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Forex Basics

Five Unfortunate Truths About Forex Trading

Trading and forex from the outside can seem like a fantastic way to make money. In fact, those without a lot of money often see it as a way that they will be able to make a little bit extra on the side, or for some, the dream to become rich. Unfortunately, things aren’t quite as rosy once you get in and there are some hidden truths that you only really discover once you have a better understanding of what Forex trading actually is.

So let’s take a little look at some of the unfortunate truths about trading and what they actually mean.

There is No Single Best Strategy

When you look at the markets from the outside, they either go up or down, easy to predict right? Well no, there are thousands of factors that affect them, some far more obvious than others. This is why there are so many strategies out there. With there being so many, it makes it clear that there isn’t a single strategy that works for everyone or for every market condition, due to this there is so much that is needed to be learned. If you try to stick with a single strategy, it may work for a while, but eventually, the markets will go against you and you will suffer some losses.

You should note though, that just because there is not a single strategy that always works, it does not mean that you cannot be profitable, instead, you need to manage your risk and to learn elements of various other strategies, this way you can adapt and also protect your account from market changes.

You Need Money to Make Money

Many come into trading with a small amount, while it is possible to be profitable with a small amount, it will be a very slow process and there is a far greater risk that you could blow your account and lose your initial deposit. Like many things in life, you need money in order to make more money. The more that you have the more likely and also the easier it will be for you to make money. With a larger amount, you can use far better risk management techniques, and also each trade will ultimately bring in more profits.

You should also note that by having smaller amounts, it can cause other issues such as greed or may cause you to make additional mistakes in the pursuit of growing the small account as far as possible, this is more likely when focusing on the profit and loss on the account. You certainly can be successful off a small amount, but if you are depositing $10 and expecting to become rich, you may be disappointed.

You Will be Wrong at Times

We mentioned that there won’t be a single strategy that will work all the time, even the most successful ones. Due to this, it should be clear that you won’t actually be right all the time. In fact, there is a good chance, especially when starting out that you may be wrong far more than you are right. The good news is that you do not need to be if you are using proper risk management, then depending on your strategy, you can still be profitable with a win rate under 50% and even under 40% with many strategies. Due to this, it is important that you do not focus on winning, you need to focus on learning the markets and also making sure that you stick to your trading plan, this is the only way to be profitable in the long run.

You also need to be able to identify changes in the markets, when something changes, you also need to adjust your own strategy and plan in order to adapt to the changes, this is the only way that you will be profitable, but remember, you do not need to chase wins, stick to the plan and even with more losses than wins, you can still be profitable.

You Will Miss Out on Opportunities

The markets are a 24-hour opportunity, unfortunately, you are not. There will be a lot of times when there are some big movements in the markets that are perfect for your strategy, the only problem is that you are at work or asleep. It is important to understand that you won’t be able to get on every opportunity, it is important that you do not look at the things that you missed, they have already gone, you need to continue to focus on what is coming up. If you have just missed something, do not jump in anyway, the opportunity has gone so let it go, there will be plenty more for you to trade. If you are up and trading during the busier London or New York sessions then you will be able to sharpen your skills a lot quicker as the markets are often moving at a much faster pace.

It May Not be Suitable for You

Trading just is not for everyone, in fact, the majority of people will end up hating it, you need to be able to take in a lot of information, you also need a lot of time and dedication which can make it a lonely job to do. If you are not able to put in the time, effort, or have the patience to learn, then you will be on route to a loss. Many people just do not have the mindset for trading, which is absolutely fine, there are other things that would much better suit your style.

So those are a few of the things that people on the outside don’t necessarily see about the Forex and trading market, if Forex is for you then you will do great, but remember, it takes a lot of time, effort and patience, as well as money to become successful in the markets.

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Beginners Forex Education Forex Basics

The Best Place to Learn Forex Trading

Last May I visited New York just for fun but out of nowhere, I met a guy who is a professional Forex trader. The guy has slightly over ten years of a carrier in trading and we had a very enthusiastic conversation, together with his friend trader, about how to chose the right path to educate yourself about this type of trading. So, the question is, what is the best source to learn Forex trading?

There is no typical answer about where we can start mainly because there is so much stuff around us when it comes to Forex trading. People are usually agile to reach for a profit, with a basic gambling impulse that is whispering in their ears: ‘You just jump from the cliff and you’ll see that you have a pair of wings’, therefore they don’t tend to educate themself properly because that’s a process and it takes time to do that. Although there’s always the easier way to do certain things, Forex trading is of course much more complex. The fact is that most of the people are losing money off of it. So I said to the guys that I’m super interested in Forex and that I want to learn to trade but there are a lot of places to do that and do they have a one to recommend.

The first thing they said to me was that it is completely unnecessary to invest in any kind of online course to learn to trade or to pay somebody to learn how to trade Forex. You people don’t need any of that, save your money. Maybe one of the best options where we can start with Forex fundamentals is a website called babypips.com. It is important to mention that a significant portion of knowledge about Forex is going to lead you down the wrong path, you guys are going to lose a lot of money before you ever learn how to get it right. The only way to make a benefit is to understand which fragments of Forex education are actually worth something and which ones are going to take you in the opposite direction where we don’t want to end up. Website babypips.com has a section ‘The school’ where everything is organized to take you through a kindergarten level up to college.

Like in a real-life order your knowledge is raising, so it is vital that one not skip their classes or levels in this particular case. Maybe some more experienced traders in trading stock would think that they already know some things and feel like a jump forward and skip certain things. We don’t recommend that kind of approach simply because every lesson kinda builds on itself. Go in order, follow the procedure, and take notes. After you finish with this course, review your notes, and then you can open up your demo account and get used to the trading platform. At this point, you will be more appointed than 80% of people out there that learned how to trade. Later on, traders explained to me that they were losing a lot of money until they learned to trade the right way and that people are still trying to trade the same way they trade stocks, which is completely wrong. Eventually, most of them start giving up, and because they couldn’t do it, they think you can’t do it either. But hey, don’t despair, you are going to do it right, and it starts at that school.

In the conclusion, traders told me: ‘Most of the things you are going to learn in ‘BabyPips School’ is absolute garbage, especially when it comes to technical analysis part and tools they are going to show you how to use. Be careful with that, it might ruin your trading account.’ Well, that was a twist! Why is it important for us to try to learn all the things anyway? The main goal for us is to be literate when it comes to Forex. There are going to be little nuggets, hidden gems, things that specifically apply to Forex that you don’t want to miss, things that are going to be applicable at some point. 99.9% of traders don’t get where they want to get to, so it is crucial to be dedicated, embrace knowledge, and try to develop your style of trading. Plus, it’s fun and cool to learn new things. Pay real close attention and do your research.

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Beginners Forex Education Forex Basics

Forex Supply and Demand Comparative

If you had to make a choice between stock, commodities, forex, and crypto markets, which ones would you say are affected by supply and demand more often than not? Contrary to common belief, forex is actually the only one that does not yield to the impact of the relationship between supply and demand among all four markets. Although the two terms are tightly connected to the subject of price, forex is exempt from such rules regardless of perceived relatedness.

Naturally, one may wonder why we should still learn about supply and demand despite the fact that forex is not susceptible to this type of market push-and-pull motion of prices. Also, can the skills we obtain through doing trading in the forex market be further utilized in trading in the other three markets and vice versa? We are going to discuss here how such inter-market support and information exchange can prove to be quite profitable down the road, what some substantial points of divergence between different markets are, and how the law of supply and demand affects money-making.

Building a Foundation of Financial Literacy

First of all, to be able to take part in the forex market, each trader must build on financial literacy. To trade money, one needs to comprehend the language of money, which implies the understanding of basic terms, trends, and laws of finance. While people who do not possess this knowledge may exist, such an approach should not be your goal or rule to live and work by. We can admit that we do not know a particular field or that committing to behaving in a specific way is not one’s forte, but the lack of feeling the urge to develop one’s skills and pool of information probably reflects the person’s mindset, rather than being an individual trait. Therefore, as financial literacy certainly isn’t an imperative, if you desire to become a professional forex trader, wouldn’t you want to do everything in your power to secure this future affluence?

Once you become really good at trading forex, you have naturally absorbed the knowledge and skills which can help you grow further and, if you feel the need, you have the chance to expand to other markets as well. Trading currencies can teach you the universal language of trading and thus help you apply this system to any other market of choice. The very necessary analysis and risk management skills used in forex can protect you and allow you to multiply your profit through expansion. If you have a stable foundation, you can allow yourself to think big and start acquiring other necessary pieces of information that such a transition could require. As expected, although general principles of trading are vital for shifting from trading in one market to trading in another, copy-paste mentality will not work. Regardless of one’s trading expertise, every individual should invest in growing context- and market-specific knowledge in order to be able to generate capital and make a profit.

The ability to trade in several markets, spreading your know-how from forex into other markets, puts you in a desirable position. At this stage, people will not only look up to you as a successful forex trader, but they will also be interested in trading any other commodity (such as grains, oil, etc.) or stocks. The possibilities are countless in this scenario because you are perceived as marketable. Nonetheless, if you are not eager to make this move, do not push yourself into undergoing this transition. Despite a degree of accompanying convenience, incentives, and benefits, spreading out should be a conscious choice, not a decision made just because.

The Importance of Diversification

Another important side of trading includes diversification – we do not only need to focus on shifting to other markets here. Diversification should be a constant approach in your trading, which pushes you to make career decisions that would support you in your search for additional sources of profit. Not only is this a good decision from the financial point of view, but it is also very smart to adopt as much knowledge about other markets as possible (e.g. cryptocurrency) due to the nature of trade. One day, hypothetically speaking, currencies as we know could disappear and knowledge of other currencies, for example, could not only alleviate the incurred challenges but help you prosper as well. We may not be able to control global events, yet we can adopt such a mindset to both prevent any possible losses and build a sustainable money flow.

Having an array of strategies to earn money at your disposal secures financial gains regardless of external factors. If you are successful at forex trading alone, you are already safe despite market trends, sudden highs and lows, or even recession. Nonetheless, no matter how dexterous a trader you may be, a time may come when a local change in laws and regulations affects this market or forex loses its significance globally, so you should consider different ways to fortify your foothold.

Devising such a clever plan always implies exploring several options and building on knowledge, as we discussed above. Even history has shown how a number of stock traders who turned to forex initially failed precisely because they resorted to the same strategies they had previously used to trade stocks. These early-on attempts to incorporate supply and demand, some old indicators, the highs and lows of the market, etc. only made them quit, thinking that forex is unsafe, unpredictable market with no future whatsoever. Even if you wanted to apply forex strategies in the stock market, for example, you would not be able to succeed without making certain adjustments. Therefore, we need to truly invest in understanding the differences and why our long-term plan could suffer unless we alter a particular approach which bore fruits in some other setting before.


In the context of supply and demand, we always have a similar situation whether we are talking from the perspective of a manufacturer, instructor, or consumer. Let’s assume that an individual possesses all of the aluminum there is on the planet, so they could always tap into this supply and trade it for whatever price they desired. As we know that aluminum can be used in a number of industries (e.g. automobile, construction, etc.), this individual would always enjoy considerable demand because everyone needing this commodity would turn to them regardless of the price.

However, if another person happened to discover a fresh supply of aluminum, the first individual would not be able to dictate the price as they used to. While the demand for aluminum did not change in this scenario, the supply did. Hence, the other person could set a lower price and therefore take over a significant portion of demand. As time goes by, someone could discover a substitute for this element, which could be used in the automotive industry instead and thus substantially influence the demand. Although this was an invented story, this rule of supply and demand always determines the price in the real world all around the globe.

Remember, Availability Always Drives Price

If we only have a limited number of items for one product, this product will always be in high demand because everyone wants or needs to have it. Moreover, its price will always be high because every manufacturer would want to use this opportunity to earn a profit. Therefore, low supply and high demand always imply high prices. Conversely, with high supply and regular demand, manufacturers cannot charge a high price for such products. In the context of the markets we trade, this phenomenon is closely related to the notion of intrinsic value. If we take all factors surrounding the stock or commodity we want to trade into considerations, everything boils down to what we believe their value is.

Quite interestingly, although markets heavily operate based on this notion, we do not need to know the intrinsic value of a product to be able to effectively trade it. The forex market, therefore, does not depend on this value especially because fiat currencies stopped being tied to the value of gold. The fact that currencies do not have intrinsic value does not imply that they have no value at all, quite the contrary, but they are not connected to anything that has real worth.

Where do supply and demand come into play when we are talking about the stock, commodities, forex, and crypto markets? When we think of the stock market, we naturally think about the worth of assets, people, information, and technology, among others, which naturally fluctuates. With the commodities market, we know that the supply is limited, while the demand can oscillate both up and down. Although involving the notion of currency, the crypto market heavily relies on supply and demand as well. As we stated before, unlike these three markets, supply and demand have no power in the world of forex trading. While there is a great number of people who propose otherwise, turning to disreputable, untrustworthy, and ill-advising sources on one hand or replicating actions and methods used in the stock market on the other can have severe consequences.

Of course, thinking about the supply, we can discuss the impact of quantitative easing and the cases when the government prints more money; however, in reality, we cannot truly predict how this affects the price. Many times we may assume that the price would go down when, in fact, it goes the opposite direction. We can, however, acknowledge the relevance of demand to forex trading. This market often witnesses a unique phenomenon where, if there is too much focus on one currency, big banks enter the picture to push the price down. Nonetheless, the relationship between supply and demand is nonexistent, which is why it does not apply in this market.

Learning from the Past

If a trader does not learn how to see past the differences between markets, they will never achieve the rewards which such knowledge bears. The understanding that the forex market is completely different from other markets must come first, and the awareness concerning supply and demand also belongs here. Likewise, the phenomenon of overbought and oversold, which is directly connected to supply and demand, simply does not apply to spot forex. Unlike other markets, currency pairs act differently to any other commodity or stock, and big banks may move prices in any direction they want.

The only other outside factor which can affect currencies is the government stepping in when a currency is officially too low or too high. However, such interventions are not predictable or regular for that matter. What is more, we cannot create a strategy based on their impact because predicting the change they are going to bring about in advance, or the market’s reaction to them is simply not possible. This entire setting with all of the key factors and players is what undeniably separates forex from any other trading market. These are in fact such essential pieces of information that are inextricably related to one’s likelihood of succeeding in forex trading.

Turning to the markets of intrinsic value, we must apply the same rule put forward for the forex market – we cannot use the same approach. The tools and values used in forex trading cannot be blindly transferred to other markets without previously making any adjustments to those markets’ needs and structures. Of course, we can always acknowledge the existence of some similarities, but to be able to draw any significant conclusions, we must address the basic discrepancies between the stock, commodities, forex, and crypto markets. Nevertheless, this should not stop you from putting some extra effort into becoming an expert trader across several markets. While this expansion might take some more time, diversifying could open up a world of new and exciting opportunities.

Of course, the topic of supply and demand, as well as the notion of intrinsic value, is vital for any long-term success in markets we trade. Most importantly, these markets’ core values and differences are so abundantly clear and straightforward that the knowledge you gather should directly help you go beyond the forex market and secure a substantial profit as a result.

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Beginners Forex Education Forex Assets

The Euro, the Pound, and the Swissy

The title of this article is not some forex movie spinoff, although there is one “bad” currency in this article. Not all things work in forex trading. You will have tools and indicators that are just bad, and unfortunately, they are abundant. Additionally, some currency pairs are not good for your strategy. If you do not know by now, the trend following strategies are the most successful according to many research studies and confirmed by experience. A group of experienced prop traders has more success in certain currency pairs than with others. The most common ones are the EUR/GBP and the GBP/CHF, out of the major 8 currencies. We will discuss these three currencies, and why they are good for trend following trading. Also, some warning signs about trading that could even ruin the best trades out of thee pairs.

Note that all this material is just an opinion by a forex prop trade who is relying on a technical analysis most of the time. Therefore, trend trading like thins involves a lot of systematic, mathematical decision making using indicators in specialized roles. Following the trend and avoiding events that could disrupt it is also one of the elements. This implies the USD is not a really good choice for this trading type. Not that it is impossible to trade, just unlikely as good as involving the EUR, GBP, and CHF. Traders that have been doing this for 10 years say the USD is full of surprises that could ruin what looked like a very consistent trend. There are several reasons for this. The first one is that the USD is heavily manipulated by the big institutions.

One proof of this is the sentiment, every time traders go long, big players go short and move the price and vice versa. The USD pairs are also most traded, or most popular. This is the place where it is easy to counter the majority of traders’ positions. The big banks and institutions will go where the traders’ money is, hence why the USD pairs are also very hard to master, especially for amateur traders who use the same tools as everybody else. News events are also more frequent with the USD pairs, the price will move illogically to the report or doing extreme shakeouts before the move happens. Anytime you see the major events like the non-farm payrolls or interest rates, the market will go crazy, disrupting your strategy and planed trades.

The Power of Tweets

Interestingly, the USD is affected by one more phenomenon – Trump tweets. Whenever the president of the US has some comment, regardless if it is related to the US economy, the media start to make stories and predictions to which forex market reacts. Now, we have one more event to pay attention to, making the USD unforgiving, choppy currency. If you like trading the news, this is not something you could use to your advantage, these events are unpredictable, unlike the reports. There is no “logical” move behind them.

Luckily for every forex trader, there are cross pairs. Cross pairs can be defined as the ones that do not have the USD, among other definitions. Again, most of the traders do not come to these markets for several reasons. Of course, it is ok to specialize on one or a few currency pairs, but we all know the basic rule of the Risk Management, diversification is good for your loss protection, never put all of your eggs in one basket. There will be times your favorite pairs will act differently, your system will have a hard time giving you any gains. If you have a specialized system, it means you will not be able to trade once markets change their face, there will be no market you can migrate your system to.

Options for Trend Followers

Back to the currencies that we think are the good ones for trend followers. The advantages of the EUR come from the currency segregation. The Euro is segregated, it is a currency of many EU countries, and it has low relation to the US economy. The EUR/USD is of course affected by the news events from the US but if we look at the EUR alone, it does not care what the USD is doing. The news that the EUR has are scattered, you will see interest rates of Germany, France, and other strong countries, but the impact they will have on the EU and the EUR is not as strong. The EUR is unlike the CAD, for example, where every bad or good event affects the price of CAD drastically. Also, the EUR news schedule is not as tight as with the USD, they are easy to follow and the ones that are not tied to a specific EU country are those that matter. You can easily plan accordingly when you know the ECB is releasing the decision on the interest rates, for example. You do not have to worry about the tweets or hysterical media that make markets go wild.

Moving on to the GBP, this currency is an oldtimer on forex. It has its own “personality” and is not correlated to anything. Depending on how much you are familiar with the market, you may notice that the EUR and the CHF are somewhat correlated. The USD and the JPY are also similarly correlated, they are both regarded as the safe-haven currencies. The USD and the CAD are correlated because they are both North American currencies. Unlike these, the GBP is not correlated to anything. Because of this, the GBP pairs are on the constant move, the constant move means strong quality trends. More trends mean more gains for trend followers. Sideways movement is bad for trend traders and GBP does this rarely. Just pay attention, when the GBP moves sideways, these ranges are whipsawing faster and higher than with other currencies.

Another specialty about the Pound is that the moves are more extreme, this is easily spotted if we compare the ATR (Average True Range) of GBP pairs and other non-exotics. Similarly to the EUR, GBP news events are also easy to follow. It is common to see the same type of news affect the GBP, fewer surprises – fewer losses. What news events affect major 8 currencies the most would require another article, but it Is important to know the outlines about the GBP, EUR, and CHF.

Coping with Neutrality

The Swissy is very neutral, just as the country politics itself. Very few news events affect the CHF, the only one you need to pay attention to is the Swiss National Bank. Whatsmore, the SNB does not have a lot to say. This means you can leave your trades running, the news will not affect trends as much. Another similar currency to the Swissy regarding this is the JPY. Swissy is also regarded as a safe haven currency, it is common to see it negatively correlated with the equities market but also positively correlated with the EUR. This is not always the case of course although when the Swissy correlates with the EUR the movements are not to the same extent. This trait of the Swissy can be used for so-called Pairs Trading method. Whatsmore, this gives you the ability to “switch” the trend if you have a position with the EUR, move it to the CHF where the news event will not affect it much.

There are moments in the forex market where a certain currency will behave like a major news event was ongoing even though you will not see anything that could cause such a drastic move. AUD might be one of these currencies, but not the CHF, at least not always (remember the CFH flash crash off the peg?). So Swissy is also the currency with few “weird” moves that do not have any arguments. It is usually the big banks play when you see something like this. So predictability is great, always take inherent risk into account with a certain currency. You mat even eyeball some chart and see if it is too choppy for your system, do you see some spikes and are those spikes affected by news which you can predict or not.

This trio can make a lot of gains when paired together. Starting with the EUR/GBP, what is so special about it?. It is the slowest out of the major 8 pairs. According to the ATR, this is what is usually seen and measured on the charts historically. Slow movement can be a good thing when you want more control. The pair is also USD news proof. The relation to the USD news is minor at best so you can focus only on GBP and the EU news, which are easy to follow. The movements on the EUR/GBP are rarely in balance, more often than not there are some trends in this pair. So when you combine something that has slow predictable movements, without much news disruptions and having trends…this is the golden choice for trend traders.

Still, this pair is not on the top of the most traded pairs list, not even close. The analogy of this might be like when most people want to have a trendy iPhone smartphone instead of a Samsung, even though it may not be a good fit for their needs or financial capabilities. According to the reports of professional prop traders, this pair has a great winning percentage. If they have a signal to buy on the GBP, they would rather trade the EUR/GBP than the GBP/USD. They are not even splitting the risk profile on two, just go full on the EUR/GBP. The probabilities they have gathered say it is just better to allocate positions on this pair, even if it means more risk by not diversifying.

Other Pairs to Consider

Moving on to the GBP/CHF, the ATR of this currency pair is higher than the EUR/GBP. The Swissy is a single national currency, unlike the EUR and is sensitive to the GBP movement, boosting the momentum. So if the EUR/GBP is too slow to trigger your trade entry or exit, check this pair as there are similar qualities. To some extent, this causes the pair to be even more trendy than the EUR/GBP. Having better “spool” and consistent trends. Stagnation is not common, at least not for the forex majors pairs standards. As with the rest of the pairs, the news events are not frequent, do not cut the trends, and are predictive. The USD events’ effects are not noticeable. GBP/CHF pair is very very unpopular. As such do not expect those weird price action movements without any news to back it up, nor sudden whipsaws.

The EUR/CHF, well, this is the one to avoid. Consider how much the Swissy is correlated to the Euro. Are the baskets similar? Compare the sideways or consolidation ranges to the GBP. You will understand this is a place where trenders either do not trade a lot or just lose. The stagnation or positive correlation to the EUR can change, at this moment this pair is moving nicely like the CHF is now more expressive in less certain times. Trading the EUR/AUD would be the same as trading the EUR/CHF a while ago before 2018, but now it is a bit different. The correlation will probably start again when the markets get out of the (if) COVID-19 crisis. For now, there is not enough historical evidence to say this pair is not correlated anymore. If you are trading this one, try it with less risk.

These observations can be seen on the charts. When we open the mentioned currency pairs charts in the MT4 or any other trading platform, you will notice the sideways movements on the daily timeframe that could last for a month or two. These are areas you should avoid. Some traders can spot these periods by the naked eye, others rely on indicators. These types of indicators are not common, but this is another subject. Take all of this as advice, especially if you have a trend following system.

A few more warnings or tips for you. When you see the GBP/CHF and the EUR/CHF charts and you have a signal on one but the other is very close to giving one, do not wait for it, go with the first pair with a signal. This hesitation could lead you to miss great trades. Professional prop traders are often calm when they lose a trade, although when they miss significant trends because they are late to the party, they are very self-critical. The second tip or a warning is not to trade GBP/CHF and the EUR/GBP at the same time. Your exposure on the GBP will be doubled, so trade one or split the risk if you have two signals.
To conclude, be aware of the USD, if you trade USD related pairs, go with reduced risk or smaller positions. Find more opportunities with cross pairs, they tend to have better trends, especially the ones mentioned. Finally, the elementary part of your Risk Management setup should be not to overexpose on one currency, remember the eggs and the basket.

