Tag: Forex Trading

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Forex Fundamental Analysis

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

Introduction

Introduction

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!

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Forex Fundamental Analysis

Importance Of ‘Housing Index’ In Gauging The Strength Of An Economy

Introduction

Introduction

Introduction

Housing Index is a broad and long term metric for investors and traders to judge the Housing Market in a country or specific region. There is a good correlation between the Housing Market, Stock Market, and economic growth. Housing Markets generally reflect the health and strength of the economy. Hence, the Housing Index serves as a pulse check or double-check for traders to affirm their economic assessments.

What is the Housing Index?

It is a measure of changes in the price movement of single-family houses. It generally measures the changes in residential housing prices as a percentage change from an index period (base period). The Housing Price Index for the base period is 100, and subsequent reports measure the change relative to this period.

For example, an HPI of 110 indicates a 10% appreciation in the single-family housing prices in a region. Hence, it is a direct measuring tool for housing price trends and serves as an indirect measurement tool for housing affordability, mortgage default rates, and prepayments, etc.  It is often expressed as change with regards to the previous month in percentage also.

Although different agencies are measuring the Housing trends, the most prevalent is the Housing Price Index by the Federal Housing Finance Agency in the United States. The FHFA HPI is a weighted, repeat sales index. It means it takes Houses that have also been refinanced into account. This data is obtained from reviewing the repeat mortgage transactions on single-family properties that have been securitized by Fannie Mae or Freddie Mac.

The HPI covers the entire 50 states, and also publishes for the nine Census Bureau Divisions, for Metropolitan Statistical Areas (MSA) and Divisions for more specific and detailed analysis.

How can the Housing Index numbers be used for analysis?

Housing Index is a widely used economic indicator by traders and investors. It gives a head check to the economic health of a country or region.

Generally, people buy houses through mortgages. When the Housing Price rises, it indicates that the market or citizens can pay for much higher rates. It indicates that the liquidity of the economy is good.

Secondly, people buy homes using mortgages most of the time, and it indicates the ease of obtaining a loan from banks at cheaper interest rates. It indicates that the bank has enough reserves to dish out mortgage loans at such low rates. It ultimately means the economy has an actively circulating wealth in the system.

Rising Housing Prices are accompanied by wage growth, employment in the construction industry, especially. It also stimulates confidence for the owners of Houses to know that they have a high-value asset with them that generally translates to increased consumer spending. Overall the total demand increases, boosting the economy and resulting in a higher GDP print.

When the Housing Prices fall, it indicates that consumers are less willing to purchase Houses as they are less confident about their future financial security. It can also indicate that banks are also lending at higher interest rates that are not affordable by middle and lower-middle-class families. The Housing Sector slowing down is a reflection of the economy in this sense. Slowdown accompanied by Mortgage defaults can be warning signs for investors, and traders about an oncoming slowdown or recession.

The below graph confirms our analysis as the housing prices fall during recession periods. As it can be seen that the Housing Index is not market sensitive and does not fluctuate to temporary shocks and instead, it has a trend that builds up over a time frame of certain months or years. Hence, it is a better tool for long term trends than a short-term trend.

Impact on Currency

The Housing Price Index is a coincident and lagging indicator in the short run, as it is a consequence of what has already happened in the economy. When the citizens feel confident about their financial security sufficiently, then only would they take a step to purchase a house. Hence, the Housing Price Index is a confirmation of a trend that would have been predicted by the leading economic indicators.

But for investors and traders who are looking for long term trends, the Housing Price Index acts as an efficient tool to assess current market prices and use it to predict the trend.

Potential shifts in the Housing Price Index can move the stock markets. The currency market movement depends on the strength of the economy.

When compared with indicators like Building Permits and Housing Starts, it relates to as a coincident indicator. In the long run, it can be used as a leading indicator to spot the trend that has already begun.

It is a proportional indicator, meaning when the Housing Price Index rises, it has a ripple effect through jobs, wages, and other industries related, and hence increased economic activity translates to higher GDP prints and appreciating currency.

Economic Reports

The Housing Price Index (HPI) is released by the Federal Housing Finance Agency (FHFA). It gets data from Fannie Mae and Freddie Mac, which are Government Sponsored Enterprises (GSE).

It releases monthly and quarterly reports for HPI on its official website. The dates for the subsequent year are already announced and are typically released at 9:00 AM on the specified date.

Many other agencies provide Housing Indices, one such popular one is the S&P’s Case-Shiller Index, which uses a slightly different approach in measuring the Housing Prices.

Sources of Housing Index

The Housing Price Index from FHFA is available here

All the current and previous reports are available here

We can find the different Housing Indices on the St. Louis FRED website here

We can find Housing statistics for various countries in the statistical form here

Impact of the ‘Housing Index’ news release on the Forex Market 

In the previous section, we discussed the House Price Index (HPI) economic indicator, which essentially is a measure of the single-family house prices movement, with mortgages backed by government-sponsored enterprises. This report helps to analyze the strength of the country’s housing market and the economy as a whole. The house price index contributes only a small portion of the GDP of the country. Thus investors do not give much importance to the news release.

In today’s example, we will be exploring the impact of the announcement of the U.S. House Price Index on different currency pairs and witness the change in volatility. A higher than expected number is considered to be positive for the currency, while a lower than expected reading is taken negatively. This report is published by the Federal Housing Finance Agency. The above image shows an increase in the value of the House Price Index from the previous month, which should be positive for the currency. Let us see how the market reacts to this data.

USD/JPY | Before the announcement:

Let’s begin with the USD/JPY currency pair and try to analyze the impact on the pair. As we can see in the above chart, the price is an overall uptrend and recently has retraced to a ‘demand’ area. Looking at the price, we can say that the price might move higher and continue the uptrend, but we need to wait and see if the news announcement causes major changes to the dynamics of the chart.

USD/JPY | After the announcement:

After the news announcement, the price sharply moves higher, and we see a bullish ‘news candle,’ indicating that the House Price Index data was positive for the economy. The volatility, which was quite less before the news release, suddenly increases to the upside after the release. This was a result of the increase in the House Price Index by 0.2% for the current month, which made traders go ‘long’ in the U.S. dollar. This is a confirmation sign that the market will further move up.

USD/CHF | Before the announcement:

USD/CHF | After the announcement:

The above images represent the USD/CHF currency pair where we that before the news announcement, the market is in a downtrend, and currently the price is at the lowest point. This means the U.S. dollar is showing weakness in this pair, or Swiss Franc is strong. When the price is strongly moving lower, it is not recommended to have any ‘buy’ positions as it could be very risky. Thus, it is better to wait for the news release and gain some clarity about the data. Based on the data, we can take a position in the market. After the news announcement, there is a sharp rise in the price and a spike in volatility to the upside. This again came from the fact that the House Price Index news data was better than last time, which brought cheer in the market and made investors buy more U.S. dollars. The bullish ‘news candle’ is a sign of trend reversal that could be extended further.

GBP/USD | Before the announcement:

GBP/USD | After the announcement:

The above images are that of the GBP/USD currency pair, where we see that the overall trend of the market is down, and recently the price has pulled back from its ‘lows.’ Here, since the U.S. dollar is on the right-hand side of the pair, a down-trending implies strength in the U.S. dollar. We will be looking to trade this pair after we see some trend continuation patterns in the market, indicating that the downtrend will continue. After the news announcement, the price falls by a good amount, and the volatility increases to the downside. The bearish ‘news candle’ signifies that the House Price Index news was positive for the economy that took the price lower and increased the selling pressure.

That’s about the ‘Housing 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!

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Forex Fundamental Analysis

The Significance of ‘Imports’ Data In Determining A Nation’s Economy

Introduction

Introduction

Introduction

Imports are one of the components of International Trade. The Import and Export figures determine whether a country is running a Trade Surplus or Deficit. What and how much a country is importing in contrast to its exports mainly drives economic growth. It is crucial to understand Import’s role in a country’s International Trade Balance and Balance of Payments and its pros and cons.

What is Imports?

The foreign goods and services sold to domestic consumers are called Imports. Goods and Services manufactured in a foreign country consumed by the domestic population all come under Imports. When a country is importing more compared to its exports, it is said to have a trade deficit. A trade deficit is generally bad for the economy as it means it is consuming more than it is earning.

An import is noted as a debit in the Balance of Payments in the Current Account Balance Reports. When a country imports money flows out of the country. An export brings money into the economy. Hence, Import is analogous to an individual’s monthly expenses, and exports are analogous to his income. It is not ideal for us to spend more than we earn for long periods as it could pile up a massive debt from which we may not be able to recover. A country running a trade deficit is no different.

A country needs to borrow capital to finance its excess import or net import (imports minus exports). It is always preferable for mature economies to be a net exporter than a net importer.

A trade deficit is not a bad thing always as countries might be importing raw materials for future projects and constructions whose output is not yet recorded. The United States has continued to be a net importer and has been running a trade deficit since 1975. Hence, what a country is importing and for what purposes is vital to understand its implications on the economy.

How can the Imports numbers be used for analysis?

A country imports generally the goods that they either cannot produce domestically or as cheap as other countries. Countries that naturally do not have the natural resources may import their raw materials from nations that are abundant in it. For example, China imports Iron Ore, which Australia exports for its manufacturing industries.

Countries may also import goods for which labor cost is expensive in the home country compared to other countries. For example, NAFTA agreement shifted Car and Automotive parts manufacturing to Mexico from the United States and Canada due to cheap labor availability.

Countries also often import goods and services in which they do not have a competitive edge in the global market. For example, even though Apple is an American Company, its production of phones is done in China as the production cost is low due to well-established infrastructure for electronic and chip manufacturing industries.

Imports are to be offset by corresponding levels of exports ideally, otherwise end up having a trade deficit which can be harmful in the long run. As the country keeps borrowing, the piling debt slowly starts crippling the economy as much of the revenue goes into servicing interest payments and debt repayments in the long run.

The heavy dependence of an economy on imports from a particular foreign nation or small group of nations can be dangerous as the economy’s function becomes dependent on the trades. It would be more crippling if the Imports are necessities like food or energy. For example, the USA faced an oil shortage and went into recession when OPEC cut its oil supply to the USA.

Imports are subject to trade tariffs and trade agreements. Imported goods and services compete with local produce, and the selling price of the corresponding goods differs based on the import tariffs implemented by the Government.

On the one hand, importing goods at a lower price rather than producing domestically at a higher price seems reasonable to some as it gives consumers goods and services at a lower rate avoiding inflation effects. On the other hand, imports affect the local manufacturing sectors in the same category. Foreign Competition can wipe out local businesses, which can, in turn, slow down the economy.

In the long run, exports stimulate growth while imports impede growth. Hence, Import is a double-edged sword that needs to be handled carefully in conjunction with exports to strike a correct-balance in the Balance of Trade.

Impact on Currency

When a country imports the country pays for it, and hence currency flows out of the country. When a country’s imports outweigh its exports (net importer), the domestic currency is in oversupply in the global market, and hence currency value depreciates.

A sudden surge in imports over exports is followed by currency depreciation and vice-versa. The global FOREX market is self-regulating and adjusts to such shocks, and the Government can intervene to peg their currency higher to reduce the cost of imports. Japan and China are good at winning this type of Currency War games in the global markets where they peg their currency high during imports and low during exports to maximize benefits in their favor.

Economic Reports

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

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

Sources of Import Reports

Data related to U.S. Imports can be found here. The World Bank also publishes the World Trade reports of many countries categorized by different sectors in their World Integrated Trade Solution’s official website. We can also get the statistical data of Imports and Exports of various countries from the International Monetary Fund’s official website.

Visual representation of a country’s imports can be accessed here. Below is the illustration of the same. 

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

Until now, we have learned all about imports and the different ways it can affect the economy and the currency. Imports offer many benefits to the consumer of the importing nation, such as greater choices, a wide range of quality, and access to lower-cost goods and services. Imports create healthy competition in the domestic market, forcing local producers to improve their quality or by reducing costs. Therefore, if imports are kept at a reasonable level, they can be beneficial to companies, consumers, and the economy. We need to change the method in which the value o trade is measured.

In today’s illustration, we will be analyzing the impact of Imports on different currency pairs and see the change in volatility before and after the news announcement. The below image shows the latest Imports data of the United States, where it says that there has been a reduction in the net Imports from the previous month. Let us find out how the market reacts to this data.

USD/JPY | Before the announcement:

The first pair we will be discussing is the USD/JPY currency pair and where the above image shows the state of the chart before the announcement. We see that the market does not appear to be moving in any single direction, which means there is volatility on both sides, and there is confusion prevailing in the market. Traders need to watch the impact of the news announcement and then take a suitable position.

USD/JPY | After the announcement:

After the news announcement, the price sharply falls lower, and volatility expands on the downside. As there was a reduction in the value of Imports, the market reacted negatively to this data by causing weakness in the U.S. dollar. The long bearish ‘news candle’ is an indication of the continuation of the downward move, and so, one can take a ‘short’ position in the currency after the news release with a stop loss above the recent ‘high.’

GBP/USD | Before the announcement:

GBP/USD | After the announcement:

The above images represent the GBP/USD currency pair, where we see that, in the first image, the market again is not trending in any direction, and currently the price is at the ‘supply’ area. Therefore, we can expect sellers to come back into the market and stimulate selling pressure. Since the impact of Imports data is moderate to high, it is advised to wait for the news release to see what changes it will cause in the price. After the news announcement, there is a sudden surge in the price where the ‘news candle’ closes with a fair amount of bullishness. Since the U.S. dollar is on the right hand of the pair, a rise in the price indicates weakness in the currency. As the Imports were lower, traders increased the volatility to the upside by selling a lot of U.S. dollars. From a ‘trade’ point of view, we will go ‘long’ in the market only after the price breaks the ‘supply’ area and moves higher.

AUD/USD | Before the announcement:

AUD/USD | After the announcement:

The above images are that of the AUD/USD currency pair, where we see that the market is in an uptrend, and at present, it looks like the price on the verge of continuing the trend after a price retracement. The price is currently at the previous ‘high,’ so we can sellers become active at this point. Thus, we should not take any position before the news release. After the news announcement, the price goes higher and closes as a bullish candle. As the Imports are relatively weak, traders sold U.S. dollars and increased the volatility to the upside. This could be a confirmation sign of the continuation of the trend. Aggressive traders can take ‘long’ positions with a stop loss below the recent ‘low.’

That’s about ‘Imports’ 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

Introduction

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!

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Forex Fundamental Analysis

‘Leading Economic Index’ – Understanding This Forex Fundamental Driver

Introduction

Introduction

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!

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Forex Fundamental Analysis

Understanding ‘Manufacturing PMI’ & Its Impact On The Forex Market

Introduction

Introduction

Introduction

The Manufacturing Purchasing Manager’s Index is an excellent leading or advanced macroeconomic indicator, which is used widely to predict economic expansion or contractions. It has a variety of applications for investors, economists, traders alike. It is a significant indicator to predict GDP, employment, and inflation in the upcoming periods. Hence, understanding of Manufacturing PMI can be hugely beneficial for a trader’s fundamental analysis.

What is Manufacturing PMI?

The Manufacturing Purchasing Manager’s Index is a survey of about 400 largest manufacturers in the United States of America. The word Manufacturing here implies that the study is associated with the industries that produce physical goods. Non-physical goods come into the category of Services Purchasing Manager’s Index, which is different.

Purchasing Managers in a company are the employees associated with procuring the raw materials, goods, and services that are required for running the company. For example, A car manufacturing company’s Purchasing Manager would typically be in charge of procuring nuts and bolts at the lowest or best prices from the market. The Purchasing Manager’s in this sense have a good idea of what the company requires and during what periods these requirements are set to increase or decrease.

How is the Manufacturing PMI calculated?

The Manufacturing PMI hence is a compilation of the survey answers given by the Purchasing Managers of the largest 300 manufacturing giants in the USA. The questions typically involve asked in the survey are related to month-over-month changes in the New orders, Production, Employment, Deliveries, and Inventories with equal weightage, as shown in the table below:

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

The Manufacturing PMI rating lies within the range of 0-100, where a score of above 50 indicates an expansion in the economic activity in the manufacturing sector, below 50 indicates contraction and 50 indicates no change in comparison to the previous month.

Economic Reports

In the United States, the Institute for Supply Management widely known in short as ISM releases the Manufacturing Purchasing Manager’s Index every month.

The ISM, established in 1915, is a large non-profit organization in its field. The members of the ISM Business Survey Committee (BSC) receive the questionnaire each month, asking them to identify the monthly changes for each index.

The ISM releases its Manufacturing PMI on the first business day of every month. The data for the Manufacturing sector goes back to 1947.

There are other companies that also publish PMI numbers, and IHS Markit Group is one such company that puts out numbers for the companies outside of the United States. Still, within the United States, the Insitute for Supply Management’s PMI is the most popular.

