consider short opportunities. Let us find out what happens next.

The chart produces a bearish engulfing candle. Since it shows in the daily chart, the combination traders may flip over to the H4 chart to look for a short opportunity. A double top resistance and a bearish engulfing candle suggest the sellers may jump in here to drive the price towards the South further.

It is the H4 chart. The chart produces a double top and makes a breakout at the neckline. The combination traders are to wait for the price to consolidate and produce a bearish reversal candle to go short below consolidation support. The price consolidates here. However, considering consolidation length, it is better to skip such entry.

The price heads towards the South with extreme bearish pressure. It travels a long way to produce a bullish reversal candle. The sellers would love to get the reversal candle earlier though. Anyway, it is better late than never.

The chart produces a bearish engulfing candle closing well below consolidation support. The sellers may trigger a short entry right after the last candle closes by setting stop-loss above consolidation resistance with 1R.

The price heads towards the South with good bearish momentum and hits the target. It seems that the price may travel towards the South further. The point to be noticed here is that the chart consolidates after traveling a long way. It would give a better reward if it consolidated and produced the signal candle earlier. It makes the sellers wait for more as well. In the end, the sellers make a profit out of it but think how hard they are to concentrate on it to make it work for them.Traders’ life is not as easy as some people may think.

Categories
Forex Daily Topic Forex Price Action

Even a Fragile Breakout Makes the Price Move

In today’s lesson, we are going to demonstrate an example of a chart producing a double top and offering entry. The breakout does not look that promising though. However, the price heads towards the breakout direction and makes a long bearish move. Let us get started.

The chart shows that the price has a rejection at a level and makes a bearish move. Upon finding its support, it produces a bullish engulfing candle and heads towards the North. The chart produces a bearish inside bar around the level of double top resistance. It may attract the sellers to keep their eyes on the chart to go short upon a neckline breakout.

The price heads towards the South with good bearish momentum. The last candle comes out as a bullish inside bar. It is a sign that the chart may get choppy instead of making a breakout at the neckline. However, we never know. The sellers may keep patience and wait for a bearish breakout.

The price consolidates for a while and makes a bearish move. The last candle closes below the neckline. It is a kind of breakout that the sellers are waiting for, but it is a breakout. Let us wait and see what the price does here.

The chart produces a spinning top. The candle closes within the breakout level. Thus, it is a valid breakout. The sellers may wait for the chart to produce a bearish engulfing candle closing well below the last swing low. Let us proceed to the next chart.

Look at the last candle. The candle comes out as a bearish engulfing candle closing well below the last swing low. The sellers may trigger a short entry right after the last candle closes by setting stop-loss above the breakout level and take profit with 1R.

The price heads towards the South with excellent bearish momentum. It hits the target of 1R in a hurry too. This means the trade setup has worked for the sellers nicely. Considering the breakout factor, the trade setup is not an A+ trade setup. However, we may consider two important factors here.

  1. Double Top
  2. The signal candle.

These two factors are significant to make the price move. Yes, when an A+ momentum breakout goes with two of them, it gives us more chances to make a profit out of the trade. Today’s example shows that as long as it’s a breakout, upon the breakout confirmation, the price may head towards the trend direction with good momentum if the mentioned two factors meet all the requirements.

 

Categories
Forex Daily Topic Forex Price Action

To Hold It or Not?

In today’s lesson, we are going to demonstrate an example of an H4 chart offering entry after consolidation. The price does not head towards the breakout direction after triggering the entry as expected. It is Friday and the market is going to close. The question is whether we hold the position during the weekend or close the position. Let us find this out.

This is an H4 chart. The chart shows that the price heads towards the North with good bullish momentum. The last candle comes out as a bearish inside bar. The chart belongs to the buyers. The price may make a bearish reversal from here. The sellers must wait to get a strong bearish reversal pattern to go short in the pair.

The chart produces another bearish candle followed by a doji candle. The buyers may wait for the price to make a breakout at the wave’s highest high to go long in the pair.

The price heads towards the North but does not make a bullish breakout. If the chart produces a bearish reversal candle around the level, it may get bearish. On the other hand, the buyers may still be hopeful that they get a bullish breakout to push the price towards the North further.

The chart produces a bearish engulfing candle right at the double top resistance. It makes a breakout at the neckline as well. Thus, the sellers may keep their eyes on the chart to go short and drive the price towards the South.

The price consolidates for a while. It produces a bearish reversal candle, but it does not make a bearish breakout to offer a short entry. The last candle comes out as a bullish candle. Both the buyers and the sellers must wait and let the price decide to give them a direction.

The chart produces a bearish engulfing candle closing well below consolidation support. The sellers may trigger a short entry right after the last candle closes by setting take profit with 1R. Let us proceed to the next chart to find out how the trade goes.

The price consolidates again. The chart upon producing a bearish engulfing candle at a double top resistance and getting consolidation, it does not move towards the trend’s direction. The sellers do not expect that. However, this is how the market goes. The market is going to close within three hours. Do the sellers close the position?

It is an H4 chart. If it were other intraday charts such as the H1, 15 M, 5M, we may close the position. In this case, the reversal candle is an engulfing candle; the reversal pattern is a double top; the price consolidates accordingly, and the signal candle comes out as a bearish engulfing candle as well. Thus, considering these factors the sellers may hold the position.

 

Categories
Forex Basic Strategies Forex Daily Topic

Trading Three-Point Reversal and Continuation Patterns

Introduction

The fundamental question that any technical investor asks it is where a trend begins and ends? The final aspiration of the analyst is to identify the start of a new market direction as early as possible, enter the market, and make money with the trend.

A technical tool that could aid in the reversal trend identification process is the reversal chart patterns, which we will review in this educational article.

Three-Point Patterns

Three-point patterns are chart formations that can be broken into two categories, identified as reversal and continuation patterns. But, in this regard, the technical trader should consider that sometimes reversal chart formations may act as continuation patterns.

Stop-Loss Setting: In general terms, the stop-loss level should be located above (or below) of the nearest peak or valley of the entry-level of the chart formation.

Take Profit Setting: There is a broad range of methods available to the technical trader to establish a profit target level. Some of the options to establish this level are:

  • A Fibonacci ratio projection.
  • Parallel trend lines defining a trend channel.
  • An equivalent length to the previous impulsive wave.
  • A range extent similar to the previous move.

Trailing Stop Use: A trailing stop is an added method to protect profits. The trail stop advances as the move progresses in favor of the trade, but the stop level holds during retracements.  This method not always improve the results, although it is an excellent psychological anchor. The downside of using trailing stops, however, is that it could generate a premature closure of the trade, thus not allowing a trade to mature properly while the current trend is still progressing.

Classical Three-Point Patterns

In the technical analysis literature, there exists a wide variety of chart patterns. However, both Thomas Bulkowski, as Fischer and Fischer, agree on a reduced group of trend reversal patterns as the best indicators of a reversal. These are identified as follows.

Head and Shoulder Pattern: The H&S pattern is the most popular trend reversal pattern. H&S tends to appear regularly in the financial charts. However, in some cases, the H&S formation fails, and the market action continues developing with its previous trend. An ideal Head and Shoulder pattern should have the right shoulder at the same level as the right shoulder.

A market entry might be taken once the price action breaks and confirms the close below (or above) the neckline. The stop-loss should be placed above the second shoulder. The profit target level is assumed to be placed at an equivalent distance taken from the head to neckline, and projected from the breakout level.

Triple Top and Bottom: These formations rarely appear in financial markets. However, when they do, they tend to be profitable. 

The entry signal is to be set once the price breaks and closes above (or below) the top (or the low) price range. The stop-loss level should be placed below (or above) the triple top (or bottom) range. As a profit target, it is recommended a range equivalent to the length of the high and low, projected from the breakout level.

Rectangle Pattern:  In this formation, the price moves between two parallel trend-lines that progress horizontally. A trade signal will trigger after the price breaks and closes above (or below) the rectangle range. 

A conservative way to confirm the entry signal consists of waiting for the closeout of the rectangle formation range. The stop-loss and profit target levels hold the same arrangement as in a triple top and bottom pattern.

Key-Reversal Days: Although a Hammer Candlestick pattern offers poor performance, it tends to increase when the price action develops a hammer in a third peak or valley at the end of a fast market.

This pattern does not have any specific entry setup; however, Fischer and Fischer considers that for the pattern to be considered, the shadow’s length of the hammer should be at least three times its body.

The stop-loss should stay below (or above) the low of the key-reversal day. The profit target level may be set at the same distance as the previous trading range.

Three Ascending Valleys and Three Descending Peaks: These formations are usually the most reliable three-point patterns.

The essence of these formations, higher (or lower) highs and lows, indicate the continuation of the trend. Generally, a long position signal will trigger if the price rises above the highest peak and a short position when the price settles below the lowest valley.

The stop-loss should be located above (or below) the recent peak (or valley.) Finally, the profit-target level should be set at the equivalent distance of the previous range projected from the entry-level.

Triangles: Triangle patterns shows three basic variations, symmetric, descending, and ascending. The symmetric triangle could be both a reversal and a continuation formation; however, the ascending and descending triangles usually are continuation patterns.

The entry signal happens when the price breaks the triangle base-line. A stop-loss order may be located above the triangle top. In the opposite case, the protective stop should be placed below the triangle.

As profit-target level, a range from the highest to the lowest level of the triangle can be projected from the breakout level.

Conclusions

The identification of the beginning of a new trend and how to make money from it has been the primary investor’s quest since Charles Dow’s era. Three-point patterns are useful tools not only to identify trend reversals but also to recognize continuation patterns.

In this context, Bulkowski’s work cited by Fischer and Fischer provides a useful statistical study, illustrating the failure rate of a broad range of chart formations. For example, the rectangle top pattern when the price breaks up has a 2% failure rate. On the other hand, the top key-reversal pattern has a 24% failure rate.

Lastly, Bulkowski’s ranking study could be a powerful tool for the technical trader, seeking ways to reduce the risk of his market entries. In this regard, identifying the patterns and their execution requires practice and confidence when placing the order on a breakout.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).
  • Bulkowski, T.; Encyclopedia of Chart Patterns; John Wiley & Sons; 2nd Edition (2005).
Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Full-Time Employment’ Fundamental Forex Driver

Introduction

Full-Time Employment statistical figures are a good measure for long term economic growth. Understanding the difference between part-time and  Full-Time employment and its economic impact can help us better understand the long-term trends in economic growth.

What is a Full-Time Employment?

Employment

It is the state of having paid work. A person is considered employed if they do any work for pay or profit. People who are eligible for employment are between the age of 15 and 64 and are called the working-age population.

Full-Time Employment

As such, there is no fixed law defining and differentiating full and part-time employment. Conventionally 40 hours a week has been considered as Full-Time employment, but lately, deviations from this have been observed.

For instance, the United States Bureau of Labor Statistics (BLS) describes 35 hours or more per week as Full-Time employment. Conversely, 1 to 34 hours of work per week is considered part-time employment. The Affordable Care Act (ACA) explains Full-Time employees as those who are working for 30 or more hours a week.

How can the Full-Time Employment numbers be used for analysis?

Distinguishing between the part and Full-Time employment has benefits. Full-Time employment generally has the following benefits over part-time or contract-based employment:

Paid leaves: Full-Time employees are eligible to take leaves or vacation for which there would be no loss of pay. It is generally not applicable to part-time employees. Most part-time employees have a per hour payment. They are paid for the number of hours worked.

Healthcare plans: When an employee spends most of his life working for an organization, it is the company’s responsibility to take care of his health and well being. Full-Time employees enjoy the benefits of healthcare insurance for themselves and their family members as well. Health insurances secure employees against heavy financial losses during health emergencies. Part-time employees don’t generally have those benefits.

Pension plans: Full-Time employees are also given the benefits of retirement plans through pension funds or any other retirement scheme. It financially secures the employee in his/her old age, which is essential. Part-time employees generally do not have any such benefits and usually have to save for retirement themselves.

Job Security: During times of economic slowdown or even worse a recession, companies generally lay off their part-time and contract workforce first. Full-Time employees are their prime assets and generally are managers or professionals in the organization. Hence, Full-Time employees are generally less vulnerable to business and economic cycles.

Part-time employees could also be seasonal and find it hard to get work during off-seasons and are more vulnerable to business cycles.

It is easy to infer that the standard of living of Full-Time employees is generally better than that of their counterparts. As employees feel more financially secure in a Full-Time job, their spending habits would reflect the same. Credit eligibility also is more for Full-Time employees over part-time ones. Hence, in the long run, much of the consumer spending would likely be coming from Full-Time employees.

No one seeks part-time employment voluntarily, and no one wants to sit idle during certain quarters of a year. When companies are making long term progress in their profits rather than short-term gains during particular business cycles, a growth in Full-Time employment could be observed. When businesses are fully established in their sector and are marginally well-off, they opt to hire and retain Full-Time employees more. Otherwise, companies would rely on seasonal hiring and firing strategy only to keep the business running.

Policymakers giving the necessary support and means in terms of infrastructure, financial support, ease of doing business could help organizations to grow faster and offer better employment benefits. As more people from the labor force go into the full-time employment category, fewer people are working as part-time employees overall. When the majority of the labor force is full-time employed, we can expect a robust economy and steady economic growth that is immune to both domestic and international business and economic cycles.

Impact on Currency

Full-Time employment and its other half part-time employment only come into picture when we are trying to assess long-term economic growth and improvements in the citizens’ living standards. Hence, Full-Time employment statistics are more useful to policymakers who are committed to bringing wellbeing to their citizens through meaningful policies.

The currency markets are more concerned with the overall picture and the current business cycle’s impact on the currencies. Hence, Full-Time employment statistics, which are only part of the total labor force, do not move the markets like other employment indicators.

Full-Time employment is a low impact coincident indicator that is more useful for measuring long-term improvements in the quality of people’s lives for investors and policymakers only.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes monthly, quarterly, semi-annually, and yearly Employment Situation Reports on its website. The labor force statistics from the Current Population Survey details the nominal values of the full and part-time workers classifying them based on age, sex, race, and ethnicity. Full-Time employment reports are available monthly, quarterly, and annually.

Sources of Full-Time Employment

The United States Bureau of Labor Statistics Current Population Survey details Full and Part-time employment statistics in detail. The United States Bureau of Labor Statistics publishes monthly employment and unemployment reports that are very useful for market analysis. We can also find the same indexes and many others with a comprehensive summary and statistics of various categories on the St. Louis FRED that are relevant for our study. Consolidated reports of Full-Time employment for most countries can be found in Trading Economics.

Full-Time Employment Announcement – Impact due to news release

Full-time employment refers to the number of people working a specified number of hours or more per week at their main job or only job. The number of hours is fixed by the government, who later classify employees in different categories.

Traders and investors worldwide watch the indicator value closely as it tells about a country’s employment situation. For example, in Canada, if a person works 30 hours or more per week, he is considered a full-time Employee. One should expect high volatility in the currency during and after the news release.

The below image shows the employment change in Canada during May. We see that full-time employment increased in Canada by 219.40, which should be positive for the currency. Let us witness the impact of this news release on the Canadian dollar by considering various currency pairs.

CAD/USD | Before the announcement

Let us start with the CAD/USD currency pair to observe the impact of full-time employment change on the Canadian dollar. The above snapshot shows the 15 minutes time-frame chart of the currency pair. The currency has been maintaining a range before the news announcement, and it is only three hours before the release, there seems to be a positive momentum building up for CAD/USD.

CAD/USD | After the announcement

After the news announcement, the price initially moves higher, but this is immediately sold, and the market erases most of the gains. The wick on top of the news candle indicates a strong buy sentiment that is carried over, and momentum continues to build up over the next days. As we can see, despite strong sell at the end-of-the-day positive momentum still built up and the market reached a new high than before the news announcement.

AUD/CAD | Before the announcement

The above image is a snapshot of the AUD/CAD pair on a 15-minute time frame before CAD full employment data release at 12:30 GMT. As we can see before the news announcement, positive momentum was building up, and a downward trend started just hours before the news candle.

AUD/CAD | After the announcement

After the news announcement that came in favor of CAD, AUD/CAD falling momentum increases, and investors lose further confidence in AUD, and a strong sell is seen. That momentum is carried over to the next two days, and the AUD continues to fall against CAD.

CAD/JPY Before the announcement

The above image is a 15-minute time-frame snapshot of CAD/JPY. Before the news announcement, there is no clear uptrend or downtrend.

CAD/JPY After the announcement

It is only after positive news for CAD through full-time employment report the uptrend is further amplified and continues throughout the next few days.

The full-time employment data was able to move currency in favor of CAD against significant currencies after the news announcement confirming the importance of the economic indicator.

Categories
Forex Daily Topic Forex Fibonacci

Tweezer Top/Tweezer Bottom and Fibonacci Levels

In today’s lesson, we are going to demonstrate an example of a Tweezer Top forming at a significant Fibonacci level. We’ll find out the impact of a tweezer top in the chart. Let us get started.

The chart shows that the price has a rejection at a level of resistance twice. At the second bounce, it produces a doji candle. A doji candle is not considered a strong reversal candle. If the next candle comes out as a bearish engulfing candle, the sellers may keep their eyes in the pair to look for short opportunities.

The next candle comes out as a bearish engulfing candle. It makes a strong statement that the bear has taken control. Double top support, along with a bearish engulfing candle, usually attracts more sellers to look for short opportunities.

The price consolidates and finds its resistance. The chart produces a bearish engulfing candle. The sellers may go short right after the last candle closes with 1R. Let us proceed to the next chart to find out how the entry goes.

The chart shows that the price heads towards the South with good bearish momentum. It hits 1R at a moderate pace. It finds its support again and heads towards the North to make a bullish correction. Look at the last two candles. The first candle comes out as a bullish candle, and the last candle comes out as a bearish candle, both having a long upper shadow. The combination of these two candles is called “Tweezer Top”. Tweezer Top is considered one of the strongest bearish reversal patterns. Those two upper shadows suggest that the price has a strong rejection at the level of resistance. The bearish body of the last candle suggests that the bear may take over. Another point we may consider whether it is produced at a significant level or not. By drawing the Fibonacci extension, we may find this out. Let us draw Fibonacci extension and find out how far the price travels towards.

We see that Tweezer Top is formed right at the 61.8% level. Usually, the 61.8% level drives the price towards the level of 161.8%. This is what happens here, as well. The price hits the level of 161.8% within the next candle.

We know how handy drawing Fibonacci level can be in trading. Especially, 61.8% and 38.2% level plays a very significant role in driving the price with good momentum. If we get a strong reversal pattern such as Tweezer Top or Tweezer Bottom, it adds more pressure. Thus, the traders do not have to wait long to achieve their target.

Categories
Forex Daily Topic Forex Price Action

Reversal Breakouts Offer a Lot

The trend is traders’ friend. Breakout is traders’ best friend. In today’s lesson, we are going to demonstrate an example of an H1 breakout, which makes a reversal even in the daily chart. Thus, the price heads towards the breakout direction with good momentum ending up offering an excellent reward. Let us get started.

The chart shows that the price makes a strong bearish move and finds its support. Upon producing a bullish engulfing candle, the price heads towards the North at a moderate pace. The price does not make a breakout at the last swing high. Thus, the chart is still bearish biased. Please note, the H1 chart does not show, but the daily trend has been bearish in this chart.

The chart shows that one of the candles breaches through the last swing high, closing well above the level. The last candle comes out as a bullish candle as well. It confirms the breakout. The buyers may wait for the price to consolidate and get a bullish reversal candle to go long in the pair.

The last two candles come out as bearish candles. The spinning top closes within the level of support. If the level produces a bullish engulfing candle, the buyers may go long in the pair.

The last candle comes out as a bullish engulfing candle closing well above consolidation resistance. The buyers may trigger a long entry right after the candle closes by setting stop loss below the level of support and by setting take profit with 1R.

The price heads towards the North with extreme bullish momentum. The way the chart looks, it seems it may continue its journey for a while. The chart shows that the buyers achieve their target within the next two candles after triggering the entry. Let us proceed to the following chart to see what the price does.

The last candle comes out as a bearish engulfing candle. It is produced at the second rejection as well. This means the chart forms a double top here. A double top resistance forming a bearish engulfing candle suggests that the price may make a bearish move here. However, if we calculate the length of the bullish move, it ends up being a very good one. This is what usually happens when the price makes a breakout at the last daily candle’s highest high when the daily chart is bearish and if the breakout takes place at the lowest low when the daily trend is bullish. Make sure the price consolidates and produces a strong reversal candle at the breakout level. If that happens, it often ends up offering an excellent reward in the end.