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Forex Fundamental Analysis

How The New Announcement Of ‘GDP Per Capita’ Indicator Affects The Forex Market?

Introduction

GDP per capita is the primary economic indicator in macroeconomics to measure the standard of living and economic prosperity. While GDP indicates the economy’s size in terms of economic output, it does not reveal for what populace the output is divided. Hence, GDP per Capita is more suited to assess the wealthiness of the country’s population. 

Every nation strives to improve its standard-of-living by increasing the wealth of the population beyond just meeting daily needs. Hence, GDP per Capita becomes an important economic indicator for countries’ comparison of how well-off their people are.

What is the GDP per Capita?

GDP 

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national). It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year. The commonly used term “size of the economy” refers to this economic indicator. The USA is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Per Capita

It is a metric that is obtained by dividing a country’s GDP by its population count. Here, “per Capita” translates to “per average head” or “for one individual.” Hence, GDP per Capita is the measure of economic output per person. 

If we want to compare GDP per Capita amongst countries, we use the Purchasing Power Parity (PPP). Through PPP measure, we can compare countries on equal terms, as many countries have different currencies, comparing economic output becomes difficult. Hence PPP measures everything in the United States dollar terms, thus creating a base standard for comparison.

How can the GDP per Capita numbers be used for analysis?

Since GDP is the total economic output, countries with lower economic output than other countries may not necessarily be poorer. On the contrary, it could be wealthier. For example, Qatar has only 19 billion US dollars GDP in comparison to the USA, which has 20.54 trillion US dollars. But Qatar is the number one ranked the country as per GDP per Capita. It has 126,898 US Dollars compared to the United States that has only 62,794 US Dollars. Hence, the people of Qatar are wealthier than those in the United States. 

Here, we have to understand GDP per Capita is a function of the population. Higher population results in higher GDP prints but also distributes the GDP amongst more people. Qatar is a prosperous country with sizeable natural oil resources, which is not a labor-intensive task to extract and export. Hence, the high GDP through Crude Oil exports is divided amongst a few populace of 2.7 million people compared to the United States 328 million. The USA is the third most populous country after China and India.

Overall, small and prosperous countries and developed industrial nations tend to have high GDP per Capita. The wealthiest and most impoverished countries are also assessed based on the GDP per Capita as a primary metric.

The income per capita and GDP per Capita are the two most common tools for measuring economic wealth and prosperity. GDP per capita is more popular and widely used as it is more regularly tracked and maintained on a global scale by most countries. It, in turn, helps in ease of calculation, usage, and comparison amongst countries.

It tells us how much economic output is attributed to a citizen. Hence, it is a measure of national wealth. On the other hand, it can also tell us the economic productivity of the people. Productive and talented groups of people will contribute more value to the GDP prints.

GDP per capita is used alongside GDP and other GDP related metrics like the GDP Growth Rate, Real GDP, by policymakers to assess the economic health and take necessary actions to drive the economy in the right direction. When the GDP prints are consequently decreasing for two quarters, Central Authorities intervene through monetary and fiscal levers to counter deflation and stimulate economic growth through inflationary pressures. 

GDP metrics are closely watched by investors (domestic and foreign alike) to make investment decisions. Declining GDP holds off investments from investors, due to decreased confidence and vice-versa.

Impact on Currency

GDP metrics are used in a variety of ways by a variety of people. Economists and Central Authorities primarily use GDP per Capita to understand the economic wellbeing of its people. GDP Growth Rate is primarily used by Traders, Business people, and Investors to make business decisions.

GDP per capita would likely be more useful for Policymakers, and Business people. Business people can use this as a wealth metric and consequently decide the products that would suit the budget of people. The higher the wealth of the individual citizen, the costlier products and services they can afford. Hence, business decisions can also be impacted.

It is a proportional high impact indicator. Fluctuations in the GDP metrics bring a lot of volatility in currency markets. Falling GDP metrics are terrible for the economy, its businesses, consumers, and the Government. GDP impacts everyone. Hence, Central Authorities are committed to maintaining GDP Growth and take the necessary actions to avoid deflation. Businesses also hold off investment decisions in the stagnating economy and vice-versa.

Higher GDP per Capita is good for the currency and the economy and vice-versa. Although for trading decisions, GDP Growth Rate serves as a more relevant metric for comparisons amongst different currency countries. 

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures from which we can obtain our statistics on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends. 

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of GDP figures of most countries on their official website:

Sources of GDP per Capita

For the United States, the BEA reports are available here.

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website. You can find this information in the below-mentioned sources. 

GDP & GNP – FREGDP per Capita

Real GDP per Capita – FRED

GDP per Capita – World Bank

Impact of the “GDP per Capita” news release on the Forex market

In the above section of the article, we saw the definition of GDP Per Capita and understood how it differs from the nominal GDP. Per Capita GDP is calculated by dividing GDP over the entire population of the country. GDP Per Capita is a universal measure used by most economists to gauge the prosperity of nations.

It provides insight into the economic prosperity and economic development across the globe. Countries with high technological progress see a significant increase in GDP Per Capita. It is also a significant indicator of comparing the economic growth between the two countries. GDP Per Capita if often analyzed alongside GDP. GDP Per Capita considers both the GDP and its population.   

In today’s lesson, we will analyze the impact of GDP on the value of the currency and observe the variation in volatility due to the news announcement. In this regard, we have collected the year-on-year GDP of Japan, where the below image shows the GDP measured in the last fiscal year. Let us find out the reaction of the market to this data.

USD/JPY | Before the announcement:

We shall start with the USD/JPY currency pair to observe the impact of GDP data on the Japanese Yen. We can see in the earlier image that the market is in a downtrend with a large bearish candle visible a few minutes before the news release. As the market is very bearish, we will look to the currency pair after a price retracement to a technically significant level. At this point, we cannot take any position in the market. 

USD/JPY | After the announcement:

After the news announcement, we see that the price moves lower, resulting in further strengthening of the Japanese Yen. As the GDP data was very close to market expectations, traders comprehended this data to be positive for the economy and bought Japanese yen by selling the currency pair. In terms of positioning ourselves in the market, once should not go ‘short’ in the market soon after the news release as this would mean chasing the market, which is very risky.     

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the market has crashed recently, and the price is at the same level since then. This means there is extreme optimism in the market concerning the Japanese Yen. As the price is meager, we need a pullback before we can take a ‘short’ trade in the currency pair. Until then, we will watch the impact of GDP on the currency.

After the news announcement, the volatility expands on the downside, and the price sharply lower. The market reacted positively to the GDP data since it was measured to be nearly the same as before. This proved to be bullish for the Japanese Yen, where traders bought the currency and took the price lower.   

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

The above images are that of EUR/JPY currency pair where we see that again, the market is in a downtrend, but in this pair, we notice a strong bullish candle from the lowest point, which has taken the price higher. This means the Japanese Yen is not as bullish as it was in the above two pairs. Since the market is not expecting a fall in the GDP, aggressive traders can take a ‘short’ position with a strict stop loss.

After the news announcement, the price moves lower and closes with a large bearish candle. This increases the volatility to the downside and strengthens the Japanese yen. Therefore, it clear that the GDP data had a hugely positive impact on all the currency pairs.    

We hope you understood the concept of ‘GDP per Capita’ and how the Forex price charts get affected after its news release. All the best. Cheers!

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 Fundamental Analysis

What Is ‘Services PMI’? How Important Is It In Assessing A Nation’s Economy?

Introduction

The Services Purchasing Manager’s Index is an excellent leading or advanced macroeconomic indicator, which is used widely to predict economic expansion or contractions. It has various applications for economists, investors, and traders. This indicator predicts inflation, GDP, and the unemployment rate of an economy. Hence, understanding of Services PMI can be hugely beneficial for a trader’s fundamental analysis. 

What is Services PMI?

The Services Purchasing Manager’s Index, also called the Non-Manufacturing Index (NMI), is a survey of about 400 largest non-manufacturers in the United States of America. The word non-manufacturing here implies that the study is associated with the industries that do not produce physical goods; instead, they provide services. Non-physical goods mean the services provided by the IT and software giants like Microsoft and Google etc. The services PMI has fewer survey questions than the manufacturing PMI as some questions, such as inventories, not being relevant to many service providers.

The Services PMI was born more out of a need to accommodate the changing world due to the technological advancements in the last few decades. For most developed nations like the United States, the Service sector contributes more than the Manufacturing industry due to which it had to be taken into account to predict economic trends more accurately.

Purchasing Managers in a company are the purchasing and supply executives associated with procuring the required goods and services that are necessary for running the company. For example, A software company’s Purchasing Manager would typically be in charge of contacting and getting the best internet service provider for the entire company at the lowest or best prices from the market.

They may also be responsible for tie-ups with fellow software companies to get the required software to run their operations. The purchasing Managers have a decent idea of what a company needs, and during what periods these requirements change.

How is the Services PMI calculated?

The Services PMI hence is a compilation of the survey answers given by the Purchasing Managers of the largest 400 non-manufacturing companies of about 60 sectors in the USA. The questions typically asked in the study are related to month-over-month changes in the Business Activity, New orders, Deliveries, and Inventories with equal weightage, as shown in the table below:

All the four categories, as seen when putting together, form the NMI. These four components are enough to ascertain a growth or contraction in the business activity of that company.

The rating of Services PMI range between 0-100. A score > 50 indicates an expansion of economic activity in the non-manufacturing sector. Likewise, a score < 50 indicates contraction.

How can the Services PMI be Used for Analysis?

The data of ISM NMI Reports on Business goes back to 2008 due to which the levels of confidence in the data set may be lower than that of Manufacturing PMI; nonetheless, it is no less effective in ascertaining economic figures like GDP, inflation and employment, etc.

The Non-Manufacturing sector of the United States makes up 80% of the total GDP, and hence the Services PMI is a significant economic indicator in that regard. The Non-Manufacturing sector primarily drives the macroeconomic numbers like the GDP. Together the NMI and PMI cover more than 90% of the industrial sectors that contribute to GDP; hence Services PMI is a must for fundamental analysis.

The correlation between the ISM NMI Data and real GDP is about 85%, which is pretty good. The main advantage of studying Services PMI is that it is an advanced economic indicator. It predicts the real GDP a year ahead, which is commendable.

Below is a snapshot of Services PMI plotted against the real GDP growth rate historically, and we can see the strong correlation existing between them. This explains the importance of these leading indicators in the fundamental analysis of traders.

Impact on Currency

The impact of Services PMI on the currencies is as same as the impact of Manufacturing PMI. You can find this information here.

Sources of Services PMI Reports

We can monitor the NMI reports on the official website of the ISM official website. We can also go through the NMI of other countries from the IHS Markit official website on a subscription basis.

Impact of the ‘Services PMI’ news release on the price charts

The Flash PMI, like Manufacturing PMI, measures the activity level of purchasing managers but that in the services sector. This report is based on surveys taken by the officials covering 300 business executives in the private sector services companies. Traders keep a close watch on the services PMI data as the decisions of Purchasing managers give early access to data about the company’s overall performance, which in turn acts as an indicator of the economy.

Since the services PMI only gives an insight into the performance of the service sector, it does not directly affect the economy. Therefore, the impact of the data on currency is quite less. But traders, build and liquidate some positions in the market based on the PMI data.

The below image shows the previous and latest Services PMI data of Australia, where we see a decrease in the value of the same for the month of February, and now we will analyze the impact it created on the Australian dollar. A higher reading than forecasted is considered to be bullish for the currency while a reading lower than what is forecasted must be considered negative.

AUD/JPY | Before the announcement:

We begin with the AUD/JPY currency pair, where, in the above image, we see that pair is an uptrend before the news announcement. The volatility is high, and the price is making a new ‘higher high.’ As the impact of the PMI data is less, positive data should take the currency higher, and negative PMI data might result in a short-term downtrend. It is preferable to trade the above pair if we come to encounter the second situation as it could essentially result in a retracement of the uptrend, which can be used to join the trend.

AUD/JPY | After the announcement:

After the PMI data is released, owing to a decrease in the PMI number and this immediately is followed by some buying pressure. This is where we can understand the impact of the indicator on a currency where initially due to poor PMI data, the price falls, but it could not even go below the moving average. Thus, one can take this opportunity to join the major trend by trading the retracement, which was brought in due to the bad news. Since the uptrend is strong, one can hold on their trades as long as the market shows signs of reversal.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, and the reason why the chart is going down is that the Australian dollar is on the right-hand side. The chart characteristics almost appear to be the same as in the above pair, but the volatility on the downside is more violent and strong, indicating more strength in the Australian dollar. The only way to trade the pair is the market pulls back and gives us an opportunity to enter, which is the typical way of trading a trend.

After the news release, volatility expands on the upside due to weak PMI data, and the market moves higher. This change in volatility can be used as an opportunity to enter for a ‘sell’ expecting a continuation of the downtrend. This is how the impact of the news can be used to our advantage.

AUD/HKD | Before the announcement:

AUD/HKD | After the announcement:

The next currency pair we will be discussing is the AUD/HKD, and since the Australian dollar is on the left-hand side, the market should move up if the currency gets strong. But here the market is more range-bound, and there is no clear trend. Before the news announcement, price is exactly at the ‘resistance’ area, and soon after the outcome, the price could either try to break out or fall from the ‘resistance.’

After the news announcement, we see that volatility increases on the downside, and later it slows down. This low impact could be signing that traders may not sell at the ‘resistance,’ and thus, it can breakout. If you are an aggressive trader, consider going ‘long’ in the market with a tight stop loss below the recent ‘low.’

That’s about ‘Services PMI’ and the relative impact of its news release on the Forex market. Good luck!

Categories
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!

Categories
Forex Fundamental Analysis

How Does The ‘Private Sector Credit’ Data Impacts The Foreign Exchange Market?

Introduction

Changes in Private Sector Credit and the nominal values can be used to assess the recent economic stability and oncoming trend. It is an indicator of economic health and can be used as a broad metric to know the overall economy’s liquidity and rate of economic growth. Hence, Private Sector Credit can be utilized as an economic indicator for our fundamental analysis to double-check our current assessments and forecasts.

What is the Private Sector Credit?

As the name suggests, Private Sector Credit refers to the financial resources provided to the Private Industry in the form of loans, securities, or other forms of capital by the financial institutions like Commercial banks, finance companies, or other financial institutions, etc.

How can the Private Sector Credit numbers be used for analysis?

Private Sector Credit is affected by the following factors:

Interest Rates – Higher interest rates from financial institutions can discourage private business firms from taking credit. As the credit becomes “expensive,” it drives out the small businesses’ chances of obtaining credit. Only the top-tier institutions may be able to borrow the credit. The Interest Rates that are prevalent in the market is influenced by the Central Bank’s interest rates. In the United States, it is called the Fed Funds Rate. Hence, Central Authorities also play a key role in loan affordability for the private sector.

A loose monetary policy, where Central Banks inject money into the market through open market operations (purchasing bonds, securities), increases the liquidity of the banking sector, which slowly passes on to other sectors of the economy. It decreases the overall Bank Lending Rates and encourages people and businesses to avail credit. It is generally called a dovish approach.

In a tight monetary policy, Central Banks withdraw money from the economy by selling bonds, securities to decrease liquidity. It results in Banks increasing their short-term interest rates. It encourages people to deposit and save more than borrow and spend. It is generally called a hawkish approach.

Credit Rating – Every individual and corporation has a credit rating that tells the worthiness of the candidate for credit. It measures the risk associated with defaulting on the credit. A high credit rating indicates the risk of default is very less, and banks would be willing to lend more, and even in some cases, at a lower rate. A bad credit rating, in most cases, prevents banks from lending, while some institutions may prefer to lend less, or at a higher interest rate than the market rate for the risk associated.

The Credit Rating is backward-looking; it looks at the candidate’s credit history. The good performance of the business is possible in a healthy economy and vice-versa. Hence, past economic health also influences current credit scores. Economic health, business performance, and credit ratings are interlinked, in a feedback loop, one affects the other.

Property Prices – Since Credits are mostly backed by collateral in the form of assets like real estate, or houses, an increase in the property prices creates a wealth effect. It gives a positive sentiment for the financial institutions to lend resources to the private sector, be it consumers or business firms.

Government Backing – When businesses are backed by Government support, lending is also easy. It is more observable in developing economies, where Governments actively support private businesses to boost employment rates, wage growth, and overall economic growth. The government in developing economies may assist in land acquisition for business set up or disburse loans at cheaper rates to the corporate firms.

Increase in Private Sector Credit indicates the financial institutions are confident about the past and current economic conditions and predict that the economic stability shall continue for the near future, at least. When the confidence of financial institutions is deteriorated by inflation fluctuations, unstable markets, banks increase deposit rate interests, to promote saving, thereby increasing their liquidity, and refrain from lending to a significant extent.

Tight lending environments are symptoms of a weak economic growth rate. An increase in the real GDP growth rate has been observed to be followed by increased Private Sector Credit. In turn, this increased credit helps businesses to increase employee staff, improve productivity. It overall increases economic activity and further assists in the GDP growth rate. Hence, both feed-off each other. Slowdowns also feed-off each other, and it accelerates the stagnation or economic downturn. In such cases, the Government or Central Bank intervention is crucial to keep the economy going.

Impact on Currency

In the context of currency markets, Private Sector Credit figures would be a backward-looking indicator (lagging or coincident indicator) as credit is issued if past business performance and current economic conditions are favorable. Hence, Private Sector Credit is a coincident indicator reflective of the current economic conditions.

The Private Sector Credit is not market sensitive, changes in the figures build up over time, and hence, it is a low impact indicator for predicting short-term currency moves within a 1-2 month time horizon. It is useful for assessing a long-term economic trend, though.

Economic Reports

The World Bank maintains the Domestic Credit to Private Sectors in the form of an online database on its official website. Statistics are added once individual countries’ statistics are reported.

For the United States, a weekly report of the Assets and Liabilities of Commercial Banks in the United States is released by the Federal Reserve, from which we can derive the Private Sector Credit information. The report is released every Friday at 4:15 PM.

Sources of Private Sector Credit

For the United States, Private Sector Credit data is maintained by the St. Louis FRED, and that information can be found here. World Bank Private Sector data is available here.

We can find Private Sector Credit statistics for many countries in nominal terms and as percentages of GDP here.

Impact of the ‘Private Sector Credit’ news release on the price charts

Now that we have a clear understanding of the Private Sector Credit economic indicator, we will now watch the impact of the news announcement on various currency pairs and analyze the data. Private loans measure the change in the total value of new loans issued to consumers and businesses in the private sector. To an extent, the allowances will determine the growth of the private sector.

Thus, the higher the government and banks lend to companies, the greater will be the development. The investor considers this data to be an important parameter when making large investment decisions in a currency or in the stock market. However, when it comes to short term movement of the currency, traders don’t pay a lot of attention to the data.

In today’s example, we will be analyzing the Private Sector Credit in the Eurozone and examine the change in volatility in major Euro pairs due to the announcement. A higher than expected reading should be positive for the currency while a lower than expected reading should be negative for the currency.

EUR/USD | Before the announcement:

We shall begin with the EUR/USD currency pair and examine the impact on this pair. In the above image, we see that the pair is in an uptrend, and just before the news announcement, the price has is at its highest point. Depending on the reaction of the market to the Private Sector Credit news, we will be able to take a position in the market.

EUR/USD | After the announcement:

After the news announcement, we witness a lukewarm reaction from the market, and there is hardly any change in volatility. This is because the Private Sector Credit was nearly the same as before with an increase in a mere 0.1%. This cannot be considered as a major boost to the private sector as the government and banks did not increase lending of loans by a vast percentage. As the impact was least, one can trade the pair on the ‘long’ side by joining the uptrend.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/NZD currency pair, where we see that before the news announcement, the market has displayed reversal patterns, and there is a possibility that the market might turn into a downtrend. If the news announcement does not increase the volatility to the upside and price does not cross above the moving average, one can some ‘short’ positions expecting a further downward move.

After the news announcement, the price moves higher by a tad bit, and the ‘news candle’ displays little volatility. As the price remains below the moving average and impact was not great, one can take a risk-free ‘short’ trade in the market with a stop-loss above the recent ‘high.’

EUR/CHF | Before the announcement:

EUR/CHF | After the announcement:

Finally, we will discuss the impact on the EUR/CHF currency pair. Here, we see that the overall trend of the market is up and recently the price has started moving in a ‘range.’ Before the news announcement, the price is at the bottom of the range, and thus a buying pressure can come back into the market at any moment. As the impact of Private Sector Credit is less, aggressive traders can ‘long’ position in the market as the price is at the lower end of the range.

After the news release, volatility expands on the upside, and the price closes with a huge amount of bullishness. The Private Sector Credit data proved to be very positive for this pair, which resulted in a sharp rise in the price to the higher side. After the close of ‘news candle,’ traders can go ‘long’ with stop loss below the support and a ‘take-profit’ at the resistance of the range. We cannot have a much higher ‘take-profit’ as the impact will not last long.

That’s about ‘Private Sector Credit’ 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 Fundamental Analysis

Significance Of ‘Wage Growth’ As A Forex Fundamental Driver

Introduction

Wage Growth is an essential fundamental indicator that influences the GDP of a country, where the income of people of the country has a major say in the GDP calculation. So, even if Wage Growth does not directly affect the economy but shows its importance by affecting other economic indicators. In today’s article, we will understand how Wage Growth is measured and how it impacts the value of a currency indirectly.

What is Wage Growth?

Wage Growth is referred to the rise in wages of employees that is inflation-adjusted and is often expressed in percentage. It is a macroeconomic concept that determines the economic growth of a country in the longer-term, as it reflects the purchasing power of people in the economy and the living standards. A high wage growth implies price inflation in the economy, and low wage growth indicates deflation. A low wage growth scenario requires intervention from government agencies such as the Reserve Bank, which will stimulate the economy through changes in the fiscal policy.

One of the important ways of maximizing wage growth is through the re-skilling process and investing in the development of the skills of employees. When skilled workers are involved in the decision-making process, it leads to the growth of business and industry as a whole. Hence, more financial compensation can be given for skilled workers who not only lift wage growth but also stimulate competitiveness in the economy. This leads to higher productivity and, thus, GDP per worker.

Measuring Wage growth

The key drivers of Wage Growth are productivity and inflation expectations. Wage Growth that is relative to the increase in prices of commodities in the economy—also known as real wage growth—reflects labor productivity growth as well. However, there are several other factors in a business cycle that results in wage growth diverging from production growth.

There are two different ways of measuring real wages. One is from the producer perspective, while the other is from the consumer perspective. Producers fix their labor costs by calculating them relative to the price of their outputs. Consumers measure wage growth by comparing their income with the cost of goods and services they purchase. Thus, most countries examine real wage growth by adjusting it with the rate of inflation. In Australia, for example, real wage growth is determined by considering three parameters, including inflation, hourly wages, and the average number of working hours.

Factors affecting Wage Growth Rate

Today, wage payment is a crucial factor in influencing labor and management relations. Workers are worried about the annual rise in their wages as it affects their standard of living and purchasing power. Managements in some companies are not concerned about higher wages to their employees as they feel the cost of production will go up and their profits will decrease. Let us see some other factors that affect wage growth.

Demand and Supply

The labor market operates on the forces of demand and supply. When demand for a particular type of skilled workers is more, and there is less number of people skilled in that job, the wage growth rate will be high.

Government Regulation

In countries where the wages are very low, the government may pass legislation for fixing the minimum wages of workers. This will also ensure a minimum level of living. This is especially the case in underdeveloped countries where the bargaining power of laborers is weak.

Training and Development Cost

Before handing over the projects to employees, it is necessary to train them enough, so they are capable of doing the job with high skill. This process usually takes time and money, which the company has to bear. Hence this has an effect on the annual growth in wages of employees.