How can the Manufacturing PMI be Used for Analysis?

The data of ISM Manufacturing Reports on Business or the PMI goes back to 1947 due to which the data is robust and has high levels of confidence in ascertaining economic figures like GDP, inflation and employment, etc.

The Manufacturing sector of the United States makes up 20% of the total GDP, and hence the Manufacturing PMI is a significant economic indicator in that regard. The Manufacturing sector primarily drives the economic activities within the nation as it involves physical goods; hence it affects other dependent industries like transportation, labor force, etc.

The historical correlation between the real GDP and the ISM Manufacturing Data is about 85%, which is pretty good. The main advantage of studying Manufacturing PMI is that it is a leading or advanced economic indicator. It predicts the real GDP with a 12-month time lag, meaning it predicts a year ahead of time the real GDP due to which this index is widely sought after by investors.

A score of 80 and above has been correlated with a 3% average real GDP growth historically. A score of 70-80 correlates with 0-2% GDP growth rate and 55-70 correlates with -3% to 0% real GDP rate. Hence, above 50 indicates the overall economy is growing, and below 50 indicates contraction and possible recession.

Based on the Manufacturing PMI of different sectors, Suppliers can adjust their prices with the market. For example, if a cereal producing company’s Manufacturing PMI indicates expansion, then the crop suppliers can change their prices to a higher level to match the increase in demand and vice versa.

Below is a snapshot of Manufacturing PMI plotted against the real GDP growth rate historically, and we can clearly see the healthy correlation that exists between both. This shows the importance of this leading indicator’s importance in fundamental analysis of traders.

Impact on Currency

Since the United States is the largest economy, the US GDP drives the global GDP. In this sense, monitoring Manufacturing PMI gives us a good clue of the direction of the US economy and the relative direction of other economies. From this perspective, we can ascertain the currency direction also.

The further the score is away from 50 and closer towards 100, the better it is for the economy and resultantly for the currency. Higher scores translate to oncoming currency appreciation periods, while low scores would signal an oncoming recession and currency depreciation period.

A score of 85 and above is a strong signal for improving economic conditions and inflation in the economy.

Sources of Manufacturing PMI Reports

We can monitor the reports on the official website of the ISM. We can also go through the PMI of other countries from the IHS Markit official website.

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

The Manufacturing Purchasing Manager’s Index (PMI) measures the activity of the purchasing managers in the manufacturing sector. The indicator is particularly important for the manufacturing industry, which measures the growth of that sector; this eventually contributes to the growth of the economy. Therefore, the index has a direct and indirect effect on the economy. When speaking about the impact on the currency, the indicator does not cause a drastic change in volatility, but we do witness some positions being build up in the currency during the announcement.

In this section, we will be analyzing the latest Japanese Manufacturing PMI which was released in the month of March. The below image shows the previous and actual PMI data, where we see an increase in PMI from before. A higher than before PMI reading is considered to be bullish for the currency, while a lower PMI than before is taken to be negative. Let us view the reaction of the market in this case.

AUD/JPY | Before the announcement:

We start our analysis with the AUD/JPY currency pair, and as we can see in the above chart, the market is in an uptrend pointing towards weakness in the Japanese Yen. One of the reasons is that the market is expecting a subdued PMI data this time which is making the pair go higher. The only way to trade this pair is if the PMI data of Japan comes out to be very positive, which could result in a reversal and strength in the Japanese Yen. However, if the data proves to be negative, we cannot join the trend until we get a retracement.

AUD/JPY | After the announcement:

After the PMI numbers are announced, we see a sudden surge in volatility on the upside as the data was negative for the Japanese economy. As the numbers were disappointing, traders sold the Japanese Yen and took the price higher. A strong bullish candle shows the impact of PMI data on the currency pair. From a trading point of view, one cannot enter the market for a ‘buy’ soon after the news release. By doing this, he would be chasing the market, which is against the principles of risk management.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, which again is in a strong uptrend, but the up move is not as aggressive as in the case of the AUD/JPY currency pair. Just before the news announcement, the price appears to be at the ‘resistance’ area, which means if the PMI data comes out to be negative for the economy, we can see a breakout on the upside or if the data is positive, it could result in a short-term reversal.

After the PMI data is released, volatility expands on the higher side, and later the candle closes with a wick. This wick is a result of selling witnessed at ‘resistance.’ Therefore, the Manufacturing PMI data has a similar effect on the currency pair. We can trade the above pair after the price retraces to the resistance turned support area and then going ‘long’ with a strict stop loss.

USD/JPY | Before the announcement:

USD/JPY | After the announcement:

In the USD/JPY currency pair, the characteristics of the chart seem to be different from the above-discussed pairs. Here, the Japanese Yen is showing signs of strength before the news announcement. Thus, a positive PMI data should take the currency lower while negative data might result in an up move. The volatility is seen on both sides of the market. Thus, it is advised to wait for the actual data before taking any action. It is also not advisable to trade in the ‘options’ segment as it is a less impactful event and volatility after the announcement will be ‘low.’

After the announcement is made, the market goes up just by a little, signifying the least amount of volatility. The Manufacturing PMI, even though it was negative for the Japanese economy, it failed to take the price higher as in other pairs, as the impact of it very less. Thus, the small rise in price could be used as an opportunity to join the downtrend.

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

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Forex Fundamental Analysis

‘New Orders’ – Everything About This Economic Indicator & Its Impact

Introduction

Introduction

Introduction

New Orders are essential for economists, government officials, and investors alike. It is a direct indication of oncoming expansion or contraction in the economy. For investors, decisions regarding investment in different sectors are critical, and New Orders figures are perfect tools to gauge an increase or decrease in economic activities. Hence, understanding this economic indicator can help us predict economic prospects better in our Fundamental Analysis.

What is the “New Orders” number?

The New Orders is not in itself a separate report. Still, it is published as part of an overall report that details the performance of Manufacturing Industries in terms of the previous month’s and current business activity and prospective plans.

The New Orders form the part of the report titled: “Manufacturer’s Shipments, Inventories, and Orders,” which is generally referred to as Factory Orders, published by the United States Census Bureau. It is also called the M3 Survey, which constitutes the New Orders Report that we are interested in. The overall report measures the performance of the industrial sectors by factoring in the total Shipments, New Orders, Order Backlogs, Total Inventory, etc. Hence, M3 Survey is a broad measure of economic conditions in the domestic manufacturing sector.

New Orders are reported in the dollar value of goods and services that have been ordered in advance. In the manufacturing sector, generally, orders are made months ahead of supply so that production can be planned and delivered accordingly. Hence, a New Order is conveying an objective to buy for immediate or future delivery from clients. New Orders report of M3 Survey includes all the manufacturing companies in the United States with more than 500 million dollars of annual shipments and specific selected smaller firms overall.

Also, Orders data for industries that have almost immediate deliveries are not recorded. Only the Orders which are supported by legal binding documents like a letter of intent, or signed contracts detailing booking of orders are included. The New Orders report all the New Orders received, excluding the canceled Orders for the previous month.

Special Consideration:

The word “New Orders” is also a component of the Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI), which are also used to gauge business activity through similar survey-based index development. The New Orders in these statistics are also similar to the one we are discussing in this section and differ slightly in methodology, participants of surveys, surveyors, seasonal adjustments, and specific calculations that are different for Service Industries. These New Orders are different from the ones reported by the Census Bureau. Hence, care must be taken not to confuse with similar terminologies in both surveys.

How can the New Orders numbers be used for analysis? 

In the life cycle of production and consumption of goods and services, New Order is the earliest indicator in the manufacturing sector. In this sense, it is an advanced or leading indicator of an increase in economic activity.

The M3 survey is extensively used by government officials to develop economic, fiscal, and monetary policies. The New Orders serve as a warning sign for the officials to support the manufacturing sector as any significant downturns can lead to economic contractions and even employee layoffs. Politicians are motivated to keep employment rates high to ensure their chances of winning during elections.

As illustrated in the plot of the New Orders graph, the shaded areas indicate a recession period where we can observe a significant decline in the New Orders figures well before the actual recession, which confirms the importance of this economic indicator. It is also important to note that the year to year fluctuations are due to seasonally unadjusted figures.

Impact on Currency

Since New Orders are leading indicators of economic growth, the corresponding impact on the currency may be visible only after a certain period, which can vary from 1 month to 6 months. It is also important to note that the percentage change in New Orders from the previous month is not amplified by inflation and is only due to an increase in New Orders.

It is also essential to understand that the New Orders are seasonal for many industries, and it is vital to take the Seasonally Adjusted figures for a more accurate indication of economic growth.

An increase in New Orders indicates an increase in economic activity, which is good for the country and correspondingly to its currency. Hence, the New Orders figure is a proportional indicator, and a decrease in New Orders for previous months indicates a slowdown or contraction of economic activity.

The influence of investment markets on the economy is significant, and hence investors closely monitor for economic signals through New Orders. A positive change in New Orders translates to a positive change in equity markets too.

Economic Reports

The United States Census Bureau publishes the monthly M3 Survey reports on its official website. The Bureau releases two press releases every month.

The first one is “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders,” which is available about 18 working days after every month.

The second one is “Manufacturers’ Shipments, Inventories, and Orders,” which includes durable and non-durable manufacturing and is available about 23 working days after every month.

Sources of New Orders Reports

Census Bureau’s Factory Orders report is available here. For reference, you can find the latest advance report of the Census Bureau here. We can find the New Orders for different economies with statistical representation here. The graphical plot of New Orders is available on the St. Louis FRED official website.

Impact of the ‘New Orders’ news announcement on Forex

Till now, we have discussed the New Orders fundamental indicator and understood it’s significance in an economy. New Orders measures the value of orders received in a given period of time. They are legally binding contracts between a consumer and a producer for delivering goods and services. New Orders help in predicting future industrial output and production requirements. Investors feel that the data does not necessarily gauge the growth in the manufacturing and so they do not give a lot of importance to the data during the fundamental analysis of a currency.

Today, let’s analyze the impact of New Orders on different currency pairs and observe the change in volatility due to the news announcement. The below image shows the New Orders data of Sweden, where we see there has been a huge reduction in the percentage of New Orders compared to the previous month. A higher than expected reading is considered as bullish for the currency while a lower than expected reading is considered as negative. Let us see how the market reacts to this data.

USD/SEK | Before the announcement:

The first pair we will be discussing is the USD/SEK currency pair, where the above image shows the position of the price before the news announcement. It is clear from the chart that the market is in a strong downtrend, and the price is presently at its lowest point. Technically, we will be looking for a price retracement to a ‘resistance’ or ‘supply’ area so we can join the trend. At this moment, we cannot take any position.

USD/SEK | After the announcement:

After the news announcement, the market moves higher initially, but due to the selling pressure from the top, the candle closes almost near its opening price. As the New Orders data was extremely weak for the economy, traders go ‘long’ in the currency and sell Swedish Krona in the beginning. But since the trend is down, sellers push the price lower, and the ‘news candle’ leaves a wick on the top. We still cannot take any position after the news release.

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

The above images represent the EUR/SEK currency pair, where the characteristics of the chart are similar to that of the above-discussed pair. The market here too is in a strong downtrend signifying the great amount of strength in the Swedish Krona, as the currency is on the right-hand side of the pair. We can see in the first image that the currency pair is not very volatile, which means there will be additional costs (Spreads & Slippage) when trading this currency pair.

Hence, we should trade this pair if the news announcement ignites volatility in the market. After the news announcement, the price hardly reacts to the news data where it stays at the same point as it was just one candle before. Therefore, the news release does not have any impact on this currency pair, and there is no alteration to the volatility.

SEK/JPY | Before the announcement:

SEK/JPY | After the announcement:

Lastly, we will look at SEK/JPY currency pair and see if there is any change in volatility due to the news announcement in this pair. Before the news announcement, the market is in a strong uptrend indicating strength in the Swedish Krona. In order to join the uptrend, we should wait for the price to pull back at a’ support’ area, as the price is at the highest point, and then take position accordingly.

After the news announcement, the price initially falls lower owing to poor New Orders data, but it bounces exactly from the moving average and closes with a wick on the bottom. Hence, we can say that the news release has some impact on this pair, causing a fair amount of volatility after the announcement.

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

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Forex Course

115. Trading The Double Tops and Double Bottom Chart Patterns

Introduction

Introduction

Introduction

We will be discussing many Forex chart patterns in the upcoming course lessons that are widely used by traders around the world. But none of those patterns can beat the popularity of Double Bottom and Double Top chart patterns. This pattern can be seen frequently in not just the Forex market but all types of markets.

This pattern is independent of timeframes, i.e., it appears on all the time frames and the strategies that we are going to discuss work on all the trading timeframes too. Fundamentally, the Double Top and Double Bottom are reversal patterns, and they consist of two price swings approximately the same size on the same price level.

Double Top Chart Pattern

The Double Top chart pattern typically appears in an uptrend. It is formed when a bullish trend is interrupted at some point, and as a result, the price action tends to range. If that range consists of two swing tops, we can consider that as the formation of a Double Top chart pattern. After the second top, the price action drops and starts a new bearish trend.

Double Bottom Chart Pattern

The Double Bottom chart pattern typically appears in a downtrend. It is formed when the downtrend is interrupted at some point, which results in the price action to form a range. In the consolidation phase, if the range consists of two swing lows, and if the second low is struggling to reach the BottomBottom of the range, we can confirm the formation of the Double Bottom chart pattern. When the second Bottom is printed, we can expect the price to print a brand new higher high.

Neckline

The Double Top and Double Bottom patterns consist of a neckline. The Neckline is often used to confirm the pattern. The Neckline in a Double Top pattern is the horizontal level at Bottom where the two tops converge. Likewise, Neckline in a Double Bottom pattern is the horizontal level at the top where the two bottoms converge.

How To Trade The Double Top & Double Bottom Patterns? 

Double Top Pattern

The below charts represents the formation of a Double Top pattern on the AUD/JPY daily Forex chart.

In the below chart, we had activated a sell trade when the price action broke below the Neckline. The stop-loss is placed just above the Double Top pattern. It is advisable to set the take-profit order two times below the size of the pattern. Activating our trades at the Neckline is the safest and most professional way of trading this pattern; because it shows that the last buyers are out of the league, and going short positions from here is a good idea.

Double Bottom Pattern

The chart below represents the formation of a Double Bottom chart pattern on the GBP/AUD Forex pair.

As we can clearly see below, when the price action is closed above the Neckline, it indicates a buy signal.  We can see the most recent leg of the buyers being very strong, which indicates the buyers’ strength. Hence, in this case, we have decided to place the stop-loss just below our entry. For placing TP, we chose the previous recent high, and we can see how perfectly the price respected our placement.

This ends our discussion on Double Top & Double Bottom Forex chart patterns. We, at Forex Academy, have provided a lot of strategies to trade this pattern in the Basic Strategies section. You can check them out to get a deeper insight into these patterns. Cheers!

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Categories
Forex Basic Strategies

How To Trade The ‘Double Top’ Chart Pattern Like A Pro

Introduction

Introduction

Introduction

There are some patterns in the market that are widely used by traders across the world, and the Double Top is one of them. It is a simple and straightforward method of identifying the potential selling trades in any given Forex pair. Most of the novice traders who trade this pattern tend to face problems as they do not know how to use it correctly. Hence, for those types of traders, we are putting this piece together. By the time you finish reading this article, you will exactly know to identify and maximize gains using the Double Top chart pattern.

Double Top Pattern

The Double Top is a bearish reversal pattern that is usually formed at the end of a bullish trend. The two consecutive rounding tops complete this pattern with approximately the same highs. The first rounding top should be formed at a significant resistance area. Most of the time, the momentum of the second round top is quite weak, and this indicates the buyers are getting exhausted.

This eventually means that the sellers are now going to take control. Both the round tops retrace at a significant support area, which we call the neckline. The identification of this pattern can be comprehended as the professional traders and investors trying to obtain the profits from the bullish trend. And now, the markets are ready to publish a new selling trend.

Psychology Behind The Double Top Pattern

We know that the Double Top pattern occurs at the major resistance area. This pattern indicates when the price action reaches a significant resistance area, the buyers are now afraid to buy because of resistance. On the other hand, the sellers are hitting the sell orders at the same resistance area.

At this point, when the price action is pulled back to a significant support area, which we called the neckline, it shows that the buyers are now buying again at major support areas to print brand new higher high. However, when the price action reaches the resistance area again, buyers fail to print a brand new higher high. As a result, they start to book the orders, and now the sellers are gaining control. Hence the price action tends to move in the opposite direction.

Double Top Pattern – Trading Strategies 

There are several ways to trade the Double Top chart pattern. But the strategies we are going to share here are well-proven methods. Also, we have backtested these strategies time and again to make sure they are accurate.