Categories
Forex Daily Topic Forex Fibonacci Forex Price-Action Strategies

Generating Trading Signals Using Fibonacci Tools

Introduction

In our previous educational article, we reviewed how the identification of double top and double bottom formations could provide a trading setup, which, according to its technical configuration, returns a risk to reward ratio equivalent to 1:1.

In this educational article, we’ll review the use of Fibonacci retracements and extensions to generate trading signals.

Trading the Market Corrections

Trading based on corrective movements has its origin in the idea that when the price action makes an impulsive move, the market develops a corrective movement before continuing to develop a new motive move.

This method’s risk derives from the possibility of false breakouts, which, depending on the primary trend, could be a “bearish trap” or “bullish trap.”

Considering that there is a broad range of Fibonacci ratios, Fischer & Fischer propose filtering the trading volume using the 61.8% level as a conservative level. The use of 61.8% provides the technical trader the possibility to invest risking a reduced part of its capital.

As a second entry filter criteria, traders could use the swing size average of the asset under analysis. Considering that every financial asset holds a different personality and volatility, this filter demands the technical trader to develop statistical backtesting to understand the asset’s inherent volatility under study.

Trade Setup

Entry Setup: Considering that the entry rule requires a unique Fibonacci level, the entry will occur once the price touches and closes above (or below) the level 61.8%. This criterion could help shield the technical investor against a potential false breakout.

Stop-Loss: The trade invalidation level will be set above/below the last peak/valley preceding the entry-level. The benefit of trading using the 61.8% level as the point of market entry is the reduced risk compared with other typical Fibonacci levels, such as 38.2% or 50%.

Trailing Stop as Profit Protector: This method by itself doesn’t make the use of a profit target level. As an alternative, the use of a trailing stop could help protect profits with a trailing criterion of the last peak or valley. The disadvantage of this method is that, constrained by the volatility observed in the real market, it is unlikely that the resulting risk to reward ratio goes beyond a mere 1:1.

Trading the Market Progress

As the Elliott Wave Theory states, the price tends to advance in three or five waves. This method uses Fibonacci extensions to define target levels.

In general, when the price action develops a price movement on strong momentum and, then, its correction doesn’t violate the starting level of the initial move, it means the market is not building a bullish or bearish trap; thus, it is likely the action will continue progressing in the direction of the first move.

Entry Rule:  In the same way as in the case of a price correction setup, the entry should be set when the price retraces and closes, starting a new impulsive move. This condition doesn’t require that the price retraces to the 61.8% level of the initial movement.

Stop-Loss: The invalidation level of the trade setup should be located below the last peak or valley preceding the entry-level.

Profit Target (Three Movements Case): When the price evolves following a three-move sequence, the profit target should be set at 161.8% of the projection of the first sequence, as illustrated in the next figure.

Profit Target (Five Movements Case): This scenario considers two options. The first one is when the progress happens in the third segment and the second one when the price action has completed the third move and could be initiating its fifth movement. These scenarios are illustrated in the following figure.

Conclusions

In this educational article, we reviewed two cases in which to use as Fibonacci retracements as the extensions tool. Both methods presented in this article offer specific risks. The use of the corrections method provides a reduced risk to the technical trader, due to the trailing stop use criterion, this doesn’t mean that it could deliver a risk to reward ratio of over 1:1.

On the other hand, the use of the Fibonacci extensions, according to Fischer & Fischer, always means to invest against the trend. However, a combination of both methods could provide an opportunity to enter in favor of the market direction.

To reduce the noise and risk in the investment process, the technical trader must evaluate the performance strategy developing statistical backtesting with historical data before risking real money.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).

 

Categories
Forex Daily Topic Forex Price Action

If Double Bottom/Top Does Not Offer Entry, Wait for Triple Bottom/Top

In today’s lesson, we are going to demonstrate an example of double bottom support, which does not end up producing entry. However, the price comes back to the level of support again, and upon producing a triple bottom, support offers a beautiful trade setup. Let us get started.

This is the daily chart. The price makes a strong bearish move and bounces off at a level of support. It produces a bullish inside bar and heads towards the North. The price comes back to the level of support again upon producing a bullish engulfing candle. The buyers may flip over to the H4 chart for the price to consolidate and produce a bullish engulfing candle to trigger a long entry.

We are still on the daily chart. The H4 chart does not consolidate or produce a bullish reversal candle. On the daily chart, the price comes down again and consolidates around the level of support. Both the buyers and the sellers are to wait for the price to see what it does. Does it produce a bullish reversal candle, or does it make a bearish breakout?

The chart produces a bullish engulfing candle at the level of support again. It has become a level of triple support. Thus, the buyers may be more interested in going long in the pair. The buyers may flip over to the H4 chart now.

This is how the H4 chart looks. The last candle comes out as a hammer. The buyers are to wait for a bullish engulfing candle to trigger a long entry. Let us proceed to the next chart to find out what the price does.

The price consolidates for four more H4 candles. At last, it produces a bullish engulfing candle closing well above consolidation resistance. It takes a long time to produce the signal candle, but it does just before the day ends. It is a valid signal. The buyers may trigger a long entry right after the last candle closes by setting take profit with 1R.

The price heads towards the North with good momentum and hits the target. The extreme bullishness of the signal candle makes the price hit the target in a hurry.

If we look back, when the chart produces the first bullish engulfing candle at the level of double bottom support, it does not end up offering an entry. When it bounces again at the same level of support, it ends up offering an entry. This is what may happen more often than traders think. If a buyer leaves the chart when it does not offer entry, he will lose the chance to make a profit from the trade setup that we have demonstrated here.

Categories
Forex Chart Basics Forex Daily Topic

Trading the Double Top and Double Bottom Pattern

Introduction

In our previous articles, we had reviewed several technical formations that render signals for potential market-entry setups in a trend reversal context or trend continuation.

In this educational article, we will review the characteristics of the double top and double bottom pattern.

The Nature of Double Top and Bottom

The double top and double top formations are the most popular trend reversal technical patterns in financial markets. These patterns characterize themselves by developing an internal “M” and “W” structures on double tops and double bottoms respectively.

Considering the fractal nature of financial markets, the technical trader can detect these formations in any timeframe, from intraday chart to monthly range. 

The double top formation tends to be tough to identify, especially if the second peak is higher than the first one. This situation occurs because the technical trader could be waiting for the uptrend continuation or a bullish trap.

The Setup Rules

The price action will generate an entry signal if the price breaks and closes below (or above) the swing between both peaks (or valleys), as shown in the following figure.

The stop-loss order will take place above the last high (or low); this distance between the entry-level and the previous top (or bottom) is known as the swing size, as illustrated in the last figure. 

The double top/bottom pattern holds an easy way to identify the profit target level. The technical rule says that if the swing size is 50 pips, the profit target will locate at 50 pips from the entry-level.

The Behavior of the Double Top and Bottom Formation

Thomas Bulkowski, in his “Encyclopedia of Chart Patterns,” described the performance of double top and bottom considering some shape variations as a rounded peak or a spike. 

In general, Bulkowski reveals that on average, the break-even and failure rate of the double top pattern is 11.5%, while the percentage of break-even and failure of double bottom is 6.5%. However, the double top formation tends to reach its price target 71.5%, while the double bottom tends to strike its target 51.25% of times.

Bulkowski summarizes its finds stating that some variations of double top and bottom patterns with a narrow range perform better than those that show a wide one.

Conclusions

In this educational article, we reviewed the essential reversal formation known as the double top and double bottom pattern. The setup studied provides the technical trader a one to tone risk to reward ratio, which could be increased as the trade advances in favor of the trend.

In the next article, we’ll review the use of Fibonacci tools as retracements and extensions to identify trade opportunities.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).
  • Bulkowski, T.; Encyclopedia of Chart Patterns; John Wiley & Sons; 2nd Edition (2005).
Categories
Forex Chart Basics Forex Daily Topic Forex Price-Action Strategies

Spotting Out Support/Resistance is an Art

Support/Resistance levels are one of the most important factors in trading. In today’s lesson, we are going to demonstrate an example of adjustment in determining the support/resistance level.

Forex market gets volatile from time to time. It often produces spikes. Sometimes traders have to count those spikes to determine support/resistance level, and sometimes they do not have to do that. We try to learn when we have to count, and when we do not have to count those.

This is an H1 chart. However, any chart may look like this. If we are to draw support/resistance levels here, we may find out the two most significant points where the price bounces and where it gets a rejection from. Let us proceed to the next chart with those two lines.

Look at the level of drawn support. The price bounces at the level and produces a bullish inside bar. It comes back at the level and bounces twice. At the second bounce, it produces a long lower shadow and heads towards the North. We may skip counting the spike here and draw the level of support at where the price produces a bullish inside bar and bounces twice later.

Look at the level of resistance. This is where we have counted spikes since the price reacts at the level earlier. However, we may have to adjust it later. We will be able to find this out later as far as price action is concerned.

When the price comes back down, it breaches the level of support and produces a good bullish candle. However, there is a gap, and the price goes back within the previous level of support. Thus, we may still consider the drawn level as a significant level of support.

The price heads towards the North and breaches the level of drawn resistance. The price comes back within the drawn level again. The drawn level is still a significant level of resistance since the price reacts to it. However, we have a new highest high, which must be counted.

The price heads towards the South and reacts to the level of drawn support again. Upon producing a bullish inside bar, it heads towards the North again. Here are two questions.

  1. Where would you set your take profit level as a buyer?
  2. Do you have anything else to do here?

As a buyer, you may consider taking your profit at the previously drawn level. Here we have drawn the level of resistance with a little adjustment. Have you noticed it? Yes, this is what you have to do. Spotting out significant points and monitoring price action around them are two most important things to be able to make adjustments with the support/resistance level. To be able to trade accordingly, we often need to do this. Thus, we must learn the art of adjusting the support/resistance level.

Categories
Forex Daily Topic Forex Fundamental Analysis

What Does ‘Gross Fixed Capital Formation’ Economic Indicator Tell About A Nation’s Economy?

Introduction 

Gross Fixed Capital Formation can help us as a leading indicator of economic growth. GFCF figures increase when growth is forecasted, be it for companies, governments, or organizations, etc. Understanding this macroeconomic indicator can help us understand the level of economic activity going on the global scale and forecast the changes in the rate of growth for different economies, as indicated by the Gross Fixed Capital Formation figures.

What is Gross Fixed Capital Formation?

Gross Fixed Capital Formation (GFCF) is a measure of gross net investment into fixed capital goods by companies, governments, and households within the economy for a specific period. It is also called investment in short, or business investment generally.

Capital Goods: These are tangible assets that are used by companies to produce consumer goods and services. In simpler words, it refers to the physical goods required by a company to run its business. For example, a transportation company will have trucks as its capital assets that enable them to run its business and generate revenue. An IT company would have computers that would be its capital assets or goods that help it run its business. Any tangible (or physically quantifiable) good required in assisting the company production is termed as Capital Goods. Hence, Capital Goods can be tools, equipment, raw materials, transportation assets, power supply, etc.

Hence, GFCF is a measure of how much a company invests in acquiring capital assets to maintain or enhance its production capacity and efficiency. Capital Formation is a necessary component for any business or government operation. 

It is called “Gross” because it does not take into account the adjustments to consumption associated with the fixed capital, i.e., depreciation of the fixed capital assets that occur over time due to normal wear and tear. 

GFCF is not a gauge of total investment. It only measures net addition to fixed assets, and all financial assets are excluded along with inventory stocks and other operating costs. Among all these exclusions, the essential exclusion is that of real-estate (land sales and purchases). Real estate transactions only mean that land has been only transferred in ownership from one organization to another and is only included when a new land that did not exist before was created and added into the economy.

How can the Gross Fixed Capital Formation numbers be used for analysis?

As the capital goods wear out over time and a decrease in value, companies that cannot afford new capital goods will observe a reduction in production output. Also, a company that plans on expansion would be required to acquire new capital assets to increase its production capacity.

The difference in the Capital Formation figures for different countries reflects the economic development rate and the catch-up process amongst the compared economies. Higher investment rates into capital goods in less developed economies will lead to improved living standards in the long term on account of accelerated economic growth and improved equipment for the workforce with modern technology. 

GFCF is, in a way, a measure of how much of the revenue is invested back into its growth. The higher the investment into its growth, the more accelerated growth the economy undergoes in the long-run. Of course, when a portion of the revenue goes back into the business itself, it leaves lesser revenue for the shareholders or the business owners in the short run, but it pays off in the long run.

Changes in GFCF is indicative of fluctuations in business activity, business confidence, growth pattern. During economic uncertainty or a recession, business investment is reduced, as decreased revenue is consumed for immediate needs and maintenance operations. On the other side, during times of consistent economic growth and stable market, there is a general increase in GFCF as it is more likely to yield favorable returns in the future. It is less risky to invest in a stable market environment.

The below snapshot of the GFCF for the United States establishes our analysis point above:

Impact on Currency

GFCF is a proportional macroeconomic indicator. It is very suitable for macroeconomic analysis and is more suited to the regional or international level analysis of market conditions. While the increase in the GFCF figures is good for the economy in the long run, it is an especially useful indicator for long term traders and investors. It is not a very reliable measure for short-term currency market volatility assessment.

It is a quarterly report, and hence, other monthly indicators would be more appropriate for traders looking to stay ahead of the fundamental trends. But this GFCF is a leading indicator for companies, or economic growth both and can act as a double-check for our fundamental analysis.

Hence, in the currency markets, the GFCF figures bear low impact due to the frequency of release, and its long-term trend indicative nature makes it a less favorable indicator for day and swing traders.

Economic Reports

The GFCF figures are macroeconomic indicators and are generally available on the official websites of international organizations like the OECD (Organization for Economic Co-operation and Development), World Bank, or IMF (International Monetary Fund). The reports are released quarterly and annually for most countries, as data becomes available from different countries’ respective reporting institutions.

Sources of Gross Fixed Capital Formation

For the United States, the St. Louis FRED maintains the OECD data of GFCF here

You can find the GFCF data for all the OECD countries on its official website here.

You can find the GFCF list for various economies in the sources mentioned below. 

GFCF – Trading Economics

GFCF – World Bank

GFCF – United Nations

GFCF – IMF

Impact of the” Gross Fixed Capital Formation” news release on the Forex market

In the above section of the article, we defined the Gross Fixed Capital Formation economic indicator, which estimates the value of acquisitions of new or existing fixed assets by the business sector, governments, and households. When this value is subtracted from the fixed assets, we get the Gross Fixed Capital. Investors around the world consider this indicator to be an essential determinant of the GDP of a country. This value is directly reflected in the GDP as it measures the total assets owned by the government and individuals. 

In today’s article, we will be analyzing the impact of Capital Formation on the value of a currency and watch the change in volatility due to the news announcement. For that purpose, we have collected the previous and latest Capital Formation data of Japan as it is shown in the below image. A higher than expected number is considered to be bullish for the currency while a lower than expected number is considered bearish. Let us find out the reaction of the market to this data.

USD/JPY | Before the announcement:

The first pair we will be reviewing is the USD/JPY currency pair, where the above image shows the characteristics of the price before the news announcement. It is very clear from the chart that the market is in a strong downtrend with no retracement. This means the Japanese Yen is stable, and we might not see price retracement until strength comes back in the U.S. dollar.    

USD/JPY | After the announcement:

After the news announcement, volatility increases to the upside, and the price shows signs of bullishness. Since the Japanese Yen is on the left-hand side in this pair, and increasing price signifies the weakening of the currency. The market reacted negatively to the news release due to the weak numbers. However, we see that weakness does not sustain, and the volatility increases to the downside after a couple of candles.

GBP/JPY | Before the announcement:

GBP/JPY | After the announcement:

The above images are that of the GBP/JPY currency pair, where we see in the first image that the market is in a strong downtrend indicating that the Japanese Yen is stable. As there is a lot of bearishness in the market concerning the British Pound, an ideal trade plan would be to take a ‘short’ trade as the price pulls back to a ‘resistance’ or ‘supply’ area. Until then, we cannot position ourselves in the currency pair. After the news announcement, the price initially moves higher, owing to weak Capital Formations data where there was a reduction in the total assets compared to the previous quarter. Due to the selling pressure witnessed from the top, the weakness in Japanese Yen does sustain, and the ‘news candle’ closes with a wick on the upper side. The market fails to retrace even after the news release, and the price continues to move lower.       

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where the characteristics of the chart appear to be similar to that of the above-discussed pairs. The price is violently moving lower before the news announcement with almost no retracement of any kind. We will be looking to sell the currency pair only if we geta price retracement due to the news release or any other release.

After the news announcement, we see the volatility increases to the upside for some time, and the ‘news candle’ closes with some bullishness. The market goes up as a consequence of the below than expected Capital Formation data where there was a reduction in the Capital Formation during the fourth quarter. Cheers!

Categories
Forex Daily Topic Forex Videos

Fundamental Analysis For Novices – German IFO Indicators

Fundamental Analysis For Novices – German IFO Indicators 

Thank you for joining our educational video four fundamental analysis for novices. In this video, we will be looking at the German IFO Indicators.


One of the absolute must-dos for traders is to routinely analyze economic data releases from governments around the world. These show the economic health of that particular nation’s economy.  This data can be found on an economic calendar such as this one.  The majority of brokers provide an economic calendar, and you should refer to it every day in order to avoid trading around times of possible extra market volatility surrounding the release of high impact economic data.
The key components of an economic calendar are the day, date and time, the actual event, the likely impact of the data, the actual data upon release, the previous data for comparison, and a market consensus of what the likely figure will be.

INSERT WHAT IS THE GERMAN IFO

This is a German business sentiment index. The data is compiled by the Munich based CESIFO Group. The institute conducts a survey of around 9000 German businesses, including manufacturing, the service sector, trade and construction, and focuses on their assessment of the business situation, including their short-term planning.  Each response is weighted according to the significance of the particular firm’s importance within the German economy. The data is compiled in such a way to reflect outcomes between – 100 and plus 100.  where the lower, the worse for the German economy and vice versa.  The IFO is a leading indicator.

Here we can see that the IFO economic indicator is due for release in 27 minutes and where the data is released in three components: business climate for June, current assessment for June, and Expectations for June.  The impact of value is medium, and that means there is a possibility that the data release can cause volatility in the market upon release.

The consensus values are highlighted and are expected to be slightly higher in each case for the previous releases for May 2020.  This means that economists and market analysts are predicting the IFO releases will be an improvement on the previous month.

This is the technical analysis of a 1-hour time frame for the euro US dollar pair just prior to the release of the IFO number.

This is the actual data release for each of the three components. While all three are better than the previous month’s figures for May, the current assessment component is slightly lower than the consensus value.

After an initial dip lower due to volatility at the time of the release, a slight bid tone returns to the pair. Traders saw a positive figure, which was above the previous release, and this was considered to be good for economic growth, and therefore traders viewed this as bullish for the Euro. A lower reading would have had the opposite effect.

A short while after the markets had time to analyze the data and listen to some negative comments, post-release, from the German finance minister, the pair pushes lower.

It is always advisable when trading around important data releases, such as the German IFO economic indicator, to wait until such time as the market has done its own analysis and then try and get on to a trend once it is started to develop.

Categories
Forex Daily Topic Forex Price Action

Double Top or Double Bottom Often Offers More

In today’s lesson, we are going to demonstrate an example of a chart offering multiple entries upon producing the double bottom. We know the double bottom is one of the strongest bullish reversal patterns. When a chart produces a double bottom, price action traders keep their eyes on the chart to keep going long. Usually, a double top or a double bottom ends up offering multiple entries. Let us now have a look at today’s example of how it offers us multiple entries.

This is an H4 chart. The chart shows that the price heads towards the South with good bearish momentum. It makes a long bearish move too. However, look at the last candle in the chart. It comes out as a bullish inside bar, which is produced at double bottom support. The buyers are to wait for a breakout at the neckline and go long in the pair.

The chart shows that one of the candles breaches through the neckline level. The next candle comes out as a bullish candle. The buyers are to wait for the price to consolidate and produce a bullish reversal candle to go long in the pair.

Upon producing a bearish inside bar, the price produces a bearish candle. The last candle looks very bearish. However, the buyers must keep their eyes on the chart since it may produce a bullish reversal candle anytime as far as double bottom and neckline breakout are concerned.

The chart produces a bullish reversal candle followed by another bullish candle breaching through consolidation resistance. The buyers may trigger a long entry right after the last candle closes by setting stop loss below consolidation support and by setting take profit with 1R.