The Economic Reports

The Wage Growth Rate Reports are released annually and on a quarterly basis that covers the review of the data from the previous quarter to the current quarter. All the major economies of the world and some developing countries publish this data on a quarterly and yearly basis that money managers use for evaluating various performance metrics.

Analyzing the DATA

The Economic Data of Wage Growth is a major determiner of the GDP of a country and, thus, the economy. The GDP, as we know, is a key measure in determining the strength of a country’s economy and, thereby, the value of the currency. By comparing the year on year wage growth, we can predict the growth of the economy and improvements in the standard of living. One can also compare the Data of two countries and analyze why the country with higher Wage Growth has been able to achieve it. The monetary committee can note down the differences in the policies.

Impact on Currency

There is an indirect relation between Wage Growth and the value of a currency. When we see a growth in the wages of workers, this is said to increase industrial growth and overall productivity, which in turn improve the GDP of the country. Higher levels of GDP will generate a higher demand for the currency and will increase the economic activity of the country. However, when wages are stagnant and do not show any rise, this will decrease consumer spending and leads to lower living standards. Due to this, the GDP will be affected and will drive the currency lower.

Sources of information Wage Growth

Most countries release Wage Growth data on a quarterly and yearly basis, and countries like the United States and Australia provide a detailed analysis of the same. The reports are published by the respective governments on their ‘Treasury’ website, which includes the International comparison of wage growth rates, Trends in wage growth, and more. 

Links to Wage Growth Information Sources   

AUD- https://tradingeconomics.com/australia/wage-growth

CAD- https://tradingeconomics.com/canada/wage-growth

EUR- https://tradingeconomics.com/euro-area/wage-growth

JPY- https://tradingeconomics.com/japan/wage-growth

CHF- https://tradingeconomics.com/switzerland/wage-growth

GBP- https://tradingeconomics.com/united-kingdom/wage-growth

USD- https://tradingeconomics.com/united-states/wage-growth

The growth in demand for goods and services depends on the spending power and the income that flows to the population, a significant portion of which comes from wages. Companies and government need to understand that growth in wages is not just a cost of production but are also a source of spending and thus of revenue and profit for the business.

Impact of the ‘Wage Growth’ news release on the price charts

After understanding the significance of Wage Growth in an economy, we shall extend our discussion and find out the impact of Wage Growth data on currency pairs. From the below image, we can infer that the Wage Growth may not cause a drastic change in volatility of a forex pair as the level of importance assigned to it is very low. Wage Growth numbers are announced on both a monthly and yearly basis, but to estimate the degree of change in volatility, we will be analyzing the year-on-year numbers of the same. A reference currency that we have chosen for this purpose is the Russian Ruble (RUB).            

Below is an image showing the latest, estimated, and previous Wage Growth data of Russia, where we see that there has been a decrease in Wages by 0.4% from the previous year. A higher reading than before is said to be positive for the currency while a lower than before data can negatively impact the currency. The Wage Growth data is officially released by the ‘Russian Federation Federal State,’ which is responsible for maintaining the fundamental information of Russia. Since the impact of the Wage Growth news announcement is least, let us look at the reaction of the market.

USD/RUB | Before the announcement:

We shall first look at the USD/RUB currency pair and analyze the impact of Wage Growth on this pair. In the above chart, we see that the market is a strong downtrend and recently we see a retracement from the lowest point. Since economists have forecasted a much lower wage growth than before, it is not prudent to take ‘long’ positions in the market as, technically speaking, this would mean we are trading against the trend. Therefore, a risk-free approach would be to wait for the news announcement and then trade based on the change in volatility.

USD/RUB | After the announcement:

The above chart shows the market reaction to the Wage Growth news announcement where the data came was beyond expectations and mildly lower than the previous year’s numbers. Since the data was robust, the price goes down, and the Russian Ruble strengthens. As the difference between the forecasted to actual data was huge, the volatility increases a lot on the downside, and the market seems to continue its downtrend. After the clarification of Wage Growth data and confirmation signs from the market, we can enter the market by ‘shorting’ the currency pair with a stop loss above the ‘news candle.’

EUR/RUB | Before the announcement:

EUR/RUB | After the announcement:

The above images represent the EUR/RUB currency pair, which is similar to that of the USD/RUB pair in terms of price behavior. However, the downtrend here is more resilient and stronger than in the above pair. The pullback, too, has been very little, which shows the strength of the Russian Ruble. Therefore, an above-average Wage Growth data should take the currency much lower while below-average data can result in a rally for a small duration of time, but not a trend reversal.

After the news announcement, we see that the price falls and leaves a wick on the bottom. This wick is due to the reaction at the support area, but this shouldn’t scare us, and we can confidently take ‘short’ positions in the market with a compulsory stop loss.

GBP/RUB | Before the announcement:

GBP/RUB | After the announcement:

The above charts are that of the GBP/RUB currency pair, where we see that the characteristics of this pair are totally opposite to that of the above-discussed pairs. Before the news release, we witness a strong uptrend, and the price is currently at a resistance area. We have two options at this point in time, one, to ‘long’ in the market as Wage Growth data is expected to be very bad and second, to wait for the news announcement, and if the numbers are weak, go ‘short’ in the market.

After the release of Wage Growth data, the price initially goes down as the numbers were better than expectations, but later, the candle closes in green. The volatility increases on both sides, but the numbers were not good enough to strengthen the Russian Ruble. Therefore, the only way to trade this pair is to wait for a breakout above the resistance area and then trade the retracement of it -using the Fibonacci tool.

That’s about ‘Wage Growth’ and its impact on the Forex market after its news release. In case of any queries, let us know in the comments below. Good luck!

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 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 Fundamental Analysis

What Is ‘Government Budget’ & How It Helps In Determining A Nation’s Economy?

Introduction

Government Budget is one of the annual reports that moves the market volatility significantly. The Government of a country or a state is responsible for managing the economic activity of that region. Hence the Budget will primarily determine the pace of economic activity for that fiscal year. Government Budget figures are incredibly crucial for traders and investors as it can impact everything from taxes to Sovereign risks.

What is Government Budget?

Government Budget is a detailed annual plan for public spending by the Government. The Budget, in general, applies to individuals, corporations, and Governments. An individual planning his finances for the year determining what portion of his monthly/annual income he is going to allocate for his expenses would be his Budget. For corporations, annual budgets would detail what amount of revenue would be spent on different departments like R&D, marketing, infrastructure, etc.

The Government Budget is the same as the above, but the list of expenses is related to public welfare. The Government is responsible for a multitude of operations like salary payments to Government employees, financing agricultural subsidies, providing financial support to specific industries. It may also include paying for military equipment, payout pension funds to the applicable people, and other Government running operations expenses, etc.

The Government Budget is calculated on an annual basis, and for the United States, this fiscal year begins on the 1st of October to the next year’s 30th of September.

What a Government earns through taxes is called revenue, and what it spends on is categorized under Government Spending. When the spending exceeds its revenue, then we call it as a Budget Deficit or Fiscal Deficit. On the other hand, when the revenue exceeds spending, we have what is called a Budget Surplus or Fiscal Surplus. The United States has been running a budget deficit most of the time throughout history, as shown below:

Budget money spent is usually categorized into two categories:

  • Mandatory Spending: These are the spending that the Government has no choice to cut back on as these are stipulated by law, which the Government cannot fault on. For the United States, Social Security is one such program that was brought into the United States law by President Roosevelt in 1935, under the Social Security Act. Medicare and Medicaid are also typical examples of Mandatory Spending, which are fixed and must be paid out by the Government.
  • Discretionary Spending: This part can make or break an economy. It is the part of Budget that the Government decides to spend on other programs that are not mandatory but essential for growth. There is certain flexibility on how much can be spent on which part of the economy.

How can the Government Budget numbers be used for analysis?

The Government’s Fiscal Deficit is financed through borrowing money from investors in the form of bonds for which the Government promises to pay interest. Deficit each year adds to the debt. The United States and many other developed economies have spent most of their time maintaining a Budget Deficit as the spending has been failing to stimulate the economy year after year.

If the Government decides to cut back on spending to service debt and interest payments, then the economy may slow down due to a lack of funding stimulus. On the other hand, if the Government continues to spend beyond its revenues to stimulate the economy, then it will keep piling up the previous debts.

The Budget has both short-term and long-term impacts on the economy. Based on which sectors the Government has chosen to allocate its spending, investors and traders can predict economic growth and slowdowns in different sectors.

The Budget’s portion that is being spent on servicing debt and interest payments also decides whether the country is in danger of Sovereign Credit Risk. The credit rating agencies like Standard & Poor’s, Fitch Group, and Moody’s, etc. credit rate the Government. If the credit rating falls, then investors quickly lose confidence in the Government’s ability to pay back.

Hence, investors demand higher interests for the risk associated and which further cuts a bigger pie out of the Budget, leaving less room for spending. The vicious cycle of debt is tough to get out of for the Government and hence, Budget figures and strategic allocation of funds is crucial.

Impact on Currency

Currency markets quickly lose faith in the Government that is unable to resolve National Debt and large Budget Deficits, and currency immediately depreciates. Increased confidence in the Government can appreciate the currency value.

Budget strategy tells the market the Government’s ability to maintain its debt and simultaneously invest its Spending on Growth. Only servicing debt slows the economy, and only spending on Growth piles up debt, which eats up tax revenue. Both are dangerous for the Government and the economy.

Hence, the Government Budget is a significant leading economic indicator for traders and investors alike. 

Economic Reports

The Budget reports of all countries are available on their respective Federal Government’s website. On an international scale, the World Bank and International Monetary Fund maintain the budget data for most countries. For the United States, the Budget reports are available on the Treasury Department’s official website and Office of Management and Budget’s website.

Sources of Government Budget

A comprehensive summary of all Budget related statistics are available on the St. Louis FRED and some other credible websites that are given below:

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

Till now, we have understood the importance of Government Budget in an economy and how it can be used for fundamental analysis of a currency. The Budget impacts the economy, interest rate, and stock markets. How the finance ministry spends and invests money affects the economy. The extent of the deficit influence the money supply and the interest rate in the economy. High-interest rates mean higher cost of capital for the industry, lower profits, and lower currency prices.

In this example, let’s analyze the impact of Government Budget on various currency pairs and examine the change in volatility due to the announcement of the same. For that, we have collected the data of Canada, where the below image shows the latest Budget that was fixed by the Canadian Government during the reference month. Let us find out the reaction of the market to this data.

USD/CAD | Before the announcement:

The first currency pair which we will be discussing is USD/CAD. The above image shows the exact position of the currency before the news announcement. We see that the market is in a downtrend, and recently the price has pulled back to a ‘supply’ area, and some initial reactions (red candle) can also be seen. Since the impact of the news outcome is less, aggressive traders can take a ‘short’ position with a stop loss above the ‘supply’ area.

USD/CAD | After the announcement:

After the news announcement, we see that the market moves higher, and there is a sharp surge in the price. The volatility increases to the upside the price closes as a bullish ‘news candle.’ Even though the Government Budget was higher than before, it narrowed to 3.58 billion in February from 4.31 billion in the corresponding month of the previous year. This is negative for the economy when analyzing from a yearly perspective. Thus, traders went ‘long’ in the currency and weakened the Canadian dollar.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where we see that in the first image, the market is in moving within a ‘range,’ and currently, the price seems to have broken below the ‘support,’ showing an increase in the selling pressure. Since the Canadian dollar is on the left hand of the pair, a strong down move indicates a weakening of the currency. Since the price has broken below, we will be looking to sell the currency pair after some consolidation in the market.

After the news announcement, the price crashes below, and volatility extends on the downside. The bearishness in the price is a consequence of the weak Government Budget data that saw a decrease in the value compared to the previous year. Therefore, traders went ‘short’ in the currency pair by selling Canadian dollars. One needs to be cautious before taking a ‘short’ trade as the price is approaching a ‘demand’ area, and buyers can pop up at any moment.

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images are that of GBP/CAD currency pair, where we see that the market is in a strong downtrend before the news announcement, signifying strength in the Canadian dollar. We also observe that the price has recently bounced back from its’ lows’ and has crossed the moving average. This could be a sign of trend reversal, which we shall validate based on the outcome of the news.

After the news announcement, the price initially moves higher, but later selling pressure is seen, and the candle closes in the red. Here the volatility is witnessed on both sides of the market, and the price manages to close above the moving average line. The market appears to be volatile even after the news announcement, and we do get a sense of the direction of the market. However, aggressive can go ‘long’ in the market on the basis that the price continues to remain above the moving average, after the news release.

That’s about ‘Government Budget’ 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 Fundamental Analysis

‘Housing Starts’ – The Significant Of This Fundamental Indicator!

Introduction

‘Housing Starts’ Report is a widely used economic indicator by investors and traders to gauge the economic activity of a country. Construction of Houses affects many other dependent sectors like employment, raw material supplies, etc. Hence, we need to understand Housing Starts as part of our overall fundamental analysis.

What are Housing Starts?

Housing Starts refers to those properties whose housing construction activity has started on the foundations. It means only those are counted for which the building activity has crossed beyond the beginning foundation or footing laying stage. Houses for which only pillars and foundations are laid and stopped are not counted in.

This report follows the Building Permits reports, and after this stage, we have a Housing Completion report. Here each of the survey reports signifies different stages of the housing construction activity.

An increase is first observed in Building Permits, which then translates to an increase in Housing Starts and later translates to Housing Completion reports accordingly as the construction activity goes from start to completion. In this regard, understanding which report follows which one and what they mean from an economic viewpoint is crucial, as we will see later in the analysis section.

Housing Starts Report data is divided into the following three main categories:

Single-family homes: A single independent house constructed by a single-family is regarded as Single-family homes. This is the go-to type of home that people go for when they are financially secure and well off.

Townhomes and Condominiums (Condos): These are typically multi-storied or have multiple homes within a single structure that are independently owned. They differ from Apartments mainly in terms of ownership. Different owners own each independent unit.

Multi-family Structures: These would typically include Apartments or large townships which are owned by a single organization and made available on lease.

Economic Reports

The United States Census Bureau releases the Housing Starts reports under “New Residential Construction Survey Report” at 8:30 AM on the 12th working day of every month, which usually falls on 17-18 of every month, on their official website.

The survey is partially funded by The Department of Housing and Urban Development. The data is collected by Census field representatives using interviewing software through laptop computers.

In February, the annual estimates of New Residential Construction are finalized and released for the previous year. Initial estimates of single-family homes sold and for sale are also available every month in the New Residential Sales (NRS) press release as per the NRS Release Schedule. The housing numbers are seasonally adjusted to accommodate the weather dependency on the nature of the housing work to give more statistical accuracy.

How can the Housing Starts numbers be used for analysis?

The Housing Starts number is confused and misinterpreted with its sibling reports, i.e., Building Permits and Housing Completion reports, all signify different stages of economic activity effects. In that sense, Housing Starts numbers are current economic indicators, which means it tells what is going on in the economy right now. Building permits then in relativity is a leading or advanced indicator, and housing completion would be a lagging indicator.

When the government injects money into the economy, loans are available easily, and businesses are stimulated. There would be an increase in employment, which would have resulted in better wages for many. Such an activity would have prompted a rise in building permits, and when the money does reach people, housing starts numbers would see an increase. In this sense, an increase in housing starts tells investors that the economy is moving in a positive direction.

The type of Houses that have seen increase can also tell us the sentiment of people towards the financial future of the economy. An increase in single-family homes would suggest that more people are wealthy enough to afford one and are confident towards mortgage repayment. This also indicates that banks are also giving higher loans to more people, and the economy has more liquid money injected into the system.

An increase in condos or multi-family structures with respect to single-family homes would suggest that people are not comfortable enough to go for expensive homes and would rather save and settle into cheaper alternatives. This is usually prevalent during weaker economic periods, and a significant difference in the numbers can indicate an oncoming recessionary period.

Impact on Currency

An increase in the Housing Starts is reflective of the present current economic conditions. A strong economy would have higher numbers in the housing reports relative to a weaker economy where people would shy away from purchasing single-family homes.

An increase in housing starts reports also implies that demand for construction materials, hiring of labor forces, loans, and other construction-related activities has risen, and the economy is actively generating revenue than before, which is good for the nation and its currency.

Below is a snapshot of the Housing Starts historical report taken from the FRED official website, which shows the economic indicator’s correlation with the national economy’s growth. During times of recession (shaded bars in the background), there have been significant plunges in the numbers and vice versa. The below graph proves the importance of Housing numbers as an indicator of the economy’s performance in our fundamental analysis.

Sources of Housing Starts Index

Given below is the latest Housing Starts report taken from the official website of the Census Bureau. Follow this link for reference. Here, you can find the data related to New Residential Constructions. The St. Louis FRED website has comprehensive data in graphical forms, which will be easier for our analysis. The Census Bureau also explores other related economic indicators related to Housing Activity within the United States.

Impact of the ‘Housing Starts’ news release on the price charts

Housing Starts is one of the leading economic indicators which measures the strength of the housing sector. It shows the change in the number of new residential buildings that began construction during the reported month. The indicator, however, is not said to cause a major impact on the currency, and the volatility during news release will be ‘low.’ So, traders around the world do not pay much attention to this data. However, they do keep a watch on the trend to gauge the economy’s strength in the longer-term. Hence, based on the current data, they make some changes to their current position in the currency.
Many of the countries release the housing starts data on a Monthly and Yearly basis, where today we will be analyzing the month-on-month numbers of Canada. The below image shows previous, forecasted, and actual Housing starts data of Canada, where we see an increase in the number of constructions in the month of February. The Canadian Mortgage and Housing Corporation release the housing starts data of Canada. A higher than forecasted reading is considered positive for the currency, while a lower than expected data is taken to be negative.

CAD/JPY | Before the announcement:

We start our analysis with CAD/JPY currency pair, and the above image shows the state of the pair before the news announcement. We see that the Canadian dollar is in a strong downtrend, and recently it has formed a range that has created areas of ‘support’ and ‘resistance.’ There is of pessimism in the market as the economists and institutional investors are expecting a lower ‘housing starts’ data than before, which is one of the reasons behind the price going lower. Since the market is at the ‘support’ area, it is risky to go ‘short’ in this pair, and thus we need some clarity of the ‘housing starts’ data before entering the market.

CAD/JPY | After the announcement:

After the ‘housing starts’ numbers are out, there is very little change in volatility, which was expected as it is not a highly impactful event. The price initially goes up, which is a result of better than forecasted ‘housing starts’ data, but it gets immediately sold, and the candle closes at the opening price. The selling pressure is seen because even though the data was better than expected, it was still lesser than previous data, and this is negative for the currency. As the volatility is less and the price is at the ‘support’ area, we do not recommend a ‘short’ trade as the risk-to-reward ratio is unhealthy.

EUR/CAD | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the EUR/CAD currency pair, and since the Canadian dollar is on the right-hand side, weakness in the Canadian dollar should take the currency higher, which is why the market is going up in the above pair. The ‘range’ before the news announcement seems to be much more established and clearer than in the previously discussed pair. Since price is close to the ‘resistance’ point, a positive ‘housing starts’ data can be an opportunity to go ‘short’ in the currency pair.

After the news release, we see that the candle closes with a wick on the top indicating strength in the Canadian dollar. Since the data was positive for the economy, one can take a ‘short’ trade expecting the volatility to expand on the downside. We should not forget that since the data does not have much impact, our ‘take-profit‘ for the trade should be the recent ‘support’ area.

NZD/CAD | Before the announcement:

NZD/CAD | After the announcement:

The next currency pair which we will be discussing is NZD/CAD, and in the first image, we see that the market is in an uptrend trying to make a new ‘higher high.’ This shows the amount of weakness in the Canadian dollar and the strength of the New Zealand dollar. As we have explained that the event does not cause much volatility in the pair, taking any position against the trend would be very risky.

After the news announcement, the Canadian dollar shows some strength owing to positive ‘housing starts’ data but not enough to take the price lower. This minimum volatility is a sign that once cannot go ‘short’ in the pair and instead look to join the trend.

That’s about ‘Housing Starts’ 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 Fundamental Analysis

‘Households Debt to GDP’ – What Should You Know About This Economic Indicator?

Introduction

Households Debt to GDP is an indicator of ascertaining the financial soundness of the economy. There is a certain amount of healthy correlation between the Households Debt and GDP, and by understanding this ratio correctly, we can predict major economic events with reasonable confidence. This metric has gained more attention around the time of the global financial crisis of 2008. Hence, understanding this metric is important in understanding long-term macroeconomic trends.

What is Households Debt to GDP?

Household Debt

It refers to the total debt incurred by households only. All the monthly debt payments people owning a home are taken into consideration. The debt can be of any type like mortgage loan, student loan, auto loan, personal loans, credit cards. Any form of credit for which you are paying back from your income is a debt in this context.

But, merely measuring household debt without any relative quantity to ascertain the burden of debt to an individual is not useful. For example, a country earning 100 billion dollars in a year having a debt of 70 billion dollars can be burdensome. While a nation making 200 billion dollars would be comfortable paying off this debt and still afford to invest in public spending and other activities. It is this relative context that appropriately paints the macroeconomic picture of a nation in front of us.

On the Macroeconomic level, GDP is equivalent to the income of the nation, and the portion of that income that goes into servicing debt payments determines what is left for other activities. The debt burden can also be measured in different forms, like by taking the ratio of the debt to disposable income or pre-tax income (gross income).

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

The household debt impacts the Personal Spending (which is the amount left after deducting necessary expenditures from the Disposable Personal Income, DPI). High debt results in lower spending, which promotes saving and discourages spending. When spending is reduced, the demand falls in the market, and businesses enter a slowdown.   Expansionary plans are rolled back, and employees are laid off, resulting in deflationary conditions overall.

The financial crisis of 2008 – From 1980 to 2007, the increase in debts due to the low-interest rate environments stimulated the economy beyond its sustainable levels, which resulted in extended spending by individuals buying houses all over the United States.

Once the individuals bought their homes, till then, the market and economy were seeing a boom, but soon reality hit when people started repaying the debt, which reduced the overall spending that resulted in a slowdown of the overall economy. What happened here is, the government tried to give an artificial boost to the economy, which although sped up the economy for some time, it later dragged the economy back to the extent that even today, the economy’s growth rate is lower than it should be.

The debt burden led to a global financial crisis in many countries where loan defaults were becoming increasingly common. Many people just abandoned their house and debt, due to which the real estate market fell, the investors lost money, the stock market crashed. All this resulted in an economic collapse in the United States. Similar patterns followed throughout the world in many countries.

Historically, when the Households Debt reached 100% of GDP, the economy took a severe downturn and went into recession. The years leading up to the financial crunch, i.e., 2007, many industrialized countries experienced a major spike in Households Debt. Countries that experienced 100 and above percentage figures in the Households Debt to GDP ratio experienced the Credit Crunch and entered a prolonged slowdown period. In the below plot, we can see during the recession (shaded region), the Households Debt to GDP reached around a hundred percentage.

Impact on Currency

The Households Debt to GDP percentage figure is an inverse indicator. The higher numbers are bad for the economy and the currency. Lower values mean that either the debt has reduced, or the GDP has increased, or both. It is suitable for the economy, and the currency appreciates.

Since GDP is a quarterly figure, and hence the ratio numbers are also released quarterly. Also, the Households Debt to GDP is a long-term number, in the sense that the numbers will not rise or fall overnight. It may take years to build-up or go down. Hence it is a low-impact indicator as it is indicative of the long term trend and does not reflect the current short term trends in the economy.

But, Households Debt to GDP can be used to analyze severe economic downturns like that of 2008’s financial crisis. In this sense, investors, economists can use this statistic to predict any shocks that may occur in the future.

Economic Reports

The International Monetary Fund ( IMF) releases the Financial Soundness Indicators (FSI) for many economies based on the data they receive from the individual countries. There are no fixed release dates of the report’s release, as they compile and publish once they receive information from the source countries. The FSI data goes back to 2008 for many countries, but for some, it goes back to 2005.