Double Top Pattern + Bearish Candlestick Patterns

There are various bearish candlestick patterns that are widely used by the traders in the market. For this strategy, you can use any of the bearish candlestick patterns. Some of the most commonly used bearish candlestick patterns are Bearish Engulfing, Evening Star, Shooting Star, Hanging Man, Three Black Crows, etc.

The idea is to identify any of the above mentioned bearish candlestick patterns near the second peak. If you find any of these patterns, you can go short. Make sure to place the stop-loss above the resistance line. We can place two or more TP orders. First, take-profit must be at the neckline, whereas the second one can be placed two times above the size of the pattern formed.

Identifying the Pattern

In the below EUR/JPY chart, we have identified the formation of a Double Top pattern.

Entry

As we can see in the below chart, the price action prints a Bearish Engulfing candlestick pattern right after the second top. This indicates that the sellers have completely absorbed the buyers, and now it’s time to go short in this pair. We took a sell entry at the close of the Bearish Engulfing candle.

Stop-Loss & Take-Profit Placements

As we can see, we have entered the market at the closing of the Bearish Engulfing candle and placed the stop-loss just above the resistance line. This pattern has the highest odds of working in our favor; hence we can go with smaller stop-loss. Because, whenever this set-up is found, the price action has a very little chance to spike.

As discussed, the first take-profit was placed at the neckline of the pattern, and the second take-profit was placed double the size of the complete pattern. But, please decide the placement of TP according to your trading style. Remember that you can close your position wherever you want.

Double Top Pattern + RSI

In this strategy, we have paired the Double Top pattern with the RSI indicator to identify accurate shorting signals. As you might have probably known, RSI stands for the Relative Strength Index. It is a momentum indicator developed by the J. Welles Wilder Jr. in 1978. This indicator oscillates between the traditional levels of 70 and 30. When this indicator reaches the 70 level, it indicates that the market is in an overbought condition, and it indicates the market is oversold when the indicator reaches the 30 level.

Here, the strategy is simple. When the price action hits the second peak and starts to struggle, see if is the RSI is at the overbought market conditions. If it is, then it can be considered a potential sell signal.

Identifying the Pattern

We have identified a Double Top chart pattern in the below GBP/CHF Forex pair.

Entry

In the below chart, we can see the first peak and second peak of the pattern being quite strong. When the price action approached the second peak, it dropped immediately. This shows that the buyers are exhausted, and sellers took over the show. At the same time, we can also see the RSI giving a sharp reversal in the overbought area. Hence we can confidently go short in this pair.

Stop-Loss & Take-Profit

We went short when the criteria are fulfilled and placed the stop-loss just above the entry. Take-profit was placed at the higher timeframe’s support area. Overall, it was a 100+ pip trade. If there is no significant support area for you to exit your positions, you can close them when the RSI reaches the oversold area.

Conclusion

Pattern trading is the easiest way to make more profits in the market. Some patterns provide a great risk to reward trades, and some do not. The Double Top is one such pattern that offers some of the best risk-reward entries. This pattern works well on all the trading timeframes. Make sure to know the logic behind this pattern before trading so that any potential mistakes can be avoided. All the very best!

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Forex Course

113. Introduction To Forex Chart Patterns

Introduction

Introduction

Introduction

We have learned a lot of concepts related to technical analysis in the past few course lessons. Starting from Moving Averages, we have extended our discussion to Fibonacci Trading, Candlestick Patterns, and Indicator based analysis. We have also gone through some of the advanced technical trading concepts like Pivot Trading and Elliot Wave Theory.

We hope you have understood these concepts and started to apply them in a demo account. If you have any queries, please post them in the respective lesson comments so that we can address them in the right place. However, this is not the end of the technical analysis basics. We must go through one most crucial concept before going further. And that is to learn the trading of Forex Chart Patterns.

What are Forex Chart Patterns?

Do not mistake these Forex chart patterns with the Candlestick Patterns that we have learned before. Two or more candlesticks form candlestick patterns. And the maximum number of candlesticks in a single candlestick pattern is not more than four. But when it comes to Forex Chart Patterns, there are more candlesticks involved. The number can range from 50 to 500 and beyond.

To explain in simple terms, we know the price action moves in three different stages – Trends, Channels, and Ranges. When moving in these stages, the candlesticks follow specific patterns at times. Primarily, these patterns are formed by a group of candlesticks, and they look similar to the shapes that we see in real life. For instance, below is the snapshot of one of the very well known Forex chart patterns known as Cup & Handle Pattern.

(Image Taken From – Forex Academy)

In the above image, we can see how candlesticks combined to form a Cup & Handle Pattern.

Why is it important to know them?

We can consider these Forex Chart Patterns as land mine detectors. Because, when mastered, we will be able to detect the market explosions before even they occur. Hence any technical trader needs to learn to identify and trade these chart patterns. Forex chart patterns are given the highest importance because of one simple reason – high probability performing trades.

For technical analysts and price action traders, these chart patterns offer reliable clues to make their moves in the direction in which the price might go in the future. The reason behind this is that these patterns have the potential to push the price in a specific direction. There is a logical reason behind the formation of every single chart pattern, and why the price will go in a particular direction after the formation of these patterns.

Types of Forex Chart Patterns

Just like what we have learned in the Candlestick pattern lessons, there are three different types of Forex Chart Patterns.

Continuation Patterns – The appearance of these patterns indicates that the underlying trend will continue, and the price will continue moving in the direction that it is currently moving.

Examples – Pennant Chart Pattern and Rectangular Chart Pattern

Reversal Patterns – If we have identified these kinds of patterns on the price chart, it is an indication that the market is about to reverse its direction. Hence the name – Reversal Patterns.

Examples – Wedge Pattern, Head & Sholders Pattern, and Double Tops & Bottoms.

Neutral Patterns – These patterns are termed neutral because the price can move in either of the directions after the formation of these patterns. So we must be careful while trading these kinds of patterns.

Example – Symmetric Triangle Pattern

We will be covering a combination of these in the upcoming articles so you will get a holistic knowledge of trading Forex patterns. Stay Tuned!

Categories
Forex Fundamental Analysis

How The ‘Government Debt’ Numbers Impact A Nation’s Currency Value?

Introduction

Introduction

Introduction

Government Debt as an economic indicator has recently been gaining more attention from economists, investors, and traders. Many economies have chosen to actively take on debts to boost economic growth. Hence, it has become a metric & also a concern for many.

Just like a piling up debt is terrible for a householder, huge government debt is a negative sign for any economy. How the debt is used to run economic activities, methods deployed to repay it, all these have a long-term financial impact. In this sense, Government Debt is a critical metric by itself that needs to be watched out for, as investors decide to lend money to governments, basing this also as one of the reasons.

Government Debt levels have consequences that are many-fold to understand. Hence, understanding Government Debt now is more important than ever as the world’s largest economies are taking on debts beyond their revenues.

What is Government Debt?

Government Debt, also called Sovereign Debt, Country Debt, National Debt is the total public Debt and intragovernmental Debt owed by the governing body of the country. It is the money that the Government owes to its creditors.

            Government Debt = Public Debt + Intragovernmental Debt

Public Debt – It is the Debt held by the public. The Government owes this Debt to the buyers of the government bonds, who can be its citizens, foreign investors, or even foreign governments.

Intragovernmental Debt – It is the Debt owed by the Government to other Government departments. It is generally used to fund Government and citizen’s pensions. The Social Security Retirement account would be one such typical example.

Whenever the Government spends more than its generated revenue, it creates a budget deficit and adds to the total Government Debt. To operate in this budget deficit mode, the Government has to issue treasury bills, notes, and bonds, which are promissory notes to lenders that the Government shall pay back the amount along with interests.

Hence, The National Public Debt is the net accumulation of all annual budget deficits of the Federal Government.

How can the Government Debt numbers be used for analysis?

The Governments depend mainly on public spending to stimulate growth in the economy by assisting businesses and individuals in the form of unemployment compensations, wage hikes, etc. This leaves Government no choice but to fall back on taking on more Debt and keep paying interests from the tax revenues and other income sources.

The piling Debt may let things continue smoothly now but will inevitably tighten the belt for the economy in the future. When Debts go out of hand, it can lead to economic collapse, as default on Debts leads to reduced credibility and may lead to a lack of funds during times of need.

When support is lost for the Government, it has to fall back on assets, selling them and thus going to the brink of bankruptcy. At this stage, a nation is vulnerable as enemy nations can also use this situation to their advantage to wage wars in extreme cases. When there is no monetary support, business slowdowns and recessions are unavoidable.

The following are some strategies the Government may opt to reduce the debt burden:

📎 Low-Interest Rates: By lowering interest rates through open market operations, the Government can make borrowing money easy for the business and people in the economy to boost the economy. This has been the case in the United States. Prolonged low-interest-rate environments have not proven to be an effective solution to Debt-ridden Governments.

📎 Monetization: Countries like the United States, whose currency is not pegged to any other currency or commodity, can print off money and clear Debt. But this can lead to hyperinflation and currency depreciation. Hence, it is not preferable.

📎 Spending Cuts: This is the hard pill to swallow that actually works. It is the spending that leads to an increasing debt burden. If the Government cuts back on spending, which is equivalent to cutting back of money supply into specific segments or programs, that will lead to deflationary situations in the economy that can lead to a recession. Furthermore, when the Government cuts back on spending, they lose the support of citizens and fear losing favors in elections by businesses and the population.

📎 Tax Raises: The main culprit is failing to cut back on spending. As the spending continues to rise year after year, increased tax revenues do little to help reduce the burden of Debt. It is the most common practice but is not effective in the long run.

📎 Pro-Business/ Pro-Trade: By selling off real assets like real estate, gold, and military equipment, the Government can reduce the burden. It is like selling your house to pay off the mortgage. This type of solution is not applicable to all countries, but some like Saudi Arabia reduced their Debt significantly from a debt 80% of GDP to 10% in seven years by selling off oil.

📎 Debt restructuring or Bailouts: When the solvency of the Government is at the brink, Debt restructuring (renegotiating the terms of Debt, or partial payments) is one final option. It is a pseudo-defaulting case. This is not also a practical solution, as the credibility is damaged after this, as it tells the world that the economy is weak.

📎 Default: Defaulting may seem the most effective way to get rid off Debt. This is considered only when there are no other options for the Government. This leads to a lack of future monetary support from the rest of the world. Defaulters like Pakistan, Greece, and Spain are good examples of this. Defaulting occurs when the Debt burden crosses way beyond the tipping point, which is 77%. For the United States, it has already passed 100% in recent years.

Impact on Currency

The National Debt is an increasing concern in recent years as the repayments are starting to take more massive proportions of the Government’s revenue. What method the Government decides to opt for to tackle its debt burden in a given year directs the growth for that business year.

The Government Debt is a proportional indicator, meaning higher Government debt numbers are more stimulating for the economy, and appreciating for the currency and vice-versa. The vital thing to note here is that as long as the Debt has not gone way out of control that the Government cannot afford to pay the interests also. For the United States, the Debt burden will be unbearable by 2034, at which point they have to cut back on spending and raise taxes.

The Government Debt is a lagging and reactionary number. It is taken on to solve an issue and is not an initiative effort. Debt numbers follow the already ongoing situation. Hence, it has a low market impact. The more direct implications of the taken Debt are manifested through press releases and other news reports like wage growth, employment statistics, etc.

Economic Reports

The Treasury Department has the “Debt to the Penny” section on their website which shows, the daily Debt after all purchase and sale of the Government Bonds.

The U.S. Treasury Department releases quarterly, end of the period, the Federal Government’s Debt reports.

Sources of Government Debt

The Office of Management has a historical tables section where we can find Federal Debt records. Some of the most reliable sources are given below.

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

Government Debt which also known as the national debt, is the public and intergovernmental debt owned by the federal government. The government may take a loan from the World Bank and or from other financial institutions for a variety of reasons. It could be required for fulfilling the needs of the people, for defense purposes, or for stabilizing the economy. A moderate increase in debt will boost economic growth, but too much debt is not good for the economy.

It dampens growth over the long term. Higher debt means a higher rate of interest and, thus, more burden on the government while repaying the loan. Investors compare the debt held by the government and its ability to pay it off. Based on this data, they have a short to long term view on the currency. However, traders do not react violently to the Government Debt news release and make few adjustments to their positions in the market.

In today’s article, we will be analyzing the impact of the Government Debt announcement on Turkish Lira as traders identify the debt of the Turkish Government. The below image shows the previous and latest Government debt of Turkey, which indicates an increase in debt from last month.

USD/TRY | Before The Announcement

The above image represents the USD/TRY currency pair before the news announcement. We see that the chart is in an uptrend and the price has broken many resistance points. Currently, it is approaching a major resistance area from where the market has reversed earlier. High volatility on the upside could be an indication that the market is expecting a weak Government Debt data. One can join the uptrend only after the market gives a retracement.

USD/TRY | After The Announcement

As soon as the Government Debt data is announced, the market violently moves higher, and price rises quickly to the top. The reason behind the increase in volatility to the upside is that the Government Debt increased by almost $70B for the month of March. As a rise in Debt is considered to be negative for the economy, this explains why traders and investors sold Turkish Lira and bought U.S. dollars after the numbers were announced. The bullish ‘news candle’ is a sign of trend continuation, and thus one can go ‘long’ in the pair after a suitable price retracement.

TRY/JPY | Before The Announcement

TRY/JPY | After The Announcement

Next, we will discuss the impact of the news on the TRY/JPY currency pair, where we see that the market is moving in a range, and the overall trend is up. As the Turkish Lira is on the left-hand side, a ranging market indicates an indecision state of the market. Before the news announcement, price is at the ‘resistance’ area, and thus one can expect some selling pressure from this point, which can take the price lower. In such a market scenario, aggressive traders can take a ‘short’ trade in the market, expecting bad news for the economy.

The news release resulted in volatility expansion on the downside as the market reacted negatively owing to poor Government Debt data. The price crashed and closed as a strong bearish candle. But this was immediately retraced by a bullish candle, which could be due to the reaction from ‘support’ of the range. Thus, one should go ‘short’ in the pair after the price breaks key levels as the overall trend is up.

EUR/TRY | Before The Announcement

EUR/TRY | After The Announcement

The above images are that of the EUR/TRY currency pair, and here too, the market is range-bound where the overall trend is down. Since the Turkish Lira is on the left-hand side, a ranging market indicates a moderate strength in the currency. Just before the announcement, price is at the ‘bottom’ of the range, and one can expect some buying strength in the market, which can take the price higher from here. The safer approach is to wait for the shift in volatility due to news release and then trade based on the data.

After the data is released, the market, just as in the above pairs, moves higher sharply, and traders sell Turkish Lira. The bullish ‘news candle’ indicates that the Government Debt data was extremely bad for the economy and thereby prompting traders to go ‘long’ in the pair. As now the price is at resistance, one should wait for a breakout and then ‘buy.’

That’s about ‘Government 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 Course

111. Trading Forex Market Using Elliot Wave Theory

Introduction

Introduction

Introduction

In all the previous lessons, we understood the terminology and interpretation of the popular Elliot Wave theory. Now we are well-versed with the subject to apply it to the forex market.

The Elliot Wave Theory is a wide concept and can be traded in several different ways. In this lesson, we shall analyze the forex currency pairs using Elliot wave concepts by combining it with some price action.

The best way to trade the Elliot waves

We know that according to the Elliot wave theory, there are two types of waves. There is an impulsive wave pattern made of 5 waves, and a corrective wave made of 3 waves. The impulsive wave is towards the trend, while the corrective wave is basically a pullback for the overall trend.

As a trader, we need to look for trades that payout well along with less risk. So, it is not ideal to trade all the impulsive waves and corrective waves.

Trade setup 1

The setup is to trade the impulsive waves. In the 5-wave impulsive pattern, three waves are along with the trend and two against it. Out of those three impulse waves, the ideal wave to catch is Wave 2. This is because, the Wave 2 is usually the strongest out of the three impulse waves, which significantly reduces the risk on the trade.

Trade Example

After the market makes the first wave, the price starts to pullback. But while the market is retracing, we won’t know where the market will hold and complete its second wave. So, we make use of other tools to determine where the market will resume its trend.

Consider the below price chart. As represented, the market made its first wave. Then, wave 2 began, where the market started to retrace. But, note that, at this point in point, we cannot confirm the end of wave 2. So, to determine the completion of wave 2, we shall be applying the Fibonacci retracement.

In the below chart, the fib retracement has been applied. We can see that the market began to hold at the 50% level. This hence confirms that wave-2 leg has come to an end. Thus, we can prepare to go long in anticipation of wave 3.

In the following chart, we can clearly see that the market held at the 50% fib level and ended up making a higher high, i.e., wave 3.

Trade setup 2

This is the type of setup where we consider the complete 5-3 wave pattern. In the below chart, the 5-wave impulsive pattern is represented with the black trend lines, while the 3-wave corrective pattern is represented by the red trend lines. Since in an Elliot wave pattern, the high of the third corrective wave must be below low of the first wave in the impulsive wave pattern, we can trigger the sell at the area shown in the chart.