The price heads towards the North with good bullish momentum. It hits 1R within the next candle. The price consolidates and produces a bullish reversal candle closing above the last swing high. Do you notice anything here? Yes, this is another entry. The buyers may trigger a long entry right after the last candle closes. Let us have a look at the trade setup with two horizontal lines on the chart.

The price heads towards the North again and hits 1R within the next candle. It seems that the buyers are having a feast here. The way it has been going, they may wait for the price to consolidate again and produce another bullish reversal candle to offer them one more entry. In a word, this is a chart that is going to be closely monitored by the buyers until it produces a strong bearish reversal pattern such as a double top or a bearish engulfing candle on the daily chart (this is an H4 chart). Next time when you see a double top or bottom on a chart, keep eyeing on the chart to make full use of that.

 

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Retail Sales MoM’ Fundamental Forex Driver

Introduction

The Month-over-Month Retail Sales figures are one of the closely watched statistics in the financial markets and have a lot of volatility in the markets around these figures. An increase in sales is one of the earliest signs of growth for businesses that can imply a multitude of things for the economy. It is a closely watched high impact leading indicator. Hence, an understanding and analysis of Retail Sales are paramount for our fundamental analysis.

What is Retail Sales Month-over-Month?

Retail Sales

In the purest sense, it is just the dollar amount of purchase of goods and services made by end-consumers for a given period. Here, the period is MoM, which stands for Month-over-Month. It is the sale of durable and non-durable goods at the retail outlets to consumers.

It can also be defined as the purchase of finished goods and services by consumers and businesses. The goods and services have reached the end of the supply chain. The chain generally starts with the manufacturer or provider and ens up at the retailer where the general population or other businesses consume it.

The Retail Sales figures are often presented in two ways: including and excluding auto and gas sales. As the Auto (vehicle purchase) figures and Oil prices fluctuate frequently, the exclusion helps to identify the trends better once the volatile components are removed. The excluded version is called the Core Retail Sales report.

Retail Sales statistic covers the in-store (retail) sales, catalog sales, and out-of-store sales of durable (goods that last more than three years) and non-durable goods (that have short-life span). The major categories include:

Retail Stores have the following categories:

How can the Retail Sales MoM numbers be used for analysis?

The Retail Sales figures provide us a reliable measure of CURRENT economic activity. It is essential to an objective assessment of the need for and impact of a broad range of policy decisions. Hence, the policymakers use this statistic to keep a pulse-check on the economy’s health.

The Retail Sales figures are significant statistics for many as the Consumer Spending makes up 66% of the United States Gross Domestic Product. The remainder is from Government Spending, Business Spending, and Net Exports. It is also essential as it represents the end of the supply chain figures. All the statistics that precede the Retail Sales figures like Inventory Changes or Manufacturing Production figures all lead up to the Retail Sales, which confirms and triggers the next wave in the trend change in the other indicators, in a feedback loop.

In other terms, once Retail Sales figures improve, businesses see an increase in their revenue and correspondingly demand their products, which leads to an increase in their Manufacturing Production figures, and that would later translate to Change in Inventory statistics. So, we see how the Retail-Sales figure operates amongst the economic indicators in a feedback loop cyclical pattern.

Once Retail Sales figures improve, businesses see profits that encourage expansionary plans, that would increase investment in their business, employment, or even wage growth. It is necessary to understand, Sales improve business, once business improves, wage growth or employment increase is a possibility. Hence, the Retail Sales figure is an essential leading macroeconomic indicator for our fundamental analysis.

The US Bureau of Economic Analysis releases quarterly GDP statistics. If the Month-over-Month Retail Sales figures have been influential, then there is a good chance that the GDP print will be higher. The only downside to the Retail Sales figures that we need to be careful of is that it does not account for inflation, and the increase in the Retail Sales figures could also be a by-product of inflation.

To be noted: The Retail Sales figures are seasonal. It generally tends to increase around the holiday season. Hence, care must be taken during analysis that the decline in stats is due to a business slowdown or seasonal effects. In this case, the Retail Sales figures Year-over-Year is also another parameter that we can use to compare the current conditions with the preceding year to understand the growth trend better, as the GDP is also compared with the last year.

Although data is available in the seasonally adjusted format, to account for the seasonal patterns but it does not adjust for inflation. Hence, it is essential for users of the data to check for the seasonally adjusted figures.

Impact on Currency

Retail Sales is a leading macroeconomic high impact indicator. An increase in Retail Sales is the first sign of growth for businesses in monetary terms. Due to a multitude of economic factors that are affected by the Retail Sales figures, the volatility around the release of these figures is generally high.

It is a proportional indicator, meaning that a consistent or significant increase in the Retail Sales figures translates to increased profits for the businesses, indicates reasonable Consumer Confidence and Consumer Spending, and in turn it will also translate to increased employment, and wage growth. It is a cyclical effect that further promotes spending, and business booms and the economy prospers. It translates to higher GDP prints, which is appreciating for the currency.

Low Retail Sales figures are indicative of a slowdown of business, bearish Consumer Sentiment, where consumers are saving more and spending less. It stagnates the businesses, in the worst case, could lead to lay-offs, and ultimately recession. It will translate to lower GDP prints, which is depreciating for the currency.

Economic Reports

In the United States, the Census Bureau publishes monthly reports of the Retail Sales figures on its official website under the section “Monthly Retail Trade.” The report is released at 8:30 AM about two weeks after the reference month (13-15th day of the month). The schedule for the year is already posted on the website for the user’s convenience. The report details the total sales, percentage changes, and also YoY (Year-over-Year) changes.

Sources of Retail Sales MoM

  • The Month-over-Month Retail Sales statistics can be found here
  • Both advance estimates and Retail Sales figures are available in aggregated format in St. Louis FRED website here
  • We can find Retail Sales monthly figures for various countries here

Impact of the ‘Retail Sales – MoM’ news release on the Forex market

In the previous section of the article, we understood the Retail Sales economic indicator and its consequences on the economy. We will take this discussion forward in identifying the impact of Retail Sales on the value of the currency. Retail Sales is an important economic indicator because consumer spending drives much of our country.

When consumers spend more, the economy tends to hum along, whereas if consumers are uncertain about their financial future, they hold off their purchases that lead to the slow down of the economy. The release of Retail Sales numbers is said to have a large impact on the currency, as shown in the below image.

In this section, let’s analyze the Retail Sales data of the Unites States that was gathered in the month of March. The below image shows that there was a big drop in the Retail Sales compared to the previous month indicating a major disruption in the economy. Let’s see how the market reacts to this data.

USD/JPY | Before the announcement

We will start with the USD/JPY currency pair to witness the impact of the news announcement. The above image shows the state of the chart before the news announcement, where we see that the overall trend of the market is up, and currently, the price is on the verge of continuation of the trend. Depending on the impact of the news, we will position ourselves in the currency pair.

USD/JPY |  After the announcement

After the news announcement, there is a surge in the price, and volatility jumps to the upside. Even though the Retail Sales were very poor in the month, the market reaction was opposite to what was expected. After the news release, traders bought US dollars and strengthened the currency much more. The bullish ‘news candle’ shows the impact of the news on the currency. Since the market reacted very positively to the data, we should take a ‘buy’ trade only after a price retracement.

EUR/USD | Before the announcement

EUR/USD | After the announcement

The above images represent the EUR/USD currency pair, where we see that the market is in a significant downtrend indicating the great amount of strength in the US dollar. The price is currently is at its lowest point, which means we need a pullback in the market to join the trend. If the news announcement results in a retracement of the price, this could be taken as an opportunity for taking a ‘short’ trade.

After the news announcement, the market moves lower, and volatility increases to the downside. Although the Retail Sales data was weak, it did not result in weakening of the currency, but rather the US dollar strengthened. This means the news data was not bad enough to turn the markets to the upside. We will still be looking to enter the market only after a price retracement to a key technical level.

USD/CAD | Before the announcement

USD/CAD | After the announcement

The above price charts are of the USD/CAD currency pair, where we see that the market is aggressively moving up with almost no price retracement. This indicates the US Dollar is very strong, or the Canadian dollar is weak. In any case, we will join the trend only if the price retraces to a ‘support’ or ‘demand’ area.

After the news announcement, volatility expands on the upside, and the price closes, forming a bullish ‘news candle.’ Here too, the Retail Sales data has an opposite impact on the currency as the market reacts positively to the data even though the Retail Sales were largely lower in this quarter. It is advised not to chase the market after the news release since it against the rules of risk management.

We hope you understood Retail Sales MoM fundamental Forex driver and the relative impact of its news announcement on the Forex price charts. Cheers!

Categories
Forex Daily Topic Forex Price Action

Evaluate Whether the Chart Belongs to Your Strategy or Not?

In today’s lesson, we are going to demonstrate an example of an H1 chart, where the price makes a bearish breakout and produces a bearish reversal candle upon making a bullish correction. However, things do not go as the sellers would like. Let us find out what happens and what the reason may imply.

The chart shows that the price produces two bearish candles consecutively. The level of support seems to be a strong one. It may produce a bullish reversal candle and push the price towards the North. However, the sellers may wait for the price to make a bearish breakout at the level of support.

Here it comes. The next candle breaches the level of support closing well below the level. This is one good-looking breakout candle. The sellers are to wait for the price to consolidate or make a bullish correction to produce a short signal.

The price makes a bullish correction. The last candle closes within the breakout level. Please pay attention to the number of candles the chart uses to make the bullish correction. The chart takes five candles to complete the correction. It means the level of support has become H4 support. Let us proceed to the next chart.

The chart produces a bearish inside bar. This is a bearish reversal candle, of course. However, the question may be raised here whether the sellers take a short entry depending on the H1 chart or not? Let us assume that a seller triggers a short entry by setting stop-loss above the breakout level.

The next candle comes out as a bearish candle. However, the last candle comes out as a bullish engulfing candle. The level is H4 support now. Thus, the buyers may look to go long in the pair and drive the price towards the North. It does not look good for the seller. The price may hit stop loss.

The next candle comes out as a strong bullish candle closing well above the breakout level. The short entry has been wiped off. If we consider the sequence bearish breakout, bullish correction, bearish reversal candle at the breakout level, it seems perfect to go short in the pair. What goes wrong here? In the Forex market, any entry may go wrong. However, over here, the H1 sellers may miss the point that the support is not H1 support anymore. It is H4 support since the level of support holds five candles. This is why the H1 traders may skip taking the short entry in this chart. It often happens in combination trading that traders forget to calculate or synchronize the chart that they are trading at. However, to be successful in trading, traders must not miss this point.

Categories
Forex Basic Strategies Forex Daily Topic

Stop Hunting – The Strategy That Is Used By Most Of The Investment Banks

Introduction

Currently, there is a strategy that is followed by most investment banks around the world, and that is known as Stop Hunting. It attempts to force some market participants out of their positions by driving an asset’s price to a level where many retail traders set their stop-loss orders. The triggering of many stop losses at once generally leads to high volatility, and this can present opportunities to some smart traders who seek to trade in such an environment.

The fact that the price of a currency pair can experience sharp moves when many stop losses are triggered is exactly why many traders engage in stop hunting. Traders who are aware of this fact and have observed this phenomenon of the market try to make of this opportunity by being patient and conservative. The strategy we will be discussing today takes advantage of this sudden rise in volatility due to what is known as ‘stop-hunting.’

Timeframe

The beauty of this strategy is that it can be employed on all timeframes. However, it is not recommended in extremely small timeframes as there is a lot of noise in those timeframes, which may lead to confusion and misunderstanding. Hence, if one wants to profit greatly from this strategy, he/she should trade in 15 minutes or a higher time frame.

Indicators

We will be using just one technical indicator, and that is ‘Simple Moving Average (SMA)’ with 5 or 10 as it’s period. No other indicators are used in this strategy.

Currency Pairs

The strategy is suitable for trading in all currency pairs, including major, minor, and some exotic pairs. However, illiquid currency pairs should be avoided as the price action patterns are not reliable in these pairs.

Strategy Concept

In this strategy, we will be using the concept of previous highs and lows instead of support and resistance to act as our reference points. This is easy to understand and easier to spot in a chart. We will then anticipate these highs and lows as our support and resistance areas, which could break out of. Lows on a price chart are points where the price found support and started to go up.

In other words, this is a price point where there were ready sellers. When price revisits that area, sell orders get triggered, and the price starts to fall. However, during a breakout scenario, the momentum of the price is so much that it breaks the previous high and continues moving south. The Opposite is true for the breakdown of previous lows.

At times it is seen that even when the previous high or low is broken, the price doesn’t always continue in the direction of the breakout or breakdown. The price immediately retreats and bounces off the high or low. We will call these scenarios as fake-out or ‘stop-loss hunt.’ When price retraces back immediately, there is a high chance that it will continue in the same direction, at least until the latest hurdle. Let us explore the steps of the strategy.

Trade Setup

To explain this strategy, we will consider the EUR/USD currency pair and find a trade that fulfills all the criteria of the strategy. In this example, we will be analyzing the 1-hour time frame chart and look for appropriate price action patterns in the pair.

Step 1

The first step of the strategy is to look for highs and lows from where the market has traveled a fair amount of distance. Spotting for such areas in the direction of the major trend is preferred as the risk is lower in such trade setups. For instance, look for buying opportunities at lows of an uptrend and selling opportunities at the highs of a downtrend. This step is very important from a risk aversion point of view. Thus, one should give a lot of importance to this step of the strategy.

Step 2

The next step is to look for a fake-out price action pattern at the low, marked in the previous step. This is the first confirmation that buyers or sellers have come back into the market, and the banks have cleared out all the strategies that were placed below the low and above the high.

The below image shows how the price goes slightly below the previous low clearing all the stops of retail traders, and the last candle closes with a great amount of bullishness.

Step 3

In this step, we see where we take an entry in the market. We take an entry right after the price starts moving higher or lower and closes above or below the simple moving average (SMA), respectively. Conservative traders can wait for the price to retrace to the SMA and then take an entry while aggressive traders can enter right at the close of the candle.

The arrow mark in the below image shows that the entry is made at the close of the second bullish candle after the fake-out.

Step 4

We have one take-profit and one stop-loss point for this strategy where we take profit at the high or low as we had marked in the first step of the strategy while stop loss is placed below or above the low and high, respectively. If one is trading in the direction of the major trend, he/she can take profits at new highs or lows. However, one needs to be conservative while taking counter-trend trades.

Strategy Roundup

Stop-loss hunts are becoming as common as breakouts. By including this strategy in our trading arsenal, we will have something that we could use when we notice such patterns in the market where other traders are looking for breakouts. In this strategy, we have put a significant amount of stress on price action, which makes this strategy very reliable and consistent. One can use trailing stop-loss to protect their profit even when the target isn’t reached. All the best!

Categories
Forex Daily Topic Forex Price Action

The H1-15M Charts Combination Trading: Watch Out for Signal Candle’s Attributes

Reversal candle’s attributes play a significant role in driving the price towards the trend. An Inside Bar is considered to be the weakest reversal candlestick. However, in combination trading, even an Inside Bar may create good momentum as a reversal candle. In today’s lesson, we are going to demonstrate an example of that.

This is an H1 chart. The chart shows that the price heads towards the South with good bearish momentum. The price has a bounce at a level of support and makes a bullish correction. The sellers are to wait for a bearish breakout at the lowest low of the wave.

The chart produces a bearish reversal candle that comes out as a bearish engulfing candle. The last candle comes out as a bearish candle as well. However, it has a long lower shadow.

The chart makes a breakout at the lowest low of the wave. The last candle comes out as a bullish engulfing candle, which is a strong bullish reversal candle. However, the sellers may still keep their hope. If the breakout level produces a bearish reversal candle, they are right on the track.

This is what the H1-15M combination traders are waiting for. It produces a bearish reversal candle. Now they have to wait for a 15 M bearish candle to go short in the pair. It is time for the combination traders to flip over to the 15M chart.

This is how the 15M chart looks. The sellers are to wait for the price to produce a bearish candle closing below the last 15M candle. Let us wait and see what the price does. Let us proceed to the next chart.

The last candle comes out as a bearish candle without having any lower shadow.

The sellers would love to see a candle like this every time as a signal candle.  The combination traders may trigger a short entry right after the last candle closes. Let us find out how the entry goes.

This is the H1 chart again. The price heads towards the South with extreme bearish momentum. The last candle comes out as a doji candle. The price hits 1R within two candles. Those who love letting their winners run, they may close their entry right after the last candle closes.

If we notice, the bearish reversal candle at the breakout level comes out as an Inside Bar. However, it creates a strong bearish momentum. It is because the 15M signal candle comes out as a strong bearish continuation candle. Thus, combination traders may focus more on the signal candle. Signal candle’s attributes are more important than the reversal candle’s attributes as far as chart combination trading is concerned.

 

Categories
Forex Daily Topic Forex Fundamental Analysis

Heard Of Germany’s ‘ZEW Economic Sentiment Index’?

Introduction

ZEW Economic Sentiment Index is a leading economic indicator that specially focuses on Germany and a few other countries. The correlation of the index with the growth is healthy. Hence, like any other business sentiment index, it is handy for our fundamental analysis to predict near-term economic activity, and identify potential opportunities.

What is the ZEW Economic Sentiment Index?

The ZEW Economic Sentiment Index is a sentiment index compiled out of the ZEW Financial Market Survey.  ZEW stands for Zentrum für Europäische Wirtschaftsforschung, which means the Center for European Economic Research.

ZEW Financial Market Survey 

It was introduced in 1991. A survey of about 350 analysts working at banks, insurances, and significant industrial firms are surveyed in a time frame of about two weeks. The proportion of participants from different sectors generally remains constant. It collects the general German sentiment or expectations with regards to the development of six international financial markets, especially Germany.

The panel of financial experts selected for the survey express their near-term expectations of the business cycle growth and progress, inflation rates, short and long term interest rates, stock market, exchange rates, and the oil prices. The survey questions aim to answer the situations in Germany, the USA, Japan, France, Great Britain, Italy, and the Euro-zone as a whole.

The experts are finally asked to assess the profitability of many economic sectors like banks, insurances, trade, construction, vehicle industry, chemistry, electronics, mechanical engineering, utilities, services, telecommunication, and information technology. Each expert forecasts on every category form a fraction that reflects different assumptions in percentages. The score from each individual in percentages are summed together to give an overall sentiment.

The results of this method, when it is applied to forecasted changes in the economic situation in Germany, is known as the “ZEW Indicator of Economic Sentiment.” The ZEW Indicator of Economic Sentiment is obtained from the results of the ZEW Financial Market Survey. It is computed as the difference between the percentage share of analysts that are bullish and those that are bearish towards the German economy in six months.

For instance, if 30% of the survey respondents predict the German economic situation to deteriorate, 20% expect it to remain the same as before, and 50% expect it to improve. The overall score of the survey would be a positive value of 20. It is a bullish reading and suggests that financial experts see positive signs for growth in the medium term.

Note: The IFO Business Climate Index is also a similar survey-based index that is popular in Germany. It is also a monthly report that surveys over 7,000 companies in Germany to obtain business condition sentiment for the near term. It measures business confidence and is also a leading indicator. It is a weighted index, meaning company scores are weighted in based on their contribution to the economy’s revenue.

However, the ZEW panel comprises of financial experts and is more diverse in its area of coverage as it also publishes estimates about other economic zones outside of Germany. IFO is business sentiment, while ZEW is economic sentiment, economic sentiment is a broader gauge, and hence, for our fundamental analysis, it is more useful.

How can the ZEW Sentiment Index numbers be used for analysis?

Sentiment Index in any country or any sector is the leading economic indicators for traders, investors, economists, and policymakers. Since the ZEW Sentiment Index is composed of a panel of financial market experts, people who are well-versed with the economy and business cycles throughout their career, their assessments generally have a strong correlation with actual GDP growth.

As with any sentiment index, the ZEW index also tends to be overly sensitive to changes in the economy, meaning the results sometimes would seem exaggerated but in the right direction. For our analysis, the direction of the economy is essential, and the magnitude can be understood over time with historical data.

Overall, the Economic Sentiment Index is helpful for us to predict the upcoming six-month changes with a good amount of certainty.

Impact on Currency

Market volatility is sensitive to Economic Sentiment Indexes. Significant moves in the index cause volatility in the market. It is a leading indicator. The above picture is a snapshot of ZEW for the past one year.

High Positive Economic Sentiment Index figures translate to improving economic prospects, which will translate to higher GDP prints and currency appreciation. Low or NegativeEconomic Sentiment Index figures translate to possible business slowdowns in the near-term, in extreme cases, even a recession. It will translate to the contracting economy, and lower GDP print, and thereby leading to currency depreciation.