The IMF FSI reports contain different types of loans and their ratios to GDP and other metrics that are available on their official website.

For the United States, the Board of Governors of the Federal Reserve System releases the report titled “Financial Accounts of the United States – Z.1”, also called Z1 reports, quarterly on their official website. This report gives the Households Assets and Liabilities and Net Worth, the charts show the balance sheet of households and non-profit organizations to DPI.

Sources of Households Debt to GDP

  • IMF FSI reports are available here.
  • United States Assets and Liabilities report can be found here.
  • The above-mentioned figures are available in the St. Louis FRED website.
  • Compilation of the Households Debt to GDP for all major economies is available here.

Impact of the ‘Households Debt to GDP’ news release on the price charts

After understanding the Household Debts to GDP economic indicator, we will now proceed and analyze the impact of the same on the country’s currency. The Household Debt to GDP is a metric that measures the country’s public debt to its Gross Domestic Product (GDP). From the definition, it is clear there exists an inverse correlation between the indicator and value of the currency. When there is an increase in the value of the indicator, it means people’s debts are increasing, and consumer spending is reducing. This negatively impacts the economy and, thus, the currency, whereas a decrease in Household Debts is positive for the currency.

In today’s example, let’s analyze the Household Debts to GDP data of India and find out the impact of the same on Indian Rupee. As we can see, India’s Household Debt accounted for 11.3% of the country’s Nominal GDP in March 2019, compared to the ratio of 10.9%  in the previous year. The year-on-year data is said to have a long term effect on the currency, and hence we are observing the impact on the ‘daily’ time frame chart.

EUR/INR | Before the announcement:

We first look at the EUR/INR currency pair, where we see that the price is in a major downtrend and has been moving in a range from the past two months. Just a few days before the news announcement, the market has retraced the downtrend partially and is on the verge of continuation of the trend. Technically, it is judicious to go ‘short’ in this pair as it is the best way to trade the trend. Now we only need confirmation from the market in terms of the market going below the moving average after the news release.

 EUR/INR | After the announcement:

After the news outcome, the market moves a little higher owing to weak Housing Debt to GDP data, and traders around the world sell Indian Rupee. There is an increase in volatility to the upside, but on the immediate next day, the market gets sold into. This means that even though the data was unhealthy for the Indian economy, it wasn’t as bad to take the price much higher and result in a reversal of the trend. Therefore, we enter the market for a ‘short’ trade only after the price slips below the moving average, and volatility increases on the downside.

GBP/INR | Before the announcement:

GBP/INR | After the announcement:

The above images represent the GBP/INR currency pair, and as we can see, the market has reversed the downtrend of 2018 and is currently in an uptrend. This up move started at the beginning of the year and has been new ‘highs. Before the announcement, the price seems to have made a top and might be going down to the ‘support’ area to resume the up move. Since we do not have the forecasted data of the indicator, we cannot take any position in the market. After the news announcement, the market does not fall much, nor does it go higher. This means the HOUSING DEBT TO GDP data was neutral for the economy and thus for the currency. As the change in HOUSING DEBT TO GDP was not drastic, we do not witness substantial volatility during the announcement. The ‘trade’ idea for this pair is similar to the above-discussed pair, where we go ‘short’ in the pair once the price goes below the moving average.

CAD/INR | Before the announcement:

CAD/INR | After the announcement:

In the CAD/INR currency pair, we see a retracement of the big downtrend of 2018 in the form of an uptrend, similar to the GBP/INR pair. One major difference is that the uptrend in this case not very strong and is unable to make new ‘highs. This means the down move is having more influence on the pair and that the up move might get sold into anytime. If the Housing Debt to GDP data were to be positive or neutral for the Indian economy, we could join the downtrend after suitable confirmation from the market. After the Housing Debt to GDP data is released, the price suddenly falls below the moving average, and volatility increases on the downside. A bearish ‘news candle’ shows the impact of the news on this pair, and we can conclude that Housing Debt to GDP data did not prove to be negative for this pair.

That’s about ‘Household Debts to GDP’ and how this economic indicator impacts the Forex market. For any queries, let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

‘Leading Economic Index’ – Understanding This Forex Fundamental Driver

Introduction

Business people, Investors, and Politicians are often more interested in where the economy is heading than where it has been in the past or where it is right now. In this regard, the Leading Economic Index receives more attention than Coincident Index indicators or any individual economic indicators.

Leading Economic Index gives a more accurate snapshot of the future economic trend than any individual leading or coincident indicator. In this sense, the Leading Economic Index is essential to observe the economy’s ‘big picture’ better.

What is the Leading Economic Index?

Leading Economic Index is an amalgamation of multiple leading economic indicators that give us a better snapshot of the economic prospects of the country.

Economic Activity Index: The Economic Activity Index for the states presently includes five indicators, namely: non-farm employment, unemployment rate, average hours worked in manufacturing, industrial electricity sales, and real personal income minus transfer payments. It is a Coincident Economic Index that tells us the current economic situation in the broader sense. The below table summarizes the composition of the Economic Activity Index.

The Leading Economic Index uses the Economic Activity Index for each state as well as various state, regional, and national variables to predict the nine-month-ahead change in the state’s economic activity index. This estimate of the nine-month percentage change in the state’s current Economic Activity Index is the state’s Leading Index.

Hence, by using a mix of coincident indicators, leading indicators, and other variables, the Leading Economic Index is constructed. The below table summarizes the composition of the Leading Economic Index.

The Leading Economic Index has the base period 1992, i.e., the Leading Economic Index score for the year 1992 is 100. Based on this period, all subsequent index periods are scored.

A score below 100 is observed as contractionary. A score above 100 is seen as expansionary for the economy. The Leading Economic Index uses a time-series model (vector autoregression). The current and prior values of the forecast are combined to determine the future values of the index.

Below is a snapshot of the Leading Economic Index of the three districts and the USA:

(Source – Philadelphia Fed)

How can the Leading Economic Index numbers be used for analysis?

Individual economic indicators like Initial Unemployment Claims, Purchasing Manager’s Index from the Institute of Supply Management, Employment rate can often give conflicting signals.

No one indicator can give us the broader economic outlook that we are seeking to have. It is often preferred to have an idea on different sectors (private, public, or manufacturing, services, or business, consumer) and different economic indicators to obtain a complete macroeconomic picture.

An economy consists of many moving parts, imports, exports, jobs, businesses, banks, money supply, etc. all these economic levers push or pull the economy. With so many levers in place, it is indeed difficult for the common man to know for sure the overall economic condition. The geography also plays a part, a slow down in one state does not necessarily translate to the overall economic slowdown, it might even be the case ten other states have improved above average.

In this regard, the Leading Economic Index is useful to get the big picture more accurately. As shown in the below plot, for Pennsylvania, four recessions since 1970 have been preceded by a minimum of three negative readings. The Leading Economic Index is generally measured as a change in percentage concerning the previous month score.

(Source – ST Louis Fed)

 

Impact on Currency

Improvement in the Leading Economic Index figures signals an expansionary growth in the economy ahead, which is appreciating for the currency and vice-versa.

In this sense, the Leading Economic Index is a leading and proportional economic indicator, i.e., it forecasts growth and the increase or decrease in figures generally translate into improvement or deterioration of the economic growth.

The Leading Economic Index is a low impact indicator as the data from the individual indicators that make up the Leading Economic Index would have already been released a week before, and the corresponding market short-term moves would have already taken place. Although, the long-term trends and forecasting power of the Leading Economic Index makes it a suitable tool for investors and long-term traders to assess economic direction over a time horizon of 3-6 months better.

Economic Reports

The Federal Reserve Bank of Philadelphia releases the Leading Economic Index for all of the 50 states. The Indexes are released every month generally a week after the release of the composing coincident indicators. The release dates for the upcoming year’s Leading Economic Index reports are already posted on its website.

Sources of the Leading Economic Index

The State’s Leading Economic Index is available on the official website of the Federal Reserve Bank of Philadelphia:

Leading Economic Index – FRB -P

Release Schedule – Leading Economic Indexes

The Leading Economic Index and the Coincident Economic Activity Index are also available on the St. Louis FRED website:

Leading Economic Index – FRED

Coincident Economic Activity – FRED

The Leading Economic Index for various countries are available here in statistical and list form:

Impact of the ‘Leading Economic Index’ news release on the price charts

In the previous section, we described the Leading Economic Index fundamental indicator, where we said that it is a composite index that is based on nine economic indicators and is used to predict the direction of the economy. The data is gathered from economic indicators related to consumer confidence, housing, money supply, stock market prices, and interest rate spreads. The report tends to have a relatively muted impact on currency pairs because most of the indicators that are used in the calculation are released previously.

The below image shows the previous and latest data of Leading Economic Index indicator, where we see a decrease in 0.4% compared to the previous month. A higher than expected data should be taken to be positive for the currency and vice-versa. Let us observe the change in volatility due to the news release.

AUD/USD | Before the announcement:

The above image shows the chart of the AUD/USD currency pair before the news announcement. We see that the price is in a downtrend, and recently it has formed a ‘range.’ This looks like a retracement where the price may continue its downtrend after touching a key technical level. Depending on the news data, we shall take an appropriate position in the market.

AUD/USD | After the announcement:

After the news announcement, the price falls and goes below the moving average, indicating that the Leading Economic Index data was negative for the economy. As there was a decrease in the value, traders went ‘short’ in the currency pair and increased the volatility to the downside. This was accompanied by another news event that was positive for the Australian dollar, and hence we see the sharp rise in price. Nonetheless, the Leading Economic Index was bad for the economy due to which the currency weakened initially.

AUD/CHF | Before the announcement: 

AUD/CHF | After the announcement:

The above images represent the AUD/CHF currency pair, where we see that the characteristics of the chart are similar to the above-discussed pair before the news announcement. Here too, the market is in a downtrend signifying weakness in the Australian dollar, and the price has pulled back from its ‘lows’ recently. There is a possibility that the downtrend might continue depending on the outcome of the news. After the news announcement, the market moves lower, and the price closes as a bearish ‘news candle.’ Since this announcement followed another news release, one needs to be cautious before taking any position in the market. If we are to analyze this data alone, we can expect an increase in volatility to the downside, leading to further weakening of the currency.

EUR/AUD | Before the announcement: 

EUR/AUD | After the announcement:

The above images are that of the EUR/AUD currency pair, and here, the market is an uptrend before the news announcement. Since the Australian dollar is on the right- hand side of the pair, an up-trending market indicates weakness in the currency. The price is currently moving in a ‘range,’ and just before the news release, it is at the bottom of the range. Ideally, this is the ideal place for going ‘long’ in the market. Aggressive traders can take a ‘long’ position with a stop loss below the support. After the news announcement, we see that the market moves higher, and the bullish ‘news candle’ indicates weak ‘Leading Economic Index’ data where there was a reduction in the value for the current month. Compared to the other fundamental drivers, the Leading Economic Indices news release would have taken the currency higher, and high volatility would be witnessed on the upside. Therefore, we need to keep a watch on the economic calendar to be aware of all the news announcements.

That’s about the ‘Leading Economic Index’ 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 Fundamental Analysis

The Importance of the ‘Car Registrations’ Data While Gauging The Economy’s Health

Introduction

Since the advent of mass production of Cars, by Henry Ford in 1913, the automobile industry has been booming. The consequent effects on the dependent industries are as significant as the study of Automobile Industries itself. Car Registration statistics are useful for policymakers, and many dependent industries of automobiles.

What is Car Registrations?

Vehicle Registration is the process of registering a newly purchased or resold vehicle with a government authority. The primary purpose is to link every car with a corresponding owner. It helps in identifying owners of lost vehicles and reckless driving caught on traffic cameras, etc.

How can the Car Registration numbers be used for analysis?

Car Registrations in our analysis is useful to the following sectors of people:

Policy Makers – Car Registration statistics are useful for policymakers to predict traffic volume, forecasting congestions in narrow road areas, and planning new highway construction projects to facilitate smoother transportation.

Oil Vendors – It is useful for the Oil vendors, who can use this data to forecast an increase or decrease in fuel demand and adjust their inventory or stock in advance to meet the demand.

Road Construction companies – Companies can track regional increases in car sales and identify traffic patterns, to put forward a proposal for road construction to government officials to get a construction contract.

Modification Jobs – Many companies in the modern world offer customization options. By monitoring what type of cars are more frequent and in which locations, can help such small scale businesses to set up their business, and offer suitable services.

Sales analysis by Car Manufacturers and Investors – Car Registration figures are the number of cars purchased by customers and are on-road as we speak. The Car Production figures show the picture from the manufacturer’s perspective, while Car Registrations show the actual demand from the customer’s viewpoint. It is the actual sale that counts, and Car manufacturing companies can analyze what type of cars are trending the market right now, which can help them build similar models of cars. Investors can analyze this data to know which company sales are growing in which sector, and where potential growth lies in different regions.

Environmental Analysts: Cars are one of the primary sources of Air pollution, by analyzing the trend in Car Registrations, environmental analysts can assess whether people are shifting to more eco-friendly options like electric cars. Thereby research the implications for submission of their reports on environmental impacts.

Of these factors, road construction, sales analysis is essential, and that is what most of the time data is mainly used for.

In the aspect of economic growth, Car Production and Car Registration statistics point in the same direction, where  Car Registration is more accurate, as production does not equal equivalent purchase.

As more Cars are registered, it indicates more consumers can afford it. It indicates consumers have enough disposable income and are financially stable enough to either procure a loan or direct purchase. It also indicates, banks also have enough liquidity to disburse loans for such purposes.

Historically, during times of recession, there is a corresponding decrease of Car Registrations, as evident from the above graph, as Consumer Sentiment is low, and prefer to save more than spend to save for a future rainy day. Overall, Car is not a cheap commodity, and an increase in its registration indicates, increased Consumer Confidence, and tells us the economy is stable and faring well.

With more emerging economies like India, Japan, etc. improving their economic conditions by export-led growth in the global markets, the total number of people who are above the poverty level is increasing. This would ultimately translate into increasing Car Registration figures in the upcoming times. The below plot justifies this:

As the standard of living improves in the emerging economies, we are bound to see an increase in demand for automotive, in those countries. As people become wealthier and have extra income after accounting for the daily needs, people open up to the more non-essential or luxury goods, and first in that list comes a car and a home in most developing economies. Hence, increased car registration figures are a sign of an increase in the standard of living of that economy.

Impact on Currency

Car Registrations are a lagging indicator of economic health, as purchase happens only when the economic conditions have improved significantly and have continued to stay good for a while. In this sense, it is a lagging indicator, compared to other leading and coincident indicators like Disposable Income, Interest Rates, Personal Consumption Expenditure, etc. for traders.

Hence, it is a low impact indicator, as the change in numbers is backward-looking and not forward-looking. It is more useful for policymakers and investors interested in Automotive industries looking for investment ideas and opportunities.

It is a proportional indicator, and a decrease in registrations of new vehicles is just signaling weakening economy and corresponding currency devaluation, which has already been confirmed by other indicators. It will be just confirming our predictions from leading indicators.

Economic Reports

The Federal Highway Administration keeps track of the total vehicle registrations by type and builds on its official website.

The Organization for Economic Co-operation and Development maintains the data for all its member countries, which is available on the St. Louis Fred website that is easier to access.

Sources of Car Registrations

Federal Highway Administration State Vehicle Registrations – 2018

Annual Motor Vehicle Registration – Total – CEIC Data

The St. Louis FRED data also maintains data extracted from the OECD database about the vehicle registrations here and here. We can find the monthly data for the Car Registrations data in the statistical form here and here.

Impact of the ‘Car Registrations’ news release on the price charts

After getting a clear understanding of the Car Registration fundamental indicator, we will now try to comprehend the impact of the indicator on different currency pairs and observe the change in volatility due to the news announcement. The Car Registrations figure gives an estimate of the total number of purchased Cars and which is billed to the customer during that month. The indicator helps us to understand the growth in the purchasing power of people in a country. Even though the purchasing power is measured by many other parameters, Car Registration is one of the major factors. Thus, traders do not give much importance to this data while analyzing a currency.

In the following section of the article, we will analyze the impact of the Car Registration economic indicator on various currency pairs and try to interpret the data. The below image shows the Car Registrations data of Canada, where the data says there were 113K registrations in January. There is a decrease in the number of registrations as compared to the previous month. Let us find out the reaction of the market.

USD/CAD | Before the announcement:

We shall begin with the USD/CAD currency pair for analyzing the impact. The above image shows the position of the chart before the news announcement. We see that the currency pair is an uptrend making higher highs and higher lows and apparently has broken out above the ‘supply’ area. This means the uptrend is getting stronger, and the news will determine if it will continue further or not.

USD/CAD | After the announcement:

After the news announcement, the price moves in both directions but very little. The currency pair exhibits the least amount of volatility due to the news release, and the candle closes, forming a ‘Doji’ candlestick pattern. The lukewarm reaction of the market indicates that the data was not very disappointing, and thus traders do not make changes to their positions in the currency pair.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair where before the announcement, we see that the pair is in a strong downtrend, and as the Canadian dollar is on the left-hand side, it shows extreme weakness in the base currency. Recently, the price seems to be moving in a range, and just before the news release, the price was at the bottom of the range. Thus, buying force can be seen at any time in the market from this point.

After the news announcement, the market falls slightly but gets immediately bought back. Due to a lower Car Registrations, market players initially sold the currency but later took the price higher as the data was not very bad. Technically, this is a ‘support’ area, and thus traders went ‘long’ in the market, which resulted in the price rally. Therefore, the impact due to the news announcement was least in the currency pair.

AUD/CAD | Before the announcement: 


AUD/CAD | After the announcement:

Lastly, we discuss the AUD/CAD currency pair where, before the announcement, the market is range-bound, and there isn’t any clear direction of the price. The currency pair is seen to exhibit minimum volatility before the news release. It is necessary to have market activity in order to analyze a currency pair rightly. Trading in such currency pairs attract extra slippage and spread.

Therefore, it is advised not to trade in pairs where the volatility is less. After the news announcement, the price moves higher, and ‘news candle’ closes with a slight amount of bullishness owing to poor Car Registration data. But since the news data is not very important to traders, we cannot expect the market to start trending after the news release also. We need to wait until the volatility increases, to take a trade.

That’s about ‘Car Registration’ 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 Videos

How To Succeed In Forex – Why Knowing your Strategy parameters makes sense

 

Why Knowing your Strategy parameters makes sense

Usually, traders’ interest focus on entries. Forecasting seems to them a crucial skill for succeeding in the Forex market, and they think other topics are secondary or even irrelevant. They are deadly wrong. Entries are no more than 10 percent of the success of a trader, while risk management and position sizing are crucial elements that the majority of traders discard as uninteresting. Let us show why risk can be such an exciting topic for people willing to improve in their trading job.

Making sure our strategy is a winner

There are two ways to trade The good one and the bad one. The good one is when the trader fully knows the main parameters of his system or strategy. The bad one is when not.
So, why do we need to know the parameters to be successful? The short answer is that it is
Firstly, to know if the system has an edge (profitable long-term).

Secondly, by knowing the parameters, we will know how much we can risk on each trade.
And thirdly, and no less important, by identifying these parameters, we can more easily define the monetary objectives and overall risk (drawdown).


Good, let’s begin!

The two main parameters of a strategy or system!

To fully identify a strategy, we need just two parameters. The rest of them can be derived from these two with or without the position size. The parameters in question are the percent of winning trades and the Reward-to-risk ratio.
Mathematical Expectancy (ME)
With these two parameters, we can estimate if the system is a winner or a loser using the following simple formula, defining the player’s edge: ME = (1 + A)*P -1

Where P is the probability of winning and A is the amount won. The formula assumes that A is constant since this formula came from gambling. Still, we can very much approximate the results is A is our average winning amount, or even better, the Reward-to Risk Ratio.


As an example let’s assume our system shows 45% winners with a winning amount two times its risk
ME = (1+2)*0.45 -1
ME = 0.35
The mathematical Expectancy (ME) expressed that way, shows the expected return on each trade per dollar risked. In this case, it is 35 cents per dollar risked.

Planning for the monetary objectives
Once we know ME, it is easy to know the daily and weekly returns of the strategy. To do it, another figure we should know, of course, the frequency of trades of the strategy. Let’s assume the strategy is used intraday on four major pairs delivering one trade per pair per day. That means, the system’s daily return (DR) will be 4XME dollars per day per dollar risked, while monthly returns (MR) will be that amount times 20 trading days:

DR = 4 x ME = 4 x 0.35 = 1.4
MR = 20xDR = 20 x 1.4 = 28

Therefore, a trader risking $100 per trade would get $2,800 monthly on average.
That is great! By defining our monthly objectives, once knowing ME and the number of trades the system delivers daily or monthly, we can determine the risk incurred. For example, another bolder trader would like to triple that amount by tripling the risk on each trade. Why not a ten-fold or a hundred-fold risk to aim for 280K monthly income?


Drawdown

That touches the dark side of trading, which is drawdown. Drawdowns are the result of the combination of the probability of losing of the trading system and the amount lost. Drawdowns are unavoidable because a system always shows losing streaks. Therefore, any trader must make sure that streak does not burn his trading account.

The risk of ruin increases as the trade size grows, so there is a rational limit to the size we should trade if we want to keep safe our hard-earned money.
As a basic method to be on the safe side, a trader must first decide how much of his account is willing to accept as drawdown, and from there, use as trade size a percent of the total balance which satisfies that condition of maximum drawdown.

Let’s do an example

Let’s say a trader using the previous strategy will not accept to lose more than 25 percent of his funds. As an approximation to this drawdown, we can think of a losing streak of 10 consecutive trades, an event with 0.35% probability of happening. Which is the trade size suitable to comply with these premises?
Trade Size = MaxDD% / 10
Trade Size = 25% / 10 = 2.5%
That gives us the reasonable trade size for this particular trader. If another trader is not willing to risk more than 10%, then his trade size should be 1%. Once this quantity is known, the trader only has to compute the dollar value by multiplying by the current balance.

Resetting the objectives

Let’s assume the balance is $5,000, then the max risk per trade allowed is $ 125. That means we could expect a monthly return of about $3,500 on the previously discussed strategy for a max drawdown of no more than 25%. If the trader would like to earn $7,000 instead, he should add another $5,000 to the account to guarantee a 25% drawdown or accept a 50% drawdown and risking $250.

Final words

Please, note that this is just an example and that sometimes the trade size is limited by the allowed leverage and other conditions. Also, note that trading the Forex market is risky. Therefore, please start slow. It is better to begin by risking 0.5% and see how your strategy develops and the drawdowns involved.

The first measure you must take is creating a spread-sheet annotating all your trades, including entry, exit, profit/loss, and risk per trade. Then compute your strategy parameters on a weekly basis. This is a serious business, and we should be making our due diligence and keep track of the evolution of our trade system or systems.

Categories
Forex Videos

Mastering Forex – Trading The Euro US Dollar Pair

 

Trading The Euro US Dollar Pair

 

Of the Forex Major pairs, the EUR/USD has generally been considered the most liquid, with over 20% of all transactions, followed by the USD/JPY, the GBP/USD, and USD/CHF. But this can change, depending on supply and demand.
In fact, the EURUSD pair seems to have dried up considerably in recent months. Where a couple of years ago, it would not have been unusual to see the pair ranging over 150 pips per day. More recently, it has been fairly common to see a sideways range of under 20 pips!


So what on earth is going on with the Euro? It is important to consider all of the economies that make up euroland, the most significant of which is the mighty powerhouse of Germany, which largely props up the smaller nations such as Greece and Italy who have been struggling with their economies over recent years. It is also important to note that Germany has also been struggling with manufacturing output, especially within the car industry, and where it’s gross domestic product has been shrinking and causing its economy to stagnate, although it has been staving off an overall recession. Coupled with this, the uncertainty which has prevailed regarding Brexit, many hedge funds and investment firms, and even central banks will have been reeling over all of the uncertainties that are going on in Euroland and the general decline of global growth. And so they have been standing on the sidelines or trading other assets. It also has to be said that the economist and former President of the European Central Bank between 2011 and 2019, Mario Draghi, had – what the market perceived as – a cautious and somewhat dovish stance towards the Euro area. However, Christine Lagarde, who takes over the role, has been largely welcomed by the financial markets and where some positive light seems to suggest a slight recovery in the economic fortunes of the Euro area, which have to lead to a stronger Euro in recent days.