This hence concludes our discussion on the Elliot Wave theory. In the next lesson, we’ll summarize this topic for your better understanding and then pick another interesting course.

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Categories
Forex Services Reviews-2

Critical Support and Resistance Panel Indicator Review

The Critical Support and Resistance Panel was published back in June 2016. The creator, Wang Yu, has published over 50 indicators in the past and most of them seem to be well-received traders.

The Critical Support and Resistance Panel was published back in June 2016. The creator, Wang Yu, has published over 50 indicators in the past and most of them seem to be well-received traders.

The Critical Support and Resistance Panel was published back in June 2016. The creator, Wang Yu, has published over 50 indicators in the past and most of them seem to be well-received traders.

This particular Panel indicator has only had one update that was done after one month of its launch, so users can now download version 2.0 of the Critical Support and Resistance panel that can be used on the MetaTrader 4 platform.

Overview

The Critical Support and Resistance Panel is an intuitive graphic tool that can help users to monitor closely and manage critical support and resistance price points quickly and easily. All the information can be viewed on one panel making it easy to follow and take action at the right moment. Support and Resistance levels are used to identify price points on charts where, for a variety of reasons, the probabilities favor a reversal or a pause of a prevailing trend.

This indicator was designed to help traders monitor and take full advantage of critical support and resistance areas such as pivot support 1/2/3, pivot resistance 1/2/3, daily/weekly/monthly pivot, and daily open.

This indicator alerts the user once prices move close to these support and resistance warning areas that the users themselves can adjust beforehand. Apart from receiving a notification, users will also see the indicator panel change its color to red to make it more noticeable.

With these features, users will be informed and make the right decisions at the right time without having to constantly monitor charts all day long. To minimize the number of alerts users will receive, once notification of a particular support and resistance zone is sent, the next alert will be sent after 5 minutes to avoid numerous alerts being sent continuously that can be irritating for users.

Here are the main three features of this indicator; the ability to adjust the warning range for each type of critical support/resistance, the ability to select which critical support/resistance is to be used (if the user does not specify this, by default, all are selected) and the ability to adjust the position of the indicator panel.

Cost

Customers wanting to purchase this indicator can do so for $10. Unlike many other indicators available, this one cannot be rented out. Luckily there is a free demo version that can be tested before actually purchasing it.

Conclusion

Currently, there are no user reviews that we can share with you so we suggest any of you who would like to test this indicator out to download the free demo to see if this panel’s alerts and notifications can be beneficial to your trading.

This Forex Indicator is currently available in the MQL5 marketplace: https://www.mql5.com/en/market/product/17122

Categories
Forex Course

110 – The Key Rules in the Elliot Wave Theory

Introduction

Introduction

Introduction

The Elliot Wave theory is a subjective topic. The key to trading Elliot waves is to find and comprehend the waves correctly. By understanding the wave theory correctly, we will be able to figure out which side of the market we have to be on. For doing so, there are a few rules we can lay on the Elliot waves while confirming the legitimacy of a wave. They are based on waves in the 5-3 wave pattern. And most importantly, these rules must never be broken.

The Three Golden Rules of Elliot Wave Theory

Rule 1: Wave 2 must be above wave 1

Wave 1 is the impulse wave, which is towards the trend, while wave 2 is a smaller corrective wave against the trend. So, to hold the definition of an uptrend, the second wave must never go below the first wave. In other terms, there should be a higher low in the price.

Rule 2: Wave 3 must never be the shortest impulse wave

Wave 3 is the second push towards the overall trend. This wave represents the move where all big players buy into the market. Hence, this wave is the strongest and the longest. According to the rule, the wave 3 can be shorter than either wave 1 or wave 5, but not BOTH.

Rule 3: The Wave 4 must stay above the wave 1

Wave 4 is the second corrective wave in the 5-wave pattern. And this wave should never cross below the area of wave 1. In technical terms, the low of Wave 4 must be higher than the high of Wave 1.

This sums up the rules that need to be mandatorily followed while trading the Elliot Waves. So, even if one of the rules is not satisfied, then the Elliot wave pattern must be counted from the beginning, and the current must be discarded.

Guidelines for trading Elliot Waves

Now that you are clear about the rules, here are some guidelines for trading the Elliot waves. Note that these are guidelines and not rules. Hence, they are not a necessary condition to trade Elliot waves.

🌊 When Wave 5 is the longer impulse wave, then wave 5 can approximately be as lengthy wave 1.

🌊 It is useful in targeting the end of Wave 5. Traders also determine the length of the Wave 1 and add it with the low of Wave 4 and use it as a possible target.

🌊 Wave 2 and Wave 4 will usually be different forms. For instance, if Wave 2 was a sharp correction, then Wave 4 will be a flat correction and vice versa. With this, chartists can determine the time of correction of Wave 4

🌊 After a strong Wave 5 impulse wave advance, the 3-wave ABC correction pattern could come down only until the low of Wave 4.

These are the guidelines traders must understand and interpret in their own meaningful way. With this, we have come to the stage where we can apply the concepts and trade the Forex market. So, stay tuned for the next lesson.

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Categories
Forex Fundamental Analysis

How The ‘Terrorism Index’ News Release Impacts The Forex Market?

Introduction

Introduction

Introduction

Terrorism Index is a macroeconomic indicator that can influence long term investing and foreign investments flowing into an economy. The smoothness in business activities and productivity of the economy is influenced by acts of Terrorism, thereby affecting the overall Gross Domestic Product (GDP). Hence, understanding the changes in Terrorism Index and its impact can help economists and policymakers make critical decisions towards the country’s growth.

What is Terrorism Index?

Terrorism Index, also known as the Global Terrorism Index (GTI), is a report that gives us a comprehensive summary of the key global trends and patterns in the acts of Terrorism. It is one of the measures of Terrorist Activity in different economic regions.

Terrorism: According to GTI, Terrorism is defined as the threatened or actual use of illegal force & violence by a non-state actor to achieve an economic, political, religious, or social goal through fear, coercion, or intimidation.

It also details incidents of Terrorism throughout the globe for the past 50 years, covering the period of the beginning of 1970 and the change in recent periods. It also identifies and categorizes terrorists into designated groups. GTI also ranks the countries that it covers as per the degree of Terrorist Activity being experienced by those economies. It covers 163 countries that attribute to about 99.7 percent of the world population.

Below is the top ten countries list losing their GDP due to acts of Terrorism.

How can the Terrorism Index numbers be used for analysis?

Acts of Terrorism harm the economy. The impact of Terrorism is calculated through IEP’s cost of violence methodology. The methodology includes direct costs like loss of lifetime earnings, medical bills for treatment, and property loss from terrorism incidents. It also accounts for indirect effects like a loss in productivity, job or earning losses, psychological traumas that impact the victims and their associated family and friends.

Prolonged periods of terrorist activities can result in an unstable economy, where people may panic and fear for their life that impacts social order, political tensions, security threats, and leads to economic contractions. The more the terrorist activities, the lesser the chance for governing bodies to spend on public and growth, and the overall majority of revenue goes into combating Terrorism and bringing back the economy to its normal state.

Overall the economic impact is divided into four categories: deaths, injuries or fatalities, destruction of property, and GDP losses from Terrorism. Terrorism has many implications for the larger economies. It depends on the duration, level, and severity of the terrorist activities. Typically, when countries suffer more than 1000 deaths from Terrorism, IEP’s model includes national output losses that are equivalent to two percent of the total GDP.

The deaths from Terrorism has a significant impact overall, followed by GDP losses. The global economic impact of Terrorism was 33 billion U.S. dollars in 2018, 38 percent lower than in 2017. Terrorism also has wide-ranging economic consequences that have the potential to spread quickly through the global economy with significant social ramifications.

The violence caused by Terrorism, and the fear of Terrorism creates critical disruptions in the economy. It changes the economy’s behavioral patterns, like changes in investment and consumption patterns, diverting public and private away from productive and economic activities towards protective measures. Developed economies are able to absorb the economic shocks of Terrorism better than growing economies. Terrorist activities directed towards specific organizations specifically hurt that company’s stocks in the short-term.

Trades become costlier as it has to account for increased security and higher wage premiums for workers working during such uncertain times. Countries whose main revenue streams include tourism take a severe hit as terrorist attacks significantly reduce tourist arrivals and, accordingly, the revenue from it.

Impact on Currency

GTI is an inverse indicator, meaning; low GTI levels are suitable for the economy and the currency. High levels of GTI results in allocating a lot of government resources in combating and containing Terrorism. In extreme cases, the regions experiencing high levels of terrorist activities can enter curfews for weeks or even months on end that is bad for the economy.

High GTI discourages foreign capital flow into the economy as investors are not sure of a smooth growth of business and industries within that economy when frequent disturbances are expected.

Terrorism Index is an annual metric and has a low impact on the volatility of the market as it is a lagging indicator and shows the long term trends and studies of Terrorism. The more direct consequences are obvious through other macroeconomic indicators, but GTI is useful for investors and impacts long term growth plans of the economy. High GTI can also lead to shying away from foreign companies to invest and expand in the country.

A decrease in the percentage of GTI is indicative of recovering economy and hence, can be used as a positive signal for growth overall.

Economic Reports

The Global Terrorism Index (GTI) report is released by the Institute for Economics and Peace (IEP) and was developed by Steve Killelea, the founder of IEP. It obtains its data from mainly from the Global Terrorism Database (GTD) and some other sources.

GTD data is collected at the University of Maryland by the National Consortium for the Study of Terrorism and Responses to Terrorism (START). It is an annual report that is released at the year-end, usually around November and December, on the official website of Vision of Humanity organization.

Sources of Terrorism Index

The GTI and Peace reports are available on the official website of the Institute for Economics and Peace – Institute for Economics and Peace – Reports

We can refer the 2019 GTI report here: GTI – 2019

We can find the GTI for different countries listed out in various categories here.

Impact of the ‘Terrorism Index’ news release on the price charts 

The report of the Global Terrorism Index is gaining a lot of importance today as it measures the amount of loss incurred by a country due to the destruction caused by the terrorism activities. The report consists of patterns and trends of terrorism activities in 163 countries. It also measures the economic impact of Terrorism.

Terrorism, for instance, impaired the GDP growth of 18 Western European countries from 1971 to 2004, where the GDP per capita fell by 0.4 percentage points. A large terrorist attack can affect financial markets negatively in the short-term. However, in the long term, they continue to function efficiently, absorbing the shock. Therefore, more and more countries try to quantify the effects of Terrorism on the granule level so that the currency is not adversely impacted.

In today’s article, we will be analyzing the impact of the Global Terrorism Index news announcement on various currency pairs and interpret the change in the volatility. For illustration, we have considered the Terrorism Index of the U.S., where the below image shows the Rank, Score, and the Change in Rank from the previous year. It represents the year-on-year Terrorism Index Score of the U.S., which was released in November.

EUR/USD | Before The Announcement

The above image is that of the EUR/USD currency pair before the news announcement, where we see that the overall trend is down, and currently, the price has retraced up to a key level of support equals resistance. From the knowledge of technical analysis, this is the perfect trade setup for going ‘short’ in the market, but since there is a news announcement on the next day, it is wise to wait and then trade based on the numbers. However, aggressive traders take a ‘short’ trade with a larger stop loss above the recent ‘high.’

EUR/USD | After The Announcement

After the Global Terrorism Index numbers are announced, the price goes lower, and there is an increase in volatility to the downside. But the candle leaves a wick on the bottom and closes near the opening price. Initially, traders bought U.S. dollars because of the positive economic indicator data where the Terrorism Score was better than last time, and the rank reduced by two positions. Even though it was positive, there were some traders who felt it was that robust, which is why the selling did not sustain. One can still go ‘short’ in the pair but with a shorter ‘take-profit.’

USD/JPY | Before The Announcement

  

USD/JPY | After The Announcement

The above images represent the ‘daily’ timeframe chart of USD/JPY currency pair, where in the first image, it is clear that the market is moving within a channel, and now it is at the bottom of the channel. Technically, it is the right place for going ‘long’ in the market as one can expect some buying force from here. A ‘buy’ trade is only for the aggressive traders, and others still need to wait for the clarity in news data. But since a news announcement.

After the numbers are published, volatility increases on both sides, and the candle managed to close in green. The market reaction was again neutral in this case as the Terrorism Index data was mildly positive to mixed, which is why the ‘news candle’ forms a ‘Doji’ candlestick pattern. Thus, one can now go ahead and take a ‘long’ position once the price goes the moving average with a ‘take-profit’ near the upper trendline.

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

These are the images of NZD/USD currency pair, and since the U.S. dollar is on the right-hand side of the pair, a down-trending market means that the U.S. dollar is showing strength. Though recently, the price is moving in a range and right before the announcement, it is at the top of the range, also known as ‘resistance.’ Another important point of consideration is that the volatility has increased on the upside, and this could be a sign of reversal. Therefore, ‘short’ trades from here have to be taken with caution.

After the Terrorism Index data is released, we see that the market moves lower and a moderate increase in volatility to the downside. The news outcome did not create the kind of impact that was expected and seen in other pairs. Thus, we need more indication from the market in order to go ‘short’ in the currency pair.

This ends our discussion on the ‘Terrorism Index’ and its relative news release impact on the Forex price charts. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Assets

‘BNB/USD’ – Analyzing The Trading Costs Involved

Introduction

Introduction

Introduction

BNB/USD is the abbreviation for the cryptocurrency pair Binance coin against the US dollar. This pair is quite volatile to trade compared to coins like Bitcoin, Ether, Ripple, and Litecoin. It has a market capitalization of 2.76B. Because of its volatile nature, this pair is usually traded in cryptocurrency exchanges than forex brokers.

Understanding BNB/USD

The market price of BNB/USD represents the value of the US Dollar equivalent to one Binance coin. It is quoted as 1 BNB per X USD. For example, if the value of BNB/USD is 17.541, then we can say that each Binance coin is worth 17.541 US dollars.

BNB/USD specifications

Spread

Spread is the difference between the bid and the ask price that is set the exchanges. Below are the spread values of the BNB/USD currency pair in both ECN & STP accounts.

ECN: 45 pips | STP: 53 pips

Fee

For every position a trader opens, the broker charges some fee for it. Traders must know that this fee is applicable only on ECN accounts and not on STP accounts.

Slippage

Slippage is the difference between the price required by the trader for execution and the price at which the broker executed the price. There is this difference due to the high market volatility and slower execution speed.

Trading Range in BNB/USD

A trading range is the representation of the volatility in BNB/USD in different timeframes. The values are extracted from the Average True Range indicator. One may use the table as a risk management tool as it determines the profit/loss that a trader is possessed towards.

Procedure to assess Pip Ranges

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

BNB/USD Cost as a Percent of the Trading Range

The total cost of the trade varies based on the volatility of the market. So, we must figure out the times when the costs are less to position ourselves in the market. Below is a table representing the variation in the costs based on the change in the volatility of the market.

Note: The percentage values only depict the relative magnitude of costs and not the actual costs on the trade.

ECN Model Account

Spread = 45 | Slippage = 10 |Trading fee = 10

Total cost = Slippage + Spread + Trading Fee = 10 + 45 + 10 = 65

STP Model Account

Spread = 53 | Slippage = 10 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 10 + 53 + 0 = 63

Trading the BNB/USD

Volatility and Cost are the two factors traders take into account for trading any security in the market. With the assistance of the above tables, let’s analyze these two factors to ideally trade the BNB/USD.

Volatility

In every timeframe, we can see that the pip difference is significantly high between the minimum volatility and the average volatility. As a day trader, our aim is to make money from the movement of the market. But, if there is hardly any movement in the price, then it becomes challenging to extract some money out from the market. Hence, it is ideal to trade when the volatility is at least at the average value.

Cost

The cost increases as the volatility decrease. They are inverse to each other. In other terms, highly volatile markets have the least costs. However, it is quite risky to trade markets with extreme volatility though the costs are low. Hence, to maintain a balance between the cost and volatility, traders may find trading opportunities when the volatility is around the average values or a little above it.

Bonus

Traders can also bring down their total costs by placing orders as ‘limit’ instead of ‘market.’ This will entirely cut the slippage on the trade and therefore reduce the total cost. In the above example, the total cost would decrease by ten pips, which quite a decent reduction for just changing the type of order execution.

Categories
Forex Fundamental Analysis

‘Initial Jobless Claims’ – What Should You Know About This Fundamental Indicator?

Introduction

Introduction

Introduction

The Initial Jobless Claims is a weekly statistics released by the United States department of labor. Unlike most other indicators that are released monthly, this report has an additional advantage. Because the Initial Jobless Claims report predicts the unemployment two to three weeks ahead compared to the employment report that is released monthly.

What is the Initial Jobless Claims report?