Economic Reports

The ZEW Economic Sentiment Index is released every month on its official website, with insightful comments on different sectors. The IFO reports and ZEW Economic Sentiment Index are the two popular Sentiment Indexes in Germany.

Other companies also publish Economic Sentiment numbers, and IHS Markit Group is one such company that puts out numbers on the international scale for many countries. Internationally, IHS Markit business surveys are popular, but within Germany, ZEW is more popular amongst the traders, investors, policymakers.

Sources of ZEW Economic Sentiment Index

We can monitor the reports on the official website of the ZEW.

We can also go through the Sentiment Index of other countries here.

We can also find the aggregated statistics of all business confidence indexes for various countries here.

Impact of the ”ZEW Economic Sentiment Index” news release on the Forex market

In the previous section of the article, we understood the ZEW Economic Sentiment fundamental indicator, which essentially rates the outlook of an economy for a six-month period. On the index, a level above zero indicates optimism, below indicates pessimism. It is a leading indicator of economic health.

The reading is compiled from a survey of about 350 German institutional investors and analysts. Therefore, it is given a fair amount of importance from investors, especially when analyzing growth in the Eurozone. The ZEW financial market survey covers a number of areas, sectors, and regions which are used to create the ZEW Economic Sentiment.

In this part of the article, we will examine the impact of the ZEW Economic Sentiment indicator on the value of various currencies involving the EUR and witness the change in volatility. For that, we have collected the latest data of ZEW Economic Sentiment, which was published in the month of April. We can see in the below image that the index jumped by a huge margin in April 2020, which was well above market expectations.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the impact of the ZEW Economic Sentiment Indicator on the value of EUR. The above image shows the state of the chart before the news announcement, where we see that the price is in a downtrend, and very recently, the price has formed a ”range.” Just before the news release, the price is at the bottom of the ”range,” so we can expect buyers to come back in the market, initiating some strength in the Euro.

EUR/USD | After the announcement

After the news announcement, market crashes below the ”support” of the ”range” and volatility increases to the downside. Although the ZEW Economic Sentiment was extremely positive for the economy, market participants do not by Euro immediately at the ”news candle,” but instead, we see a rally in the price after the close of ”news candle.” Thus, we witness moderate volatility in the currency pair after the news release.

EUR/CAD | Before the announcement

The above images represent the EUR/CAD currency pair, where, in the first image, we see that the market is in an uptrend signifying strength in the Euro. Currently, the price is at its highest point, crossing the previous ”higher high.” As per the technical analysis, we should wait for price retracement to a ”support” or ”demand” area in order to join the trend. Depending on the impact of the news release, we will position ourselves in the currency.

EUR/CAD | After the announcement

After the news announcement, the price initially falls lower due to volatility, but it does not sustain at that level where the buyers immediately take the price higher. We can see that the market bounces exactly from the moving average and continues to move higher. The market is seen to react oppositely to the ZEW Index at the time of release, but one should not conclude the impact of news from just one candle.

EUR/AUDBefore the announcement

 

EUR/AUD | After the announcement

The above images are that of the EUR/CAD currency pair, where we see that before the news announcement, the market is in a strong uptrend again, signifying the great amount of strength in the Euro. Just before the release, the price appears to be at the ”supply” area, which means we should expect some selling pressure from this point. A breakout trade is possible if the price sufficiently breaks the ”supply” area.

After the news announcement, we witness slight bearishness in the currency but was not large enough to cause a reversal of the trend. We see that the price only hovers at the ”supply” area, with no major impact, which results in a breakout.

That’s about the ‘ZEW Economic Sentiment Index’ and the relative impact of its news announcement on the Forex price charts. Let us know if you have doubts regarding the article in the comments below. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

How Important Is ‘Corporate Profits’ Economic Indicator In Determining A Nation’s Economy?

What is Corporate Profit?

Corporate profit is the money left after the company pays all its expenses and taxes. The money that is collected by the company after selling all products and services during the specified period is considered as line revenue. From this revenue, various deductions happen in the form of tax and salaries, to name a few. Money left over after all the expenses are paid considered to be the company’s profit. The profit earned by the company is an important parameter when it comes to the fundamental analysis of a company.

How is Corporate Profit measured?

The corporate profit economic indicator calculates the net income of a company that is measured by considering the following factors:

Profits from present production – This type of profit is gained from two components. First, the income that is gained after inventory replacement is included in this, and secondly, the income statement depreciation is considered. This type of profit is also known as operating or economic profit.

Profit on books – The profit earned from net income minus inventory and depreciation adjustment is known as book profits.

Profit after-tax – Book profit after the tax deduction is called profit after-tax. This type of profit is believed to be the most relevant number when calculating corporate profit.

Real Corporate Profit

Corporate profits are one of the most studied data of a company. It also plays a major role in other financial measures of the country. Profit is not a measure of the amount of cash a company earned in a given period. We need to understand the income statement that includes non-cash expenses as well. It is also important to understand the changes in accounting methods that have influenced the profit margins.

These are some hidden charges that are directly deducted from the net profit. Therefore, it is often more appropriate to consider profit as a percentage of sales when comparing one company to another. Remember, a comparison between companies should be made among companies within the same industry, and the net profit should be seen in this context.

Analyzing corporate profits

Corporate profit is nothing but a company’s income and the one that is directly reflected in the official statement. Hence, they are one of the most important things to consider when investing in the shares of a company. Increasing corporate profits means either increasing corporate spending, growth in retained earnings, or increasing dividend payments to shareholders. All of these are positive steps taken by a company indicating growth.

The corporate profits data is most useful for an investor rather than a trader. It involves buying the shares of a company and holding them for a minimum of 3 months. An investor may also use this number to do performance analysis. If an individual notices an increase in the profit of a particular company while the overall corporate profits are declining, it could signal company strength. Alternatively, if an investor notices that the company’s profits are declining while overall profits are increasing, i.e., of the sector, a structural problem may exist in the company.

Economic reports

Corporate profits are through statistical reports that are published by the Bureau of Economic Analysis (BEA). It is a comprehensive report comprising of the company’s net revenue, earnings before tax, earnings after tax, corporate profits, expenditure, etc. Finally, the report summarises the net income of corporations in the National Income and Product Accounts (NIPA). One thing we have to make a note of here is that the corporate profit numbers derived from the NIPA, which is dependent on the GDP growth, are different from the profit statements released by the companies. So, while analyzing the data, we need to be cautious by looking at both the numbers and rely on the ones where the difference is not huge.

Impact on Currency

There might not be a direct relationship between corporate profits and the value of a currency as the former is more company-specific and represents a very small portion of the economy. However, an overall corporate profit that is a collective data of all companies affects the stock market. If the data is good, it means the manufacturing is growing and that domestic companies are generating profits. This, in turn, has a positive impact on the currency and leads to an appreciation of the domestic currency. However, if the collective data is negative, it can lead to depreciation of the currency in the long term.

Sources of information on Corporate Profits

Corporate tax data is released by the Bureau of Economic Analysis (BEA) quarterly on the official website. Another reliable source of information on corporate profits is the press release by the respective companies. The press releases can be found on the website of the stock exchange. Links to Corporate Profits sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/corporate-profits

AUD – https://tradingeconomics.com/australia/corporate-profits

USD – https://tradingeconomics.com/united-states/corporate-profits

CAD – https://tradingeconomics.com/canada/corporate-profits

EUR – https://tradingeconomics.com/germany/corporate-profits

JPY – https://tradingeconomics.com/japan/corporate-profits

Corporate profits are a closely watched economic indicator by institutional investors. Profitability provides a summary of the company’s financial health and serves as an essential indicator of economic performance. Profits are retained earnings, providing much of the capital for investing in productive capacity. The estimates of profits and related measures are used to evaluate the effects on corporations of changes in economic policy and the financial condition of the country.

Impact of the ‘Corporate Profits’ news release on the Forex market

Corporate profit, also called net income, is the amount remaining within the company after all costs such as interests, taxes, and other expenses are deducted from total sales. It is also referred to as net profit or net earnings. A high cumulative corporate profit generally indicates that a company is running efficiently, providing value to its shareholders, and contributing towards the growth of the manufacturing sector.

It is significant because it shows how well the company has managed its costs. The corporate profit data is not that important for traders as it does not have a direct impact on the value of a currency. Hence, we should not expect high volatility in the currency after the news announcement.

In the following section of the article, we will be analyzing the impact of Corporate Profit on various currency pairs and analyze the change in volatility due to the news release. The below image shows the latest quarter’s corporate profit in Canada that was released in June. We see a major drop in profits compared to the previous quarter, which means companies were unable to make huge profits in this quarter. Let us find out the reaction of the market to this data.

USD/CAD | Before the announcement

We will first examine the USD/CAD currency pair to observe the impact of corporate profit on the Canadian dollar. The above image shows the state of the chart before the news announcement. We see that the pair is in a strong uptrend, and recently the price seems to be retracing. Our approach should be to ‘buy’ the currency pair as the major trend is up, but the price needs to retrace to an important technical level before we can buy. Let us see that if ‘news’ gives us that opportunity.

USD/CAD | After the announcement

After the news announcement, the price goes lower, and volatility increases to the downside. Even though the Corporate Profit data was awful for the economy, traders went ‘long’ in the Canadian dollar by selling U.S. dollars. The bearish news candle shows that the news candle did not have any adverse effect on the currency. Few hours after the news announcement, volatility continues to increase on the downside, and we witness large selling pressure in the market.

GBP/CAD | Before the announcement

GBP/CAD | After the announcement

The above images represent the GBP/CAD currency pair, where we see that before the news, the market is moving in a ‘range,’ and recently, the price has moved higher after reacting from the support. Since the impact of corporate profits is least on the currency, traders shouldn’t be scared of the news release and can take a position in the market according to their strategy.

After the news announcement, the market slightly moves lower, or even one could argue that the news release had a major impact on the currency. The corporate profit data had a minor impact on the currency pair, which lasted for a few minutes. Traders should analyze the pair technically and not be worried about news data.

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images are that of CAD/CHF currency pair, where we see that the market in a strong downtrend with some minor price retracement at the moment. We should be looking to go ‘short’ in the currency pair after the occurrence of the price continuation pattern in the market. However, if the price continues to move higher, the sell trade is off the table. Conservative traders can wait for the news release and then take a position based on the impact of the news.

After the news announcement, the price moves higher, and volatility expands on the upside. The small up move gets completely retraced by the immediate next candle, and the market continues to move lower. Hence, it is evident that the news has a negligible impact on the currency pair, where the overall trend of the market dominates the move after the announcement.

We hope you understood this Fundamental Indicator and its relative impact on the Forex price charts. All the best!

Categories
Forex Daily Topic Forex Fundamental Analysis

The Impact Of ‘Factory Orders’ News Release On The Forex Price Charts

What are Factory Orders?

Factory orders are the dollar value of all orders received by factories. The U.S. Department of Commerce reports the number of new orders every month. Factory orders are divided into four parts: new orders, unfilled orders, shipments, and inventories. It includes information about durable goods and non-durable goods. Factory orders data is often not very surprising because the report of durable goods orders comes out one or two weeks earlier.

Dividing Factory Orders        

The factory orders data is divided into four sections:

  • New orders, which indicate whether orders are increasing or decreasing
  • Unfilled orders, indicating a backlog in production
  • Shipments, which indicate produced and sold goods
  • Inventories, which indicate the strength of future production

The figures are mentioned in billions of dollars and also as a percent from the previous month and previous year. Factory orders data is often dull, mostly because the durable goods orders come out a couple of weeks earlier, and people have an idea of factory orders for the current month. However, the official factory orders data gives more detailed information on orders estimate and fulfillment.

The factory orders report includes information about both durable and non-durable goods. Durable goods have a life span of at least three years and often refer to items not purchased frequently, such as machines, garden equipment, motor vehicles, and electronics. In contrast, non-durable goods include fast-moving consumer goods such as food, clothes, footwear, medication, and cleaning items.

Investors get an insight into the growing trend of the economy with the help of factory orders report, which largely influences their investment decisions. Factory orders give an early indication of the growth in the economy, and its impact is felt on the equity market.

Analyzing the data

When it comes to the fundamental analysis of a currency pair, it is important to understand how factory orders are analyzed to make proper investment decisions. Factory orders are analyzed by comparing the previous and current readings, where, if we notice a consistent drop in the ‘orders,’ it could signal a slump in the overall demand.

These factory orders are not just used for analyzing one country but also for comparing the economic growth of any two countries. Investors shift their funds to countries where there is a growth in the factory orders, and demand is high. One needs to remember to compare countries with the same economic status. For example, factory orders of a developed country should not be compared with that of a developing nation.

The economic reports

Factory orders are released monthly by the Censuses Bureau of the U.S. Department of Commerce. The full name is “Full report on Manufacturers’ Shipments, Inventories and Orders” but is commonly referred to as Factory Orders. This report usually follows the Durable Goods Reports, which provides data on new orders received from more than 4,000 manufacturers of durable goods.

The factory orders report is more comprehensive than the durable goods report, where it examines the trend within industries. For example, the durable goods report may account for a broad category, such as industrial equipment. In contrast, the factory orders report will provide details about the hardware, software, semiconductors, and raw materials. This lack of information in a durable goods report is attributed to its release speed.

Impact on currency

Factory orders are an important economic indicator. When factory orders increase, the economy usually expands as consumers demand more goods and services. High demand, in turn, requires retailers and suppliers to order more things from factories. This is interpreted as positive for the economy by foreign investors who then invest in the country through the stock market or currency.

An increase in factory orders could also mean that inflation is just around the corner. When factory orders decrease, the economy is usually contracted, which means there is less demand for goods and services, so retailers will not place a lot of orders. When this is reflected in reports, investors tend to have a negative on the economy and think twice before investing in such economies.

Sources of information on Factory Orders 

The factory Orders data is closely watched by investors around the world, which is why the report is immediately available on most of the open-source economic websites and some of the broker’s websites. The official source of information is the U.S. Census Bureau, where it provides statistical information of all the information related to factory orders.

Links to ‘Factory Orders’ information sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/factory-orders

USD – https://tradingeconomics.com/united-states/factory-orders

EUR – https://tradingeconomics.com/germany/factory-orders

Factory orders are a key economic indicator for investors and others monitoring the health of economies. It provides information on how busy factories may be in the future. Orders placed in the current month may provide work in factories for many months to come as they will have to work to fill the orders. Businesses and consumers generally place orders when they are confident about the economy.

An increase in factory orders signifies that the economy is trending upwards. It tells investors what to expect from the manufacturing sector, a major component of the economy. The factory orders data often tend to be volatile with revision in the methodology now and then. Hence, investors typically use several months of averages instead of relying too heavily on a single month’s data.

Impact of the ‘Factory Orders’ news release on the Forex market

In the previous section of the article, we understood the factory orders economic indicator and saw how important it is for foreign investors. As defined earlier, it is a report which shows the value of new factory orders for both durable goods and non-durable goods. The survey is usually released a week after durable goods orders report. The report tends to be predictable, with only non-durable goods appearing as the new component compared to the previous report. Thus, investors would have priced in most of the information even before the official release. Still, it causes some volatility in the currency pair during the news announcement.

In today’s lesson, we will analyze the impact of the factory orders news announcement on various currency pairs and witness the change in volatility due to the news release. The below image shows the latest factory orders data of the United States, where it can be seen that the orders were better than expectations but were lower than last time. A higher than expected reading is considered to be bullish for the currency, while a lower than expected reading is considered negative. But, let us find out how the market reacts to this data.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the impact of factory orders on the U.S. dollar. The above image shows the 15 minutes time-frame chart of the currency pair where the market is in a strong uptrend before the news announcement. Recently the price has formed a ‘range,’ and the price is at the top of the ‘range’ at this moment. Technically, this is an ideal place for going ‘short’ in the market, but since a news announcement is due, it is advised not to take any portion before the announcement.

EUR/USD | After the announcement

After the news announcement, the price initially moves higher, but this is immediately sold, and the market erases all the gains. The ‘news candle’ finally closes at the price where it had opened. Therefore, the factory orders data brought about a great amount of volatility in the currency pair, which is evident from the wick on top of the ‘news candle.’ One should wait for the volatility to settle down before taking a position in the market.

USD/CAD | Before the announcement

USD/CAD | After the announcement

The above images represent the USD/CAD currency pair, where we see that the market is extremely volatile before the news announcement, and there is no clear direction of the market. As a point of a tip, it is not advisable to trade in currency pairs where the volatility is more than normal as there are a lot of risks associated with trading in trading such pairs.

After the news announcement, the currency pair gets exceedingly volatile where essentially the price drops greatly, but buyers pressure from the bottom takes the price back to its opening level. Therefore, the factory orders data had a major impact on the pair where the price continued to move lower a few minutes after the news release.

AUD/USD | Before the announcement

AUD/USD | After the announcement

The above images are that of the AUD/USD currency pair, where the price is retracing the overall uptrend of the market. In such market situations, we should be looking for trend continuation candlestick patterns to confirm that the market will continue moving up.

After the news announcement, the price sharply moves higher and leaves a wick on top of the ‘news candle.’ Since volatility is high on both sides of the market during the announcement, we cannot ascertain if the factory orders data was positive or negative for the currency. As the market continues to move higher after the close of the ‘news candle,’ one should look for going ‘long’ in the market a few hours after the news announcement.

This ends our discussion on the ‘Factory Orders’ Fundamental driver. It is crucial to know its impact on the Forex price charts before trading this market. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Industrial Production Index’ & Its Relative Impact On The Forex Market

What is the Industrial Production Index?

Industrial Production Index or IPI, as it is commonly called, is an index that tracks manufacturing activity in different sectors of the economy. The IPI number measures the industrial production for the period under consideration, usually a month. IPI is a key economic indicator of the manufacturing sector of the economy. It measures the real output in the mining, electric, and gas industries, relative to the base year.

How is IPI calculated? 

Industrial Production is expressed as an index relative to the base year, which is 2012. They do not express absolute production numbers or volume, but the percentage change in production relative to 2012. The parameter taken into account is often varied, including physical inputs and outputs such as tons of iron, or inflation-adjusted sales figures, and when these parameters are not available, hours logged in by production workers is considered. This data is obtained from industry associations and government agencies, and the index value figure is obtained after incorporating these numbers in the Fisher-Ideal formula.

Within the IPI index, several sub-indices provide a detailed look at the production levels of highly specific industries. One can find the monthly production data of residential gas sales, ice cream, carpet and rug mills, spring and wire products, audio and video equipment, and paper in these sub-indices. The indices are seasonally adjusted, and sometimes the format is unadjusted.

Limitations of the IPI

While GDP estimates show that the manufacturing sector has picked up, the IPI doesn’t. In such cases, the question arises, which of the two should we believe. The selection of items for measuring the production output has remained the same for many years. This will have implications on the index value. IPI growth will have a certain directional bias. The recommendation has always been to make it more dynamic. All they are saying is to revise it more frequently. But the officials have been only pushing the dates forward.

Another limitation is in the selection of the base year. The 2011-2012 base year series shows faster growth than the previous one, 2004-2005 base year. Therefore, it is suggested to use the old methodology alongside the new method.

Analyzing the IPI 

The IPI data is particularly useful for money managers and investors who are a part of the business. At the same time, the composite index is an important macroeconomic indicator for economists who analyze the impact of the numbers on the economy and industry. Fluctuations within the industrial sector account for variation in the overall economic growth. The monthly metric keep investors informed about the shifts in the production levels.

At the same time, IPI ignores the most popular economic output measure, the Gross Domestic Product (GDP). GDP calculates the price paid by the end-user, so it includes the value-added in the retail sector. This is ignored by IPI. Another observation is that the industrial sector is losing its share in the GDP of a country; for instance, it made up less than 20% of the GDP of the U.S. economy as of 2016.

Along with IPI, capacity utilization is another useful indicator that investors analyze to assess the demand scenario. Low capacity utilization or overcapacity, in other words, signals weak demand. Policymakers read it as a need for fiscal or monetary stimulus in the economy. Investors read it as a sign of coming downtrend for the currency and the stock market. High capacity utilization, on the other hand, acts as a warning signal that the economy is overheating, suggesting the risk of price hikes and asset bubbles. Policymakers react to such threats with interest rate hikes or fiscal austerity. There is also a possibility that this could ultimately result in a recession.