Brexit still remains a hurdle for Euroland and until the matter is fully resolved the Euro faces a lack of direction and is ripe for some strong moves in either direction, although some large institutions, such as Goldman Sachs, suggest an uptrend to the 1.15 level for the EURUSD is on the cards. We’ll have to wait and see on that one.


But the bottom line is that, when traded with a little extra caution, while waiting for extra volume induced breakouts, the EURUSD pair is still a market favorite among traders and is probably the most reliable pair to trade via technical analysis. At some stage, it is highly likely that Forex volumes, which have generally been lower in the market this year, will return. At which point the EURUSD should see a return to volatility. Here at Forex.Academy, we have some great trade sets up explanations for all the Major pairs in our Forex Video library, and they are all freely available for your educational needs.

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Forex Videos

Forex Academy Education For Absolute Beginners Session Four – Becoming A Professional Trader

Forex.Academy Education For Absolute Beginners – Session Four

In session 3 we showed you the power of using technical analysis and how that enables traders to stack the odds in their favour when it comes to trading forex. Simply by adding a few technical indicators to your charts,, you will be able to identify recurring chart patterns and trends and make your trading decisions based on what these tools tell you about a currency pair, just like professional traders do all over the world.


However, if you are thinking about running off and opening a trading account and adding a couple of technical tools to your screens and start trading, you will be making the same mistake as many other novice traders. Because, although technical analysis is the backbone of currency trading, there are also other components that you must learn about before you dive in and risk your hard-earned cash.
The next key component which you must learn about is fundamental analysis. This is the study of a country’s financial status based on the money it has coming into its coffers in the form of taxes and its overall expenditure, including debt.

All of this will show whether a country is doing well, OK and as the market is expecting it to perform, or if it is doing badly. This, in turn, will affect the value of the currency of that country. And if we go back to session one, where we learned that all currencies are traded in pairs, new traders must understand that a country’s wealth is constantly changing and, therefore, the value of its currency – based on another country’s currency – will continually fluctuate.
What’s more, countries regularly release economic data regarding the status of their country, and this will include information such as the amount of people that are unemployed, the amount of income that a country generates, which is called it’s gross domestic product or GDP, and also other factors including the amount of spending power of its population and the country’s interest rates and future plans help the country in times of slowdowns, or to help slow down an economy if the national debt becomes too high.


And so it is essential to follow an economic calendar, which is freely available and to ensure that trading positions are not opened directly when such data is released, because the market can become volatile at these times.
Forex.Academy, Is a complete library on fundamental analysis, and do not worry, because you do not need to be an economist, but we will show you the absolute basic requirements that you should know in this ar

Categories
Forex Psychology

Having the Mindset to Deal with a Frustrating Situation

Patience is one of the most essential components of Forex traders. Traders are to keep patience in every single second. Before triggering an entry, a trader is to find out a trend, key levels, momentum, news events, etc. After all this hard work, he may not be able to take the entry. It is frustrating, but for Forex traders, it is a usual thing. A trader must accept it simply. In today’s lesson, we are going to demonstrate an example of that.

The price heads towards the South; it consolidates and heads towards the North. The price breaches a level of resistance, which the buyers are to keep an eye at for a bullish reversal. Let us proceed to find out how the next chart looks.

The buyers were waiting for the red-marked level to hold the price and produce a bullish reversal. If the level had held the price and pushed the price towards the North breaching the highest high, the buyers would have taken a long entry. They must have waited eagerly, but all went in vain.

The price headed towards the South further and found its support. After finding the support, it heads towards the North again. On its way, it makes a breakout at the highest high of the last bearish wave. The buyers are to keep an eye on this pair again to find a long entry. To take the long entry, the price is to come back at the breakout level, to produce a bullish reversal candle, and to breach the highest high of the last wave.

This time it looks good. A candle closes within the level of support. The buyers are to keep an eye to get a bullish reversal candle first. This means they have to be patient again. Let us proceed to find out what happens next.

The level produced a bullish reversal candle, but it did not breach the highest high. It instead came down and breached the support level. In a word, all efforts have gone in vain. What wastage of time!

                   The Bottom Line

If you want to take trading seriously as a business or a consistent source of income, you must not think that it is a wastage of your time. It is an investment. Traders must be patient and not be frustrated when opportunities are lost or do not come as per expectation. They must deal with it professionally.

The bad thing is it does not come with practice or experience. The good thing is it is all about mindset. Even a beginner may have a mindset to deal with a situation like this, whereas it might frustrate a trader with five years of experience. We must remember that if it frustrates too much, it hurts trading performance.

 

Categories
Forex Psychology

Do Not Change Your Demonstrated Strategy Out of the Blue

Forex market is appealing to the traders. It operates 24/5, and it is the most liquidate financial market. It offers numerous trading opportunities to traders of all sorts. Since it has so much to offer, investors love investing in the market. However, these benefits often work against traders. Statistics suggest that 95% of traders lose their money in the Forex market.

A question may be raised here why most of the investors are unsuccessful in this market. There are quite a few to mention. However, today, I am going to talk about a very common factor that makes many traders unsuccessful.

We know winning trade and losing trade go hand by hand in the financial market. In the Forex market, it goes more frequently than other financial markets. Ideally, if a trader wins his 60% trades even with a 1:1 risk-reward ratio, he is considered a good trader. At the end of the day, he is making profit matters. By losing 40% of trades, he is still able to make money. It is simple math. Let us now dig into this simple math and find out how it could make a trader unsuccessful.

Let us assume a trader has learned or found out a strategy that offers 1:1 risk-reward with a 60% winning rate. He takes six entries in a week, and all of them hit Take Profit. In the following week, he takes four entries, and all of them hit Stop Loss (For the sake of statistics). He starts thinking something must be wrong with his strategy. He forgets the whole picture. Psychologically, he is down. Thus, he would have more problems with the strategy. He abandons his proven approach and starts looking for a new one, though, there is not anything wrong with the strategy.

As far as statistics are concerned, if on average a trade strategy gets us 40% losers, it means that 16% of the time (one every three losing streaks) a trader will encounter two losers in a row, 7% of the time he will get 3 consecutive losers, 3% of the occasions he will experience four losers. Are you already pondering? Here is the last data to be presented in front of you; about 1 in 100 trades, he will encounter five losers in a row. A trader needs to accept the fact because it is inherent to the statistical properties of his game.

We know a trader needs to do a lot of back-testing, study, demo trading before using it in live trading. This process consumes time. Moreover, a good strategy does not mean that it would suit every single trader. The new one may not be his cup of tea. Assume what happens next. He starts looking for another one.

Meanwhile, he starts losing his faith in him and this market. The consequence is obvious. He becomes a member of that ‘95% Club’.

The Bottom Line

It does not matter how good a trader someone is; he is to accept losing trades. The entire result is to be calculated. A trader must not worry about one or two losing trades, but must have faith in his strategy (which he uses after hours of back-testing, study) as long as it brings him consistent profit.

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Forex Courses on Demand

Master Risk Management & Conquer The Forex Market

 

Mastering risk management
What is risk management in Retail Forex?
It doesn’t really matter how well you set up your trade, the bottom line is that you wont know the amount of volume that is trading against you in any particular situation. And so if you have a particular trade set up, which is producing returns on a consistent basis, that’s great news, however, there will always be times when trades will go against you, and this is when you must have a good risk management strategy (RM) in place. Also, if you are trying new trade set ups you especially need to be mindful of your potential losses if your trade does not go to plan. Again, this can only be done by implementing RM.

One of the biggest friend that you will ever have in RM is strong understanding the currency pair that you are trading, or thinking about trading. When you consider taking on a trade you should know whether or not there is a great risk of extreme volatility just about to commence in a particular pair as soon as you have pulled the trigger. Therefore, before you execute a designated Spot (on the spot) or Limit order trade you should be extremely cautious of looming fundamental reasons why the trade might very quickly go against you. For example, it could be that major fundamental, economic, news is just about to be released and where you had no knowledge because you had not researched this properly. Or, it could be that a finance minister pertaining to one of the currencies is just about to give a statement, or press conference regarding monetary policy. This could dramatically move the market against you. There is also a timing issue to factor in to your trade,for example; let’s say that you have a trade set up in mind, but the market is just about to move from one time zone into another (e.g New York to the Asian session). Traders in the new time zone might have a completely different view about the exchange rate on your chosen pair and then decide to move it in a different direction: against you!

But let’s say you have taken all the above, necessary, precautions and you are ready to pull the trigger on your trade. You should have a profit target in mind to exit your trade. But, what you should also have an exit threshold in the event that the trade goes against you and you want to cut your you’re losses. The most simple and effective way to mitigate against this is to use a stop loss order on your trade: a market order to close out your position, or a part of it, at predetermined exchange rate, in the event that the trade moves against you.

To be a successful Forex Trader it is a simple matter of mathematics: you need to win more trades than you lose and those losses should be less than your wins. Therefore you should aim for a minimum of 2 to 1 as a ratio. Example: you should be aiming to win $200 for every $100 loss. This is considered to be a positive risk to reward ratio and will be a minimum requirement for you coupled with more winning trades than losers.

Another area where new traders regularly have shortcomings is that they often take their profit too quickly and let their loosing trades run on too long. this is very often coupled with chasing losses: where traders take extra risks to try and win back losses. This will often come about by ‘doubling up’ and taking on riskier trades without validating set ups. This type of destructive trading can be mitigated against by adopting a trading style which is successful and with the above risk to reward strategy and then trading consistently without deviation.

One other problem which can burst a new trader’s bubble is a lack of understanding when it comes to leverage. By over leveraging your position you will be in danger of getting close outs due to margin calls (more to follow on both). By trading with over extended leverage you run the risk of blowing your account. In fact, over 70% of new Retail Forex trdaers will blow their accounts in the first 6 months of opening. And so learning to gauge how to trade with a reasonable amount of leverage relating to your account balance will allow you to develop a

consistently winning trading style. This is when to consider ramping up your leverage: when you are winning, not when you are losing!
And therefore, the most effective way to adapt a successful RM strategy is to remember that winning consistently at Forex will only ever happen with self discipline and by adopting the above methodology. This, in tandem with an uninterrupted work space, a cool head in stressful situations and some degree of self evaluation with regard to psychological suitability (trading isn’t for everyone) is a must if you are serious about trading successfully in the Forex market.

 

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Forex Courses on Demand

The Biggest Fundamental Events Analysis & Case Study

Hello, and welcome to this latest edition of courses on demand, brought to you by Forex dot Academy! In this course, we will be discussing those real-life case studies, considering fundamental analysis. Now there is, of course, inherent risk when deciding to trade the financial markets. So, just before we begin, please do take a moment to familiarise yourself with the following disclaimer.

So, what, are we going to cover exactly in this webinar? Well, we’re going to discuss the overall economic environment of the markets that we trade, and then we’re gonna break down some really key or significant economic events through the course of the last ten years that really made a huge impact in actually changing how traders, perceive the markets. Changing the overall formulation of risk on or risk of approaches to investing, and trading, and obviously provide us with opportunity both in the long term, and some volatility in the short term, as well in terms of our study, as fundamental traders, or I suppose students of the markets it is essential that we know what we’re doing in these environments, and that leads us on to discuss whether we’re deciding to trade the bond markets or Forex pairs we need to know how these large economic events will affect the perception, are the real decisions that other market participants will involve themselves with, when deciding to put on positions, and trade these markets, and others no different from ourselves. So, let’s delve in to really discussing first, and foremost the trading the economic environment, and the trading of the macroeconomy. So, why does this matter? Why does the economy matter to us? As traders, the financial markets reflect the overall performance of the economy financial equity indices represent the overall business health of an economic region and their strength, and weakness bears a close connection to gross domestic product other asset classes such, as commodities bonds, and stocks, are therefore affected by the level of business on with activity circulating in the economy okay. So, as an overall growth perspective in terms of trading in the economy are those financial analysts out there they look to the GDP the gross domestic product to see whether we’re in a recessionary recovery or perhaps a boom period of growth, and that will indicate to us how strong an economy is in relation to its competitors, as well how do large economic events help shape the global economic outlook, and that will be the point of our lesson here large economic events can fundamentally change the way in which investors, and traders, perceive future economic growth, and stability they often cause a dramatic change in the level of risk and uncertainty over asset pricing, and that’s both in the short-term, and long-term, and we have seen that quite significantly in some of the topics we will discuss during the webinar the Brexit decision the massive depreciation of sterling, and the US election there with Donald Trump caused a lot of volatility, and then we’ve seen a total repricing of assets, as well. So, let’s delve into this in a lot more detail but first, and foremost, as us traders, how do we how do we perceive or how do we read the news how does it affect our opinion perhaps on the economy whether we have short ideas in terms of trading an asset like perhaps the global equity index for a two-month period how do we actually take this economic news in or these shifts in global sentiment into our trading let’s look at this for a moment we have a trader here concerned about some figures that he has heard or seen sort of releasing into the news the US economy expanded at an annualised two point nine percent on-quarter in the last three months of 2017 that’s higher than two point five percent in the second estimate on beating market expectations of 2.7 percent hmm personal consumption expenditures, are privately inventory investment, are revised up okay. So, we have the personal consumption expenditures, and private inventory investment, are revised up. So, we’re sitting here, as traders, were involving herself in this economic environment to make trading decisions how do we speculate, and how do we really try, and gather an understanding of what this means well this could cause volatility in the forex markets of course in the short term we can see different pricing in terms of what domestic nations were trading. And for trading as apparent against the US dollar we need to know, if that U.S. increase in gross domestic product, how that might affect the dollar in relation to those other currencies obviously we might love to trade the equities, are our baby we’ve got a long US equity trade here, if we have positive growth in the US economy, as well. So, there’s our light bulb. It’s working off some new trading ideas, and that is what we do as traders. Now that’s how we understand and trading this economic environment. So, let’s look at what we have here, and we sort of touched on it in some detail u.s. GDP growth rate and we have EU unemployment rate to charge to the left-h, and side our job, as traders, is to really bring this information over the two charts to the left onto our price action chart to the right, and speculate get involved trading these markets. So, first, and foremost GDP growth.

Well, we have a figure there relative in the last quarter of 2017. Quite strong with 2.9 percent. We can see how it relates to overall performance throughout the year, is it perhaps a bit in terms of estimates we know that it was, that will lead us to actually look for buying opportunities? And we can see the market has reflected in such a way we looked in perhaps for an EU unemployment rate it is continuously over the long-term going down there’s a good sign for us traders, here in Europe who, are considered to trade more often those European indices, are perhaps Forex pairs or any sort of relevance in terms of European markets that it’s supposed to be, and certainly will be in terms of fundamental decision-making be supportive. So, that’s what we do here in terms of trading the economic environment we look at these economic events or these economic data to formulate trading decisions over the medium to long-term in delving in understanding more about the economy we will become better traders. Now let’s delve into our real case a study number one which is of course Bragg’s it I’m sure most of us, are very familiar with this situation it was due to a referendum there ‪on the 23rd of June‬ 2016 the UK voted to leave the European Union this was a massive shock to the financial markets not only because most how expected the UK electorate would overwhelmingly support staying within EU but because it would have astronomical ramifications in how the UK would conduct business, and trade with its neighboring economies okay. So, that’s going to have long-term effects on trade relations in the short-term it generated a huge level of uncertainty over future trade relations continued economic growth employment, and immigration between nations, and of course political discord which might I say continues today such a fundamental shift in domestic policy for the UK government was sure to have very real effects on the financial markets particularly those securities related to Britain. So, the question I would like to pose, when we decide to fundamentally analyse these case studies is what fundamental changes took place, and what trading opportunities did it provide, and that’s really the point of fundamental analysis, as well remember it’s not to necessarily be correct it’s to make trading decisions, and look for those opportunities in the marketplaces. So, first, and foremost obviously an event of this magnitude of this scale is going to cause short-term, and long-term sentiment volatility whether you’re a Forex trader you’re going to know that’s going to cause more opportunity for you or whether it perhaps you’re holding long equity positions in the UK or across Europe obviously that’s going to have a really negative effect with the volatility in the short-term on your position, and potentially it could lead to some future opportunities in terms of speculation in trying to price in the surprises scenario, and obviously then the most immediate effect the financial markets would have been the depreciation a quick depreciation in sterling from around 147 to 132. So, quite a drastic move, and obviously that led to a more longer-term approach in terms of long-term depreciation in the currency that led them to a re-evaluation of the UK economy, and obviously if you’re an equity trader to a total repricing of UK equity markets. So, obviously we have seen a short-term volatility fundamentally we know that’s going to cause a lot of concern in the financial markets but, as the markets start to repress these moves these economic case events that we studied that leads to a total shift or a total repricing in such assets in particular here, as we discuss the UK equity markets just think of ourselves, as potential UK equity investors perhaps only owning portfolio of stocks there in the UK all of these shares, are going to be revalued based on the change in the actual currency itself the indicative currency that these, are priced in. So, let’s look at the chart here in front, and actually assess this fundamental case in a little more detail in terms of the price action well in front we have the Pound u.s. dollar Forex cable market, and we can see obviously the big engulfing con of the sticks out like a sore thumb there a depreciation or devaluation of that currency from 147 to 132 almost overnight. So, we have it a 10.2 percent drop in a 48-hour period that is of real concern for forex traders, particularly obviously, if you’re trading those currency pairs valued across the pound sterling pairs, and obviously, those assets that, are related to those pairs. So, any real commodities that come from the UK whether they’re import or export commodities any assets such, as the equity markets mentioned would have been gravely affected, and this is obviously going to change the entire sentiment of the market in the short-term, as the market starts to source to really reprice the risks reprice the uncertainty in terms of how the political discord will ensue on what it might mean for economic growth within the eurozone here we have the bracelet shock then we can see the intense volatility there adjust by observing the candlestick structure the Japanese candlestick structures during the weekend obviously we see the footsie closes on Friday evening at six thous, and three hundred, and fifty-eight, and after the weekend after the Bragg’s referendum vote it opens at five thous, and seven hundred, and seventy. So, that’s sort of mid-range in that very large candle there you would have seen the daily price action trader, and how’s the mantra to start to read prices move with the currency devaluation to see how it actually affects some of the big earners in there the export boom companies, and starting to actually repress the performance of the faulty, as an equity index we see the price move out quite sternly, and obviously in three to four period come back up to new levels then we see the brexit after months the markets totally revalue the composition of the footsie 100 index, are suggested, and traders, pricing that future value of export firm growth, and this inevitably is something that is quite a shock to the market, ironically leads to a period of boom within the UK economy, in terms of the market structure repricing those assets, and in terms of actually looking at the trend in front we can see it actually fundamentally, this fundamental case serves to support economic growth to the upside. ‬

So, let’s move on to our real case study number two, and discuss the Swiss National Bank the Swiss National Bank is responsible for the monetary policy of Switzerland, and just like any other Bank it does aim to provide growth, and stability of the domestic economy by working towards target inflation rates, and price stability considering the geographical significance of Switzerland, and it is very important that the nation, are strong, and perhaps favourable trade relations with its European neighbours even though it does not share the domestic currency with the single euro mechanism the SNP or Swiss National Bank announced on the 6th of September 2011 that it intended to address changes in the value of the Swiss franc to the euro aimed at depreciating the currency cap to 120. So, as to remain competitive to its neighbours then on the 5th of January 2015 the Swiss National Bank made an unexpected announcement to the markets that they believe the euro crisis had passed, and that they were no longer following the euro currency arrangement. So, let’s take a step back for a moment, and try, and assess this scenario fundamentally for the nation of Switzerland, if we think we have at this time a euro crisis where we have negative interest rates across some regions, and obviously there’s a lot of concern that this euro sovereign debt crisis is going to deepen we see a country geographically like Switzerland, and right in the centre of all this controversy, and they want to continue their growth, and continue their business amongst the calamity what they’ll want to do, if we think of the composition of the SMA which is the Swiss market index the leading equity index there in Switzerland, and we have companies like Nestle the chocolate maker then we have Novartis Roche some of these companies, are huge exporters in terms of global dem, and, and obviously would do most of their business, and in the eurozone so. Now that we know fundamentally the reason for the Swiss National Bank pegging their currency to 120 euro, and obviously the aftermath of actually Pauline a peg how can we assess them, and look to see what happened in the currency markets well we have here the euro Swiss franc, and inevitably we can see an absolutely huge move to the downside that prism was a huge amount of fear, and uncertainty and obviously the fact that it was such a sudden announcement is going to cause increased volatility to the downside we’ve seen literally the floor has been pulled from this market the support has broken at 120 Fundamental was the case, and really the notion or the directive from Thomas Jordan, and from a Swiss National Bank to actually send this currency back to a level of equilibrium in terms of national domestic currency in relation to the eurozone it it’s his biggest partner in terms of trade relations let’s move forward, and to discuss in our real case study number three, and that is the infamous collapse of Lehman Brothers. So,, if you have been a financial trader, are just genuinely interested in the markets, and the economies over the past 10 15 years or generally just interested in the financial recession, and crisis that we had there this is certainly a case study of interest Lehman Brothers was one of the largest investment banks on Wall Street it was perhaps the first big bank to capitalise on the growth of the US mortgage organisation market where massive amounts of profits were being made on u.s. home loans by 2006 it had merged with many active lenders across America. So, much that it had appeared to do almost all of its investment business in collateralised real estate, and only a portion in traditional financial investment this era of investment growth coincided with the rise of the shadow banking industry, and financial leveraging that monumentally increased Lehman’s exposure to the mortgage market. So, in a little detail, if you’re unaware of the shadow banking industry, you may have seen the movie ‪the big short‬ it’s simply where all of these financial firms learned to package, and bar that together reprices it was good that settled on throughout the financial system. So, that Laird obviously to all of this being joined collectively, and spread systemically throughout the system times of economic boom ensured that such investments were profitable however the significant portion of its assets allocated to managing housing loans meant they were vulnerable to a market downturn, and of course more vulnerable to an eventual market downturn in the housing market itself which is eventually what happened during the later months of 2007, and early 2008 it was clear there had been a housing bubble all led by the easy availability of credit, and the ease at which was to get a mortgage loan accepted property prices quickly began to fall, and millions of mortgages became unaffordable, and un-payable overnight, and that happened millions of Americans wear their homes effectively their mortgages turned into negative equity over a very short space of time while enjoying profits during the boom Lehman’s over leveraged exposure to the mortgage market meant that a 4% decline in the value of its assets would entirely eliminate its book value of equity on the 15th of September 2008 Lehman Brothers filed for chapter 11 bankruptcy protection it had accumulated a total holding of over 600 billion in US assets 600 billion dollars in US assets quite a substantial amount the collapse of Lehman Brothers was not only an economic disaster for the US housing market it brought into question the systemic risk these financial institutions caused to the entire global financial system another certainly really the story of this case, and really the bullet point in terms of being a student of the financial markets, when you study the shell banking industry, and these banks the question at the time was, are these banks perhaps too big to fail, and of course there was discussion at the time between those in government, and those in the private sector whether they could actually floater or keep blaming brothers above water, and how that would actually affect the financial system they agreed at the time that they simply could not they also went on to build many other banks art but let Lehman Brothers evidently collapse it being the largest investment bank on Wall Street. So, a very significant period of history in the U.S. let’s look at how this real case study the actual collapse of Lehman Brothers affected the markets in looking at the economy we have here the S&P; 500 daily chart over a long period of time we can see the market downturn shows us a lot of volatility another is representative of the serious amount of concern or uncertainty that a market participants, and traders, are feeling, as we see the fresh news flow perhaps mortgages denied housing sector fall outs all of these things will come into the news and cause volatility to the downside. So, we see the downside with the reality of the housing bubble itself it became clear banks, and financial institutions where indeed overexposed but particularly the size the too-big-to-fail phenomenon, and really affected the downturn, and was the catalyst for price movement, when it became clear that Lehman Brothers was simply not too big to feel under the entire banking system was indeed in jeopardy, and that’s what we’ve seen in terms of the price follow-through, and I inevitably caused the catalyst for the 2008, and global recession in some more detail in terms of analysing this fundamentally what does this mean for us, as traders, over the long-term we know that as investors in the community you’ll generally go through four to five periods within your own lifespan also considering how long you live, but we do go through the business cycle periods of booms, and busts, slumps, and obviously there, are intermittent, and recessionary periods within that. ‬