Jobless claims report comes directly from the United States department of labor, AKA. DOL. The department of labor is an executive branch of the United States Federal government and is mainly responsible for monitoring and promoting employment, employee welfare, improving employee wages, and helping them to claim their employment benefits. To do so, it enforces the main Federal laws and regulations.

The United state has a provision for providing insurance for those who are unemployed. In the year 1935, this policy came into implementation. Although it does not mean that every unemployed person is eligible, it has certain criteria. Insurance is provided to the people who have worked for a certain period and have recently lost their job due to factors that do not directly involve them.

For example, seasonal layoffs or business closure, the unemployment compensation insurance is applicable. The payment of compensations is for about 20-26 weeks, which may vary from state to state. The amount is usually a percentage of their most recent average wage for the year.

The initial jobless claim is different from them continued jobless claims. This report only shows the number of people who have applied for the unemployment benefit for the first time during the last week. In this regard, it becomes slightly more important than the continued jobless claim as it indicates the increase or decrease in the unemployment rate within the country.

How is the Initial Jobless Claims calculated?

The Initial Jobless Claims is prepared by the department of labor, which receives this data from state unemployment offices, which intern receive them from the local unemployment offices. The department of labor releases this report at 8:30 a.m. Eastern Standard Time.

Although many citizens apply for the benefit, it necessarily does not represent all the eligible people. Because, it is just a claiming, which will be either considered valid or invalid by the respective departments later.

Is the Initial Jobless Claims important?

When trying to assess the importance of the Initial Jobless Claims report as an economic indicator, there are many things we need to keep in mind.

The report does not cover the entire population. Not all people who are eligible for benefits apply for the same. Many people who are not eligible for the benefits will also apply. Also, the report is very volatile from week to week and is also a function of seasonality.  Hence, A four week moving average of the Initial Jobless Claims report irons out this volatility.

Below is a snapshot of the initial jobless claim report for the period of January- 2018 to February-2020. As we discussed, the numbers are very volatile, which makes it one of the ‘not-so-easy to decode’ economic indicators.

An increase in the Initial Jobless Claims report numbers relative to the previous numbers tells that more people have lost a job in the recent time. This has been historically associated with times of GDP contraction and economic stagnation. In other words, it indicates the beginning of an upcoming recession. A conversely significant decrease in the report occurs when the economy is coming out of recession and progressing towards economic growth (GDP expansion).

How can the Initial Jobless Claims Report be Used for Analysis?

The Initial Jobless Claims can act as abridge towards assessing the unemployment rate or the employment situation report (which are released monthly). The frequency of the report is the main advantage in comparison to other indicators. Because it allows interested people to get the most current economic situation. As mentioned, it can give us an idea about economic health two to three weeks before the employment reports that are released monthly.

Some Forex traders who are looking to buy or sell the US dollar can use this report for the most recent data in this regard. Higher the number, lesser is the confidence in the economy’s strength and vice versa. But in general, this is a minor indicator in comparison to the monthly reports, which are complete, thorough, and consistently reliable as they cover a greater section of the nation’s population.

Overall the Initial Jobless Claims report is a cruder and rudimentary indicator and is not robust or consistent at all times. But to some extent, it can reflect the direction in which the economy is heading. It may not be easy for us to know the minor movements in the economy accurately, but major movements get definitely reflected. In such cases, the Initial Jobless Claims report can also act as one of the main leading indicators to predict any oncoming recession or expansion of the economy.

Sources of Initial Jobless Claims Reports

The United States Department of Labor releases the Initial Jobless Claims report weekly on their official website in the ‘news releases’ section. Reference link – Initial Unemployment Insurance Claims

You can also find the same indexes diversified and other related categories like Continued claims etc. on the St. Louis website.

Impact of the ‘Initial Jobless Claims’ news release on the price charts 

After understanding the definition and significance of Initial Jobless Claims as an economic indicator, we are ready to find out the impact of the same on the currency. As we know that Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the week, and the impact is said to vary from week to week. A higher than expected reading is considered to be negative for the currency while a lower than expected data is taken as positive. The data has a moderate to high impact on a currency that causes a fair amount of volatility in the pair.

The below image shows the previous, forecasted and actual number of people who filed for unemployment insurance for the third week of March. We can see that the Jobless Claims were much higher than before with a rise in 70K people. From prerequisite knowledge, this should be extremely negative for the economy and hence the currency, but let us examine the reaction of the market.

USD/JPY | Before The Announcement

We start our analysis with the USD/JPY currency pair, where we notice a strong uptrend, which a result of excessive buying interest of US dollars. The strength in the US dollar could be due to another fundamental factor that is driving the currency higher. Technical analysis tells that when the market is trending strongly in one direction, we need to wait for a retracement to join the trend or wait for market reversal patterns. Hence, before the news announcement, we do not find any suitable way to position ourselves in the market.

USD/JPY | After The Announcement

After the Initial Jobless Claims are announced, volatility increases on both sides but finally closes in the form of ‘Doji’ candlestick pattern. Even though the data was very bad, it was bad enough to cause a reversal in the market. After looking at the market reaction, we can say that the data created confusion among traders as the market consolidates after the news release. Since the Unemployment data did not cause the price to break key levels of support and resistance, the uptrend is still intact. Therefore, one can enter for a ‘buy’ after an indication from an important technical indicator.

GBP/USD | Before The Announcement

GBP/USD | After The Announcement

The above images represent the GBP/USD currency pair, where we witness a strong downward move on the previous day before the news release. After the big move, market moves in a range, and just before the announcement, the price is at the ‘support’ area. This means traders who are optimistic about the Unemployment data can position themselves on the ‘long’ side with a strict stop-loss below the support.

After the news announcement, we hardly notice a change in volatility, and the candle again forms an indecisive pattern. Since the Jobless Claims data did not cause any drastic change in volatility, traders can enter for new ‘long’ positions or hold on their existing ones and should compulsorily exit at the nearest resistance.

GBP/USD | Before The Announcement

GBP/USD | After The Announcement

The GBP/USD currency pair shows similar characteristics as that of the USD/JPY pair, where before the news announcement, the market is in a strong uptrend. In such market scenarios, we essentially cannot position ourselves on any side of the market as we don’t have any technical factors supporting our trade. Therefore, it is wise to wait for the news release and then act based on the data.

After the Initial Jobless Claims numbers were announced, we see an increase in volatility but with no bias. It results in the formation of an ideal ‘Doji’ candlestick pattern with wicks on both sides and small body. Since the market did not collapse, we can conclude that the data was not damaging to the US dollar. From the trading point of view, we cannot enter for ‘buy’ even after the news release as technically, we need a retracement before we join the trend.

That’s about ‘Initial Jobless Claims’ and its relative news release impact on the Forex price charts. If you have any questions, please let us know in the comments below. All the best.

Categories
Forex Fundamental Analysis

The Impact Of ‘Personal Saving’ News Release On The Forex Price Charts

Introduction

Introduction

Introduction

Personal Saving is one of the main components of Personal Income. Savings can give us hints on Consumer Spending patterns and future sentiments concerning financial matters. Personal Spending and Personal Savings are two primary sections into which the Disposable Personal Income divides, and the proportion of these two helps us ascertain short-term and long-term economic activity. Hence, understanding Personal Savings and Personal Savings Rate reports can help us solidify our understanding of fundamental analysis.

What is Personal Saving?

Personal Saving is the difference between Disposable Personal Income and Personal Outlays.

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

Personal Outlays, or Personal Spending, refers to all the expenditures incurred to conduct one’s lifestyle, like rent, internet, fuel, transportation, groceries, etc.

For example, If an individual earns 100,000 dollars per year and his tax-deductible is 30%. His DPI is 70,000 dollars. If his year around expenses amount to 63,000 dollars, then the Personal Savings would be 7,000 dollars. Here, the Personal Saving rate would be 10%. Personal Savings would be the amount left after all the expenses have been deducted from the available income.

Personal Savings Rate (PSR) is the ratio of Personal Saving to the Disposable Personal Income expressed as a percentage.

Marginal Propensity to Save (MPS): It is one more metric used to assess Saving, which is defined as the ratio of the amount saved for each additional dollar. If a person got 100 dollars extra as a bonus this month, and if he spends 60 dollars of it and saves 40 dollars, then his MPS would be 0.4 (40/100). His general savings saw an increase of 40 dollars, and his disposable income saw an increase of 100 dollars. Hence, MPS considers the change in savings to change in income rather than the actual Saving.

Factors That Affect Personal Saving

DPI: An increase in Disposable Personal Income generally translates to increased savings once the necessities are met. Low levels of DPI mean that the majority of the available income is spent on Personal Expenditures leaving little room for saving. Personal Saving has been affected by variations in household net worth, consumer debt, and housing investment. In 2008 and 2009, during the most recent recession, the personal saving rate increased by about two percentage points each year, reaching 5.9 percent in 2009.

Economic Stability: Unstable economic conditions and frequent recessionary periods induce higher saving patterns in the general public as they cut back on their expenses to save for future rainy days. A growing and healthy economy see a stable saving rate and an increase in personal consumption, as people spend more when they have a positive sentiment towards their future financial security.

Deposit Rates: Banks pay interest to depositors for their deposited money. Higher interest rates can attract the general public to save money overspending as it would generate more money for future consumption.

Individual preference: How people traditionally see debt, mortgages, and savings also determines people’s saving and spending patterns. Generally, people from unstable economic regions or developing economies tend to save more than people who have always been in a stable economy. For example, the China saving rate is 35%, while that of America is around 8%. This cultural backdrop also plays a role in people’s tendency to save and spend. The proportion of different people within the economy will determine the direction of Personal Saving Rates.

How can Personal Saving numbers be used for analysis?

Changes in the saving rate are inversely related to changes in household net worth (i.e., cost of a house) as a percentage of DPI. The ratio of household net worth to DPI typically rises during periods in which household real estate and financial assets are appreciating and falls when these assets are losing value. As household assets appreciate, incentives to save from current income are lessened, while incentives to save are increased during periods of falling asset values.

An increase in Personal Savings is good for banks as they can give out more loans in one aspect and hence is good in the long run for the economy. But, in the short term, it implies expenses are cut back, which means businesses will see a slowdown, and that is not good either. An optimal balance between Spending and Saving has to be struck for sustained growth.

Personal Savings usually see an increase during economic shocks and recessionary periods. Hence a significant spike in Saving Rate can be considered as an indicator of an ongoing financial contractionary period.

Personal Savings numbers simply would be a function of growing population and inflation. If the economy improves, so does the Personal Savings. For example, saving 100 dollars ten years back and now are two different things. We have to take inflation and increase in wages into account. Personal Saving Rate is more accurate in this regard as it is proportional. This is illustrated clearly in the below graphs of PS and PSR, respectively.

Hence, PSR is more prevalent amongst economists and investors for analysis. Also, Marginal Propensity to Save is higher for wealthier people than for poorer people. Hence, MPS can also be used to understand what is the standard of living and wealth the general public is enjoying, which reflects the strength and wealth of the overall economy itself.

Impact on Currency

As such, there is no direct one-to-one indication of Personal Savings figure to GDP, but there is a pattern here, during deflationary conditions when the currency value depreciates there is an upward spike in Personal Savings figures. In this sense, it is an inverse indicator and has a mild-to-low impact on the currency market. Economic shocks can also increase the Personal Savings figure.

Due to the long-term nature of the figures themselves, the currency volatility is low around these numbers compared to other macroeconomic indicators. Still, they are useful in understanding the long-term direction of the economy.

Economic Reports

The United States Commerce –  Bureau of Economic Analysis releases Personal Saving as part of the monthly report titled “Personal Income and Outlays.”

BEA releases the report in the last week of the month for the previous month. Quarterly and Annual reports, Seasonally adjusted versions of the same, along with Personal Saving Rate Reports, are all available under this release.

Unlike the PCE (Personal Consumption Expenditure) report, the Personal Saving figures are not expressed in percentages. Instead, the Personal Saving Rates is more popular, which is a percentage metric.

Sources of Personal Saving

The monthly Personal Saving numbers releases can be found on the official website of the Bureau of Economic Analysis under the “Current Release” section. This data can be found here – Consumer Spending – BEA. The Personal Saving Rate report can be found here.

Historical and Graphical comparisons are available on the St. Louis FRED website. Visit these pages to access this information. Personal Savings – FRED & PSR – FRED.

Personal Savings date for countries other than the USA can be found here.

Impact of the ‘Personal Saving’ news release on the price charts 

The Personal Savings Rate is a big determinant of economic activity. The savings of an individual are directly related to consumer spending, which accounts for 63% of GDP. Higher savings can generate higher levels of investments and boost productivity over the longer term. The Harrod-Domar model of economic growth suggests that the level of Personal Savings is a key factor in determining growth. This has an effect on the value of the currency, and traders have a short to long term view on the currency based on the Personal Savings data. Today we will be analyzing the fourth quarter Personal Savings data of Australia that was released on the following date.

The below image shows the latest and previous Personal Savings data, where it was decreased to 3.6% percent in the fourth quarter of 2019 from 4.8% percent in the third quarter of 2019. A higher than expected reading is considered to be bullish for the currency while a lower than expected reading is considered to be bearish.

AUD/JPY | Before The Announcement

The first pair we will be examining is the AUD/JPY currency pair, and as we can see in the above image, the price has shown signs of reversal and might be going lower. Just before the announcement, the market has retraced the recent down move and is somewhere near the support turned resistance area. Technically, this is the ideal situation for going ‘short’ in the market, but it is wise to do so after we get confirmation from the market.

 AUD/JPY | After The Announcement

After the Personal Saving numbers are announced, there is a sudden surge in volatility where the price the initially moves higher, but this gets immediately sold into, and the ‘news candle’ leaves a large wick on the top. When traders found the Personal Savings to be lower than last time, they sold Australian dollars and weakened the currency. This happened as the news was not healthy for the Australian economy. Once the volatility increases to the downside, one can go ‘short’ in the pair with a stop loss above the ‘news candle’ and a ‘take-profit‘ near the ‘support’ area.

EUR/AUD | Before The Announcement 

EUR/AUD | After The Announcement

The above images are that of the EUR/AUD currency pair, and since the Australian dollar is on the right-hand side, a down-trending market, as in this case, indicates strength in the currency. After the big move to the downside, the market has started moving in a range and volatility appears to be high on both sides. Just before the news release, price is at the bottom of the range, known as ‘support,’ and from here, we can expect some buying force, which can take the market higher.

But as there is news release in the next few minutes, it can bring a drastic change in volatility, and we cannot predict where the market will go. After the announcement is made, we see a similar reaction from the market as in the above pair, and the ‘news candle’ leaves a wick on the bottom. We find that the Personal Savings was lower than last time and poor. This is why we see some buying interest in the market from the support, and thus we can go ‘long’ in the market with a stringent ‘take-profit’ near the resistance.

NZD/USD | Before The Announcement

  

NZD/USD | After The Announcement

These images represent the AUD/USD currency pair, where we see that the market is in a strong uptrend, and the Australian dollar is showing a lot of strength. Before the Personal Savings numbers are announced, price is above the moving average, and the uptrend is very much in place. As we do not have any forecasted data available with us, we cannot take any position in the prior to the announcement. We need to notice the change in volatility and then take suitable in the market.

After the Personal Savings data is announced, the market falls owing to poor Personal Spending data, and we see some selling pressure. But since the price does fall drastically and we do not see any trend reversal patterns, going ‘short’ in this pair is ruled out. Thus, the news announcement does not have a major impact on this pair as the uptrend is very strong.

This completes our discussion on the fundamental indicator ‘Personal Spending’ and the impact of its news release on the Forex market. If you have any questions, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Why ‘Personal Spending’ is Considered a Crucial Fundamental Indicator?

Introduction

Introduction

Introduction

Personal Spending makes up one half of Consumer Spending. As consumer spending drives total GDP, tracking Personal Spending patterns and changes can help us better understand the direction of the economy’s health.

What is Personal Spending?

In the broader sense, Personal Spending generally refers to Consumer Spending, which is a significant economic indicator as it drives about 70% of the total GDP. Consumer Spending is made up of two main components: Personal Saving and Personal Spending. Consumer Spending refers to the amount spent to meet daily needs and personal expenses to conduct one’s lifestyle.

In other words, it refers to the money paid for goods and services by the general public. The products and services can include all that we, as an individual, consume to live our lives. The groceries, the movies, the savings, the internet bills, phones, etc. all these are part of our lives that the Consumer Spending measures. Personal Spending in this regard is the more specific component of Consumer Spending.

Consumer Spending = Personal Spending + Personal Savings

Economic Reports

The United States Commerce: Bureau of Economic Analysis measures personal Spending in the form of Personal Consumption Expenditure (PCE) or Consumer Spending Report. PCE report measures the goods and services purchased by individuals and NonProfit Institutions Serving Households (NPISHs)—who are resident in the United States.