Impact on Currency

Industrial production figures are directly proportional to the value of a currency. When Industrial Production is high, it means economic activity is improving in the country that directly contributes to the GDP. A rate of GDP leads to an appreciation in the currency value. However, an effect on the overall economy is felt when industrial production is increasing each month. An improvement in the production output for one month has no impact on the currency; the average value of at least three months makes a difference. The IPI is an early indication of growth in the manufacturing sector, which is why it is closely watched by investors and traders.

Sources of information on Industrial Production Index

The Federal Reserve Board publishes the industrial production index (IPI) every month, which is released approximately in the 2nd week of the month. The revisions in the method of calculation, if any, are released at the end of every March. As it is an important indicator of growth in the manufacturing sector, most open-source economic websites keep track of their respective countries’ data.

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/industrial-production

AUD – https://tradingeconomics.com/australia/industrial-production

USD – https://tradingeconomics.com/united-states/industrial-production

CAD – https://tradingeconomics.com/canada/industrial-production

EUR – https://tradingeconomics.com/european-union/industrial-production

JPY – https://tradingeconomics.com/japan/industrial-production

The Industrial Production Index (IPI) is an important economic indicator published by the Federal Reserve Board (FRB) of the United States that measures manufacturing, mining, and utilities’ real production output. The indices are computed mainly as fisher indices with more weightage on the annual estimates of value-added. The fisher methodology only preserves the growth information, which is why the value of the base year, i.e., 2012, is randomly set to 100. This index, along with other industrial output indexes and construction, accounts for the bulk of the total output variation throughout the business cycle.

Impact of the ‘Industrial Production Index’ news release on the Forex market

In the previous part of the article, we understood the significance of Industrial production fundamental indicators in an economy. Now let’s discuss the impact of the Industrial Production Index news announcement on the value of a currency and witness the change in volatility due to the news release. As discussed previously, Industrial Production measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities.

For instance, Industrial Production measures the output of businesses in the industrial sector of the United States economy, where the manufacturing sector accounts for 78 percent of total production. Some of the biggest segments of this sector are Chemicals, food, drinks and tobacco, machinery, computer and electronics, motor vehicles, and others.

Now let’s analyze the Industrial Production data of the United States released in June. As we can see in the below image, Industrial Production in the United States increased to 1.4% percent in May, which was much higher than the previous month. The Industrial Production numbers in April and May are largely influenced by COVID-19. Let us find out the reaction of the market to this data.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair witness the change in volatility due to the news announcement. The above image shows the state of the chart before the news announcement, where we see that the market was in an uptrend and recently has laid out signs of reversal.

EUR/USD | After the announcement

After the news announcement, the price moves higher, and volatility slightly increases to the upside. However, the price does not go much higher, and the major trend to the downside continues. Thus, it would be right to say that the news announcement had a positive impact on the U.S. dollar.

USD/JPY | Before the announcement

USD/JPY | After the announcement

The above images represent the USD/JPY currency pair, where we see that the market is moving within a ‘range’ before the news announcement. Just when the Industrial production numbers are to be released, the price is at the top of the ‘range,’ and volatility is high. Depending on the impact of the news release, we take a suitable position in the currency pair.

After the news announcement, the market moves lower by a couple of candles, as seen in the above image, and gets retraced by strong buyers who take the price above the ‘news candle.’ But since the price is again at resistance, it eventually moves lower and reaches the support. By this price action, we can say that the currency pair becomes highly volatile after the news announcement.

NZD/USD | Before the news announcement

NZD/USD | After the news announcement

The above price charts belong to NZD/USD currency pair, where we see that before the news announcement, the price was moving higher, and now it has displayed a strong reversal pattern in the market, indicating a reversal to the downside. If the news release does not change the underlying price action pattern, one can take a risk-free ‘short’ position in the currency pair. This is how technical analysis is used in conjunction with fundamental analysis.

After the news announcement, the price moves higher by a little, and ultimately the reversal pattern dominates the market, and price makes a ‘lower low.’ Therefore, the slight bullishness that was witnessed due to the news announcement was of significance, and the market crashed.

We hope you got the gist on what the ‘Industrial Production Index’ is and its impact on the Forex price charts after its news release. In case of any questions, let us know in the comments section below. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Electricity Production’ & Its Importance As A Forex Fundamental Driver

Introduction

Electricity is the most versatile and controlled form of energy. It is non-polluting and loss-free. It can be produced entirely using renewable methods, such as wind, water, and sunlight. Electricity is weightless, more comfortable to transport and distribute, and represents the most efficient way of consuming energy. Strategies are being developed to generate and use electricity in the most efficient way. It must be produced in the least damaging way, without inhibiting economic development.

Net power generation

The total worldwide production of electricity in 2016 was 25,082 TWh. Sources of electricity were coal 38.2%, natural gas 23.1%, hydroelectric 16.6%, nuclear power 10.4%, oil 3.7%, solar 5.6%, biomass and waste 2.3%.

Choosing the mode of production 

The selection of electricity production mode and their economic viability is linked with the demand and supply in that region. The dynamics vary considerably around the world, resulting in different selling prices across the globe; for example, the price in Iceland is 5.54 cents per kWh while in island nations, it is 40 cents per kWh. Hydroelectric plants, thermal power plants, nuclear power plants, and renewable sources have their pros and cons, and selection is based on the local power requirement and fluctuations in demand. All power plants have varying loads on them, but the daily minimum is baseload, often supplied by plants that run continuously. Nuclear, coal, gas, oil, and some hydro plants can supply baseload.

Due to the advancement in technology, renewable sources other than hydroelectricity experienced decreases the cost of production, and the energy in many cases is cost-comparative with fossil fuels. Many governments around the world are allocating funds to offset the higher cost of new power production and make the installation of renewable energy systems economically feasible. However, their use is curtailed by their intermittent nature, less demand, and sometimes transmission constraints.

Economic development and electricity

Electricity is a major contributor to the economic development of a nation. It is the wheel that drives most aspects of everyday life in society. A nation is a compilation of activities and people whose progress is determined by the infrastructural components. Electricity is the source of fuel for almost all sectors of the economy. Most of our daily activities are dependent on electricity, our hospitals need electricity for various purposes, and airports need electricity for regular functioning and ensuring the safety of passengers.

When so many activities are dependent on electricity, production of the same is very important for every nation’s economic development because it brings investment opportunities for the country. In a country where electricity production is more, investors get interested because the cost of production in such a country is minimal compared to where there is no electricity. Running machines on electricity is cheaper compared to running them on generators. High electricity production helps to reduce the mortality rate in the country because the hospitals will be efficiently powered and is a key factor in service delivery at hospitals.

In countries with good electricity production, agricultural productivity is also high because electricity can help in powering irrigation, food preservation, and seed preservations. They enable the country to have fewer damages to agricultural products because they can be kept in storage facilities, and wastage can be avoided.

Impact on currency

Although electricity production is an important sector of the economy and a vital component, it may not have a direct impact on the value of a currency. The effect of shortage in electricity is first felt on the company, which will be reflected in its quarter-quarter data. If the results are bad, one can analyze the impact of electricity on the numbers and the stock price. If the industry itself is suffering, it primarily impacts the stock market and not the currency value. Hence, we can say that the impact of electricity is minimal on the value of a currency where investors, too, do not give much importance to this data.

Sources of information on Electricity Production

Economists and investors have not keenly tracked the electricity production data, so not many economic websites and newspapers publish the data regularly. The country’s electricity board is the official source of the data from where reliable figures can be obtained. However, we were able to collect the data on the electricity production of a few countries that can be used for reference and comparison.

GBPAUDUSDCADNZDJPY

High levels of electricity production improve the standard of living of the people in the country. This is very important for the economic advancement of a country. If people live in better conditions, it has ripple effects on every aspect of the country. It reduces unnecessary expenditures for the government. It improves the security of the country and helps to create job opportunities for the entire country because the indirect sectors use electricity to power their businesses. Development can only be realized when the key drivers of the economy are unhindered by the country’s lack of infrastructural components.

Impact of Electricity Production’s News Release On The Forex Market

In the previous section of the article, we comprehended the Electricity Production economic indicator and saw it’s economic importance. We shall extend our discussion and understand the impact of the Electricity Production news announcement on various currency pairs.

It is important to note that although electricity is needed for the economic development and well-being of citizens, it is not a crucial fundamental indicator. Therefore, investors and traders do not invest based on Electricity Production data. However, let us find out the impact on a few currency pairs on the day of the announcement.

The below image shows total Electricity Production in the United Kingdom, where it increased to 29731 in Gigawatt-hour in December from 28902 Gigawatt-hour in November of 2019. Let us see how the market reacts to this data.

GBP/USD | Before the announcement

We will begin our analysis with the GBP/USD currency pair and observe the change in volatility due to the news announcement. The above image shows the daily time frame chart of the currency pair before the news announcement. We see that the market has been moving in a ‘range,’ and currently, the price is almost at the top of the ‘range.’ Aggressive traders can take ‘short’ positions with a large stop-loss, as there can be volatility in the pair during the news announcement.

GBP/USD | After the announcement

After the news announcement, the price hardly makes a move and stays at the same place as it was before. There is no change in the volatility, as indicated by the ‘news candle.’ The market continues to move higher on subsequent days and breaks out from the ‘range.’ The move should not be considered as a result of news but instead was a technically driven move. Now traders should trade this currency pair using their breakout strategy.

GBP/CAD | Before the announcement

GBP/CAD | After the announcement

The above images represent the GBP/CAD currency pair, where we see that the market is in a strong uptrend before the news announcement and recently has been sideways. We should not expect major volatility in the pair. Technically speaking, we will be looking to go ‘long’ in the market after a suitable price retracement to the nearest support or demand level.

After the news announcement, the market moves higher by little, and volatility expands to the upside. We could say that since the Electricity Production data was slightly positive for the British economy, traders bought the currency after the news announcement and raised its value. At this point, we cannot take any trade as there is no formation of an appropriate continuation pattern in the market.

GBP/CHF | Before the announcement

GBP/CHF | After the announcement

The previous images are of the GBP/CHF currency pair, where we see that before the news announcement, the market is in a strong uptrend, indicating a great amount of the strength in the British Pound. Here too, the idea is to go ‘long’ in the market after a price retracement to a key technical level. The price seems to have broken out a small ‘range.’ Thus, we cannot take any position in the market at this point.

After the news announcement, the market instantly drops, and the prices move lower. The news data had a negative impact on the currency pair, where volatility increases to the downside. As the Electricity Production data does not have a long-lasting effect on the currency, the fall in price due to the release of the news can be an opportunity for joining the uptrend.

We hope you find this article informative. Let us know if you have any questions in the comments below. All the best.

Categories
Forex Daily Topic Forex Trading Strategies

Principles of Trading Strategies

Introduction

A trading strategy is a systematic methodology of investment that can be applied in any financial market, for example, bonds, stocks, futures, commodities, forex, and so on. In this context, a profitable trading strategy is more than a system that provides an entry signal on the long or short side with a stop-loss and a profit target.

Big traders make money to take their investment decisions systematically, reducing their risk with the diversification of the assets that make up their portfolio.

In this educational article, we’ll present a set of elements that can be part of a trading strategy.

The Elements of a Trading Strategy

A systematic trading strategy should be tested and validated with historical data, and its execution in the real-market should be done with the same accuracy as when using paper money.

The strategy should provide a setups series that allow us to recognize where to locate the market entry and in which direction. Finally, the trading strategy should allow market positioning in the long and short sides. This positioning should require identifiable stop-loss and profit target levels.

In particular, in this article, we’ll present the use of Fibonacci, candlesticks formations, chart patterns, trend lines, and trend channels.

Fibonacci Analysis

Likely, Fibonacci retracements and extensions are the most used tools in the world of retail and institutional trading. The Fibonacci series has its origin from the mathematical problem of the rabbits’ population solved by Leonardo da Pisa “Fibonacci” in his work “Liber Abaci” published in 1202.

The sequence discovered by Fibonacci not only can be applied in the rabbits’ population growth, but this series also solves other growth problems in nature and also on the financial markets.

Fibonacci and Corrections

One application of the Fibonacci tools in financial markets is the measurement of a retracement size that an impulsive wave may experience in its corrective move.

The rationale of this strategy considers that when the initial impulsive movement ends and following the subsequent corrective move, the market will develop a second impulsive move in the same direction of the first move.

The selection of the asset is linked to the timeframe under analysis; for example, the structure developed in a weekly chart will require more time than an hourly chart formation.

The following figure illustrates two potential entry setups using the Fibonacci retracement tool. The first scenario considers a retracement of 38.2% of the first move. The second scenario will occur when the price experiences a retracement of 61.8% from the top of the first impulse. 

The stop-loss will be placed at the origin of the previous impulsive movement.

Setting Targets with Fibonacci Extensions

Prices extensions are movements that resume the progress of a previous trend. Generally, the extensions occur in the third wave, and the correction corresponding to the second wave does not move beyond the origin of the first impulsive movement. The next figure exposes the extension of a regular three-wave pattern. Consider that the wave identification does not correspond to an Elliott wave labeling.

The analytic process follows the next steps:

  1. After an impulsive move, the price action must develop a minimum retracement of the first move.
  2. The size of the swing must be multiplied by the Fibonacci ratio of 1.618.
  3. The resulting level will correspond to the price target of the third wave.

The analysis in a five-wave pattern is similar to the three-wave case. The difference in this pattern is the seek the length of an additional impulsive move.

The five-wave pattern includes three impulsive movements and two corrective moves. The following figure illustrates the Fibonacci measures of this formation.

The Phi-Ellipse

The Phi-Ellipse is a countertrend trading method based on the oscillation of price with time. Its goal is to reduce the noise of falses breakouts and increase the stability of the investment strategy. The drawing process of a Phi-Ellipse requires to identify three points, as shown in the next figure.

After identifying the points A, B, and C, in a regular three-wave pattern, there should place the Phi-Ellipse in these points. We should expect a new impulsive move as the first impulse. There are three ways to trade against the trend at the end of the Phi-Ellipse, which are:

  1. Enter in a position when the price breaks outside the perimeter of the Phi-Ellipse.
  2. Entry based on a chart pattern at the end of the Phi-Ellipse.
  3. Place an order when the price action when the price moves outside a parallel line to the median line of the Phi-Ellipse.
  4. A buy position is recommended at the end of the Phi-Ellipse when it has a descending slope, and a sell position is recommended when the Phi-Ellipse has an upward slope.

Conclusions

In this educational article, we discussed the elements that should contain a trading strategy. The application of a systematic trading strategy or a combination with a strategy across time in a diversified portfolio could help the investor reduce the risk in its investment decisions.

On the other hand, the strategy’s analysis methodology should provide entry-setups for both long and short-side positions. In this context, in this article, we presented the use of Fibonacci retracements and extensions to offer entry setups inlcuding its stop loss and profit target level. Finally, we introduced the Phi-Ellipse method, which allows the investor to reduce the risk of falses breakouts in its investment portfolio.

In the next educational article, we will review the use of candlesticks formations, chart patterns, trend lines, and trend channels.

Suggested Readings

– Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding The Importance Of ‘Terms Of Trade’ As A Macro Economic Indicator

Introduction

Terms of Trade is a direct and useful measure of an economy’s International Trade health and gives us a good measure of how fast capital is moving in or out of the country. Terms of Trade make analyzing Balance Of Payments and, more specifically, Current Account Balance easier. Understanding of Terms of Trade can help us better analyze the current liquidity of the economy and its changes in a more crude way.

What are Terms Of Trade Indices?

Terms of Trade is the ratio of its Export Prices and Import Prices. It is the ratio of money received on exports to money spent on imports. If there is an individual’s analogy to be made, then it would be the ratio of an individual’s monthly income to his monthly expenses. Mathematically, it would be the number of export goods that can be purchased per unit of import.

Terms of Trade ratio expressed in percentages, and hence the ratio is multiplied by a hundred. A TOT figure above100 indicates that the country is receiving more on its exports than on its income and vice-versa.

When a country has a TOT figure of more than 100, it means that it is receiving more capital on exports compared to sending capital out on imports. Hence, on an overall basis, capital is flowing into the country. Higher the ratio, the faster the rate at which capital flows into the country. It ultimately translates to the pace at which a country is becoming wealthy and liquid.

When a country has a TOT figure less than 100, it means capital is flowing out of the economy, and its import expenses exceed that of its export revenue generated. Continued periods of TOT figures less than 100 will drive the economy to a vicious debt cycle from which recovery may be difficult. The ratio will tell us how fast the capital is depleting from the economy and is nearing a financial crisis. Countries prefer to have a ratio above 100.

The ratio tells us the rate at which the economy is accumulating capital. On the global market place and International Trade, the ratio will determine what portion of the world’s wealth goes to each country. In other words, based on the demand and supply on the international markets, the ratio will tell us how profits from international trade will be distributed amongst the participating countries.

How can the Terms Of Trade numbers be used for analysis?

Since TOT is a ratio change in TOT, figures can imply multiple things. An improvement in TOT figure could mean:

  1. Export prices have increased in contrast to Import prices being stagnant or dropped.
  2. Export prices would have dropped but not as sharply as import prices. Both dropped but not to the same degree.
  3. Export prices would have stayed the same while Import prices would have dropped.

All the above scenarios can lead to an improvement in the TOT figure. Hence, simple changes in TOT figures cannot be directly used to draw economic conclusions. It is crucial to understand the factors that have resulted in a change in TOT numbers. It is crucial to know whether the change is a consequence of a short-term shock or development or a consistent long-term trend that will persist throughout the coming periods.

TOT is susceptible to multiple economic factors, some of which are:

Exchange rate: A decrease in exchange rate adversely affects imports and benefits exports and vice versa. Imports become costly, and exports become cheap, adversely affecting TOT.

Inflation: The inflation rate across different economies and different sectors affect different economies having different export and import portfolios. For example, a sharp increase in Iron Ore prices can greatly benefit Australia, whose chief exports are Iron Ore, while it can affect importing countries like China and Japan adversely. So inflation across sectors have different impacts across economies and within the country amongst different sectors.

Demand and Supply: Increase in demand, coupled with the availability of those resources also affects TOT as exports and imports are a function of demand and supply. Scarcity increases prices and oversupply decreases the same.

Quality of Produce: Size and quality affect the pricing of products. A high-quality product is likely to cost more and benefit the exporter more. Hence, the portfolio of the country’s exports and imports determines the TOT fluctuations of different product grades.

Trade Tariffs: Protectionist strategies from Governments lead to putting trade barriers on imports. The political and trade ties between countries can also affect the long term trend of TOT figures for a given economy.

Portfolio of Exports and Imports: What types of Goods and Services a country exports and imports also matter. Countries that export goods and services that are more of primary importance (ex: food and energy) tend to always have high demand and TOT ratio more than 100 both within the economy and on the global economy.

Impact on Currency

When the TOT figure is above a hundred, it implies domestic currency is flowing into the country and creating a deficiency in the global market. Hence, higher TOT figures will increase its currency demand and thereby leading to currency appreciation. On the other hand, a continued TOT less than 100 indicates the world is being supplied with domestic currency and therefore leads to currency depreciation.

It is a coincident indicator and is more useful as a long-term trend indicator rather than short-term changes. The indicators affecting TOT would have been identified through Trade agreements or other media sources in general and hence, is a mild-impact indicator.

Economic Reports 

The Bureau of Economic Analysis publishes its TOT figures in the National Income and Product Accounts every quarter of the year on its official website. Below is a figure for an illustration of the same:

We can also find the aggregated TOT reports for the OECD countries on the official website. The World Bank also aggregates and maintains TOT data for most countries on its official website.

Sources of Terms Of Trade

For the US, we can find the Terms of Trade in their National Income and Product Accounts here:

BEA – National Income and Product Accounts

OECD – Terms Of Trade

World Bank – TOT

We can also find Terms of Trade Index for many countries categorized here.

Impact of the ‘Capacity Utilization’ news release on the price charts

In the previous section of the article, we learned the Terms of Trade economic indicator and understood its significance in an economy. The ToT Index measures the ratio of an export to the price of an import, per commodity. A country that heavily relies heavily on exports, this number gives an important hint of the nation’s growth. Even though the Terms of Trade is useful in determining the balance of trade in a country, it does not have a major influence on the GDP of the economy. Therefore, investors don’t give much importance to the data during the fundamental analysis of a currency.

Today, we will be analyzing the impact on Terms of Trade on different pairs and witness the change in volatility due to the news release. The below image shows the latest Terms of Trade data of New Zealand that indicates an increase in the value compared to the previous quarter. A higher than expected reading is considered to be positive for the currency while a lower than expected reading is considered as negative. Let’s see how the market reacted to this data.