So, here within GDP we have our boom, and bust cycles we see the collapse of Lehman Brothers just entered the markets they’re causing a bit of a catalyst, as the market free price this whole phenomenon we see a large investment bank take the hit collapse due to the massive it mortgage exposure in this in this space, and then we obviously see the slump with our financial crisis there 2008, and continuing on to even deeper slum periods. Now in aiming fundamentally to analyse why exactly or one reason why we were able to come out of this recession area period, and back into a recovery or a period of economic boom we can study real case study number four, and others quantitative easing. Quantitative easing programs were first introduced by Japan in 2007 to battle deflation in the economy. The aim was to flow the domestic market with new liquidity to promote learning and stimulate the economy. So, generally speaking, they do this through the bond markets through the new issuance of debt, as a result of the global financial crisis of 2008 many global economy is still faced financial meltdown with worsening economic conditions unlimited credit availability at the time we refer to this, as the credit crunch. So, for many traders, out there I’m sure you’re familiar with the phrase there was intense volatility in the forex markets, as well, as the equity markets, and of course we felt this everyone felt this in terms of a pinch on the pocket with the objective of boosting the economy in the United States launched a program of quantitative easing in 2008 followed by the UK in 2009, and of course the European Union later the same year each central bank took on large-scale asset purchases assuming the burden of risk for their economies, and released fresh healthier liquidity back into the markets in order to stimulate lending and growth. So, let us refer back to our business cycle what we, are trying to do is actually recover from this economic recession this global financial crisis that has systemically affected our financial institutions, and caused unemployment across many nations, and effectively slowed growth what we, are effectively doing is trying to stimulate growth by increasing the money flow into the economy swapping a bad debt with good debt, and trying to increase lending. So, that consumer spending growth unemployment regains its stature in our economies here we have the financial crisis, and coming on from that with the period of slump there we introduced QE 1 that’s commencing in November 2008 with the US Federal Reserve started buying 600 billion in mortgage-backed securities on one point seven trillion dollars of bank debt then we have qe2 that’s November 2010, and that’s another 600 billion dollars of mortgage-backed securities in that purchasing program, and then, of course, September 2013 the US Fed launched 40 billion dollars a month open-ended bond purchasing program analyst to flood the market with new liquidity to increase that landing in the private sector across the corporate finance world, and then after a long period of prolonged period of perhaps six years of quantitative easing we see these factors start to come into effect where money supply has increased it is filtered through the rest of the economy we’re starting to see these finance institutions become healthier they’re starting to lend more to smaller business enterprises who in turn create business to hire staff which actually increases in the labor market, and then obviously consumer spending, and manufacturing start to grow, as well this all leads to the total financial recovery story, and we’re currently obviously just coming into a boom period where we’ve seen a very strong market bull run for the last two to three years. So, how did the financial markets react to this fundamental story of quantitative easing well obviously they know fundamentally they’re going to be supportive by the government, and that is the primary concern or issue with QE more generally speaking market prices, are said to be discovered price discovery is a function of participation between buyers, and sellers. So, this is a very unique period of our history where actually government institutions, and central banks directly interfered with that price discovery over the long term obviously it’s in effect to help the economy and stimulate growth, but in terms of pricing assets it led to support, and obviously long term price structures to the upside given the economic growth, and health of the economy. So, here in front we have the S&P; 500 this is the largest equity index in the U.S.A consisting of the 500 the top 500 companies by market capitalisation to the left we can see obviously the financial crisis caused a huge shift of market sentiment, and obviously we see the inevitable recession that we have bringing prices way down to new lows there, and February 2009 then what we see is a period of recovery just after but it does take time for the recovery to come in, and obviously this is a fundamental discussion of quantitative easing how long will it come into effect how long will those prices and a change is starting to feed into the economy but we do see sustained both over the long-term period, when looking at her sp500 given that this is a global financial crisis the question I would like to ask, and really have you, and observers how does it affect the rest of the global equities out there in the world let’s have a view here we have the nasdaq-100 we can see that the price structure is very similar we have the 4100 again we have a very strong move to the downside, and we can see, as we move across all these global equity indices the larger story of quantitative easing is a function of actually looking to support global growth that is a very similar story in terms of the fundamental base of quantitative easing, but we can see there, are little time shifts, and that’s more relative to the fact that QE was introduced earlier in the United States, and then in the UK then in the European Union we see these prices start to stabilise, and it never will be moved to the upside over the long run. So, let us delve into a real case study number five the European sovereign debt crisis the European sovereign debt crisis that took place in the European Union towards the end of 2009, when it became clear that most eurozone economies were still struggling with the challenge of economic recovery many nations had seen an increase in sovereign debt, as a result of banking system bailouts, and were unable to pay or refinance the government debt. So, that is the key, when, when really understanding at the function of debt or our interest rates the ability to actually repay those deaths, are on loans over a long period of time to underst, and the complexity of this situation we must underst, and how inextricably linked long-term interest rates, are to macro economic health a nation’s interest rate reflects the risk associated with its ability to lend to the financial markets. So, of course in layman’s terms those countries who have a higher perception of risk perhaps they’re going through tough times economically in this particular case we have Irel, and, and Greece of course Italy Portugal they were finding it very difficult to repay their debts, and obviously that risk involved, and actually purchasing alone perhaps a 10-year bond from the from one of those governments has an added perception of risk, and obviously would require a repayment of a higher level of return. So, it is a simple risk reward ratio, when deciding my bonds or priced unlevel of interest rates to those bonds with many EU nations unable to refinance their debt massive uncertainty Andriod the bond markets causing dramatic volatility, and a surge in many domestic interest rates this effectively collapsed the bond market some countries, and led to a huge increase in unemployment for those worse affected. So, effectively what we were witnessing in the European sovereign debt crisis was the inability for many of these nations to effectively pay back their debt to the European Central Bank many of these countries had obviously taken bailouts, and we’re giving bailouts by the ECB to help stimulate domestic growth in their national economy but of course these, are loans, and these have to be pared back, when the economic performance of these nations didn’t it didn’t seem to grow in the same perspective of the bailouts, and obviously they were experienced a serious level of austerity and difficulty in doing. So, and in growing their economy, and recovering those challenges came to the front where effectively it was very difficult to pare back and make their obligations in terms of paying back debt to the European Central Bank. So, let’s look at our case study chart here what we have is long-term interest rates over the period from July 2008 to January 2018. Now in analysing or long-term interest rate short we can see that there, are two countries that really stick out for us, and both Portugal with the blue line, and Irel, and with the green line respectively what this chart tells us really is that there’s a large spike in interest rates over the period roughly July 2010 to October 2012 that would present problems for Irel, and, and Portugal in terms of trying to refinance their government operations in the bond markets giving that they would have to pay back a level of percentage interest on perhaps two h, and % we have 12.5 a peak in Irel, and they’re roughly around 13 14 % peak there with Portugal reflecting of course the overall uncertainty or perhaps perception that they could not effectively repair these loans or their bonds back in a given period of time another all constitutes the level of risk these economies, are facing at the moment one of the countries not included in our long-term interest rate short give it’s a real case study in terms of study in European sovereign debt crisis is Greece, of course, Greece had been hit very hard by the financial crisis, and it’s trouble to remain competitive, as a Euro trading partner in the eurozone was really pushed into question, and this is because really they got bailed out time, and time again, and could not repay their debt, and almost went bust several times.

So, what I’d like to do is actually pinpoint this, and I’ll call it in black that we can annotate ourselves here we have April 2010 8% which is in, and around this period we have around 10% we can see already that it is leading the way in terms of this increased volatility on long-term interest rate spike, and to the upside that is again just simply an overall reflection of the uncertainty of the peril of their economy at this stage, and their inability to effectively pay off any debt that they may assume then we have April 2011, if we scroll up, and actually look to plot the point we have it around 13%. So, they’ll just be above here again it’s going to plot high from our Irish debt at that point, and then April 2012 27% which is an astronomical figure, and I’d like to detail that just to you in terms of what it means for the financial markets, and in terms of potentially loaning, are looking to borrow from the Greek economy 27% we have April 2012 mother’s up here, and again we’ll just put it at the top of our chart what that means effectively is, if you were to assume some finance from Greece, and effectively purchased, and other time hypothetically one of their 10-year bonds they would effectively be paying an interest rate on the bond of 27 percent which is an astronomical figure in terms of generally pricing a bond, and obviously paying an interest over a long period of time with 27 percent it’s absolutely huge. So, I just show you the level of risk or uncertainty the financial markets have priced in when understanding that the level of peril the Greek economy was actually in at this time. So, all of these fundamental cases served actually to help us, as traders, not only for the knowledge they served to really give us an idea of the overall economic environment within which we trade it is the job of the financial trader to speculate on the movement of price these prices relate to many different assets but also a very common relationship to the performance of the global on domestic economy from which they, are natured become not therefore effectively do our job, if we do not have a fundamental grasp on how economic events can shape the very environment we ourselves conduct business in once we better understand, and the effects of news, and economic activity we will become more knowledgeable about our trading conditions, and therefore more assured in our trading decisions. So, that brings us to the end of our real case studies fundamental analysis webinar, let’s go over a quick review of what we learned through the webinar trading an economic environment why it is. So, important to understand, and, and grasp the overall economy, and how it changes the risk-on risk-off approach to your trading, and really hard facts all of these different assets that we trade, as financial traders, we then went through different case studies over the last 15 years we have Brexit the Swiss National Bank removing the currency paid to the Euro Lehman Brothers, and effectively a lot of detailed discussion on the financial crisis of 2008 that let us effectively into discussing the recovery mechanism of quantitative easing, and then we touched upon the European sovereign-debt crisis how that may affect liquidity, and how it certainly affected the bond markets, and perceptions of risk for domestic economies, and potentially the eurozone a growth perspective overall. So, all that is left for me to do is thank you very much for joining us on this instalment of courses on demand, and brought to you before I start economy we do hope to see you very soon bye for now!

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Introducction To Fibonacci – The Key To Unlocking Your Trading Potential

 

Hello, and welcome to this latest edition of courses on demand brought to you by Forex dot Academy. In this course, we will be discussing an introduction to Fibonacci. There is, of course, in risk when trading in the financial market. So, just before, we do begin please take a moment to familiarise yourself with the following disclaimer.

So, in this lesson, what, we hope to cover is really develop a basis with the introduction to Fibonacci. What is it all about and how do, we use it? As a technical indicator, we’ll discuss its mathematical significance, and it does actually have some significance in many walks of life in nature. We will discuss it as a technical indicator in relation to its support and resistance. So, that is really what It does. It looks for these areas within the market that, we look for trading opportunities, on congestion of price action around levels of support, and resistance. We will be really discussing how to use it as an indicator. Looking at these Fibonacci levels how to use it from high to low in the markets, and how significant. It can be, as a technical influence on our trading, and then we’ll be discussing some of the limitations obviously, as a technical indicator many other technical indicators. As technical analysts, we know and accept that they have various limitations. We’ll discuss the limitations of Fibonacci retracements themselves. So, let’s delve into our introduction to Fibonacci retracement levels, and these levels are very important to technical traders, as the highlight long-term support, and resistance levels that often identify potential market reversals. It is perhaps one of the most commonly used techniques that indicators, and us such generates additional interest when the market rates in, and around these levels okay. So, as technical traders, we are aware of these levels within the market, and that actually generates an additional level of interest, and is often a self-fulfilling prophecy, as price movement tends to react quite volatile and shift away from such levels. As an indicator, it is more applicable to trading longer time frames and is not suitable for trading shorter time frame analysis, for example, five-minute price action charting. Okay, however, given its objective in identifying potential reversal signals. It does work much better in markets that experience long-term volatility, and continued price change, and we will discuss this in much more detail throughout the webinar.

It is much more applicable for those markets that experienced volatility obviously, if we’re looking to trade off levels were, we see market pullbacks, we see levels of contraction, and potentially look to buy from those areas, if it’s selling off in that direction that fall eternity will actually give us opportunity with our Fibonacci retracement levels. So, these Fibonacci retracement levels, they alert traders to possible support and resistance areas in the market. A possible reversal is based on the prior move.

Okay, so, we’re looking potentially for market pullback to reverse, and the trading decision a bounce is expected to retrace a portion of the prior decline while a correction is expected to retrace a portion of the prior advance when a market pullback occurs technical traders identify a retracement levels for monitoring okay, and because, as I said, they are a self-fulfilling prophecy many traders are speculating in, and around these areas, we know how they’re going to react let’s say potentially the market is trading at all-time highs, and it pulls back to a 50 percent a level of retracement, we know that is very significant, and an area, where many traders are indeed monitoring the Fibonacci retracement has of course mathematical significance. It derives its values from a series of numbers these numbers were developed by Italian mathematician Leonardo of Pisa they’re in 1175 to 1250. So, those are the Fibonacci numbers they’re ranging from 1 to 144, and of course, they continue in the Fibonacci sequence, they are very significant, and, we often see them in many natural Universal proportions both mathematicians, and scientists conclude that their significance you can see them, and, as you look at the image there to the left resembles almost a share like, and make sure that you see on a beach with the formation of the swirl the Fibonacci swirl very famous indeed, they are important to us, as traders, as, they can identify these possible levels in the market support or resistance traders often trade these levels or look for breaker, and opportunities. So, when, we see them bounce from, as support to resistance within a level, they can often range, and that can cause range buying opportunities for a long consistent period of time or perhaps when these eventually break down, we can look for these breakout opportunities there is an acknowledgement of such levels often because trading congestion that leads to I suppose a lot of interest within the markets at these key for Fibonacci levels that’s generally what we’ll see there are a lot of speculative traders looking to trade these levels, and, as prices congest down to these levels that’s why you often see a breakouts after a mature trading trend almost expires from the level you can see a quick shift a quick burst of a volume in, and around these levels. 

So, they’re technically very significant. Let’s discuss our Fibonacci levels, as technical support, and resistance for a moment in identifying in January levels of support, and resistance this obviously helps traders to discover both floors, and ceilings in the market okay. So, these prices are often supported by floors unresisted by the ceilings just like our house there, we have an image of the house, where the floor is actually supporting I say your body weight, and everything in the house on the ceiling would be resisting anything from the outside have perhaps weather or rain anything like that a downward pressure on the house itself these levels are particularly important over long periods of time, they are never a sure signal just like many other technical indicators prices often breakthrough such levels with strength, and, we see that, as a breaker, and, where exactly this is the common question, we get asked, as trading educators, where exactly should support, and resistance levels be pray be placed in the markets. So, here, we have a gold market, and, we can observe just technically, where you see our technical levels of support, and resistance, and it’s really not too difficult a question to ask why do, we choose these levels of support or resistance well, as, we look at the gold market we’re looking at the daily comments like structure albeit it’s over a long period of time, we can see that there are very significant areas or inflection points within these markets, we can see, we have a long-time high in, and around, and when, we have our level of support one-three-five-six, and of course, we have some very strong bounces from such an area. So, what I’d like to do is actually highlight some of these areas within the market here these areas, of course, I’m going hole we’re back to 2014 it’s technically significant for us. It is a long-time high in regards to the last three years of price action, and obviously the market has concluded that, It cannot break these highs for a long period of time that would lead us to believe that this level of support or resistance either one-three-five-six level is technically significant but, we can see throughout that there are some very important price inflection points here would be another level where we can see yes the market traded down all but a few times but. It punched quite strongly from these levels did break it on several occasions, but you can see over the long term. It does provide some real technical support, and, we get some very consistent bounces from the area these areas can convey an or these bounces can actually only last for a I suppose a short period of time, as, we see our next level of support holds up quite well over many significant areas within the market. 

So, these are genuine levels of support, and resistance over the long term in the markets that seem to hold up, and quite well how does this relate in terms of ahead establishing the Fibonacci retracements well that is the real focus of Fibonacci retracement. It is to look for further levels of technical support, and resistance that can give you more evidence to actually look a tradeoff these areas or levels. So, as I move across to in the price chart here this is the dollar-yen daily chart the question I would like to pose for technical traders is how do we identify genuine levels of support, and resistance within the markets well let’s try, and look at, and just visibly see for a moon, if, we can see some highs, and lows over the price action that can give us our own identifiable levels of support of resistance obviously in observing these price action charts, we can see initially that some will be more significant than others. So, here, we have three very strong structured highs, and lows within the markets and they’re providing some technical support, and within this technical support, we have about a few various branches that are providing perhaps some shorter time levels of support and resistance. So, just by observing the price section chart what, we can do is look at these previous highs, and lows existing in the markets to give some technical at January levels of support, and resistance let’s look at identifying this technical support, and resistance areas over asset classes here on what, we have in front of us is the German DAX it’s an equity index in Europe, and, we have daily price action from left to right, we can see already, we have placed an overlay of some genuine levels of support, and resistance again they’re based on previous highs, and lows which give us a very strong inflection points within the markets what, we can see here is that we have a ceiling that is actually providing resistance over a sustained period of time, and, as the market trades up through, and breaks that level that ceiling then becomes a floor in the market. So, it’s very important to note that, as, we trade the markets can break through these levels, and obviously once the breakout occurs that previous level of support and resistance has actually faltered, and can actually change or shift to become a new level of support or resistance in the market 

That again provides us with trading opportunity, as, we look to more relative price action we’ve seen a very strong break to the downside in this German DAX market, and that breakout opportunity has moved quite swiftly in terms of the price, and that’s generally what can occur in these markets we’ve seen the floor here. It provided support over a sustained period of time the market, and trade up to new high reverted from new highs, and with that weakness looking at the Japanese the structure of that Japanese candlestick, we see a very strong consistent breakthrough to the downside over of our new floor here, we have the gold market in front of us again, if, we look at the price section its daily candlesticks, and moving from left to right over a long consistent period of time what, we can see is a technical overlay is actually a Fibonacci retracement, and it is extending from a recent high to low point. So, that’s how we actually use these Fibonacci indicators, we look for a recent a real high or low point or a high to low, and actually stretch the indicator from those areas that stretch across our Fibonacci retracement levels of support, and resistance. So, it creates these retracement support levels, as a function of the Fibonacci numbers, as a technical indicator. It works better for particular asset classes, and, we will discuss that again in more detail, and the question I would like to pose is what happens next, we can see the blue circle indicating almost relative price action, and it is our 23.6 Fibonacci retracement level well what happens next, we know that there could be a significant move from this level, we could see a points up to new highs again or, we could see the price break down I have from our Fibonacci retracement level right the whole way down to 38.2 potentially lower over 50% retracement level. So, let’s branch across to a different asset class here in front, we have the US dollars are, and the question again I would like to pose here, where exactly do, we place the Fibonacci retracement indicator, if, we remember back to the previous slide we’re looking for a high, and low within this market something that can give us a real genuine insight, as to, where the Fibonacci numbers may be significant we’re not looking to perhaps pick a high, and a low from the past week we’re looking for an overall a genuine level of reflection over that consistent period of trading looking at these daily candlesticks high, and low that can give us a subjective level to, where the indicator is more observable. So, here, as, we input our indicator ins in the market, we can see the most recent long term high in the most recent long term lows are the most significant areas in which to place this Fibonacci indicator. So, let’s delve into the actual study of Fibonacci retracement, as a technical indicator in terms of what it means for our trading notice that I’ve used this market before quite a few times the gold market because gold is quite significant in terms of technically adhering to the Fibonacci retracement level, and again I wanted to use this because it is a good example, to use the indicator, and actually applying it to the markets. Notice in this chart, now, that I have my Fibonacci level, as the second most recent high there, and I want to really give you this, as an indicator in terms of high price section moves, as, we look to trade. 

So, let’s just say for example, we begin trading where, we have our begin trading point marked how could, we look to perhaps trade this in terms of looking for levels of support, and resistance, and pullbacks within the market, and actually looking to trade, and corrections or our bounces from such levels will be, we have here our green circles here which actually give us very good strong signals to trade this market, we can look to buy or sell, as the market trades up or down between our indicator levels. So, very good term structures indeed but notice again that, we have some areas, where the signal actually is a pure signal on. It actually gives us some losing trades, if, we decided how it decided to take these trading positions on. So, there is a level of inconsistency with the indicator itself and, if we hadn’t started other begin trading signal there, we would have made have various good trades, and a few bad trades, as well. So, there is that level of inconsistency again, as, we approach our most recent price action the question is often well what happens here what’s going to happen next, and all, we can do is observe the price actually ask technical traders looking for closing perhaps the structure of the Japanese candlesticks – – perhaps volume, and momentum shifts to see, if we can get more of a signal that this market will actually bounce from this level or break through it, we know that it’s technically significant and that many other traders are focusing on monitoring their technical trading decisions around this retracement level. It is the awareness of these Fibonacci levels therefore that the markets often focus their attention on this can then become a self-fulfilling prophecy, as traders observe price action around these levels, and that leads us nicely on them to discussing the limitations of Fibonacci retracement, as a technical indicator the underlying principle of any Fibonacci tool is only a numeric anomaly and is not grounded in any logical proof, and that is a very important point to make there, guys. Okay, just like any other indicator of the Fibonacci retracement is not a standalone signal that, we can use for trading decisions, we could potentially look for let these levels of support, and resistance of course, and look how a price-action and trades around these areas perhaps congest perhaps there’s more volatility perhaps there is more volume but, we can see that. It is inconsistent in terms of providing us with assured signals or logical proof that this market is either going to reverse or look for sustained movement and from a breakthrough

So, it is only one indicator, and to be coupled or used to try, and heighten your probability of a trade the indicator is not applicable to all asset classes to another’s one of the reasons of course why I chose to present the Forex pairs in the gold market again because those markets are quite volatile over the long run, they can see a shorter-term shifts in sentiment, they can see shorter-term shifts in trend, and status, as well, and that’s what we’re looking for. We’re looking for potential pullbacks in these markets, where the Fibonacci retracement can be met, and actually look for trading opportunities again, if I use the example, of an equity market or an equity market bull run, and which were actually seen in the markets. Now, we aren’t given the best opportunities in terms of seeing these long-term Corrections or volatility to maybe get, as many trades off from our long-term high-to-low, and Fibonacci retracement perhaps, if, we see a real structured correction in an equity market that can give us a signal, and to maybe look for a pullback in the Fibonacci retracement pergolas, we know that volatility isn’t, as such that, we get. So, many variants of price action over a long term price action chart when observing the equities. So, it, as an indicator is not, as applicable to observing such asset classes, as equity markets class retracement only points to possible Corrections reversals on counter Tran bounces and struggles to confirm any logical buy or sell signals, and that is very significant for us, as traders, we know that we’re very much concerned with trying to find these big moves in the market, if you’re particularly a long-term trader you’re looking to either buy or sell the market, and have a directional bias in the long term the Fibonacci retracement given that it’s looking for pullback. So, market reversals or counter-trend bounces it’s looking to find out volatility to find, and perhaps opportunity within the volatility. It doesn’t actually give us those buy or sell long-term signals in the markets. So, that’s very significant in terms of trying to try, and trade, and it doesn’t necessarily help her age or decision making whatsoever, and of course it can experience a high degree of inconsistency.