PCE also includes purchases by military personnel stationed abroad, regardless of the duration of their assignments, U.S. government civilian, and by U.S. residents who are traveling or working abroad for one year or less.

BEA releases the PCE report in the last week of the month for the previous month. Quarterly and Annual reports, Seasonally adjusted versions of the same, along with Personal Saving Reports, are all available under the release titled “Personal Income and Outlays.”

Why Personal Spending?

Personal Spending is one-half of the Disposable Personal Income (the net amount left after all tax payments from the gross income), and it includes the necessities and personal expenditures. Hence, some may refer to Personal Spending to the expenses incurred by money spent on personal enjoyment like going to Restaurants, Trips, buying jewelry, clothing, movies, gaming, concerts, etc.

In this sense, Personal Spending takes a hit during job loss, tight monetary conditions, or recessionary periods as people cut back on personal comforts and tend to save more for the future. Decreased Personal Spending is not a  good sign for the economy as it withdraws money from the system and stays in people’s bank accounts or pockets only.

The correlation between Personal Spending and the GDP of a nation is strong. As we can see below, during recessions, the GDP and PCE (Personal Expenditures Report)  flat out from their usual and trend sideways or downwards (during more extended recessionary periods), otherwise steadily increase at the same pace.

Real Gross Domestic Product (In Billions)

Personal Consumption Expenditures (In Billions)

How can Personal Spending numbers be used for analysis?

Savings are for future consumption, and Personal Spending is for current use. Personal Savings are suitable for the long-term growth and health of the economy, while Personal Spending is more beneficial for short-term growth. Personal Spending becomes essential when an economy is going in or coming out of recession. It is during these periods of economic contraction-edges where changes in the spending numbers can be used to predict the trend of the economic recovery.

Investors can also monitor the Personal Spending sections of the PCE report and determine the spending patterns of people and predict sectorial growth or slowdowns. For example, a few decades ago, the service sector was not as dominant as it is today. Today about 64% of the expenses go towards services. This change in trend is easily observable through PCE. Through PCE, we can predict which markets are likely to see a boom or slowdown.

For illustration, see the below graphical representation extracted from the BEA official website, of the primary services that people are spending their money on. HealthCare and Housing Utilities make up a majority of the services that are chosen by people when compared to other services like Transportation, or Recreation. Such analysis is very useful for investors and stock traders to assess the industrial performance of different goods and service sectors.

(Image Source – BEA official website)

Impact on Currency

Personal Spending is a proportional indicator. Higher numbers in the Personal Spending section signals a growing economy and hence is good for the currency. Dip in the figures results in currency depreciation. As drop signifies, people are spending less, which results in business slowdowns in the economy, which ultimately results in lower GDP print, which is depreciating for the currency.

Personal Spending is a mild impact indicator as the retail sales figures precede the PCE monthly reports where similar tradable conclusions can be drawn as that of PCE reports. A healthy and growing economy would be reflected in the Personal Spending numbers as the people make up the economy. It is important to remember that Personal Spending is a reflection of the present financial situations of the population and hence only shows what the current economic status of the nation is.

It is a coincident indicator in this sense and is dependent on macroeconomic factors like the government’s policies, Quantitative Easing, inflation, etc. which direct the money flow. Hence, it is the effect in the cause-and-effect equation. It reflects the results of an action rather than the act itself. 

Sources of Personal Spending

The monthly PCE numbers releases can be found on the official website of the Bureau of Economic Analysis – Personal Income and Outlays-PCE

As opposed to Personal Spending, you can find the Personal Saving Rate in these sources – Personal Saving Rate & Personal Income and Savings

Personal Spending data and statistics of various countries can be found here – Trading Economics – Personal Spending

Impact of the ‘Personal Spending’ news release on the price chart 

Now that we have a clear understanding of the Personal Spending economic indicator, we will now watch the impact of the indicator on the value of a currency. As Personal Spending measures the change in the inflation-adjusted value of all Spending by consumers, it accounts for a majority of overall economic activity. This report tends to have a mild to severe impact on the currency.

The below image shows the previous, forecasted, and latest Personal Spending data of the U.S., which is announced on a monthly basis. It is published by the Bureau of Economic Analysis and is the authoritative agency that conducts surveys across the country. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative. Let us examine the reaction of the market for the latest release.

USD/JPY | Before The Announcement

We will start analyzing the impact of Personal Spending data on the USD/JPY currency pair, where the above image shows the state of the chart before the news announcement. It very clear that the pair is in a strong downtrend, which means the U.S. dollar is extremely weak. One of the reasons behind weakness in the U.S. dollar is that the market participants are expecting lower Personal Spending figures for the month of February. At this point, aggressive traders can take ‘short’ positions in the market, owing to pessimism in the market, with a stop loss above the recent ‘high.’   

USD/JPY | After The Announcement

After the Personal Spending data is released, the market as expected goes lower, and volatility increases on the downside. The actual data came out to be lower than the forecasted data, and this made traders to further sell the currency pair. We can say that the poor Personal Spending data accelerated the downfall and took the currency much lower. This is the ideal and risk-free situation when it comes to taking a ‘short’ trade. Thus traders can sell the currency pair soon after the news release and have a much higher ‘take-profit‘ as the indicator has a severe impact.

USD/CHF | Before The Announcement

  

USD/CHF | After The Announcement

The above images represent the USD/CHF currency pair, where the behavior of the chart appears to be a little different from the previously discussed pair. A similarity in both the pairs is that the major trend is down. But here, the price has shown some signs of reversal before the news announcement. This could even possibly turn into an uptrend. As the volatility is high on both sides, it is advised not to carry positions in the market before the news release. One could even face issues such as high spreads and higher mark-to-market loss.

The news announcement resulted in a sudden price drop, and the market reacts negatively to the Personal Spending data. Thus the market here too gets bearish due to poor news data. As one does not see any trend continuation candlestick patterns after the news release, he/she shouldn’t be going ‘short’ in the market right after the announcement. Only after one sees such patterns, he/she can enter the market.

AUD/USD | Before The Announcement

AUD/USD | After The Announcement

These are the images of the AUD/USD currency pair, where the characteristics of the chart are totally opposite from the above two pairs. Since the U.S. dollar is on the right-hand side, a down-trending market would mean strength in the U.S dollar. Therefore in this pair, the U.S. dollar is extremely strong contrary to the above pairs where it was extremely weak. When the volatility is so high on the downside, it is less certain that an even a negative news outcome can result in a reversal of the trend.

After the news announcement, the market moves a little higher, almost negligible, owing to bad Personal Spendings data of the U.S., but this gets immediately sold, and the ‘news candle’ closes with a  wick on the top. Therefore, we can say that the Personal Spendings data did not have a significant impact on this pair, and volatility increased on the downside.

This completes our discussion on Personal Spending and the impact of its news release on the Forex market. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Comprehending The ‘Tourism Revenues’ Statistics & Its Impact On The Forex Market

Introduction

Introduction

Introduction

The global connectivity through the internet, powerful smartphones and gaming technology, we may be led to believe that more and more people prefer to spend time in their home using their entertainment gadgets, but it is not so.

The internet has brought the world closer than ever before, making remote tourist places more accessible and affordable than ever. Tourism Revenues contributes to 2-10% of the total GDP of most countries. Tourist hot spots like Dubai, Mexico, France, Thailand, etc. have Tourism as one of their primary source of revenue generation.

Tourism Revenues, factors affecting it, and measures to improve it all have significant changes in Tourism employment labor, economic growth, and overall development of the economy.  Hence, our fundamental analysis needs to understand the Tourism patterns and its resultant changes in the marketplace.

What is Tourism Revenues?

Tourism is the act of people traveling to and staying in locations outside their usual residing place for leisure, recreation, business, or other purposes for a specified period.  For the general public, a tour typically implies leaving behind their work and home to travel and explore tourist spots with family, friends, or by themselves for refreshment.

Tourists are people coming from outside the current locality into consideration (be it a city, state, or even country) to temporarily visit the place. Business people having to travel on work purposes are also categorized under tourists. Below we have mentioned the three types of Tourism.

Inbound Tourism

Tourists coming into the country to visit are called inbound tourists. This adds to the revenue of the nation as people pay and spend money in domestic currency.

Outbound Tourism

When our citizens go out of our country to foreign destinations for tours, it is called Outbound Tourism. This takes away revenue from our country and adds to the foreign countries, as the domestic currency is exchanged for foreign currency for expenditure purposes.

Domestic Tourism

People of one state visit another state within the country; it is called Domestic Tourism. This is helpful for the visiting state as it brings revenue to the state.

Tourism Revenues

As per the United States Travel Association, in 2019, domestic and international travelers spent 1.1 trillion U.S. dollars. This spending has directly supported 9 million jobs and has generated 277 billion U.S. dollars to the payroll income an 180 billion dollars in tax revenues for federal and local governments.

Travel Industry accounts for 7% of the total private sector employment. The power of job growth through travel is higher than in many other industries. For example, every 1 million dollar sale of travel-related items directly adds to eight jobs compared to only five jobs in the non-farm sectors.

How can the Tourism Revenues numbers be used for analysis?

The following factors affect Tourism Revenues:

✰ Climate: The environmental conditions at the tourist destination adversely affect tourism. For example, In summer, hill-stations and colder regions see a rise in tourist numbers. If the ecology of the tourist place is balanced (avoiding over-exploitation of nature and over urbanization), unexpected adverse weather conditions can be avoided.

✰ Economic Situations: A healthy economy can support tourism. Financially weak people neither travel nor the Government of a weak economy create and promote an excellent tourist destination. Disposable Income of the people determines whether they can afford to spend on discretionary things like tours and travel. Political unrest and terrorist activities adversely affect tourism. Safeguarding and protection are essential from the Government’s side to assist tourism.

✰ Cultural importance: It is the historical and cultural significance of the places, monuments that attract tourists. Preserving and maintaining heritage sites over urbanization (building roads, houses, malls, or buildings for commercial use) can help foster tourism. 

✰ Research value: Researchers actively seek places undisturbed by human exploitation. The preservation of natural forests, seas, oceans can attract tourists who are Archeologists, Geologists, Biologists, Oceanographers, etc.

✰ Religious places: Tourists usually take tours to escape from their daily challenges and find peace. In this sense, religious destinations are always flooded during specific periods in a year. India is one such example where there are a lot of pilgrimage sites that bring in good revenue for the nation. Preservation and regulation of such religious places support tourism.

✰ Internet: Ease of accessibility to new people via the internet encourages people to explore these places. Enthusiasts only visit unknown and remote sites. The more people have reviewed an area, the more people would be comfortable visiting it.

✰ Amenities: Availability of transport, hotels, guiding services enhance the tourist’s travel experience. Lack of all these necessary facilities would contribute to a mediocre travel experience that would slowly decline the tourist numbers. Ratings of the place affect the tourist numbers in the long run.

✰ Economic Impact of Travel: Travelers create a “multiplier” effect on the economy. Apart from the direct purchase of goods and services by travelers, the indirect acquisition of raw materials needed to manufacture them adds to the indirect travel output.

Due to spending in the local areas, additional sales are generated that are categorized as induced output by tourism. For instance, the total jobs supported by Tourism is 15.8 million. As per the U.S. Travel Association, one in ten non-farm jobs indirectly relies on the travel industry. The travel industry has generated 2.6 trillion U.S. dollars for the economy, contributing about 2.6 % of GDP.

Impact on Currency

Tourism revenue supports jobs and the Income of the economy. Tourism is a proportional indicator. An increase in tourism revenues positively correlates to the currency value. As more tourists arrive, the more the domestic currency is in demand and hence appreciating the currency value and vice-versa.

Changes in Tourism Revenues from year-to-year have a low impact on the currency as it makes up less than 5% of GDP for many countries. For this reason, tourism is seen as a low impact indicator.

Economic Reports

The World Travel and Tourism Council provides a comprehensive summary of Tourism Revenues and its contribution to GDP for most countries on their official website. They publish monthly updates in cooperation with Oxford Economics to provide a brief overview of short term trends in the Travel and Tourism Sector.

The Travel Price Index (TPI) published monthly by the U.S. Travel Association measures the travel inflation and is comparable to CPI (Consumer Price Index).

Sources of Tourism Revenues

The information regarding tourism and related statistics can be found in the sources mentioned below.

Monthly Updates- WTTC | World Travel and Tourism Council | Monthly Statistics – USTA for (TPI, Travel Trends, etc.)

Impact of the ‘Tourism Revenues’ news release on the price chart 

Tourism Revenues are slowly becoming a significant source of income for various countries, especially for emerging economies. These revenues contribute a lot to the GDP of a country. Recently, this sector has been gaining a lot of attraction, and as a result,  governments of almost all countries are promoting the tourism industry. Today, we even have an official media release of the revenue generated by tourism alone released by the monetary agency of that country. Therefore, some traders around the world create and remove positions in the market based on the Tourism Revenues data.              

The below image shows the previous and latest Tourism Revenues data of Turkey. This is essentially the amount spent in billions of U.S. Dollars by Foreign tourists. This data is particularly important for developing countries. It is released on a monthly, quarterly, and yearly basis, depending on when the country chooses to publish. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative.

USD/TRY | Before The Announcement

We shall start with the USD/TRY currency pair and find out the impact of the news release on the pair. As we can see in the above image, the market is moving in a range, and just before the news announcement, it is at the bottom of the range. Technically, this is an area from where the price bounces and moves higher, but since there is a news announcement in some time, it is possible that this level could be broken. Therefore, we need to wait and then trade based on the news outcome and shift in volatility.

USD/TRY | After The Announcement

After the Tourism Revenues data is announced, volatility suddenly increases on the upside, and the candle closes as a bullish candle. The reason behind the sudden weakness in Turkish Lira is from the fact that the Tourism Revenues were almost halved in the fourth quarter compared to the third quarter. This made traders sell Turkish Lira and buy U.S. dollars. The buying strength coming exactly from the ‘support’ is a confirmation sign that the market will move higher, and one can go ‘long’ in the pair with stop loss below the ‘news candle.’

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

The above images represent the TRY/JPY currency pair, where we see that, here too, the market is moving in a range before the news announcement. Since the Turkish Lira is on the left-hand side, price is at the ‘resistance’ area just before the announcement. As volatility is high, traders should wait for the Tourism Revenues announcement to get a clarity of the data. Once we know the actual result, we can trade based on the news.

After the data is released, the market expectedly reacts negatively, and price falls to the downside. This fall is due to extremely weak Tourism Revenues data, which made traders sell the currency. As the volatility increases on the downside and the price goes below the moving average, one can take a ‘short’ trade with a stop loss above the ‘resistance’ of the ‘range.’

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

Lastly, we analyze the impact on the EUR/TRY currency pair, where also the market is moving in a range but with a downward bias. As we witness some selling pressure before the announcement, a positive Tourism Revenue data can be an ideal case for going ‘short’ in the pair expecting further downside. However, if the data was to be positive for the Turkish economy, one should wait for additional confirmation before entering for ‘buy.’

After the Tourism Revenues data released, the moves in both the direction and the candle managed to close in green. We do not see a strong up move in spite of weak Tourism Revenues data because selling pressure is high on the downside. As the candle closes, forming an indecision pattern, it is advised to go ‘long’ in the market only after volatility expands on the upside.

That’s about the macroeconomic indicator – ‘Tourism Revenues’ and the impact of its news announcements on the Forex market. If you have any questions, please let us know in the comments below. Cheers.

Categories
Forex Course

106. Introduction to Elliot Wave Theory

Introduction

Introduction

Introduction

Elliot Wave Theory is one of the most popular strategies applied by traders. This theory works exceptionally well if read correctly. In the early 1930s, there was this professional accountant named Ralph Nelson Elliot. He was a stock market expert who analyzed the data of stocks closely for 75 years’ timeframe. He thought that markets move in random chaotic directions but later realized that they don’t. After years of analysis and research, he published a book titled The Wave Principle. This book explained in detail about the theory he had proposed.

Elliot Wave Theory

According to Elliot, the market moves in repetitive cycles. The cause for these cycles is the emotions of mass retail investors, primarily due to psychological factors. It was seen that the upward and downward swings in prices caused by the collective psychology of traders always showed a repetition in the same manner. These swings were referred to as ‘waves.’

So, if traders have a clear understanding of these repetitive cycles, one can predict future price movements. In fact, traders can identify points precisely where the market is going to reverse.

Basic Terminologies

There quite a lot of terms involved in the Elliot Wave Theory. For now, we shall the two most fundamental terms and understand others in the later lessons.

Wave

Elliot proposed that trends are formed as a result of the psychology of investors. He proved that swings formed by this mass psychology were a recurring pattern. And these swings were termed as waves. Elliot’s theory, to an extent, resembles the Dow theory, which also mentions that prices move in ‘waves.’