NZD/USD | Before the announcement:

We shall start with the NZD/USD currency pair to examine the impact of Terms of Trade on the New Zealand dollar. In the above price chart, we see that the market is in a strong downtrend before the news announcement with increased volatility. Currently, the price is at a key technical area, which is known as the ‘demand’ area, and hence we can expect buyers to come in the market at any moment. Thus, once needs to be cautious before taking a ‘short’ trade.

NZD/USD | After the announcement:

After the news announcement, the market moves lower and volatility increases to the downside. The Terms of Trade data showed an increase in the total percentage, but this was not good enough for the market players who apparently took the price down and weakened the New Zealand dollar. Although the ‘News Candle’ closes in red at the time of release, it gets immediately taken over by a bullish candle, as this was a ‘demand’ area.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the characteristics of the chart are similar to that of the above-discussed pair. Before the news announcement, here too, the market is in a strong downtrend, and the volatility appears to be high on the downside. One thing that is different in this pair is that the price is presently at its lowest point and seems to have made a ‘lower low.’ This means New Zealand is weaker in this pair.

After the news announcement, market crashes and the price drops sharply. The Terms of Trade has a similar impact on the pair, where we see a further increase in volatility to the downside. Again. the weakness does not sustain, and the price shows a large bullish candle after the ‘news candle.’

NZD/CAD  | Before the announcement:

 

NZD/CAD  | After the announcement:

Lastly, we shall discuss the impact on the NZD/CAD currency pair and observe the change in volatility. Here, we see that the market is continuously moving lower before the news announcement indicating a great amount of weakness in the New Zealand dollar. Just before the news release, the price seems to be approaching the ‘demand’ area, which can possibly change the trend for a while by initiating some bullishness in the pair.

The Terms of Trade news announcement gets lukewarm from the reaction where the price initially moves higher little and finally closes forming a ‘Doji’ candlestick pattern. The news release leads to further weakening of the currency where the volatility expands on the downside.

That’s about ‘Terms Of Trade’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

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Forex Daily Topic Forex Fundamental Analysis

The Importance Of ‘Steel Production’ & Its Impact On The Forex Market

Introduction

Steel is a commodity of paramount importance in today’s international economy. Steel is a staple for the modern economy, and its wide range of usage from the tiniest needles to the largest bridges and tallest buildings makes it an essential commodity for economic prosperity.

Steel is no less critical than Food and Energy for today’s modern world. The far-reaching utility and demand thereof of Steel makes it a good economic indicator for us to understand its impact on exporting and importing economies.

What is Steel Production?

Iron and alloying elements like carbon, chromium, manganese, nickel, and vanadium are added to produce different types of Steel.  Steel industry began in the late 1850s before which it was an expensive commodity that was exclusively used for armors and cutleries primarily.

After the invention of the Bessemer and open-hearth process, Steel Production became easier. By the 1860-70s, the steel industry started to grow rapidly and continues to do so even today. Steel is the most sought after commodity for its durability and strength. It is used for building heavy machinery in the world, like in cars and engines. The natural abundance of Iron and Carbon makes it an affordable commodity for large scale production and supply.

Today Steel is mainly produced through techniques called basic oxygen steelmaking and Direct Reduced Iron (DRI) in an electric arc furnace. Steel’s unique magnetic properties make it an accessible material to recover from the waste for recycling. Steel retains its properties even after undergoing many recycling processes. Hence, it is reusable and economical.

How can the Steel Production numbers be used for analysis?

On a standalone basis, the steel industry directly contributes about 3.8% to the total global GDP as per 2017 research. The indirect impacts meaning the industries that depend on steel production, contribute 10.7% to the global GDP.

The importance of Steel Production apart from its utility is that the supply chain of Steel is very long. The number of dependent industries way more than any other industry. As per 2017’s research by Oxford Economics for every two jobs added in the steel sector, 13 additional jobs are supported through its worldwide supply chain. About 40 million people work in this supply chain of Steel. Indirectly it supported 259 million jobs worldwide and was worth 8.2 trillion dollars in 2017.

Steel is a critical input in the work of many other industrial sectors that produce items essential for the economy to function like hand tools, complex factory machines, Lorries, trains, railway tracks, and aircraft. It is apart from the countless items from day-to-day life like cutlery, tables, cars, bikes, etc. Hence, the economic activity goes beyond the steel-producing locations to multiple sectors across countries. Some of the primary industries that use Steel are Construction, Electronic, Transportation, Automotive, Mechanical Equipment, Energy Production and Distribution, Food and Water, Tools, and Machinery industries.

As the demand for Steel continues to rise, the exporting countries would be at a more significant advantage in terms of economic growth, as evident by below ongoing historical trend.

(Source – worldsteel.org)

Below are the rankings of major economies ranked in terms of exports and imports

(Source – worldsteel.org)

Hence, countries that are net exporters of Steel would be at a higher economic advantage in terms of its own consumption needs and revenue generation through exports. As economies continue to improve the standard of living of their population, the demand for Steel will continue to increase.

Developing economies like China and India have tapped into this market and increased their Steel production over the last decade to achieve export-led-growth. As evident from the above statistics, the developed economies like the United States and the European Union continue to be a net importer while developing economies China and Japan are the leading exporters of the same.

Significant changes in the Steel Production figures will, therefore, have adverse effects on the exporting and importing economy. Hence, Steel Production directly influences economic performance and, therefore, the currency value of that economy.

Impact on Currency 

Steel production is a proportional indicator. An increase in production is beneficial for the economy and thereby for the currency. Steel is a global commodity produced worldwide. Hence, Steel Production figures are useful in identifying the long term megatrends and newly developing Steel industries that will have long term impact.

The short-term fluctuations within the Steel Industry itself would be recorded through other more extensive indicators like Industrial Production (IP) Index in the United States. It is a low impact indicator and is more useful for making long-term sector-wise investment strategies.

Economic Reports

The World Steel Association represents about 85% of the total steel producers across the world. It aims to find global solutions to the environmental challenge to identify trends and bring together regional and national steel producers.

It publishes monthly and annual reports on steel production figures comparing economies in terms of exports, imports, contributions to global GDP on its official website. The monthly reports are usually published in the last week of a month for the previous month.

Sources of Steel Production

The WSA monthly press releases are available here. Statistical figures of global economies are available here and here. The worldwide statistical figures are also available here. The economic impact of Steel is also reported by the American Iron and Steel Institute here.

Impact of the ‘Steel Production’ news release on the Forex market

We saw how Steel Production plays a vital role in an economy with both economic and social impact. Steel is one of the essential materials for the construction of buildings and the manufacturing of many other materials. It creates opportunities in the innovation sector and in research & development projects around the world. Given such a wide range of applications, it is apparent that it has a fair amount of impact on the economy and on the currency. An in-depth analysis revealed that in 2017, the steel industry sold 2.5 trillion worth of products and created U.S. $500 billion value. The steel industry also supports and facilitates 96 million jobs globally.

In this article, we will be analyzing the impact of U.K. Steel Production on the British Pound and witness the change in volatility during the official news announcement. The below image shows the latest Steel Production data in the U.K. produced in the month of April. A higher than expected reading is taken to be bullish for the currency. Contrarily, a lower than expected reading is considered to be negative.

GBP/USD | Before the announcement:

We shall start with the GBP/USD currency pair for examining the impact on the British Pound. In the above price chart, it is clear that the overall trend of the market is down, but recently the price has pulled back quite deep. This is an indication that the downtrend may be coming to an end, and this could turn into a reversal. We will take a suitable position in the market based on the news release.

GBP/USD | After the announcement:

After the news announcement, volatility increases on the downside in the beginning, but later, the price reverses and closes in the green. The buyers push the price higher owing to positive Steel Production data, and the price forms a ‘hammer’ candlestick pattern. The Steel Production news release produced moderate volatility in the currency pair and, lastly, strengthened the British Pound. We need to be careful before taking a ‘buy’ trade as the major trend is down, and the impact of this news is not long-lasting.

GBP/AUD | Before the announcement:

GBP/AUD | After the announcement:

The above images represent the GBP/AUD currency pair. Before the news announcement, the market is in a strong downtrend, and recently the price has pulled back is very gradual in nature. The price action suggests that the market might continue its downtrend and so we will be looking to sell the currency pair after noticing some trend continuation patterns.

After the news announcement, the price reacts mildly to the news data where it nor sharply moves higher nor crashes below. The Steel Production has a slightly positive impact on the pair and lately the volatility to the upside. One should not forget that traders do not give much importance to this data, so one cannot expect the market to continue moving higher. As long as we don’t see trend reversal patterns in the market, an uptrend is far away.

GBP/CHF | Before the announcement:

GBP/CHF | After the announcement:

The above images are that of the GBP/CHF currency pair, where we see that the market is in a downtrend, and lately, the price is has retraced to the ‘resistance’ area. With this, the market has also shown some trend continuation patterns indicating that the downtrend will continue at any moment. If the news release does not change the structure of the chart, this can be an ideal chart pattern for taking a ‘short’ trade.

After the news announcement, the price initially falls lower, but buyers immediately take the price higher, and the candle closes with a wick on the bottom. Although the volatility is low after the announcement, the market is moving on both the directions and produces a neutral effect on the currency pair.

That’s about ‘Steel Production’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

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Forex Daily Topic Forex Videos

Fundamental Analysis For Novices! Housing Starts!

Fundamental Analysis For Novices Housing Starts

 

Welcome to the Fundamental analysis video for novices. In this session, we will be looking at housing starts.

So, what are housing starts?

If you are reviewing your Economic Calendar and you come across the term Housing Starts, it refers to this key economic indicator, which is released around the 17th of each month by the US commerce department. The information is subject to an Embargo, and when released, it refers to the number of new residential homes that had begun construction during the month in question. Only housing starts where construction has begun on the foundations of the property are included in the data.

In the United States, housing starts comprise of three sectors of residential homes, which include single-family homes, town homes and condominiums, and multi-family dwellings with more than five units such as apartment blocks.
Analysts and traders compare the monthly data to previous months figures, in order to ascertain if the month or month and annual housing starts are growing in numbers or falling.

So why is Housing Starts so important in fundamental analysis, and why is it considered a key economic indicator?
Housing starts help to give a clear picture of the economic health of a country because when houses are being constructed, it usually means that people are moving home, buying homes or investing in properties such as buy to let or with a long term view to buy, hold, and sell. These types of home buyers are speculators. Sometimes this area of activity is referred to as flipping, especially in the renovation sector.
The important thing is that this activity usually grows in a growing economy and will typically contract during periods of recession.

The 2008 financial crash which started in the United States was due to the subprime mortgage sector failure, where bundles of mortgages were bought and sold in the financial markets, and where many mortgages were packaged as been A-rated but were in fact blended with mortgages that were considered as high risk due to the fact that the mortgages were large in size and those taking on the mortgages could not necessarily afford them.

When the 2008 recession started, and people were unable to pay their mortgages, the knock-on effect was, banks losing money in failed mortgages, which started a knock-on effect and caused the crash. Housing starts can be affected by the weather, and this is generally factored in by economists when the data is released. They will also consider the business sector surrounding this industry, which include banks, mortgage suppliers, mortgage brokers, builders, construction workforce, and suppliers of goods and materials.

How to trade housing starts?
Because of the coronavirus pandemic, which has caused a contraction in the housing market, traders and analysts and economic commentators will be keeping a close eye on Housing, starts data over the next few months. They will use this data to try and ascertain if the crisis is over and that things are gradually getting back to normal with an uptake in house buying.

When the number is released, which usually happens on the closest business day to the 17th of each month, for the US housing starts data, keep a close eye out for the number, if it is as the market expected, we should not see too much volatility in the markets. If the number is much lower than that which is expected this would be bearish and you might see the dollar exchange rate fall in value against his counterparts, and if the number is higher than expected, this should be considered bullish because it is good for the economy and you might, therefore, see dollar exchange rates move higher.

Categories
Forex Daily Topic Forex Education Forex Psychology

Guidelines for Successful Trading

Introduction

To achieve a successful trading profession is more than a couple of good trades, and a fancy template in the trading platform, nor a social media trader’s fashioned lifestyle.

In this educational article, we’ll present a set of guidelines to aid in building a successful trading plan.

The Right Trading Mindset

Trading in financial markets must be understood as a decision process, which, when developed systematically, tends to provide consistent results.

Robert and Jens Fischer, in their work “Candlesticks, Fibonacci, and Chart Pattern Trading,” define a list of rules or guidelines that can aid investors in its decision-making process. These guidelines are as follows:

Self-knowledge 

If the investor feels uncomfortable when it is in the market, this could be indicative of an incorrect positioning in terms of position size or market side.

Ego by a winning streak

An increasing ego encouraged by a winning streak, especially in the first trades, could drag the investor toward huge losses.

Hopping when things go wrong 

Many traders tend to let run the losses expecting a market reversal to the trade direction, and they usually close a winning trade too soon, with a small profit (fearing a loss), which is a recipe for disaster. To solve this issue, traders must plan every trade in advance,  with a pre.defined stop-loss and profit target before opening any trade.

Losses are part of the business 

Investors must be aware that it is impossible to have 100% of winning trades

Avoid Martingale position sizing

The increasing the size of the position when the market and the trade moves against you is the path to bankruptcy.

Trading systems could fail

There is no trading system that could provide 100% of winner trades. However, losses will increase when the investor jumps from one system to another. Each strategy has its advantages and disadvantages. The profitability of any trading system will depend on the market conditions, and the investor must learn to live with the potential risk of his trading system.

Diversify the risk

Independent of the profitability associated with a trading product, the systematic diversification of risk could give the investor a smoother equity curve growth than when considering only a single trading asset.

Making Money by trading is a long road 

The consistent and profitable trading in financial markets is the result of a systematic work taking months or years where results obtained can confirm the rentability of each trading system.

The importance of a trading plan

Successful trading is not to make money quickly; it is related to the capability to make profits consistently long term, independently of changing market conditions.

A comfortable trading strategy

The trading strategy must provide the investor with similar results in real-time than on paper-money or in the back-test mode. If the approach does not offer the same results in real-time, the methodology must be revised.

The importance of discipline

The most important characteristic of successful traders is discipline because they limit their decisions to their established trading methodology.

The Importance of Number Three

In the financial markets, there exist a vast number of ways to analyze it technically, for example, chartist formations, Elliott wave, or candlesticks patterns. However, those ways to analyze the market have in common, and it is number three.

  • In Elliott wave analysis, when the price moves in a trend, this develops three movements in the primary trend’s direction. 
  • The most popular chartist pattern known as Head and Shoulders has three tops (or valleys) and two valleys (or tops.) When the price reaches its third valley, the price action tends to break below the previous two valleys and continue a downward (or upward) sequence.
  • An ascending triangle corresponds to a continuation pattern, in the bullish case, three valleys, and two tops. When the price action touches by the third time the top, the price surpasses the previous two highs and continues its earlier move and continues its primary trend.

In the following figure, we observe a set of patterns that follows the characteristics of “three.”

 

Conclusions

In this educational article, we presented a set of guidelines to develop a trading mindset that can support a profitable trading methodology along time.
We also exposed a group of chart patterns that correspond to a simplification of three moves, which could support the analysis and generation of trading opportunities in the real market.
In the following article, we will present the basic principles of a trading strategy.

Suggested Readings

– Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons, Inc. (2003).

Categories
Forex Daily Topic Forex Fundamental Analysis

Importance Of ‘Construction Output’ As An Economic Indicator

Introduction

Construction activity is the beginning phase of an expected economic growth, which is more vividly evident in the developing economies than developed economies. New infrastructures, buildings, renovations are all part of an expanding economy. Construction is an important economic indicator to assess economic health.

What is Construction Output?

Construction Output is the measure of building and civil engineering work in monetary terms. It is the amount of construction work done measured as the money charged to the customers. It refers to the construction work performed by an enterprise whose principal activity is classified as Construction. Since a measure of the amount of work is proportional to fees charged for the activity, it is measured in the domestic currency of the region where the construction activity was undertaken.

Overall, Construction Output is a measure of the amount charged to customers for construction activity by construction companies in a specific period ( monthly, quarterly, annually). The UK Construction Output is based on a sample survey of 8,000 businesses employing over 100 people or having an annual turn over greater than 60 million sterling pounds. The Construction Output excludes the Value Added Tax (VAT) and payments to subcontractors.

The Construction Output data reporting based on sectors, new or existing renovations, seasonal adjustments, volume, value-based, etc. precisely as illustrated for reference below:

(Picture Credits – Ons.gov)

The Construction Output data is also reported in the index format, where the base index period is 2016, for which the score is 100, and subsequent reports would be scored in comparison to this index period. Typically, it is widely discussed in terms of percentage changes concerning the previous month.

How can the Construction Output numbers be used for analysis?

The Construction Output is a significant economic indicator in the United Kingdom, that is closely watched by both private and public sectors, especially by the Bank of England and HM Treasury. The Construction Output figures assist them in policy reforms and economic-decisions. Growth is a process of emergence of new and better things and discarding old inefficient ones. Construction, in this sense, is just that. Construction involves the erection of new buildings, infrastructures, renovations, expansions of existing infrastructures.

Increased Construction Output implies more people employed, better wages in the construction sector, more demand for raw materials for the Construction, etc. The very act of Construction has a ripple effect on the economy.

Secondly, the Construction of corporate infrastructures or commercial structures implies that these buildings 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, Construction Output figures improvement is indicative of an improvement in many other sectors.

All these improvements correlated with Construction Output also stimulate consumer confidence and encourages consumer spending, which further stimulates the economy and boosts growth. The importance of Construction Output is also evident from the fact that it is taken into account for the compilation of the GDP monthly estimate.

New Orders in the Construction Industry

It is a quarterly report produced by the administrative data provided by the Barbour ABI. Construction Output data reflects immediate short term health of the economy as it accounts for the construction work that has already taken place. Whereas, the New Orders report from the ONS provides more a forward-looking estimate of the potential construction activity in Great Britain.

New Orders are also crucial in gaining insight into the upcoming economic trends. Hence, it is advisable to use the New Orders report in conjunction with Construction Output report data to assess current and ongoing economic trends more precisely. It is a quarterly report. It is also presented as an index report for which the base index period is 2016, i.e., the New Orders score for 2016 is 100, and all subsequent reports are reported in comparison to this index value.

Impact on Currency

The Construction Output is a coincident indicator in the short-run. Still, it can also be used to gauge upcoming economic trends based on the type of Construction Activities are being undertaken. Also, if we take the New Orders report, both together can act as a leading economic indicator.

Construction Output reflects the current economic conditions by showing the value of the Construction Activity that has already taken place every month.  It is a proportional economic indicator, meaning an increase in Construction Output figures is good for the economy and correspondingly for the currency and vice-versa.

Economic Reports

The Construction Output reports are published approximately six weeks after the reference month by the Office for National Statistics (ONS) on its official website.

Monthly Construction Output reports go back to 2010 for the United Kingdom. A derived data set going back to 1997 can be obtained from monthly GDP data sets. The Construction Output reports are available in seasonally adjusted and unadjusted formats, and at current prices and chained volume measures (excludes effects of inflation).

For the United States, the Bureau of Economic Analysis releases GDP by Industry quarterly and annual estimates, which serves as a close or relatable statistic for the Construction Output of the United Kingdom. As such, there is no Construction Output dedicated nationwide statistics in the United States. Hence, GDP by Sector analysis helps us to analyze the Construction Industry’s performance in the United States.

Sources of Construction Output

We can find the latest Construction Output statistics for the United Kingdom can be found below.

For the United States – Gross Output of Private Industries: Construction

Construction Output reports for various countries are available here.

Impact of the ‘Construction Output’ news release on the price charts

By now, we believe that you have understood the significance of Construction Output in an economy, which essentially includes construction work done by enterprises that are used for measuring the growth of the construction sector. It gives an insight into the supply on the housing and construction market. The Construction industry is one of the first to go into recession when the economy declines but also to recover as conditions improve. The Construction Sector has a marginal influence on the GDP of an economy. Thus, investors do not give a lot of importance to the data when it comes to the fundamental analysis of a currency.

In today’s illustration, we will explore the impact of the Construction Output news announcement on different currency pairs and compare the change in volatility. The below image shows the previous, forecasted, and latest data of the United Kingdom, where we see a reduction in total output in the month of March. Let us look at how the market reacted to this data.