This is something we’ve seen even by observing the price charts throughout the webinar we’ve seen the gold market how. It was providing us with some very good signals. It was providing us with some per Cygnus that would have led to some losses of course, as well but that’s part, and parcel of using these technical indicators, they are not always an assured sign of a high probability trade, they can often be quite inconsistent, and that’s why, as technical traders, and certainly when trading Fibonacci retracements. It is advised to look to use many of these technical indicators to really stack the odds in your favour in terms of decision making, as a technical trader okay. So, that brings us to the end of this introduction to Fibonacci webinar. Let’s have a quick review of what we’ve actually learned! Obviously in discussing both introduction to Fibonacci, and mathematical significance, we know that it is derived from the mathematical, as significance really of the Fibonacci sequence, or numbers those in turn, give us an outlay which, we can stretch on to our price action chart, and, they help us derive technical support, and resistance but, they are observable in price inflection points long-term price inflection points that, we can look to look to add our own genuine levels of support, and resistance, if, we can use perhaps the Fibonacci retracement levels across these price action charts, as well not gonna help us, and give us another signal to actually looking for mathematical levels of support, and resistance. So, that could lift a couple upon, and really giving us more probability in terms of a possible level or genuine level within the market. We then went on to actually express these Fibonacci retracement levels across various asset classes. So, we looked at the gold market, and some Forex pairs, and highlighted some trading opportunities there, and that led us nicely into discussing the limitations of Fibonacci retracement, as an indicator, it is often providing us with some very well structured levels of support, and resistance in the market what perhaps is a time very consistent with its trading opportunities given that. It gives us good signals and some false signals, as well. So, that brings us to the end of this webinar. Thank you very much for joining us on this installment of courses on demand brought to you by Forex dot Academy. We do hope to see you very soon. Bye for now.

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Correlated Market’s – Understanding Which Pairs Effect Each Other

Hello and, welcome to this latest edition of courses on demand, brought to you by Forex dot Academy! In this particular course, we will be discussing correlated markets. Now, there is, of course, inherent risk when decided to trade these financial markets so, just before we do begin, please take a moment to familiarise yourself with the following disclaimer!

So, the objective of this particular webinar is to define correlations across different asset classes. We have various markets that are both negatively and, positively correlated! The purpose again of this lesson is not just to define that but, to look to see how it can help us and, provide training opportunities. Traditionally we look at these financial markets and, instruments to look to buy something and, sell it at a higher price to make profit. Or, perhaps to short sell and, make speculative profits to the downside but, there are many different ways within these financial markets to trade and, make profits just by observing correlations. And, perhaps spreading risk across different assets is one of them. I will discuss many different opportunities in different trading strategies and, that will highlight these opportunities. So, first and foremost let us define what exactly correlation is. A correlation is a statistical measure that determines how assets move in relation to one another. It can be used for, any financial security but, it is often aimed at markets within the same asset class. So, if, we think logically about that, what we’re looking for, in terms of defining these correlations in the markets, is perhaps one or, two or, three asset classes or, markets that are sharing the same characteristics and, obviously are affected by pricing in such a similar manner. It is expressed as either a percentage or, as a relation to one. A perfect positive correlation between two assets has a reading of +1 whilst a perfect negative correlation has a reading of minus 1. correlations will be expressed more often as a decimal for example, as 0.68 for, during times of instability, many international stock markets become highly correlated as investors analyse the risk of similar securities in their portfolios.

Okay so, a lot of these asset classes themselves simply share correlations as a result of the type of risk premia they hold within the investor, community. So, to give you or, name of a few examples we have the equity markets and, given their as an investment more riskier than perhaps the bond markets. They will share an element of correlation and, of course, the bond markets themselves will share and, separate elements of correlation depending on the maturity and, the risk association. Let’s define a positive correlations themselves! Positive correlations describe two or more markets, where their prices move closely in relation to one another. So, what we have on-screen here is at the gold market and, as you can see our silver comes on top of our gold market trade analysis. We can see ‪it follows‬ to a larger extent, the large price swings in both markets here very closely indeed. So, when we see large increases in the price of gold we’re likely to see large increases in the price of silver, again fundamentally why is this? Well number one, being the fact that they are both and, well-valued precious metals and, they’re of course both priced in u.s. dollars and, traded in US dollars across financial markets they also, share the same relation to the US dollar that they were initially on the gold standard and, came off too to reflect free market operations and, traded against the dollar as such in terms of investment trading within the overall global landscape. So, they have a very very positive correlation and, so, we often see market participants looking to trade these assets when we see times of fear enter the markets because, the precious metals will see both assets and, see very large price shocks and, they also, have very stringent ties to things like inflation and, a lot of other domestic and, global economic data that will look to have an influence on the economic environment overall. One example of perhaps a negative correlation with into gold is the US dollar itself and, again in describing this it describes two or, more markets where their prices move in opposite directions to one another so, just like the gold and, silver market where we’ve seen a very very positive strong correlation we can see gold on the US dollar share a negative correlation. So, over the long run when we see at the price of the US dollar here we have the US Dollar Index traded to the downside we’re likely able to see a very strong move in the opposite direction of the underlying gold market. Another simply because the gold is priced in u.s. dollars previously it was on the gold standard you know, pre Bretton Woods standards and, we’ve seen open markets start to dictate and, the currency relative to the US dollar and, the trading the gold market as well if, we think more logically about that as well in terms of defining this negative correlation. Let us use an example, such that perhaps the bar of gold is worth $200,000 it’s of course going to have a relation to the price of that currency as the price of the currency appreciates or, depreciates so, if we see an appreciation of perhaps 10 percent in our 200,000 borrow of gold we’re going to see the universe at 10 percent depreciation of that bar of gold relative to what it holds us as a US-based currency total value.

So, of course, they share this very strong negative correlation and, are fully tradable as such and, providing some trading opportunity in the financial markets so, why do we look for, these correlations and, why does it matter so, much in terms of trading activity well number one it helps investors to choose the amount of diversification in their portfolio if, you were totally unaware as to any correlations existing in the markets you might have way too much risk on a potential portfolio that your outline for, a client or, or, perhaps your own individual personal portfolio and, actually identify in the correlations it can help you to prevent to have too many correlated assets on the one portfolio and, obviously then help to mitigate some of these risks in trading the financial markets. It provides insight into an overall perspective of economic performance, correlation can increase during periods of volatility and, that’s often what we see when we do see something like a very strong equity market sell-off. We see a closer or, a tighter relation to those correlations within certain asset classes. So, to use that as an example, given that to a certain degree all of the equity indices globally share a level of correlation because, they are of course equity markets and, they’re sharing the same risk premia in terms of an investor, deciding to invest in something as it global equity or, stock in a stock market that certainly shares the same sort of risk as in terms of you know, trading or, investing in something less risky perhaps a government bond perhaps small investment trusts or, many of these different assets that are available. More particularly if, we look at indices across the United States, we’ll look to see a stronger correlation in the S P and the Nasdaq 100 and, the Dow Jones Industrial Average well particularly because, they are all US equity indices, they’re all obviously priced in u.s. dollars are relative to economic strength within the US economy so, of course these more regional equity indices will share a very strong stronger level of correlation and, during these periods of all of the these correlations will get much much stronger, much much tighter and, specifically if it is as a result of perhaps uncertainty within that economic region itself, correlations that help traders to manage risk by choosing assets with low correlation. And again we look at portfolio diversification in a little detail here, perhaps when we see or, refer to our previous example there with the gold on US dollar market we know, that they are very negatively correlated so, straight away that tells us that perhaps it’s not a good idea to have a long position in gold and, a long position in the US dollar at the same time. More specifically having a long term objective for two long positions in both markets, at the same time we know, that that’s not a good idea because they’re going to more likely moving in different directions. On the final point, market correlations can prevent traders from taking too much-associated risk and, thus per trade decisions and, that is something that does not get enough conversation amongst traders, certainly it does in the professional trading world above, retail traders not as much.

It does help you make better trading decisions, knowing that there are many asset classes correlated. Perhaps and, again we’ll use the equity markets as an example if, you wanted to trade perhaps 10 trades at the same time, you wouldn’t necessarily, specifically given the volatility to the downside in the equity markets winners a shock and, look to actually take the same trade across these equity markets because, you know, they’re all correlated and, you’re going to be overexposed in one asset class. It can help you and, prevent you to actually making an overcompensating risk and, and, making better trading decisions so, let’s discuss correlated markets the first asset class will discuss is the equity markets they will attract European business investment and, they share the same risk premia and, they all reflect fundamental health of European economies. Here in front we have the Euro stocks 50, which is the largest 50 market cap companies and across Europe so, an overall benchmark for, European equities we have the IBEX 3 5 which is the Spanish market index and, then we have the german DAX 30 which is, of course, the German blue-chip stock index their the DAX. We can see obviously just by looking at the price action in the line chart that they’re, very very closely correlated. We see a very short move within the middle of the frame and, to the downside and, they all follow suit and, one may lead of course,  given the new story might be more reflective on one economy but, you can see the overall bearing they’re going to have in actually overall health issues in terms of judging the outlook. The overall outlook for, European equities, more importantly, they may actually provide us with some trading opportunity, to actually look to spread markets and, we’ll discuss that and, through some of these webinar slides as well. What I mean is a potential opportunity to actually look to understand, that one of these equity markets is weak and, to look to sell out while actually spreading that risk-off in another market to avoid the volatility. So, we can really see the correlations between and, the equity markets, three particular equity markets that we wouldn’t perhaps think would be so, closely correlated again what is relative to Spain’s economy and, that is relative to Germany’s economy, well, of course, be very different but, that’s not always how the market or, market participants perceive and, perceive these correlations. We often see them more strongly correlated and, price action will of course and, follow-through to a certain degree considering the strong correlations these European equities have particularly if, its European equity issue perhaps

we have changes in in sentiment of the European Central Bank we have perhaps liquidity insurance being taken from some of these central banks across Europe perhaps we’re going to increase quantitative easing again these are all going to have a correlative effect at you to a real Europe economic boom or, bust effect on the overall equity indices and, sentiment the second at class we look out here is the bond market. so, what are the bond markets of course they are the debt markets and, here we chosen to actually outline two bond markets particularly with the duration of ten years we have the US ten year Treasury bond or, the t bond and, then the German ten-year bond both tenure at debt bond instruments within the financial markets they’re both markets offer investors safer long-term investment again backed by government. so, there is of course a likelihood a very very probable chance in investing in bonds they are regarded as the most risk-less free investment given that of course you have a level of a very strong level of confidence in the government actually paying back or, are committing to their their debt instruments and, their liabilities. so, more generally speaking depending on the yield there and, obviously changes in interest rates they will move more closely together given that they are effectively landing instruments at to two to two separate governments but, of the same duration they both of course share the same risk premia and, that’s because, they are less risky than potentially equity markets or, taking long positions in some commodities where you’ve done your fundamental research you know, there’s going to be a level or, a promise a guarantee is essentially made by the government to repay based on the interest rate or, coupon from this government bond and, on the actual overall investment itself and, that as prices and, and, yields change both across these durations you’ll see that they will trade and, more relatively over the long term together in the short term they do see some very rapid price change and, do see some indifference and, that’s because, interest rates do differ in domestic economies particularly at the moment they are different in differentiating themselves in the US with more expedite it increases as opposed to those European markets who do seem to live behind in terms of increasing interest rates over the year when we to the commodities sector, to very obvious choices I suppose to trade or, well is the oil market we have a US oil WTI crude on UK oil which is really the Brent benchmark from from North Sea drilling they are both based on the underlying value of the same commodity.

so, this is perhaps one of the best examples we can use in terms of correlation we have two oil markets here and, just simply there are two benchmarks and, one European on one u.s. of course both commodities of course they they move as a result of supply and, demand, and, they differ in relation to more regional issues. so, when we do see large shifts in supply perhaps or, an increase in in that supply which has been very much the case for, 2017 and, leading on to 18 from fracking which is a u.s. process obviously drilling into the rocks we see a lot of us increase in supply has a very strong effect to the downside in US oil and, the global oil markets the outlook has. now, changed for, the better and, we are seen prices start to retrace from lows from around 40 and, increasing from $50 a borrow however just by looking at the market in front we can see that it does not change the correlation to to a larger extent that exists in in this market we see that the price action with the line short is very much the same in terms of price speculating from a very strong burst to the upside and, short moves to the downside but, what is very important to notice is that because, the this is actually the same commodity that there is a difference in price and, it’s based on a couple of factors one being the quality of the oil but, mainly the supply and, demand, factors just regionally set between the two benchmarks I know, actually allows us for, trading opportunity which we will discuss and, coming towards the end of the webinar and, then yet just to reiterate we have a negative correlation between the gold and, the US dollar they see many different factors that affect the price and, that is very logical to understand, because, if, we think of well both assets the u.s. dollar I’m gold and, think of how many factors how many news events are economic data that is released on going through it the days actually result in price change across these do it there’s two individual asset classes we know, that they are very close in terms of the correlation because, of of them both being price and, having a relative relevance on the US dollar and, changes to the currency pair but, we know, of course that and, gold itself will depend on market sentiment whether this fear or, shock in the market sentiment, of course, we’ll see spikes and, gold to the upside if, there is. so,. so, they do price a to their own extent and, but, do share that that initial correlation we could see both weak or, strong correlations depending on the data another certainly the case for, M intraday traders that see these assets start to drift away from the correlation given given the news events more short-term but, over the long term they certainly do share a negative correlation perhaps one of the most important correlations that we need to be aware of in terms of trading and, particularly the forex markets is is the Forex correlations. now, there’s two different approaches to actually assessing the fact that these pairs or, correlators number one being that all of these four experts here that I have in front or, actually correlators and, there’s plenty of them the reason being is because, they all are tied to the US dollar in some way or, another. so, these pairs where the US dollar is the quoted is quoted as the quote currency will trade in the same direction in relation to the US dollar.

So, in red there when we see a strong moves to the US dollar supportive of US dollar strength we will see these markets trade to the downside the low in blue pairs where the US dollar is quoted as the base currency will trade in the same direction in relation to the US dollar to the upset again. so, if, we see am a strong move supportive of u.s. dollar strength to the upside all of these currency pairs given that the US dollar is the base currency will trade to the upside. so, the the most important thing to really notice and, understand, is that it doesn’t really matter in terms of trading these currency pairs whether one is quote or, one woman’s base currency it would effectively be a hedge trade if, we decide to choose two here and, actually trade the Australian dollar with the US dollar and, the US dollar against the yen it doesn’t really matter if, for, a long one or, a short one were both in the US dollar trade and, there’s a level of correlation which might affect overall profitability or, the overall outlook of the trade that were actually trying to identify. so, do be aware when trading these Forex pairs that even though one is a quote I’m one of the obvious ly the base currency that there is a strong and, relation in terms of positive or, negative correlation to these currency pairs but, you’re still effectively trading the US dollar against M in this example Australian dollar on Japanese yen to one side or, another and, there is an effective hedge going on there and, it will be very difficult to formulate a trading strategy when should once you’re in those positions particularly if, you have three to four different currency pairs and, all allocated in one portfolio. so, let’s move across to actually deciding to spread risk in different portfolios here here is one example where traders choose to spread risk in forex markets by observing their correlations okay and, the first thing we can see here is that it’s very heavily dominated by the US dollar what I would like to ask is how risky is this traders portfolio well we can see the trader has chosen effectively to trade five correlated US dollar Forex pairs. so, that’s not the best idea to actually look to spread risk or, diversify the trader is therefore overexposed to fluctuations in the US dollar again we have the euro dollar pound dollar and, Swiss franc Japanese yen and, the Canadian and, dollar I suppose the main point I would like to make that is there is a certain realisation that you need to understand, that you’re actually effectively really trading the US dollar here you’re heavily invested in price fluctuations in the US dollar you’re not necessarily only trading the euro the parent the Swiss franc the Japanese yen and, the Canadian dollar you’re effectively very heavily invested in the US dollar of course relative to swings in these other currency pairs but, if, there’s going to be news out or, neutral perhaps a change from any monetary policy with the Federal Reserve and, I you know, in the previous or, next day this is of course going to have a huge effect on the underlying value of this portfolio given the exposure to the US dollar. so, the trader has inadvertently heads some of his her positions are choosing to trade both base unquote currency dollar pairs let’s assess here yet another portfolio of Forex pairs here here we have a different selection of currency pairs to trade again the question is how risky is this traders portfolio what we can see is we have a euro US dollar the pound Swiss franc the Canadian loonie our dollar against the Japanese yen the Australian dollar against New Zealand, dollar on the US dollar against the ruble. so, we do have two US dollar pairs in there but, they’re trading two very different currencies across section as well the trader has chosen to diversify with the portfolio of diversified Forex pairs what we can see is that we have one euro it kind of construct really within these selection of pairs we have one pound one Swiss franc one Canadian dollar or, one Japanese yen and,. so, forth. so, it is a very very well diversified portfolio we do of course have the US dollar against the euro and, the u.s. dollar against the ruble but, again they’re going to trade very much in relation to how the Euro on the ruble is trading. so, there is a good level of diversification there the portfolio is not overexposed to any one particular currency and, the trader can. now, treat each individual trade differently and, judge them on their own merits that’s a very important point it’s very difficult to judge the performance of your portfolio if, you have selected you know, five or, six different and, currency pairs that are all relative to the Euro or, they’re all relative to the US dollar are there all pegged to to the dollar or, another currency and, similarly. so, you’re not able to actually charge your portfolio on your trading merits just the fact that you’ve overcomplicated the portfolio will make it very difficult to gauge whether it’s going to be successful or, its level of performance when trading correlation experienced traders understand, gold on the US dollar share a negative correlation and,. so, they’ll never decide to take either along a short position in both markets at the same time understanding the concept of market correlations cannot only prevent traders from making very obvious mistakes but, can al. so, help them to gain an advantage over other market participants in developing a trading edge and, that’s we’re doing here as as traders here we’re always looking to compete against one another to make money something that perhaps isn’t totally available in the markets in terms of a knowledge-based a decision are some skill that you have ascertains that can certainly help you develop an edge will of course make you more profitable over the long term experienced traders use these common correlations within the markets to look for, money-making opportunities indirectly trading these correlations whilst at the same time try to avoid short-term volatility one such trading strategy is known as a spread trading.

so, what exactly does this mean how can you look at trading correlations and, actually look to directly make profit opportunities from trading these correlations as opposed to just simply preventing yourself from making very pure trading decisions again let’s use the oil market and, there’s a very basic approach to really explaining why because, they are two of the most correlated markets the US crude oil WTI benchmark and, the European branch oil benchmark provide great opportunity for, correlation trading why traders can choose to both buy and, sell to markets at the same time okay and, that’s potentially something that retail traders don’t necessarily think about we’re always looking for, these great buying opportunities or, great selling opportunities just to make a simple trade to the downside website and, obviously make a profit but, what happens when you find two markets that are very correlated and, there’s a strong shock in the market to take maybe an equity index or, something similar if, we know, that there’s going to be out performance in in one sector, and, there’s severe are very strong correlation within the market in general of course we’re going to buy that sector, because, it’s strong and, potentially look for, another sector, to sell just in terms of hedging that opportunity. so, actually looking at these correlations it’s no different and, here we have a very obvious example here we have the US oil and, you Carol. so, what I’d like to do is just to walk you through a trade on this asset class here the oil market. so, here on the Left we have a strong move to the upside what we can gauge by this and, what the market is really telling us is that there’s a strong move overall in the oil market but, for, whatever reason and, the UK benchmark the the UK oil benchmark is actually I performing you SWT a and, you can see by the relative move to the upside. so, what we could have to do there is actually take and, what’s called a spread trade. so, within this example what we’ll actually effectively do is we will look to buy the market of course because, it’s a strong move. so, we buy at the UK Brent and, then we look to take the other side of the trade by selling US crude what we can effectively see if, there’s a price increase in both markets of course I’m ‪55 95 257 98‬ and, 6102 to 64 37 respectively for, the US crude and, Brent markets. so, collectively that is effectively a 203 pip loser in the US crude market given that we’re selling the market and, it’s moving higher but, of course we’re buying the Brent market and, we’re ID performing on the strength of the European benchmark and, it trades up 335 pips when we actually exit that trade we have made a profit of 132 pips. so, here is a direct example guys we were we’re actually deciding to trade these correlations the very strong correlations within the markets well we’re effectively avoiding all of this volatility and, we know, that the markets don’t simply trade you know, very strongly in one direction they pull back and, what we’re trying to do is just dismay that first volatility this market has traded up 335 pips in the Brent market but, if, you were deciding to scalp that market or, to simply buy it and, mana try and, holders it would of course be pulling back. so, if, you were scalping you could have actually bought this market you know, four or, five several times and, perhaps taken losers. so, this is one opportunities that approach to trading these correlations that we can avoid the volatility that we can I perform perhaps using our knowledge of the strength of the market or, the correlation to I perform over one very correlated market and, here we have a very good trade overall we make a profit of 132 pips one of the best things about financial trading is that there are many different ways to make profit in the markets most traders simply focus on buying something and, selling it at a higher price of course short selling which is fine on a fair assumption to traditional trading that’s we would refer to traditional trading however trading correlated markets may I provide you with some insight to engineering your own profitable trade opportunities let’s take another example here we look at the European equity markets and, here we have yet one example number one the monthly German unemployment release was a big mess at six percent in contrast to an expectation of 5.2 percent okay. so, we have an expectation and, generally we’re seeing these unemployment figures start to be much better more supportive for, the economies but, let’s say we have a big mess here the expectation is 5.2 we have and, the figure compared at unemployment in Germany at 6% the markets are experiencing a lot of volatility in the trading day. so, I could we perhaps trade this market how could we perhaps look at correlations to avoid the vault to the end and, to look at an engineer profit profitable opportunity for, ourselves well here we have two markets here and, I just outlined one trade for, us as well we have the euro stocks 50 and, the German DAX. now, we know, that there is going to be a move in this market more likely to the don’t save given that you know, it’s very pure economic figure there in Germany six percent unemployment is announced we know, that the tax will be a very weak market during this trading day the aim is therefore to profit more from the tax weakness while it’s trying to avoid the volatility. so, if, we take potentially a short position here we look to sell the tax and, given the weakness and, by the Euro stock this is something that we’re going to find today we’re going to have a move to the downside in both markets but, the greater move is going to be in the wheat market and, we can use obviously what is known as spread ratio which will determine in many of our other webinars here and, it’s a mathematical equation to actually look to to find the spread ratio given there’s a pip value for, each of these markets we’re likely to find something like a 120 euro loser and, in the Euro stocks while performing a 270 winner in attacks that overall has a profit of 150 euros profit.

so, we’re aiming to we know, that the move is going to be weak we’re aiming to take advantage of this news article that that tells us that the markets are going to be weak European markets in this trading day we know, that the the German its German article of news which is going to provide more weakness for, the Lekhwiya index and, we’re simply spreading enough with a very very correlated market there the euro stocks 50 given a lot of those components or, actually German companies and, it’s an overall benchmark for, European equity performance. so, with a quick review here on correlated markets what did we learn throughout this webinar well we first started to define correlated markets and, understand, whether actually is. so, important not just in defining and, relationships between certain asset classes or, markets were to actually look for, opportunities both in spreading risk we looked at some portfolio management there we look particularly at Forex correlation as well and, in terms of over weighting an associated level of risk with the Forex pairs and, we looked at actually trying to identify new trading opportunities for, us and, actually directly trading these correlated markets whether they be commodity markets or, equity markets we can find these correlations to serve and, very good trading opportunities for, us. so, that finishes off our discussion and, topical webinar there on a market correlations thank you very much for, joining us on this instalment of courses on demand, by Forex Academy we do hope to see you very soon bye for now.

 

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Forex Courses on Demand

Mastering Asset Classes – The Full Market Breakdown

Hello and welcome to this latest edition of courses on demand brought to you by Forex.Academy. So with this course, we’ll be looking in quite some detail, in and around the whole topic of asset classes. However, just before we explain what’s involved, please do take a moment to familiarise yourself with our disclaimer. If you do need to stop and pause this particular recording, please feel free to do so. Obviously trading financial markets is inherently risky. There are risks associated with those with trading these markets, so please do familiarise yourself with our disclaimer!