Fractals

Generally speaking, fractals are structuring whose split parts are like a similar copy of the whole. These structures repeat themselves even on an infinite scale. Apart from individual stocks, Elliot discovered that stock indices showed the same recurring structures. So, he moved to the futures market to analyze if the theory worked there as well.

Predicting the Market with Elliot Waves

Elliot studied the stocks in detail and concluded that predictions could be made using the characteristics of wave patterns. It is known that for a trending market, there is a pullback or correction for it. It is usually said that “what goes up, must come down.” That is, price action is divided into trends and corrections. Trends represent the main direction of the market, while corrections are against the trend.

The Elliot wave theory also uses a similar principle. There is an Impulsive wave that moves in the same directions as the larger/main trend. It always shows five waves in its pattern. Then there is a corrective wave that travels in the opposite direction of the larger trend. On a smaller scale, under each impulsive wave, five other waves can be found again. And such a pattern repeats by going into smaller and smaller scales.

Wondering what the above figure represents? To interpret it, stay tuned for the next lesson.

[wp_quiz id=”71282″]
Categories
Forex Assets

Analyzing The GBP/SAR Exotic Currency Pair

Introduction

Introduction

Introduction

In the Forex market, currencies are traded in pairs, and one currency is always quoted against the other. The abbreviation of GBP/SAR is British Pound Saudi Riyal. Here, the first currency GBP is the base currency, and the second one SAR is the quote currency.

Understanding GBP/SAR

We compare the value of one currency to another, and hence when we buy a currency pair, we are essentially buying the base currency and selling the quote currency. The market value of GBP/SAR determines the strength of SAR against the GBP, so if the exchange rate for the pair GBP/SAR is 4.7167, it means we need 4.7167 SAR to buy 1 GBP.

Spread

Trading the Forex market usually does not involve in spending a lot of commissions like the Stock market. Here, Forex brokers make a profit through spreads. The difference between the Bid and the Ask prices of an asset is called the spread. Some broker has the cost inbuilt into the buy and sell prices of the currency pair we want to trade instead of charging a separate fee. Below are the spread values of ECN and STP brokers for the GBP/SAR pair.

ECN: 40 pips | STP: 44 pips

Fees

A Fee is simply the charges we pay to the broker for executing a particular trade. The fee varies from the type of broker we use. For example, the fee on the STP account model is zero, but we can expect a few pips on ECN accounts.

Slippage

Slippage is the implementation of a trade at a price different from that requested by a trader. Slippage can either be positive (be additional profit) or negative (additional loss) and Mostly occurs when the market is volatile.

Trading Range in GBP/SAR

The trading range is used here is to measure the volatility of the GBP/SAR pair. The amount of money we will win or lose in a given amount of time can be assessed using the trading range table. The minimum, average, and maximum pip movement of the currency pair is represented in the trading range. This can be evaluated simply by using the ATR indicator combined with 200-period SMA.

Procedure to assess Pip Ranges

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

GBP/SAR Costs as a Percent of the Trading Range

The cost of trade depends on the broker and differs according to the volatility of the market. This is because the trading cost includes slippage, fees, and the spread. The cost of variation in terms of percentage is given below. We will look into both the ECN model and the STP model.

ECN Model Account

Spread = 40 | Slippage = 3 |Trading fee = 5

Total cost = Slippage + Spread + Trading Fee = 3 + 40 + 5 = 48

STP Model Account

Spread = 44| Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 44 + 0 = 47

Trading the GBP/SAR Forex pair

The GBP/SAR is an exotic-cross currency pair and is a low volatile market. Looking at the pip range table, the average pip movement on the 1H timeframe is only 62 pips. Hence, The volatility of this currency pair is on the lower side. We know that the higher the volatility, the lower will be the cost to execute the trade. However, this is not an advantage as trading in a volatile market involves more risk.

Let’s take, for example, in the 1M time frame, the Maximum pip range value is 3952, and the minimum is 896. When we compare the trading fees for both the pip movements, we note that for 896pip movement fess is 5.36%, and for 3952pip movement, fess is only 1.21%. As we can conclude from the above example, trading the GBP/SAR currency pair will be a bit expensive.

Categories
Forex Course

105. Summary of Leading and Lagging Indicators

Introduction

Introduction

Introduction

In the previous lessons, we have understood what leading, and lagging indicators are. We also saw how these indicators could be further divided into other types. Here’s a summary of everything we’ve learned so far in this space.

Leading Indicators

Leading indicators are those who forecast prices in the market using historical prices. It indicates a signal for the continuation or reversal of a trend the event occurs. However, these indicators do not work with complete certainty. As they are making a prediction, it is more probability driven.

Lagging Indicators

Lagging indicators, as the name suggests, are lagging in nature. These indicators confirm the market trend using past prices. They are called the trend-following indicators as they give an indication once the trend has been established in the price charts. However, these confirmatory indicators are more reliable than the leading indicators as they give more accurate signals though they are late in doing so.

Please refer to this article to know the differences between these two types of indicators.

In the industry, there are three types of indicators that are widely used. They are

  • Oscillators
  • Trend-following indicators
  • Momentum indicators

If we were to put them into the bag of leading or lagging indicators, Oscillators are leading, trend-following indicators and momentum indicators are lagging. Note that an indicator may not be under one of the types; they can be a combination of two or all three.

Oscillators

An oscillator is a leading indicator that moves within a predefined range. These are to our interest when it crosses above or below the specified bound. These areas determine the oversold and overbought conditions in the market. These indicators are very helpful in determining market reversal. Some of the most popular oscillators include MACD, ROC, RSI, CCI, etc. The usage and interpretation of oscillators have been discussed in detail in this article.

Trend-Following Indicators

Trend-following indicators are lagging indicators that are usually constructed with a variety of moving averages. Crossovers are the typical strategy used with these indicators. These indicators give a signal to buy or sell when the market has already begun its move. Hence, these indicators give us late entries but are more convincing than leading indicators. For example, Moving Averages and MACD are the most used trend-following indicators.

Momentum Indicators

As the name clearly indicates, these indicators show the speed or the rate of price change in the market. Since the momentum can be calculated after the price moves, it is considered a lagging indicator. These indicators indicate when there is a slowdown in the buyers or sellers. And with this, we can assume for a possible reversal. More about this can be found here.

Conclusion

This sums up the concept of leading and lagging indicators. Having an understanding of these indicators is necessary because it is risky if a lagging indicator is analyzed as a leading indicator and vice versa. Also, it is recommended to use these indicators in conjunction with each other for better results. In the upcoming course lessons, we will be discussing interesting topics related to Elliot Wave Theory.

Categories
Forex Fundamental Analysis

Everything About ‘Gold Reserves’ & It’s Impact On The Forex Market

Introduction

Introduction

Introduction

Gold is one of the most precious metals on the planet. In the field of monetary assets and currencies, Gold is like a nuclear warhead among all weapons. Throughout history, this yellow metal has always held its place as a secure financial investment. For a certain period in the international markets, it backed the major currencies like the United States Dollar.

Even though today’s currencies are no longer backed by any metal and are free-floating fiat currencies, countries still own and purchase gold year after year in tons. This shows that it is still one of the important financial assets of many countries. Change in Gold Reserves will have an impact on the nation’s currencies. Hence the study of the same is important for fundamental analysis for traders and investors.

What are Gold Reserves?

Most of the major nations which participate in international trades through export or import maintain a certain proportion of foreign currencies to hedge their currency at times of hyperinflation or deflation to manage their exchange rate at a fixed level, thereby not incurring losses on exports or imports.

Similarly, Many countries’ Central Banks maintain specific metric tons of Gold as reserves in their nation’s vaults along with other assets. Gold deposits saved in the nation’s vaults or other nation’s vaults as their holdings are called Gold Reserves.

Why Gold Reserves?

Up until a few decades ago, the Gold was used to back up the legal tenders of many countries. Today’s world is run by Fiat currencies, which can be printed as much as required by a government as the United States did before the Vietnam war, which led to the crashing of Bretton wood’s agreement. If, in a hypothetical case, let us say the United States dollar is no longer accepted as a legal tender in the global market, then the United States cannot buy or sell goods and services using their currency. Still, they can sell their Gold in exchange for the same.

The exposure of a currency to the market trends volatility, economic crisis makes it an unsafe form of wealth, which can depreciate over time. In this regard, Gold has always proven that it can hold its ground even during a major economic crisis and continue to appreciate to match with the inflationary trends. At times of economic crisis, extreme inflation, or deflation, which results in currency depreciation of a nation, investors, and people, in general, tend to run towards Gold as a safe financial bet.

Economic Reports

The International Monetary Fund (IMF) tracks and keeps the statistics of all assets of a nation as reported by various countries, which are then used by the World Gold Council (WGC), who are responsible for keeping up the demand and supply for Gold in the global market.

The data is obtained from the Central Bank’s Balance Sheets and compiled by WGC and releases monthly. They also provide historical data about the same for various countries to compare and analyze side by side.

How can the Gold Reserves numbers used for analysis?

Gold is not an abundant metal on the planet, and its rarity, along with unique lustrous yellow radiant color and other physical properties, has always kept it in demand in the market of jewelry, trades, and particular instrument designing sectors.

Gold is seen as one of the standard forms of wealth to be passed on from one generation to another, meaning its value keeps rising with global economic growth. As economies become wealthier, the Gold price also tends to be costlier. The worth of Gold in that sense has always remained constant, i.e., a precious and expensive metal.

The Gold demand increases during times of high inflation, and because of the limited supply, the price of Gold increases against the currencies. In this sense, the countries which are a net exporter of Gold see their domestic currency worth appreciating. Countries that are importers of Gold see their currency worth falling against Gold. In this aspect, Gold is indeed still a form of currency, or we can say it is an alternate form of currency.

Nations purchase Gold from the Bullions market and store up just like an ordinary employee saves up money for future needs or as an emergency fund for a rainy day.  Major Nations increase their Gold Reserves in hundreds of tons per year as it preserves wealth better than most currencies, and also for their concern on long term economic health and growth of their nation.

Below is Gold Reserves numbers for prominent countries having high holdings.

Above image is taken from the World Gold Council Official Website

Impact on Currency

A country with no Gold Reserves is exposed to all the risks associated with Fiat Currencies. Throughout history, there have been many currency crises where the dips have been so low that markets crashed, and governments collapsed, for instance, the Black Wednesday, which pushed the Sterling pound out of European Exchange Rate Mechanism.

Countries having substantial Gold Reserves numbers can face economic crises without market crashes, and the system collapses. As at any time, they can sell their Gold Reserves to increase their Currency worth, and let it float back again in the market against other fiat currencies.

Investors who have invested in foreign companies in that nation’s domestic currency can eliminate the fear of his returns depreciating over time or during economic crises there if the nation has sufficient Gold Reserves. Traders who Carry Trade can also be sure of their deposits not being subjected to major shocks that lead to unexpected volatility in the short run as the country will be able to recover from this through their reserves.

Gold Reserves inherently indicate a nation’s capacity to bounce back from a crisis or to never go into one in the first place. This is the reason why the United States Dollar and Euros are one of the major pairs as their Gold Reserves are in the top five amongst the world due to which the volatility in the currency is so low, making it a safe bet to trade on.

Low Gold Reserves can lose the confidence of investors, which would further depreciate the value of an already weakening currency, thereby pushing the economy further down the drain of a crisis. In Conclusion, the higher the Gold Reserves, the lesser the volatility and vice versa.

Sources of Gold Reserves Index

We can monitor the Gold Reserves changes of various nations across the globe from the WGC monthly reports, and they can be found here. Global Reserves data of different countries can also be found here. You can also go through Gold Reserves of the Federal Reserve Banks of the United States history here. We can derive the same numbers from the Central Bank’s balance sheets or the National Bureau of Economic Research.

Impact of the ‘Gold Reserves’ news release on the price chart 

Gold reserves play a major role in maintaining the economic stability of a country, and thus the government tries to own a lot of Gold. Some of the main uses of Gold include hedging against inflation and determining the value of import and export. The Gold Reserve of the country is released on a quarterly and monthly basis that shows the transactions carried out by different nations. Since the Gold Reserves held by a country is an important economic indicator, it said to have a moderate to high impact on the value of a currency.

The above image shows the previous and latest Gold Reserve data of India, which is published on the 1st of every month. A higher reading than before is considered to be bullish for the currency while a lower reading is taken to be bearish. India’s Gold Reserves was reported at 28.997 USD bn in Jan 2020. This shows an increase from the previous number of 27.831 USD bn for Dec 2019. The Reserve Bank of India is the official organization that provides Gold Reserves in USD.

EUR/INR | Before The Announcement

The first pair with which we will start our discussion is EUR/INR, where the above image shows a ‘daily’ time frame chart of the same. We see that the market is in a range from more than three months and currently seems like it has broken out of the range. Since we don’t have any clue of the Gold Reserves data, we cannot take a position on any side of the market. Technically, we have broken above the range, and we need a suitable retracement to join the trend.

EUR/INR | After The Announcement

As the data is released and the market gets to know that the Gold Reserves were increased than before, we see a sudden drop in prices as a result of strength in Indian Rupee. But later, the price reverses sharply, making the candle to close in green. One of the reasons could be that since the market was in a strong uptrend, it tried to make its last move up and finally collapsed later.

The volatility is seen to increase on both sides. From a ‘trade’ perspective, here’s where the technical analysis should be combined with fundamental analysis. We cannot take a short trade until the price crosses below the moving average, which is a sign of reversal.

GBP/INR | Before The Announcement

  

GBP/INR | After The Announcement

The above images represent the GBP/INR currency pair where we witness an extremely weak Indian Rupee, and just before the announcement, price is at the recent ‘higher high,’ which means this is the point from where the market fell. Without guessing what the Gold Reserve data might be, it is wise to wait for the news announcement and then take suitable action. However, one can still trade in ‘options’ to take advantage of high volatility when the announcement is being made.

After the news release, we see that the market drops, and the candle closes in red, which means there are high chances that traders may see the data as positive for the Indian economy and hence buy INR. Thus, as soon as the price falls below the moving average, we can go ‘short’ in the pair with a conservative target. Also, the price is in an area that could be a possible resistance.

USD/INR | Before The Announcement

USD/INR | After The Announcement

In the USD/INR currency pair, before the news announcement, the market moves up after reacting from the ‘support’ area and currently is in the middle of the range. Again, we don’t find any way to trade this pair as a news announcement can cause sudden volatility on any side. The overall volatility also appears to be low in this currency pair.

After the announcement is made, we see that the price drops below as a result of an increase in Gold Reserves from the previous month. The sudden increase in volatility on the downside, making the price go below the moving average, may attract one to go ‘short’ in the pair. We can sell the currency pair, but the stop loss needs to be placed above the resistance. The risk to reward ratio of this type of trade would be around 1:1.

That’s everything about Gold Reserves and the impact of its new release on the Forex price charts. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Assets

Exploring The GBP/ILS Forex Exotic Currency Pair

Understanding GBP/ILS

Understanding GBP/ILS

Understanding GBP/ILS

GBP/ILS is the abbreviation for the Pound sterling against the Israeli Shekel. In currency pairs, the first currency GBP here is the base currency and the second currency ILS is the quote currency. In Forex currency pairs, if the value of, let’s say, the base currency goes up, the quote currency’s value will go down and vice versa.

Also, when we buy a currency pair, we buy the base currency and implicitly sell the quote currency. The market value of GBP/ILS determines the strength of ILS against the GBP that can be understood as 1 Pound is equal to how much ILS. So if the conversion rate for the pair GBP/ILS is 4.4725, it means to buy 1 GBP, we need 4.4725 ILS.

Spread

We know that the “bid” is the price at which we sell the currency, and “ask” is the price is at which we can BUY the currency. The arithmetic difference between the ask and bid price is known as the spread. The spread is how most of the brokers make money. There are also brokers who charge a separate fee instead of making profits in the form of spread. Below are the ECN and STP spreads for the GBP/ILS Forex pair.

ECN: 54 pips | STP: 56 pips

Fees

Every time we place a trade, some commission must be paid to the brokers, and that is known as a fee. This fee varies from broker to broker. For instance, there is no fee charged on STP account models, but ECN brokers do charge some fee.

Slippage

The arithmetic difference between the expected price of a trader and the price at which the trade is executed is known as slippage. It can occur mostly when the market is volatile & fast-moving. Another reason when the slippage may occur is when we place a huge number of orders at the same time.

Trading Range in GBP/ILS

The trading range here is to measure the volatility of the GBP/ILS pair. Whether we make a profit or loss in a given time period depends on the movement of a currency pair that can be assessed using the trading range table. It is a representation of the min, avg, & max pip movement in a currency pair.

Procedure to assess Pip Ranges

  1. Add the Average True Range indicator to your price chart
  2. Make sure to set the period to one
  3. Then add a 200-period Simple Moving Average to ATR
  4. Shrink the chart in order to assess a significant period
  5. Select the timeframe of your choice
  6. Floor level must be measured and set that value as the min
  7. 200-period SMA must be measured and set that value as average
  8. Finally, measure the peak levels and consider this as Max values.