GBP/USD | Before the announcement:

The first pair we will look into is the GBP/USD currency pair, where the above image shows the characteristics of the pair before the news announcement. The market is in a strong uptrend and has started moving in a range with the price at the bottom of the range at the moment. Thus, we can expect buyers to show up any time from this point. As economists are expecting healthier Construction Output data, traders can take a ‘long’ position with a strict stop loss below the ‘support.’

GBP/USD | After the announcement:

After the news announcement, the market drops slightly owing to weak Construction Output data, and the volatility is seen to increase on the downside. But since the impact of this news release is less, the effect will not last long on the currency pair, and we cannot expect the market to break key technical levels. This is why the price reacts strongly from the ‘support’ and bounces off. Traders need to analyze the pair technically and trade accordingly.

GBP/AUD | Before the announcement:

GBP/AUD | After the announcement:

The above images represent the GBP/AUD currency pair, where we see that before the news is announced, the market was in a strong downtrend indicating a great amount of weakness in the British Pound. Currently, we can say that the price in the ‘demand’ area and thus we can expect bullish pressure to come back in the market at any moment. It is not recommended to buy the currency pair as the downtrend is dominant, and there are no signs of reversal.

After the news announcement, the price quickly moves up and closes as a bullish candle. In this pair, the Construction Output data get an opposite reaction from the market where the volatility increases to the upside soon after the announcement. Traders can take a ‘short’ position in the market after a suitable price retracement to a key technical level.

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above charts belong to the EUR/GBP currency pair, where we see that the market is in an overall downtrend before the announcement, and currently, the price is in a retracement mode. Since the British Pound is on the right-hand side of the pair, a down-trending market means the currency is extremely strong. Looking at the price action, we can say that the downtrend will continue and now we need to find the right place to enter the market.

After the news announcement, the price initially goes lower, but the currency gets immediately bought into, and volatility increases to the upside. This was a result of poor Construction Output data were traders bought the currency pair by selling British Pound. As the impact is least, the up move does not sustain, and the downtrend continues.

That’s about ‘Construction Output’ and the impact on its news release on the Forex price charts. Shoot your questions in the comments below, and we would be happy to answer them. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Everything About ‘Exports’ & The Impact Of Its News Release On The Forex Market

Introduction

Exports make one half of a country’s International Trade Balance. In today’s modern economy, with many countries pursuing their economic growth through the main focus on their exports, we must understand Export and its implications on the domestic as well as the global economy. The big words that are thrown around in the media like “Currency Wars,” “Trade Wars,” etc. all revolve around the exports among countries. A thorough understanding of the International Trade and Balance of Payments of countries can help us gauge economic growth on a macroeconomic level very well.

What is Exports?

The sale of locally produced goods to foreign countries is called Exports. Goods and Services produced in one country only when sold to other countries it is called an Export. Countries generally export goods and services that they have a competitive advantage over other countries. For example, Germans export Cars, America export Capital Goods, China export electronic goods, Jamaica exports Coffee, etc.

The advent of Globalization led to an increase in international trade opening doors for domestic industries to tap into the global market. The journey has not been smooth, during the Great Depression, and the following World War II slowed down international trade where many countries closed off their doors to foreign goods as part of protectionist strategies.

Before the 1970s, countries were following an import substitution strategy for growth where countries believed in self-sustenance by producing their goods and services without relying on foreign countries. After the 1970s, the countries began to realize the failure of import substitution and started opting for Export-led growth strategy, and that has been the case to date.

In general, a trade surplus, i.e., a country’s exports, exceeds its imports, is good for the economy. Although, it may not always be necessary as countries may import more than their current exports to build future and long term projects that will assist them in their economic prospects in the long run. In today’s world, China, the United States, Germany, Japan, and the Netherlands are the biggest exporters in the world in terms of revenue.

How can the Exports numbers be used for analysis?

Exports are crucial for today’s modern economies because of the many-fold that it brings with it to the exporting country. The following are the benefits and impacts of exports on the economy:

Broader Market – Companies always want to sell more and increase their profits. By exposing them to a broader range of audience gives them a much better chance of making profits than with a limited audience. By tapping into foreign markets, the domestic companies have to evolve to meet the local demands of other nations and learn how to mix what they sell and what is required by the world well. All this makes the companies grow more robust and overall increases their size and revenue a lot faster than what they would have achieved through operating domestically.

Wealth – Exports increase demand and, consequently, profits. It ultimately leads to employment, increases in wages, and ultimately raises the standard of living. Governments actively promote and encourage exports by reducing tariffs and use protectionist strategies like import barriers to protect their domestic business.

Foreign Reserves – As the trade happens between two countries with different currency regimes, where the payment can be in the domestic or foreign currency, this increases the Central Bank’s currency reserves. With sufficient currency reserves, the Government can manipulate exchange rates to control inflation and deflation by increasing or decreasing currency volume in the global market whenever needed.  During times of substantial exports, countries intentionally peg their currency value lower to make their products appear cheaper and increase the returns on their exports. China has been accused of this low pegging their currency in their favor. Subsequently, other countries have retaliated by lowering their currencies as well. It is what is being called “Currency Wars.”

Trade Surplus – It is always better to be owed money than to owe money as an individual. The same, in general, applies to countries that want to be net creditors to the world than net debitors. Increasing trade deficits can pile up the country’s debt, which can multiply over the years and can be very difficult to overcome. A healthy level of exports, in general, brings more money into the country and keeps the economy going at a steady and healthy growth rate.

Impact on Currency

Today’s global currency markets are free-floating and self-adjusting. Any sudden surge in exports will be followed by a rise in the currency value to compensate for the increased demand on the global market for its currency. A decline in exports will be followed by decreased demand for the currency, and accordingly, the currency depreciates.

Although the market forces are self-adjusting, frequent Government interventions to speed up the correction process to keep the output of the business constant is common.

Economic Reports

Exports form part of a country’s Trade Balance, which is reported under the Current Account Section of the International Balance of Payments Report of the country. The Balance of Payments reports is released quarterly and annually for most countries. The Trade Balance reports are published every month, which consists of Exports and Imports figures.

For the United States, the Bureau of Economic Analysis publishes the monthly Trade Balance reports on their website in the 1st week of every month for the previous month.

Sources of Exports

Impact of the ‘Exports’ news release on the price charts

In the previous section of the article, we understood the importance of Exports in an economy and saw how it contributes to the growth of the country. Exports are nothing but goods and services that are sent to the rest of the world, including merchandise, transportation, tourism, communication, and financial services. A nation that has positive net exports experiences a trade surplus, while a negative net exports mean the nation has a trade deficit. Net exports may also be called the balance of trade. Economists believe that having a consistent trade deficit harms a nation’s economy, creating pressure on the nation’s currency and forcing lowering of interest rates.

In today’s lesson, we shall analyze the impact of Exports data on different currencies pairs and observe the change in volatility due to the news release. A higher than expected number should be taken as positive for the currency, while a lower than expected number as negative. The below image shows the total Exports of Australia during the month of March and April. It is evident that there was an increase in Exports in the current month by 20%. Let us look at the reaction of the market to this data.

AUD/USD | Before the announcement:

We shall begin with the AUD/USD currency pair to witness the impact of Exports on the Australian dollar. The above image shows the state of the chart before the news announcement, where we see that the market is in a downtrend, and recently the price has displayed a reversal pattern indicating a possible reversal to the upside. Based on the Exports data, we will look to position ourselves in the currency.

AUD/USD | After the announcement:

After the news announcement, the market moves higher and volatility increases to the upside. The sudden rise in the price is a result of the extremely positive Exports data where there was a rise in the value by 20% compared to the previous month. This brought cheer in the market, making traders to ‘buy’ Australian dollars and thus, strengthening the currency. One can go ‘long’ in the market after the news release with a stop loss below the recent ‘low.’

AUD/NZD | Before the announcement:

AUD/NZD | After the announcement:

The above images are that of AUD/NZD currency pair, where we see that the market is in a downtrend that began just a few hours ago, and recently the price has shown sharp reversal from its recent ‘low.’ Technically this is an ideal reversal pattern that signals a reversal of the trend. One can take a risk-free ‘long’ position if the news announcement does not change the dynamics of the chart.

After the news announcement, the price sharply rises and closes, forming a strong bullish candle. As the Exports were exceedingly high, traders bought Australian dollars and increased the volatility to the upside. This could be a confirmation sign of the trend reversal, where we can expect the market to move much higher.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, where the first image shows the state of the chart before the news announcement. From the chart, it is clear that the overall trend of the market is up, but recently the price has shown a strong reversal pattern to the downside. Looking at the price action, we will prefer taking a ‘sell’ trade depending on the impact of the news release.

After the news announcement, the price falls lower, with an increase in volatility to the downside. The bearish ‘news candle’ is a consequence of the upbeat Exports data, which came out to be exceptionally well for the economy. Since the Australian dollar is on the right-hand side of the pair, traders sold the currency pair in order to strengthen the Australian dollar. This is a perfect ‘sell’ for all.

That’s about ‘Exports’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Basic Strategies Forex Daily Topic

How ‘External Debt’ Presents A More Clear Picture Of A Nation’s Economy

Introduction

External Debt, unlike regular Government Debt, is typically more objective oriented and is indicative of future development plans for which the loan was taken. In this sense, understanding the source and size of External Debt can help us deduce the upcoming economic developmental changes occurring in the borrowing nation and corresponding benefits that could be derived by the lending party, be it a foreign Government or Banks.

What is External Debt?

It is the part of a country’s Debt that was borrowed from a source outside the country. External Debts are usually taken from Foreign Governments, Banks, or International Financial Institutions. The External Debt must be paid back in the currency in which the loan was initially taken and usually corresponds to the currency of the Foreign Government’s local currency. It puts a de facto obligation on the borrower to either hold those currency reserves or generate revenue through exports to that specific country.

External Debt is sometimes also referred to as Foreign Debt and can be procured by institutions also apart from the Government. Typically External Debt is taken in the form of a tied loan, which means the loan taken must be utilized or spent back into the nation financing the Debt.

For example, if country A takes an External Debt from country B for developing a corn syrup factory, then it may purchase the raw materials required for construction and raw input like corn from the lender itself. It ensures that the lender benefits to a greater extent apart from the interest revenue on the lent money. Hence, in general, the External Debt, specifically tied loans, are transacted for specific purposes that are defined and agreed upon by both lending and borrowing countries.

How can the External Debt numbers be used for analysis?

External Debt takes precedence over Internal or Domestic Debts as agencies like the International Monetary Fund monitor the External Debts, and also, the World Bank publishes a quarterly report on External Debt.

Any default on External Debt can have ripple effects on the credibility of the nation. Internal Debts may be managed, but once Debt is External, it is public information, and defaulting affects the credit rating, and the country is said to be in a Sovereign Default.

When a country is either unable or refuses to pay the Debt back, then lenders will withhold future releases of assets that are essential for the borrowing country. When a country defaults on Debt, the liquidity of the Government and the nation is questioned. It leads to investors and speculators quickly lose confidence in the Government’s ability to manage the economy effectively and withdraw their investments, bringing the nation to a standstill. In the currency market, such situations lead to currency depreciations very quickly.

Once Debt levels cross a certain threshold (generally, it is 77-80% of the GDP) where default risk increases, it becomes a vicious cycle. The knock-on effects of Debt servicing to decreased spending to slowing the economy all result in a recession or a societal collapse in extreme cases.

Impact on Currency

Government Debt is usually taken to finance public spending and build future projects that can help boost the economy. External Debt, when taken, is inflationary for the economy internally and leads to currency depreciation as it floods the market with the domestic currency through its spending. Hence, optimal utilization of the Debt so that it pays off, in the long run, is essential. When a country takes on Foreign Debt and spends its currency depreciates in the short-run for the duration of spending and vice-versa.

Although, the size of the External Debt compared to the economy’s size and its revenue should also be taken into account as the size of the Debt is relative. Underdeveloped economies Debt Sizes are not comparable on a one-to-one basis with those of the developed economies. External Debt is also one of the parts of the total Government Debt and hence, is not a macro indicator when compared to the likes of Total Government Debt and Total Government Debt to GDP ratio in general.

Hence, External Debt is a low impact lagging indicator as it does not account for the complete economic picture. The reasons for taking on External Debt by organizations or Governments, in general, would have been announced months ahead through which economists and investors can make decisions accordingly. Also, the changes that the Government intends to bring through the Debt can be traced through other macroeconomic indicators better than External Debt as an indicator in isolation.

Economic Reports

The World Bank maintains the aggregate External Debt data for various countries on their official website and publishes quarterly reports.

For the United States, the Treasury Department publishes the Gross External Debt reports on its official website. It releases its reports at 4 PM in Washington D.C. on the last business day of March, June, and September, and at 1 PM on the last business day of December for the corresponding quarters.

Sources of External Debt

Below are some of the most credible sources for ‘External Debt.’

Impact of the ‘External Debt’ news release on the price charts 

In the previous section of the article, we understood the External Debt fundamental indicator, which essentially represents the amount a country (both public and private sector) owe to other countries. They involve outstanding loans to foreign private banks, international organizations like the IMF, and interest payments to other institutions. Growing levels of Debt reduce GDP because the monetary payments flow out of the country. It will discourage foreign and private investment because of the concerns that the Debt is becoming unsustainable. Therefore, a country’s External Debt should be at a very nominal level.

In today’s lesson, we will illustrate the impact of External Debt on various currency pairs and examine the change in volatility due to the news announcement. For that, we have collected the data of Sweden, where the below image shows External Debt of the country during the 4th quarter. The data shows a marginal increase in Debt compared to the previous quarter, which means it may not severely affect the currency. Let us find out the reaction of the market to this data.

USD/SEK | Before the announcement:

Firstly, we will look at the USD/SEK currency pair and analyze the impact of External Debt on the price. In the above image, we see that the price was in a downtrend, and recently the market has reversed to the upside, which could be a possible reversal. If the price breaks previous resistance, we can confidently say that the market has reversed to the upside. Looking at the impact of the news release, we will position ourselves accordingly.

USD/SEK | After the announcement:

After the news announcement, the price slightly goes higher and closes exactly at the resistance area. The price after the close of ‘news candle’ is at a very crucial level. Later, we see that the volatility continues to expand on the upside, signaling a change of the trend. As the External Debt data was slightly on the weaker side, traders bought the currency pair by selling Swedish Koruna. However, the price continues to move higher after the news release resulting in further weakening of the currency.

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

The above images represent the EUR/CZK currency pair, where we see that market was in a downtrend, and now it has pulled back from the ‘low.’ This is an ideal place for taking a ‘short’ trade, but since the volatility is exceedingly less, we should be careful before entering the market. Low volatile pairs are not desirable for trading purposes as they carry additional costs such as high Slippage, above normal Spreads, and difficulty in order execution.

For these reasons, pairs like EUR/CZK should be avoided. After the news announcement, there is hardly any impact on the currency where the price remains at the same level during and after the announcement. Thus, we don’t witness any volatility in the market, and the External Debt data did not bring any change in the price of the currency.

AUD/SEK | Before the announcement:

AUD/SEK | After the announcement:

The above images are that of the AUD/CZK currency pair, where we see that the market is in a downtrend before the announcement, and recently the price has moved above the moving average, which could be a sign of reversal. Without having many assumptions, it is wise to wait for the news release, and depending on the impact of External debt news, we will take a suitable position.

After the news announcement, the price moves higher, reacting negatively to the External Debt data, which was slightly lower than last time. The volatility increases to the upside as traders go ‘short’ in Swedish Koruna. The price exactly bounces off from the moving average, indicating a possible reversal of the trend.

That’s about ‘External Debt’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Daily Topic Forex Fundamental Analysis

The Importance of ‘Fiscal Expenditure’ as a Macro Economic Indicator

Introduction

Fiscal Expenditure is one half of the Fiscal Policy that will shape the economic growth for the fiscal year. It is a closely watched statistic by traders and investors to analyze the policy maker’s behavioral trends, actions, and corresponding economic consequences for the current fiscal year.

What is Fiscal Expenditure?

Fiscal Policy

It is a strategy or scheme followed by the Government to manage its tax revenues and allocate those funds appropriately as Government spending to manage economic conditions for a fiscal year. Fiscal Policy is the action plan of a Government that decides how the inflow of the Government from tax revenue is channeled into different Government Spending programs. Fiscal Policy is analogous to Monetary Policy.

Monetary Policy is an economic lever used by the Central Bank of a nation using Money Supply and Interest Rates to influence the economy. Whereas, Fiscal Policy is an economic lever used by the Central Government of a nation using Taxation Policies and Public Spending to influence and manage the economy.

The revenue received through taxes is called Federal Receipts, and Government Spending is called Federal Outlays. The difference between the two is called the Federal Deficit or Surplus. When the spending exceeds the revenue, the Government is said to be running a deficit, and when the revenue exceeds the spending, it is said to be running a surplus.

It is preferable to balance out the spending and receipts for optimal growth. Excess revenue by holding down spending slows down the economy, and excess spending accumulates debt.

Fiscal Expenditure

It is a one-half component of the Fiscal Policy, and it refers to the outlays part of the Fiscal Policy. The proportion of revenues allocated to different sectors within the economy determines the amount of stimulus and support from the Government, helping them become profitable quickly. Fiscal Expenditure is public spending by the Government.

How can the Fiscal Expenditure numbers be used for analysis?

Apart from the mandatory spending like Medicare, Social Security, etc. the remainder of the revenue and the additional debt taken by the Government to invest in public spending to keep the economy vibrant determines the growth rate and GDP print for the year.

The Central Authorities can manipulate the taxation rules to increase its revenue, which generally puts the burden on the citizens. The second lever is the Fiscal Expenditure, where the Central Authorities may decide based on the economic situation to borrow money to finance its Public Spending programs.

When the Government Spending is increased, through forms like, for example, building a bridge. Such a project would increase employment, increase spending as more people are employed, pumping more money into the economy, and thereby making the economy stimulated. The Government can also implement tax cuts, as that leaves more money in the consumer’s hands and encourages spending and hence, stimulating the economy.

Tax Cuts and Fiscal Expenditure are both levers that the Government has to influence the economy. But these are no hard-and-fast guarantees of economic stimulation. The effectiveness of the Fiscal Expenditure lever depends on what the current economy is going through. It is useful for a stagnant economy that has slowed down. Spending acts as a fuel to the fire and rekindles the business environment in the economy, thus keeping the GDP print back on track. As shown below, during recent times, the Government has tried to increase its spending by creating deficits through increased Fiscal Expenditure.

On the other hand, Fiscal Expenditure can be reduced, coupled with increased tax cuts to curb inflation and faster than the normal growth rate. It is a cool down measure used by the Government when the economy is hyper-inflating, which leads to too much money in the economy, and goods and services prices inflate quickly beyond their value. The Government’s Debt also plays a vital role in Fiscal Expenditure. After the mandatory payments, the interest payments for the Debt and Debt itself are what takes a portion of the pie (Government revenue).

The higher the amount dedicated to service interest and debt payments, the lesser the spending for the economy. It leads to a slowdown in the economy, and deflationary conditions start to appear in the economy. When the interest rates are either low or kept low (by suppressing interest rates lower through Central Banks), it leaves a more significant room for spending on public welfare that gains favor amongst the citizens but piles up debt for the future.

In this way, the Government is stuck between a rock and a hard place. A slowing economy and piling debt. It is the case with most developed economies where their spending outstrips their revenue and thereby run large deficits running huge debts that have to be serviced in the future. As the Government keeps stimulating the economy by spending beyond its means, the Government and the country is slowly being cornered into a debt trap that can be avoided through only a massive surge in GDP prints.

The only way to manage debt is to increase revenue through GDP that has proven to be difficult in recent times for most mature economies. Hence, Fiscal Policy and mainly its components revenue and Fiscal Expenditure are being closely watched by investors today to predict economic growth and assess the risk of default by the Governments.

Impact on Currency

Fiscal Expenditure is an inverse leading indicator meaning that the currency appreciates when Fiscal Expenditure depreciates in the short-term. When money is infused into the economy in the form of Fiscal Expenditure, it stimulates the economy, prevents deflation (inflationary conditions), leading to currency depreciation in the short-term.

While the Government chooses to avoid deflation and keep the economy going by paying the price in terms of currency depreciation as people and economy take precedence over the currency.

Economic Reports

For the United States, the Treasury Department releases monthly and annual reports on its official website. The treasury statements detailing the Fiscal Policy containing receipts and outlays are released at 2:00 PM on the 8th business day every month.

Sources of Fiscal Expenditure

United States Monthly Fiscal Policy statements can be found in the below-mentioned sources – Monthly Treasury Statement – United StatesFederal Surplus or Deficit – St. Louis FRED

The monthly Fiscal Expenditure statistics of countries across the globe can be found here.