 

Ok so let’s explain what’s what we cover in the course on demand. So we’ll start off by defining asset classes, then we’ll have a look at the different types of asset classes which us as traders can trade. We’re talking about the forex markets to commodity markets, the stock markets, the global indices markets, bond markets, and I’m sure you’ve got a very basic understanding that all of these types of markets exist and I’m sure you’re very aware of the cryptocurrency markets as well.

Then we’ll have a look at trade selection, some considerations that a trader will need to make in order to determine which markets they should be looking to trade, and some of the dangers that are involved with that.Then we’ll look at the potential diversification and what that means, and how it can be applied in a very practical sense. And we will just finish this webinar with looking at asset classes, and how to access them on our metatrader4 trading platform. So that’s what you can expect over the course of this webinar.

Ok so let’s start with a definition of asset classes. It’s very simply a group of markets which have similar financial characteristics and behave similarly in the marketplace. So to try and break these down for you, the six major tradable asset classes for traders are as follows.

We’ve just alluded to some of these and ‪the‬ ‪foreign exchange markets and what we’re‬ talking about are foreign exchanges in your currencies. So, for example, you will see a symbol, like EURUSD currently up on screen, and the number of these markets are vast. We shall discuss each one of these in some considerable detail, so this is just a very basic overview.

The next major asset classes is obviously your commodity markets. So, for example, your gold or your oil markets, and then we’ve got global indices like your SP 500, the FTSE, or the Nikkei, or whatever the case may be. And we’ve also got stocks and these are individual companies like Microsoft, Facebook or Apple.

So obviously traders can select and decide what best suits their personality and approach, what they have a genuine interest in trading, and they’re able to do so. Traders can also access bonds. For example, Eurobond. Or the 10-year note, for example. And finally an asset class which is very new and fresh in everyone’s mind with the incredible moves we’ve experienced within the cryptocurrency markets certainly over the last 12 months, for example, you have cryptocurrencies like Bitcoin.

Okay, well what is important to notice is that each of these asset classes can react differently to major news events. So if you get a particular news event, they can impact the global indices in a particular way. And of course they could then impact like, the government bonds, for example, in a particular way. So it’s just important to bear in mind that there’s alot of aspects that can influence these markets, and they can react accordingly in a way which is relevant to each individual asset class.

 

So let’s start with the Forex Markets which are also known as ‪the Foreign Exchange‬ Markets or the Currency Markets. So let’s start with a definition. It’s a market in which participants can buy, sell, exchange, and speculate on currencies. So ‪the‬ ‪foreign exchange market is considered to‬ be the largest financial market with over $5 trillion in daily transactions. Now this, just out of interest, is considerably more than your future markets and your equity markets combined. So we’re talking about an incredible amount of potential volatility and price action on a daily basis. Some of the markets, which I’m sure you’re very familiar with, in the currencies, major global currencies, would include like your dollar, euro, the pound, the yen, the Swiss franc, the Canadian dollar, the Aussie dollar, and also the the Kiwi or the New Zealand dollar. Now, these are all regarded as your major currencies. What this means is you’re going to see when you exchange currency, you’ll be exchanging one currency for another.

So when we talk about majors, we’re talking about currencies which have the dollar on one side, so you’re trading it with the dollar. Now, these also happen to be the most frequently traded markets and you’ll experience lower spreads in these markets. So, slightly more affordable for those of you that are trading with smaller accounts. And, they’re the most liquid. So you get often a lot more opportunities within these markets. Now the EURUSD is the most traded, by a country mile, with nearly 30 percent of the entire foreign exchange market. So that just gives you a little bit of an indication in terms of how large the EURUSD is in terms of a standalone currency.

Now in addition to our majors, we also have the miners, or what are also referred to as the crosses. Now these, to differentiate, are very much non-USD major pairs. So we’ve alluded to the majors – they would have the GBPUSD, the AUDUSD, the USDCHF, the CADUSD. So whatever the case may be, those are your majors. But when you’re talking about the minors, we’re talking about non-US major pairs. The most active and the most liquid are obviously your currencies like the euro, the pound, and the yen. So to differentiate the majors, you might be trading the GBPUSD. Whereas, if you’re trading a minor or a cross you could be trading the GBPJPY or the GBPAUS, for example. So that differentiates the difference between your major currencies, currency pairs, and your minors, or the crosses.

So what we also have is your exotics. These are, you know, global major currencies mixed with an emerging or strong small economy. For example we’re talking about exotics like the Hong Kong dollar and Singapore dollar and also things like your Swedish and Danish kroner as well. So those are major global markets which you can trade, but please do be aware that the liquidity, the spreads, may be a little bit higher. You might not get, you might experience, a little bit more reduced liquidity in some of those markets. so you have to weigh that up if you’re deciding to trade exotic currency pairs.

Okay, so just a couple of points to be aware of. Traders are interested in the perceived strength or weakness of one jurisdiction relative to the other. Foreign exchange markets must be traded in pairs because you exchange, as I’ve alluded to earlier, one currency for another at a particular price. It’s this price which is a huge interest to not just people who exchange currency to go on holiday and they want to get as much money as they can in exchange for whatever currency they happen to hold, but also traders who are acutely aware of the price of various different currencies. So it’s this price which is the value of the first listed currency, which is often referred to as the base currency, relative to the second listed currency, which we refer to as the quote currency.

So, to just give you two or three examples, up there on screen, you can see we have the GBPUSD. So this particular market would be referred to as the cable market, for example. It’s just the other name in which this market is known. And what we can see is the first listed, so we’re talking about the first three letters in this particular symbol, is referred to as the base currency. And it’s the relative value of the base currency relative to the second list of the currency. Which is actually the quote.

So we’ll show you very shortly, when you look at this market it doesn’t matter how you perceive or how you receive these prices, it always means the same thing. So what we’re interested to know is how much, what exchange rate, you would get for each and every one pound. Because there will be a predetermined price which will determine how much US dollar you will receive for one British pound. And the same applies with the base currency across all the pair’s. So the base currency we will when we look at the price quoted for the EURJPY. We will know and understand how much yen we will receive in exchange for one euro. And finally the Aussie CAD, we will see how many Canadian dollars we will receive for one Aussie dollar.

So that’s just a little bit about how to interpret and how to see and understand what is happening with these currency markets. So to just explain it, and I’ll give you a nice little example here, this is the GBPUSD market. Now, the price you see quoted is how many units of USD it would take to acquire one pound. So for each and every pound, and it doesn’t matter if you see it in a newspaper or on the television, in whatever capacity, you will see the quoted price which is the exchange rate for the number of US dollars. Because it is the quote currency in exchange for the base currency, which is the British pound.

So in all of these occasions on a price chart we will see that we will get 1.4084 US dollars for each and every pound. And these images were taken at slightly different times, so there’s a slight variation in these prices, but it effectively means the same thing. So if we exchange one pound we will receive 1.4083. And just finally we’d be exchanging the British pound in exchange for US dollar at the rate of 1.4078.

Now what’s important to notice, you can see that this is five decimal place and some of these are quoted to the fourth decimal place. So what’s important for us as traders is the fourth decimal place. So in reality, there is a meaning behind the fifth decimal place, but it’s just a smaller unit. But what we focus on largely is the fourth decimal place. So it’s actually 4083 that is of any interest to us. And 4078. And as you can see on the top right hand corner of screen you’ll have the 4084. So it’s to the fourth decimal place for the vast majority of foreign exchange pairs. Now there is a couple of caveats to that, as there always is, like if you’re trading yen pairs for example. Then it’s a two decimal place. So you have to be aware of how the price is quoted in each and every market that you decide to trade, but that will come obviously with experience. Okay, so that’s just a look at ‪the foreign exchange‬ markets and how to have an understanding of price change.

So moving on then to the commodity markets and to give you a brief definition. A commodity market is a physical or virtual marketplace for buying, selling, and trading raw products. So there are two types for you to be aware of. There’s hard commodities, which are typically natural resources that must be mined or extracted out of the ground.  We’re talking about your gold mining for gold, natural gas, and oil drilling for oil. But then you’ve also got your soft commodities which are often your agriculture or livestock commodities. For example, corn, wheat, sugar, and pork and products of that nature. And just give you a bit of an image, you can you can see from the commodity markets, which are currently up on screen, that a lot of these are extracted from this beautiful planet of ours and they’re traded on an exchange, and they can present some significant opportunities for us as traders.

So currently, just for your information, currently over 50 physical and virtual commodity markets are tradable through a particular exchange. So a commodity market can create a large economic impact by influencing the prices companies pay for certain raw materials. And this is very important to take note of – this can become extremely volatile often due to geopolitical risks and periods of instability and where they become very reactive to changes in global demand.

So we’re all familiar with the devaluation in the oil markets. For example, in 2014 it really impacted the demand for that particular commodity market. Price dropped excessively over a fairly short period of time. And as demand comes back into that market, so does the price start to increase. So that is just a very brief overview of the commodity markets.

So moving on then to the stock markets. So again to start with a very brief definition. A stock market is where shares in corporations are issued and traded. The key component actually of a free market economy. That’s worth taking note of. Stock markets serve two main functions. Firstly, it provides companies with access to capital. Very, very important. It’s a fantastic source. To be able to access capital for a whole host of particular reasons, whether it’s product development, or expansion, or employing more people, whatever the case may be. It will enable markets which are floated on the stock exchange, it’ll enable them to to generate that capital, what they need to grow.

Now secondly, they also provide a way for investors to participate in the company’s growth and quickly convert shares into cash. So that’s one of the reasons why your stock markets or equity markets are very commonly traded. They’re a part of a lot of traders portfolios for a variety of different reasons. And it’s the fact that they can be converted into cash as well fairly quickly. But they can get involved in, that participation of, the success of a particular company. So stocks for example, equities and shares, it’s all the same. We’re referencing the same market. They’re listed and traded on global stock exchanges, for example, like your New York Stock Exchange, which I’m sure you’ve all heard of. And you’ll find companies like Coca Cola and Ford listed on the New York Stock Exchange. You have other companies which are which are listed and traded on the Nasdaq Stock Exchange. You’ll find companies, you know a lot of your tech companies, like Facebook and also Google and companies of that nature, you’ll find those stock markets available through your NASDAQ exchange. We’ve also got the London Stock Exchange, and you’ll find companies like BP and Barclays Bank. And of course in Europe you’ll have the Euro next market. So, you’ll find companies based in Frankfurt in Germany. You’ll find companies like Heineken, and BNP Paribas, as well, listed on those particular exchanges. There’s many, many more exchanges and stock markets. And that’s where you can, you have, the potential and the ability to trade the performance of those companies listed on those exchanges. And so that is hopefully just a brief introduction to the asset class of stock markets.

So moving on then, to the indices market, and to give you, to start with, a definition. This is simply a composite, or a basket, of stocks which have been put together or weighted to create one aggregate value that’s used to measure a sectors performance. And that’s the important part to take away from the variety of different global industry markets. So just to give you an example, you may have heard of the S&P 500. Now the S&P 500 is simply a composite, a combination, of the top 500 largest companies in the US, in this particular example. Now, a price is quoted for that S&P. And that is traded by many financial institutions on a global basis. So in addition to Standard & Poor’s, when we just go through, we just select a few of them, a few global industry markets, you have like the Nasdaq. Which is this time a slightly different composite of the hundred largest non-financial companies in the U.S., in this particular case. Now there’s a strong focus on your large cap technology companies. They’re very much weighted within the Nasdaq market, so it does react to changes in technology and development. So that’s your Nasdaq market. You also have the FTSE, which is a composite of the top 100 largest companies in the UK. And to finish, you’ll have the DAX, which in this case is a composite of the top 30 largest companies in Germany. And finally looking over towards Asia we have the Nikkei and this is a composite of the top 225 largest companies in Japan.

So as you can see, there’s a variety of different global industry markets. They all have slightly unique characteristics and react to different things at different times. They’ve all got a unique personality to each of these markets, and that’s worth taking on board as well, if you decide to trade your global energy markets.

Okay so moving on then to the next asset class which is your bond markets or also referred to as the debt or the credit markets. And to give you a brief overview of the bond markets, the bond market is a financial market where participants can issue new debt. And this is known as the primary bond market. And the reason for this is, it enables companies and governments to be able to issue new debt, and enable on the primary bond market to generate capital through the issuance of different types of debt and credit notes. And that will enable that particular company or government to be able to generate additional capital in order to finance a whole variety of different products. That is very much regarded as the primary bond market. But what most traders will be involved in is the buying and selling of these debt securities, which are known as the secondary bond market. And these bonds can vary in duration until maturity.

So what we want to take away from this is that we as traders can trade derivatives as well, based on these government bonds. So think of a bond as perhaps an IOU given by governments or companies. To pay the bond holder back the funds, they decide to invest, but with a certain percentage of interest added on top. So these are normally regarded as risk-free, or guaranteed, returns. Unless, and there is a caveat to that, unless the government or the actual company itself defaults on its liabilities. And that’s when, you know when we went through the European crisis, where there was a risk of the PIIGS, the companies, the countries within the European Union, were really struggling. They were on the verge of defaulting on their government debt and that would have meant that a lot of those bondholders wouldn’t have been able to have received their capital back. And certainly wouldn’t have been able to realize a particular profit or return on that investment. So there’s always a caveat to these things. So it’s important to bear that in mind as well. Now, obviously, the higher the perceived risk, the higher the interest rate or yield you would get from those particular bonds. So just going back to the European crisis once more, the interest rate on the ten-year bond in Greece during the crisis in 2012 was approximately 11%. While the interest rate on the ten-year bond from Germany was dramatically different – approximately 0.7 percent. Now these differences simply reflects the risks associated with trading those particular instruments. So the higher the yield, the higher the perceived risk. So that’s worth taking on board.

So to just explain this in a little bit more detail, what I’ve just taken is just a very brief snapshot in time of the interest rates which are offered by the US government. This is from the US Treasury’s website and it will tell you the actual rate of return that you will see. Depending on whether you are trading a 1-year bond, which ties up your capital for a whole year, and then at the end of that year you will receive the going percentage return at the point of that offering. So as you can see, you can trade short-term bond options, you can trade yearly, two-year, three-year, five-year bonds, seven-year, 10-year bonds.  And then you start going to the more longer-term which are largely more for, you know, your big files and institutions. Like your 10, 20, and 30-year bonds. And you can see that the rate of interest increases the longer you have your capital tied up in that bond offering. So the the marketplace actually dictates these particular prices, given the economic outlook for that particular region and the commercial outlook in general. And really, what the market is looking for is the propensity to repay. And if there’s a strong likelihood for like an economy like the US to continue to grow and strengthen over the longer term, then the more risk-free that particular trade becomes because the likelihood of the US defaulting on its debt is perceived to be very, very low. And which is why often, that these interest rates are also quite low as a result. Now obviously, the higher perceived risk, the higher the interest rate or yield you would get from those particular bonds. So that’s another thing to take on board.

Okay, so that’s just a very brief overview there of the bond markets. So moving on to the cryptocurrency markets. To give you a definition, this is a digital of virtual currency not issued by any central authority. So it’s very much decentralized. Rendering it theoretically immune to government interference or manipulation. And the key word there is theoretically. So it is very difficult to counterfeit because it is secure. Its security features and the anonymous nature of transactions enable it to be difficult to counterfeit. However, this very much can be a double-edged sword.

 And the reason for that is, obviously, if transactions are very much anonymous by their very nature, then they can also be used by, let’s say, entities, that are not so transparent. And there’s a dark aspect I guess to crypto currency markets as a result. And that’s obviously very, very worrying for your more established powers where they are subject to, well supposedly subject to, more transparent means. Although we’ve experienced over the last ten years that in actual fact, you know, the way that things currently stand, are not so transparent as they probably should be. However digital currency are tradable in some regions as a form of cash as well, so you can actually buy products and services with digital currencies. And the more that becomes accepted, the more opportunities that can bring for these whole, this large number of, cryptocurrencies which are currently out there now. They are tradable on private mining exchanges online, but they can now be entered as contracts of difference or future contracts as well as of December of 2017. So we do have institutions trading these markets as well, again, as of 2017, towards the end of 2017, December 2017. And these are tradable 24 hours a day, 7 days a week. Whereas your foreign exchange markets are tradable 24 hours a day, five days a week. So you can actually trade these over the weekend, as well. But they are very volatile trading conditions, given the products are relatively new to the market, and are not entirely understood by all of its participants.

A couple of final points to consider. Now, large percentages of the markets are owned by very, very few of what are called big players, so a large percentage of the markets are already owned by a small number of people. And they are very much driven by technological growth and prone to possible bubble X speculation. I’ll show you what I mean very, very shortly. They are not able to take short positions, as well, up until fairly recently on most of the available currencies, cryptocurrencies, which are available.

So they definitely have some downside, as well as some potential upside. And to show you the potential for technological growth and the possibility of bubble speculation, it can be very nicely summed up in this Bitcoin market. Right, as you can see, there was very little growth for a long period of time. This market saw a little spike in volatility around 2013. And then it sort of came back to this five, six hundred dollar level after reaching perhaps $1,000. But then we saw a bit of an explosive move towards the end of 2016. For those of you that are aware of what has effectively happened in the Bitcoin market, it topped out very close to the 20,000 level, which is an incredible period of growth. From between five and six hundred US dollars per Bitcoin right the way up to 20,000. So that is an incredible rate of growth in what is effectively 12 months of price action.

So this is what we’ve seen in 13 months. And it’s incredibly bubble-like. It’s for those traders that were quite happy to speculate on this market progressing to the upside. What we actually experienced, around this sort of price around here, was that these markets were then tradable on the future exchanges as well. And what we saw is a little bit of a push to the upside. And as you can see, an incredible reversal getting close to the $20,000 level. So this market, you know, experienced the best part of about 60 or 70 percent devaluation in a relatively short period of time. From December through to the end of January approximately, early February. But we’ve also seen, and this is a really good example of that bubble, seeing prices push higher, and what we’ve seen over the last few months is a complete devaluation of a market like this as well.

So you know people have very different ideas and expectations about your cryptocurrency markets. It’s very important to have a unique understanding about what impacts each and every cryptocurrency markets. And you know, the longer that these markets are tradable and the more access to price that you can establish, they’ll become a little bit more perhaps stabilized. I do say that with an air of caution because it’s hard to say that about a market which has seen such an explosive move in a relatively short period of time followed by a major devaluation.

So that’s just a little overview regarding the currency markets, a review of the six major asset classes, tradable asset classes, for us as traders.

So just to discuss a couple of points really around that, what we have is trade selection as well. So we have all of these markets that we can trade, but really what trade should we be looking to get into? A definition of trade selection is the strongly held belief or opinion to achieve a desired outcome. So deciding which trade should be taken is a very difficult decision, decision-making process, which can take time to master. It doesn’t necessarily come that easy. You have to sort of experience the markets and how they interact, and how they move over a period of time. 

Now, the more experienced and sophisticated investors out there trade what’s called diversified portfolios. And what these actually look to do is actively trade a combination of markets from a whole variety of different asset classes. So just a final point. This can be an extremely effective tool to assist traders manage downside risks. So embracing that principle of diversified portfolios is something that certainly your more established and more sophisticated traders will be looking to achieve. And to explain diversification in a little bit more detail and to give you again a very brief definition of what diversification is – pure and simply, it is a risk management technique that mixes a wide variety of investments or trades within a particular portfolio. So if we were to trade solely on one market we would then be completely exposed should that particular market or asset class fail to perform for a prolonged period. So we don’t want to put all of our eggs into one basket, so for that reason traders would typically attempt to trade a diversified portfolio. This could include trading markets from different asset classes. 

So we’ve just reviewed the six major asset classes which are available to us as traders. So it might mean we might have a couple of foreign exchange pairs, maybe a major pair, maybe a minor pair, maybe an exotic pair. For that matter, we might trade a couple of commodity markets, maybe an agricultural product, like corn, maybe a hard product, like gold. We might then decide to trade a US índice, and maybe a japanese indice. We might decide to trade a couple of global equities, maybe BMW in Europe. We might decide to trade the gilt in the UK, for example, if we’re talking about the UK bond. And finally, we might decide to trade a cryptocurrency as well, and there’s many, many to choose from. So that is the basic principle of diversification. 

So while attempting to diversify, we must be conscious of correlation among markets and asset classes. So what we mean by here is the EURUSD and the GBPUSD. And it’s funny how often traders trade EURUSD and the GBPUSD, not necessarily knowing they’re correlated in the way in which they are. Because they’re both trading against the US dollar. So, if the US dollar is strengthening on a particular trading day, then it will mean that the EURUSD and the GBPUSD will both move to the downside roughly at the same time if we’re getting some dollar strength. And the same applies if we start getting dollar weakness. So you’ll experience the GPBUSD and the EURUSD both moving to the upside if we’re experiencing dollar weakness, in this example. 

So it’s just very important that you are knowledgeable and you’re aware of this as a trader. That if they are correlated, they can react in a similar fashion. So effectively, what that means is you could be doubling up your potential gains, but you could also be doubling up your potential losses as well. Really knowing and understanding this, is what’s really important. So for example, the same thing applies to someone trading two indices, two US based indices, like the SP500 and the Dow Jones 30. Because they will react to similar situations more often than not. And, they’re correlated markets. And finally, like the gold market and the silver market. It doesn’t make too much sense to be trading both of these markets at the same time. Maybe just increase your size in one of them. And trade one, rather than trade two, correlated markets. 

Okay so that’s a little bit about diversification. So, just to conclude this webinar, let’s have a look at asset classes on a trading platform. We’re going to have a look at Metatrader 4 platform and so I shall get this up on screen right now. And what I want to draw your attention to is just on the right hand side of this screen. And in blue here, we can see your major currencies. And these are your dollar related trades. You have the dollar sitting on one of these sides and they’re all at, if you can notice, six letters. So the first three is the base currency. If we’re looking at the euro. And the second three is the quote currency. 

So if I just flick over to the EURUSD for example, and the current price in this market is the ‪23:23‬ currently, right now. So what that means for us if we decide to trade the EURUSD, is that we will see the quoted price of 1.2323 US dollars for each and every €1 that we trade. So that is the exchange rate. And that just applies across the board, different markets. But just focusing on the market watch, what you can do if you do trade metatrader4, and it’s the most commonly used platform out there, you can right-click on any market. And just make sure you Show All. What that will do is that will reveal all of the markets that you can trade. There’s also minors and exotic pairs in here on the currency side. This thing like the copper market. 

And as we scroll through, they’re all color coded. We also have your global indices as well, which can be traded. These, you have the dollar index, but you also have your equities, global equities like Apple and Amazon. And if you just hover over them, you’ll be able to see and understand exactly what market. You can look at a price action of each of these as well. So those are all your equities that you can trade on a contracts for difference. And there’s some more foreign exchange markets. And then you’ve got your, again, this is all colour-coded, you’ve got your commodity markets, natural gas, oil markets. The pound, sorry, excuse me, the gold markets, for example. Then you’ve got considerable, as you can see, there’s a vast number of different markets in there. You’ve got a lot of markets which are in there from various different jurisdictions globally. And then you will have access to loads of currency, cryptocurrency, markets as well. 

So that’s just a little overview about the different types of markets that you can access certainly on a Metatrader 4 platform, and there is many, many markets to choose from. Which is often what presents traders with significant issues, in terms of which markets they should be trading. 

So, that’s a little overview of the trading platform and what markets you can access. So as you can see, we’ve had a look, we’ve tried to define, asset classes. We’ve looked at the six different asset classes that are available to us as traders. The foreign exchange markets to commodity markets, the stock markets, the industry markets, the bond and the cryptocurrency markets as well. And just touched upon trade selection and diversification. 

So on that note, all that’s left for me to do now is to thank you very much for joining us, and we do look forward to seeing you all next time. Bye for now‬‬‬‬‬.