Impact of the ‘Fiscal Expenditure’ news release on the price charts

After getting a clear understanding of the Fiscal Expenditure fundamental indicator, we will now extend our discussion and discover the impact of the news release on different currency pairs.  Fiscal Expenditure refers to the sum of government expenses, including spending on goods, investment, and transfer payments like social security and unemployment benefits. This indicator is very useful in measuring the steps taken by the Government for the welfare of the country. Investors consider this data to be an important determinant of the growth of the economy.

In today’s lesson, we will be looking at the Fiscal Expenditure of New Zealand that was published on 8th October 2019 and analyze the impact on the New Zealand dollar. The below image shows an increase in government expenditure for the previous fiscal year. A higher than expected number is considered to be positive for the currency while a lower than expected data is considered as negative. Let us find out the reaction of the market to this data.

NZD/USD | Before the announcement:

We will start will the NZD/USD currency pair for examining the change in volatility due to the announcement. In the above chart, it is clear that the market is in a strong downtrend, and recently the price seems to have a retraced near the ‘resistance’ area. Technically, we will be looking to sell the currency pair after the appearance of suitable trend continuation patterns. However, it is possible that the news announcement can cause a reversal of the trend.

NZD/USD | After the announcement:

After the news announcement, the market initially reacts positively to the news data and shows some bullishness, but later the sellers take the price a little lower and close the ‘news candle’ with a wick on the top. The volatility is seen in both the directions of the market, but the price manages to close in ‘green.’ We still cannot say if the positive news outcome will cause as reversal as the price has not indicated any reversal patterns in the market. This is how technical analysis should be combined with fundamental analysis.

GBP/NZD | Before the announcement:

GBP/NZD | After the announcement:

The above images represent the GBP/NZD currency pair, where we see that before the news announcement, the market is in an uptrend, and recently, the price has pulled back to the ‘support’ area. There is a high chance that the price will bounce on the upside from here and continue the trend. Technically, this is an ideal place for joining the trend by going ‘long’ in the market, but depending on the news data, we will decide if we can do so.

After the news announcement, the price falls lower, and volatility increases to the downside, which is the consequence of positive Fiscal Expenditure data. Since the Fiscal Expenditure was increased in that month, traders sold the currency and bought New Zealand dollars, thereby strengthening the quote currency. Now that the price is exactly at the ‘demand’ area, one needs to be very careful before taking a ‘short’ trade.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

Lastly, we discuss the NZD/JPY currency pair and observe the change in volatility due to the announcement. From the first image, it is clear that the market is in a strong downtrend, and presently the price is at its lowest point. Since, at this point, buyers took the price higher last time, we can expect the buyers to activate again. Thus, aggressive traders can take a few ‘long’ positions with strict stop loss.

After the news announcement, the price goes higher in the beginning but immediately comes lower and closes near the opening price. We witness a fair amount of volatility on both sides of the market, and finally, the ‘news candle’ closes, forming a ‘Doji’ pattern. Since the news release did not have any major impact on the currency pair, one can go ‘long’ under such situations.

That’s about ‘Fiscal Expenditure’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Daily Topic Forex Fundamental Analysis

Importance Of ‘Government Spending’ & It’s Relative News Impact On The Forex Market

Introduction

Government Spending is an essential determinant of the economy’s growth. The portion of GDP that is allocated to Government Spending can primarily set the pace of economic growth. Increased Government Spending has been a critical lever to stimulate the economy during times of recession.

Government Spending numbers also determine whether the Government is elected by people next time or not. Hence, Government Spending numbers also can help or hurt the Government in elections. Thus, this can be considered a critical macroeconomic indicator for economists, analysts to predict upcoming trends.

What is Government Spending?

The Government Consumption Expenditures and Gross Investment are together, forming what is called Government Spending in general. Both of these are the final expenditures accounted for by the governing sector. Government Consumption Expenditures contains Spending by the governing body to produce and provide goods and services to the public. Expenditures would typically include National Defense and Public School Educations, etc.

Gross Investments includes the Spending by Government for fixed assets that directly benefit the general public. Investments can consist of road construction, public transports, or procuring military equipment. Hence, overall Government Spending refers to the money spent on the acquisition of goods and services such as education, health, social protection, and defense. When the Government procures products and services for current use to directly benefit an individual or collective requirements of the community, it is called Government final consumption spending. When the same is done for future use, it is classified as Government investment.

Government Spending assists businesses and people economically in many ways. Unemployment compensation, Child Nutrition, Student Loans, retirement and disability programs, etc. all are facilitated out of Government’s revenue. During the time of recession or economic contractions, the Government increases its Spending and decreasing tax rates to stimulate the economy and vice-versa.

There are four primary sources for Government Spending:

  • Tax Receipts
  • Indirect Taxes
  • Money borrowing from citizens (ex: government bonds)
  • Money borrowing from foreign (ex: Loans from World Bank)

How can the Government Spending numbers be used for analysis?

The main factors that affect Government Spending are:

Mandatory Programs: In the United States, necessary programs like Social Security, Medicaid, and Medicare make up about two-thirds of federal expenses. As more baby-boomers reach retirement age, the increase in all the above costs puts weight on Government that affects its spending capability. These kinds of payments where there is no exchange of goods and services in return are classified as Transfer Payments Spending.

National Debt and Interest bills: The United States currently has a record-high debt level of 22 trillion US dollars, which, when taken as a percentage of GDP, exceeds a hundred percent. What this means is that the National Debt is greater than the revenue it generates. Even if the entire GDP were allocated to service debt hypothetically, it would still not suffice. Such skyrocketed debt levels have put the country in between a rock and a hard place. The United States must keep the interest rates low to be able to continue paying its interests to avoid the risk of default.

Defaulting on the debt could be catastrophic for the nation and can lead to economic collapse. Increased deficit spending (Spending beyond budget) to stimulate the economy during times of recessions and bearing expenses of war and international contingency operations all have piled on the debt burden further.

Discretionary Spending: For the above two categories, the Government has no choice but to spend, but Discretionary Spending is for everything else. The Government decides how much money is to allocate to programs. Cutting back majorly on these can hurt the governing bodies in the next elections. Increased Discretionary Spendings can help in the short-run, but in the long run, all these will catch up, and consequences can be severe.

GDP: The revenue itself is an essential factor; decreased GDP rates can create deflationary situations that the Government tries to avoid in all conditions. Increased productivity and stimulations that result in higher prints in GDP can help service debts and still have enough resources to spend on economic activities freely. Increased taxes can help build up revenue for the Government but can lead to losing elections as the public might vote them out for imposing higher taxes. The Governments have increasingly relied on deficit spending to boost economic growth as indicative of the below graph.

Impact on Currency

By relative comparison with previous years, what policymakers have decided to spend on can determine many local level and national level economic impacts. Cutting back on certain sections can lead to slowdowns in that sector and vice-versa. Investors and Economists use this to predict economic trends.

In general, a relative increase in Government Spending is good for the economy. This indicator is typically expressed as a percentage of GDP, signifying how many portions of the total revenue Government has prioritized over debt servicing to stimulate growth. Government Spending for a given business cycle will decide the economy’s inflationary or deflationary conditions. When the economy is growing at a faster pace than the targeted rate, the Government can cut back on Spending and service their debts, or increase taxes to stabilize and vice-versa.

In this sense, Government Spending is a proportional indicator, the more, the better for the economy. It is a lagging indicator, as it is usually reactionary to situations in the marketplace and not an initiative effort. Government Spending is a lever used generally to fix an issue that already has happened (hyperinflation or deflation), hence has a lower impact on the long-term market volatility in the world of trading markets, although there may be some panic trading due to press releases.

Economic Reports

The Bureau of Economic Analysis releases quarterly reports on Government Receipts and Expenditures, which contains the Spending on different sectors, on their official website.

The Organisation for Economic Co-operation and Development also releases quarterly estimates of the associated countries on their official websites under the category of General Government Spending in two varieties: Government Spending per Capita and Government Spending as a percentage of its GDP.

Sources of Government Spending

The United States Bureau of Economic Analysis reports are available here:

The General Government Spending details are available for OECD countries on their official website here

Quarterly Government Spending reports of the United States Government can be found here categorically.

Below is a comparative index for countries – Government Spending as a percentage of GDP. Government Spending as a percentage of GDP – Trading Economics

Impact of the ‘Government Spending’ news release on the price charts

We understood in the previous section of the article that Government Spending refers to the money spent by the public sector for purchasing goods and providing essential services such as education, healthcare, social protection, and security. The two major categories of Spending include Current Spending and Capital Spending.

Government Spending ensures that the country is having basic facilities such as roads, bridges, hospitals, schools, and other allowances such as unemployment and disability benefits. Hence public sector spending plays a crucial part in the economic growth of a country. If Government Spending of a country is high, it also attracts foreign investment and other capital flows. Thus, the greater the Government spends, the greater will be the growth of the currency.

Today we will be discussing the impact of the news release on various currency pairs and examine the change in volatility before and after the release. For this, we have collected the latest Government Spending data of Australia, where the below image shows the quarter-on-quarter numbers of the same. The latest figures show an increase in Government Spending for the December quarter compared to the previous quarter.

AUD/USD | Before the announcement:

The first currency pair we will be discussing is the AUD/USD pair, where, in the above image, we see that the market is on the verge of continuing its uptrend after an appropriate retracement. At this point, if the Government Spending comes out to be positive for the Australian economy, we can expect the price to rise at least the recent ‘high.’ But if it were to be negative, we can expect a short-term reversal in the market.

AUD/USD | After the announcement:

Looking at the chart above, we can say that the market reacted positively to the news announcement and the price closed as a bullish candle. The bullishness in currency is due to the encouraging Government Spending data, which showed an increase in expenditure from the previous quarter. The upbeat data created cheer among traders, which made them go ‘long’ in the currency pair and buy more Australian dollars. One can ‘buy’ the currency pair after the news release after seeing that the data was better than last time.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, and as we can see, the overall trend and here too market seems to be continuing its downtrend after an appropriate retracement. Since the Australian dollar is on the right-hand side, a downtrend shows strength in the currency. Aggressive traders can take go ‘short’ in the currency pair before the news announcement as the trend shows an increase in the Government Spending from quarter-on-quarter. Remember that the stop loss should be kept higher than the recent ‘high’ due to increased volatility during the announcement.

After the numbers are released, volatility increases on the downside, and the price closes as a bearish candle, indicating selling pressure in the market. This is due to better than expected Government Spending data, which was higher than last time, and thus the market suddenly goes lower. One can go ‘short’ in the currency pair after analyzing the outcome of the data, with a stop loss above the recent ‘high.’

AUD/USD | Before the announcement:

AUD/USD | After the announcement:

Lastly, we find out the impact of the news on AUD/JPY currency pair, where we, in the first image we see that the market is range-bound and just before the announcement the price is at the ‘resistance’ of the range. This means we could expect sellers to become active at this point. However, the reaction depends on the Government Spending data, which can cause spikes on either side of the market. A ‘buy’ is also not recommended as the market is not in an uptrend.

After the news is announced, we witness a similar impact where the price goes higher and closes as a bullish candle. The positive news outcome and an increase in volatility to the upside is the ideal trade setup for going ‘long’ in the market. Thus, one can buy the currency pair with a stop loss below the support and a higher ‘take-profit.’

That’s about ‘Government Spending’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Daily Topic Forex Price Action

The Levels You Need to Pay Extra Attention

Support and Resistance are the two key factors of Forex trading. The good thing is in most cases time these levels can be guessed well earlier. By drawing support/resistance levels where the price reacts earlier,   we can spot those levels. This helps a trader set his stop loss, take profit and make a trading decision. In today’s lesson, we are going to demonstrate an example of how the previous levels where the price reacts earlier play a significant part as far as support/resistance is concerned.

Look at the chart carefully. The price makes a strong bearish move and makes an upside correction. The chart produces a spinning top followed by a bearish engulfing candle. If we consider the existent trend and candlestick pattern, it is a short signal. The question is whether it really is a short signal or not. Look at the next chart.

At the correction, one of the candles breaches through a level. This level was a level of support earlier. After being bearish, the level should work as a level of resistance. It does not. The price breaches through the level. In fact, it may work as a level of support again. If it produces a bullish reversal candle, the buyers are going to take control here.

The level seems to hold the price as a level of support. It produces two a bullish pin bar and a doji candle. If it produces a bullish engulfing candle here, the price may get bullish and head towards the North.

The chart produces a bullish engulfing candle closing well above the wave’s highest high. Let us calculate whether the buyers should go long here or not. The price makes a bullish move breaching a significant level. The price makes a bearish correction and the breakout level works as a level of support. As far as price action trading is concerned, traders may trigger a long entry right after the last candle closes.

As expected, the price heads towards the North with good bullish momentum. It gets the buyers 1R already. The last candle comes out as a bearish inside bar. The price may reverse now. However, there is still a 40% possibility that the price continues its bullish move. Let us assume that the buyers close the trade and cash in some profit.

If we consider the whole scenario, the market seems bearish in naked eyes. When we draw the significant level, it gives us a clearer picture of the breakout and correction. We, then realize that the market is actually bullish. A long entry at the pullback gets the buyers some green pips. This is what Support and Resistance (significant levels) do.

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Forex Daily Topic Forex Fundamental Analysis

Everything About ‘Home Ownership Rate’ & Its Impact On The Forex Price Charts

Introduction

Home Ownership Rate is an economic indicator that is extensively used by both the public and private sector organizations to predict the demand for different types of Houses. It also forms a part of the index of leading economic indicators and thereby is used by the Federal Government and economists to forecast the economic health of the country. It is useful for investors from abroad also to gauge the standard of living or wealth per individual or financial health of a country.

 What is Home Ownership Rate?

Home Ownership Rate is the proportion of households that are owners. In simple terms, it is the ratio of the number of houses occupied by their owners to the total number of occupied houses in the region. The region can be country, state, or a metropolitical area.

Hence, the Home Ownership Rate is given by the following equation:

In the above equation, a housing unit can be a house, apartment, condo, or single room or group of rooms that are occupied or intended for occupancy as separate living quarters. In the United States, the Home Ownership Rate is provided by the United States Census Bureau for the entire U.S., states, regions, for the 75 largest Metropolitan Statistical Areas (MSAs).

The Census Bureau collects using a probability selected sample for about 72,000 housing units, both occupied and vacant. Households from all the 50 states and the District of Columbia are part of the survey for the four consecutive months.

How can the Home Ownership Rate numbers be used for analysis? 

The Home Ownership Rate tells us the number of householders that are owning a house. Owning a home signifies a lot of things. Firstly, owning a home means that either you are wealthy enough to own a home or at least have an income source (job or business) whose prospects you are confident about.

An individual or family decides to take home only when their financial prospects are looking confident, in most cases. When more people have their own homes, it indicates healthy liquidity of the economy, where enough people have had enough money to own a home, which is not cheap at all.

The below two graphs are the Quarterly Home Ownership rates and Real GDP growth rate. It is easily seen that when the economy is seeing improvement in Home Ownership rates, there is a correlating increase in GDP. During the downtrends also the same mirroring is observable in GDP and the Ownership rate. Hence, this becomes a leading economic indicator to predict a growing or contracting trend for the economy.

When the Home Ownership rate decreases, it indicates fewer and fewer people can afford to own a home, or more people are selling off their homes to secure their future. When the people of the country are not confident about their economic prospects, then they would prefer to save for a rainy day than take a risk with a big mortgage and own a house for which they may or may not be able to pay the bills consistently.

Decreasing Ownership rates are indicative of tight lending environments where higher interest rates discourage householders from procuring mortgages for homes. It is an indication that the government is pulling money out of the system to deflate the economy. Increasing Home Ownership Rates are indicative of the lending environment that is currently prevailing in the economy. An increase in the rates is indicative of loose monetary policy enabling the banks to lend out money at lower interest rates, thereby making it more affordable to the potential buying householders.

Loose monetary policy from the Central Authorities is intended to spur economic growth, which translates to such effects (increase in rates of ownership). Such a stimulus generally tends to keep the economy either going or growing in most cases, possibly avoiding any deflation.

Impact on Currency

The Home Ownership Rate is a leading proportional economic indicator. When the number of Households owned and occupied number increases, it is accompanied by signs of an expanding or growing economy, which is appreciating for the currency. An increase in the Home Ownership rate is appreciating for currency for the coming quarters and vice-versa.

The impact of the Home Ownership Rate is mild as more frequent reports like Building Permits overshadow it that indicates before houses are even built. Building Permits reports are monthly, and hence, the trends are spotted in advance before it is also confirmed by the Housing Starts, Housing Completion, and Home Ownership Rates.

Economic Reports

The Census Bureau publishes quarterly and annual reports on its official website for the United States along with other reports like Rental and Housing Vacancy rates. Homeownership Rates are also reported based on the age of the householder and also by family status.

The release dates for each quarterly report are already posted on its official website. It is typically released around 25-28th of the reporting month for the previous quarter at about 10:00 AM. Graphical statistics for the same are also available on its official website as illustrated below:

Sources of Home Ownership Rate

We can find the latest Home Ownership Rate report from the United States Census Bureau here – Home Ownership Rate – Census Bureau. The annual statistics for the same can be found here – Census Bureau – Quarterly and Annual. The same data is also available with comprehensive plotting tools on the St. Louis FRED website. Below is the reference for the same – Home Ownership Rate – FREDHousing, and Homeownership Rate. The Home Ownership Rate for various countries is available here for further analysis – Home Ownership Rate – Trading Economics.

Impact of the ‘Home Ownership Rate’ news release on the price charts

In the previous section of the article, we learned about the ‘House Ownership Rate’ fundamental indicator, which is nothing but the percentage of homes that are occupied by owners in a country. The Census Bureau releases this data, which includes info about the state of ownership overall, after the end of every year. Home Ownership is considered an important part of contributing to a productive society. The government promotes Home Ownership by offering tax deals and cheap loans as it creates an asset for people to invest and accumulate their wealth. It indirectly encourages the growth of a country, socially and financially.

The below image shows the graphical representation of the House Ownership Rate of Switzerland in 2017 and 2018. As we can, the rate increased to 42.5% percent in 2018 from 41.3% in 2017. A higher than expected data is considered to be positive for the currency while a lower than expected reading is taken as negative. Let us analyze the reaction of the market to this data and view the change in volatility due to the announcement.

GBP/CHF | Before the announcement:

We shall start with the GBP/CHF currency pair, where the above chart represents the ‘daily’ time frame chart of the pair. We see that the price is in a downtrend and is presently at its lowest point. Technical analysis suggests that until we have a price retracement, we cannot trade in the direction of the trend. Depending on the impact of the news announcement, we will be able to a suitable position in the market.

GBP/CHF | After the announcement:

After the news announcement, we see that market falls lower, and volatility increases to the downside. The market reaction can be explained by the fact that the House Ownership Rate came out to be positive for the economy, which made traders sell the currency pair and go ‘long’ in Swiss Franc. As the impact of this news event is less, we cannot expect the market to go lower and make ‘lower lows.’ Thus, one needs to cautious before taking a sell trade.

AUD/CHF | Before the announcement:

AUD/CHF | After the announcement:

The above images represent the AUD/CHF currency pair, where we see that before the news announcement, the market was in a strong downtrend indicating a great amount of strength in Swiss Franc. Currently, the price is at a place where the market had rallied earlier, also known as the ‘demand’ area. Thus, we can expect buyers to come back into the market at any moment. Aggressive traders at this stage can go buy the currency with a strict stop loss.

After the news announcement, the price initially goes lower but gets immediately bought, and the ‘news candle’ leaves a wick on the bottom. Volatility is witnessed on both sides of the market, and the price closes near its opening price. The news release did not have an adverse impact on the pair and cause any major change in the price chart. Once the price moves higher and gives an indication, traders can go ‘long’ in the currency pair with a stop loss below the ‘news candle.’

NZD/CHF | Before the announcement:

NZD/CHF | After the announcement:

The above images are that of the NZD/CHF currency pair where the overall trend appears to be up, and recently the price has retraced to a key technical level. Here, the Swiss Franc does not appear to very strong, and the New Zealand dollar is showing signs of strength. If the news release does not influence the currency pair strongly, this could be an ideal setup for going ‘long’ in the market.

After the news announcement, the market’s reaction to the news data was minimal, and we hardly see a change in volatility. An increase in volatility to the upside is a confirmation sign that the market will continue its uptrend, and a further move to the upside can be expected.

That’s about ‘House Ownership Rate’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!