GBP/ILS Cost as a Percent of Trading Range

The cost of trade depends on the broker and mostly varies based on the market’s volatility. The below tables represent the cost variation in terms of percentages.

ECN Model Account

Spread = 54 | Slippage = 3 |Trading fee = 5

Total cost = Slippage + Spread + Trading Fee = 3 + 54 + 5 = 62

 

STP Model Account

Spread = 56| Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 56 + 0 = 59

Trading the GBP/ILS

The GBP/ILS is an exotic-cross currency pair and is a trending market. We consider the market to be trending when the price generally moves in one direction, either downwards or upwards. As seen in the Range table, the average pip movement on the 1-hour time frame is 112. This clearly shows that the pip movements are normal, and this currency pair is tradable.

Note that the higher the volatility, the lower is the cost of the trade. However, this is not an advantage as it is risky to trade highly volatile markets. Let’s take, for example, in the 1M time frame, the Maximum pip range value is 3469, and the minimum is 1080. When we compare the fees for both the pip movements, we find that for 1080pip movement fess is 5.74%, and for 3469pip movement, fess is only 1.79%.

So, we can confirm that the prices are higher for low volatile markets and low for highly volatile markets. It is recommended to trade when the market volatility is around the average values, but experienced traders who strictly follow money management can trade in a volatile market. The volatility here is moderate, and the costs are a little high compared to the maximum values. But, if our priority is towards reducing costs, we may trade when the volatility of the market is around the maximum values.

Categories
Forex Course

103. Analyzing The Power Of Oscillators

Introduction

Introduction

Introduction

In the previous lesson, we had an introduction to oscillator indicators and understood how they work. In this lesson, we shall put that into action by analyzing some of the most used oscillators.

Quick Revision

In general, Oscillator is any object that moves back and forth between two points. In simple terms, anything that moves between two points, 1&2, is said to be an oscillator.

The concept remains the same for trading as well. An oscillator is an indicator which moves within two bounds in a range. When trading using oscillators, our eye catches interest when it is around the peaks and troughs. These areas generate buy and sell signals. Precisely, it indicates the end of a trend or the beginning of a new trend.

Trading Oscillators

Stochastic, Relative Strength Index, and Parabolic SAR are the extensively used oscillators by traders.

All these indicators work under the premise that the rate of price change begins to slow; that is, the number of buyers or sellers have reduced at the current trading price. And this change in the momentum indicates a possible trend reversal because the other party is losing its gas. Such indications are given when the oscillators are at the overbought or oversold regions.

Stochastic Indicator

The stochastic indicator is an oscillator whose upper and lower bounds are 80 and 20, respectively. So, if the line moves 80, it enters into the overbought region, and if it drops below 20, it is said to be in the oversold region.

Calculating stochastic variables

There are two line on the stochastic oscillator, namely, %K and %D. Both the values are calculated as follows:

%K = 100 x (Price – L) / (H – L)

%D = (K1 + K2 + K3) / 3

Where, in %K, H and L represent the Low and High for the specified period. And %D represents the average of the most three recent values of the %K.

Note: In the given example, the period is chosen as 14 (last 14 days/candles).

RSI Indicator

The Relative Strength Index (RSI) is a momentum oscillator that measures the rate of change of price and the magnitude of directional price movements. The RSI calculates the momentum as the ratio of higher close values and lower close values for a specified period. As it is an oscillator, it oscillates between the bounds 30 and 70. The interpretation for it is the same as that of other oscillators.

Interpretation Example

To illustrate the use of the oscillators, consider the given chart of USD/CAD on the 1D timeframe. To the price chart, the stochastic and the RSI oscillator has been applied.

At the vertical red lines, it can be seen that the market was overbought according to both the oscillators. This is an indication that the market which was in an uptrend priorly is not losing strength. Hence, in hindsight, the market falls as the oscillators start to make their way back into the range.

Bottom Line

Oscillators are great leading indicators that help in determining oversold and overbought conditions. It also gives traders an indication of the possibility of a market reversal. From the above example, it is seen that these indicators work like a charm. However, one must note that oscillators work in your favor, but not always. Sometimes, one oscillator indicates a buy while the other does not. These are the times when traders must avoid trading such instruments. As shown, oscillators must be used with other oscillators or technical tools to achieve the best out of it.

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Categories
Forex Fundamental Analysis

Understanding The Impact Of ‘Crude Oil Production’ On The Forex Market

Introduction

Introduction

Introduction

Crude Oil is the primary mineral from which the most widely used petroleum products like Diesel, Petrol (or Gasoline) are produced. For most countries, Oil is a primary energy source. Any decrease or increase in the global production of Crude Oil creates significant Oil market price volatility.

There are many countries whose primary source of revenue is from Crude Oil production alone. Hence, changes in the Crude Oil Production levels hurt the buyers due to raised Oil prices and the sellers due to decreased income. Thus, Crude Oil Production statistics are critical metrics to predict expenditures of Oil Consumers and revenues of Oil Exporters.

What is Crude Oil Production?

Crude Oil

It is a naturally occurring, hydrocarbon mineral, unrefined petroleum product inside Earth. It is dark yellow-black in texture, and, based on the region of extraction, it can have different impurities with it. It is a non-renewable energy source and hence is limited.

If the impurities are more, it is called Sour/Heavy Oil and is generally abundant and is not preferred much due to the additional refining costs that are associated with it. If the impurities are less, it is called Sweet/Light Oil and is the preferred one over the Heavy one and is naturally costlier than its counterpart. Refining of Crude Oil and boiling it distills away the impurities to give useful petroleum products like Petrol, Kerosene, Diesel, etc.

Crude Oil Production

It refers to the process of Oil extracted from the ground after the removal of impurities and inert matter. It consists of Crude Oil, Natural Gas Liquids (NGLs), and additives. It is measured in a thousand tonne of Oil equivalent (toe). The final products, like Gasoline, are measured in the number of barrels produced. One barrel is equivalent to 42 Gallons, or 159 Litres, or 35 Imperial Gallons. The leading Oil Producing countries are the United States, Saudi Arabia, and Russia.

Organization of the Petroleum Exporting Countries (OPEC)

It is an organization of 12-oil major producing countries that make up 46% of the world’s oil production. They regulate the price of fuel to sustain this non-renewable resource for an extended period. In the early 21st century, the advent of new technologies (mainly Hydrofracturing) has led to a boom in the U.S. Oil production numbers, decreasing the influence of OPEC.

How can the Crude Oil Production numbers be used for analysis?

Crude Oil production is susceptible to the following factors:

Political Tensions: Many of the countries sitting on top of Crude Oil reserves are victims of political unrest. Crude Oil supply is drastically affected by political turmoil and wars. Iran-Iraq War, the Persian Gulf wars, Arab Oil Embargo, etc. are some typical examples.

Weather Patterns: Storms and Hurricanes have always threatened Crude Oil deposits and shipments. Oil spillage due to bad sea-weathers is the worst. An example would be the Deepwater Horizon Oil Spill in 2010, where approximately 480 tonnes of Crude Oil was spilled into the Ocean. This type of incident spikes the Crude Oil prices as the supply is reduced.

Exploration and Production: Crude Oil is a non-renewable energy resource. It will be exhausted after a certain period. Exploring new regions for drilling and extraction involves huge costs. Set up of Production units is also a hefty investment

Investments & Innovation: Poor technology and lack of funds can negatively affect Crude Oil Production. The United States gained back its dominance in Crude Oil Production through the innovation of Hydrofracturing that dramatically increased its Crude Oil Production.

Demand: Demand motivates companies and governments to invest more in Crude Oil Production. As the world starts to switch to other resources, it is the demand that will primarily drive the supply of Crude Oil in the long run. Application is linked to population growth and reliance on Crude Oil as an energy source. As emerging economies increase Oil consumption while alternate energy sources are being developed, the current Oil consumption is set to stay steady and, if not, increase more for now.

Impact on Currency

Investors purchase mainly two types of Oil contracts:

Spot Contract: In this, the price of Oil reflects the current market price of Oil. Commodity Contracts in the Spot market are effective immediately, i.e., Money is exchanged, and Oil delivery starts right then.

Futures Contract: This is the more common form of Contracts purchased by traders, as they speculate the price of Crude Oil based on many factors and algorithms. They agree to pay a certain amount for Oil at a set future date. Companies dependent on Crude Oil use these contracts to hedge the risk of price volatility.

In Northern America, West Texas Intermediate (WTI) is the benchmark for Oil futures traded on New York Mercantile Exchange (NYMEX). In the Middle East, Europe, the reference is the North Sea Brent crude exchanged on the Intercontinental Exchange (ICE).

A decrease in Crude Oil Production leads to a rise in oil prices, which is terrible for the economy and currency. As fuels become expensive, currency value depreciates. It creates inflationary conditions within the economy. All Oil dependent industries like textile, chemical, medicine industries increase the cost of their end-products to compensate for the price increase. Gasoline, Petrol, and Other Crude Oil end-products become less affordable.

A sufficient supply of Crude Oil is necessary to keep inflation in check. Hence, it is a proportional indicator. Although the Crude Oil market is more volatile than currency and stock markets, large scale price changes reflect in the currency and stock values over a period. The effect on currency is dependent on the degree of dependence of the nation on Oil. The more dependency, the more the volatility in the currency. Typically, Major currencies do not see a change in values as dramatic as the Oil price.

Economic Reports

Investors, economists, and traders closely watch OPEC’s Monthly Oil Market Report (MOMR). It is released in the middle of the month for the previous month. The International Energy Agency (IEA) Oil Market Report released monthly is also widely used by many. IEA was formed in 1983, and since then, it has been the source for official government statistics from all OECD and few non-OECD countries.

The Weekly Petroleum Status Reports from the United States Energy Information is also a famous report to monitor Crude Oil Inventory levels. The American Petroleum Institute’s Weekly Statistical  Bulletin (WSB) reports the United States and regional Crude inventories and data related to refinery operations.

Sources of Crude Oil Production

The Global Crude Oil Production and Trade statistics can be found in the sources provided below.

OPEC – MOMR | IEA – Oil Market Report

Enerdata – Crude Production | Crude Oil Production – OECD | EIA – Crude Oil Production

EIA Weekly Inventory Status Report | API WSB Report

Impact of the ”Crude Oil Production” news release on the price chart 

Crude Oil Production plays a significant role in the economic growth of a country and in determining the rate of inflation. It is especially important for monetary policymakers and Central banks who decide on the interest rates based on oil production. The fundamental factors of demand and supply influence the rise and fall of oil prices. This Crude Oil Production has a direct impact on the oil price.

Low production of crude oil increases the price of Oil, which increases the cost of production and transportation. This increases the cost of goods and services in the country and has an adverse effect on the value of a currency. As Crude Oil Production is such an important news release, it creates a great impact on almost currency pairs, but predominantly more on the U.S. dollar pairs.

In today’s article, we will be analyzing the impact of Crude Oil Production in the Gulf, where the data is published by the Organisation of the Petroleum Exporting Countries, famously known as OPEC. The below image shows the quantity of Crude Oil Production in Barrels for the month of March.

USD/JPY | Before The Announcement

First, we shall analyze the USD/JPY currency pair, and the above image shows the state of the chart before the news announcement.  Around three hours before the release, we see that the market is aggressively moving down, indicating a great amount of downward pressure. If we carefully observe, currently is at a place where this price was portraying as ‘support’ on the previous day. Therefore, we can expect ‘buying’ strength to come back into the market from this point.

USD/JPY | After The Announcement

After the Crude Oil Production data is announced, the price falls drastically, and the ”news candle” closes as a strong bearish candle. The market reacted very negatively because the Crude Oil Production was lower as compared to the previous month. This impacted the U.S dollar adversely, and traders sold the currency, thereby increasing the volatility on the downside. As mentioned in the previous paragraph, since the price at the key ”support” level, taking a ”short” trade can prove to be risky at this point. It is safer to ”sell” after a suitable retracement.

AUD/USD | Before The Announcement

AUD/USD | After The Announcement

The above images are that of the AUD/USD currency pair, where we see that the market is in a strong downtrend, and recently the price has moved higher in the form of retracement. Technically, this is the ideal scenario for trend trading and going ”short” in the pair, but as there is a high impact news announcement in few minutes, the market could sharply move on any side. Therefore, it is wise to wait for the release and then trade based on the data and shift in volatility.

After the news announcement, the price suddenly surges and moves higher in the beginning, but the price sees some selling pressure from the top and closes with a large wick on the top. The sudden up move is because of the weak Crude Oil Production data, which made traders sell the U.S. dollar and cause a short-term reversal in the market. As the ”news candle” still closes as a bullish candle, one should not underestimate the buyer’s strength and go ”short” in this pair. We also cannot go ”long” in the currency pair due to the selling pressure seen later. Thus, we can only trade the pair after he/she gets a sense of clear direction.

NZD/USD | Before The Announcement

  

NZD/USD | After The Announcement

Lastly, we shall discuss the NZD/USD currency pair, where the first image shows the characteristics of the chart before the news announcement. As we can see, the pair is in a strong downtrend, and just before the release, it is at the lowest point. This indicates a great amount of strength in the U.S dollar, as it is on the right-hand side. If the Crude Oil Production is lower than before, the pair will continue to move lower, and we will not have a suitable trade entry.

On the other hand, if the data is better than last time, we can only go ”long” in the market, if we see some reversal patterns. After the data is released, the market moves sharply higher, almost similar to the above pair, and again leaves a wick on the top. The bad news in the form of lesser Crude Oil Production increased the volatility on the upside and shot the price up.

That’s about ‘Crude Oil Production’ and its impact on the Forex market. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Comprehending ‘Capital Flows’ As A Macro Economic Indicator

Introduction Capital Flow is a useful indicator to assess the relative strength of economies and sectors within an economy. Capital always tends to flow towards growing, improving, and strengthening regions, be it industries, economies, or even currencies. Tracking the flow of Capital can help us understand the expanding areas within a nation and also throughout […]

Introduction Capital Flow is a useful indicator to assess the relative strength of economies and sectors within an economy. Capital always tends to flow towards growing, improving, and strengthening regions, be it industries, economies, or even currencies. Tracking the flow of Capital can help us understand the expanding areas within a nation and also throughout […]

Introduction

Capital Flow is a useful indicator to assess the relative strength of economies and sectors within an economy. Capital always tends to flow towards growing, improving, and strengthening regions, be it industries, economies, or even currencies. Tracking the flow of Capital can help us understand the expanding areas within a nation and also throughout the world. It also gives us an insight over which sectors are contracting or experiencing a slowdown. Hence, understanding Capital Flow is crucial for investors and traders to make critical investment decisions.

What is Capital Flows?

Capital Flow refers to the money movement within an economy amongst different classes or economies in the broader sense. Capital movement from one sector to another can be for various purposes like an investment, trade, or business operations. On a small scale, individual investors can direct their savings and investment capital into securities such as mutual funds, bonds, or stocks, etc.

On the medium scale, It can include money flow within corporations in the form of investment funds, capital spending on business operations, and R&D. For example, Big tech Giants like Apple or Microsoft can direct their funds on expanding their production sites in other countries. In this case, Capital flows out of the country, or they may choose to invest in Research and Development Sector to develop new products and services, where Capital flows into that division, which is usually headquartered in the native country, in this case, the United States.

On the larger scale, Capital Flows are directed by Government from their federal tax receipts to many outlets like public spending programs, regulatory operations, foreign trades, currencies, and foreign investments, etc. On what aspects the Government decides to direct the flow of Capital can imply many things like development, employment, inflation, foreign goods, imports, etc.

As the entire world runs on money, directing the flow of money is essential. An excess of influx or deficit of money flow can be detrimental for any sector. Hence, the Government segregates Capital Flows into different types for studying, regulating, and policy-making purposes. The following are the Capital Flow types:

Asset-class movements: It refers to the changes of Capital between liquid currency, stocks, bonds and other financial instruments like real estate, metals (ex. Gold, Iron, etc.)

Venture Capital: It refers to the shift in trends of capital movements directing towards startup businesses. Which sector new startup businesses are seeing capital inflow and which are not is tracked through Venture Capital statistics.

Mutual Funds Flow: It tracks the overall addition or withdrawal from the underlying classes of its funds, which can be bonds, stocks, banks, or other mutual funds. Inflow and outflow from one segment to others can imply many things for investors. In general, the influx of Capital Flow into a sector is positive, while outflow is depreciating for that segment class.

Capital Spending Budgets: It refers to the Capital movements for the corporate institutions and is used to monitor growth and expansionary plans of the corporate based on their budget allocation patterns.

Federal Budgets: This is the critical component amongst Capital Flows as it has a long-term impact on the economy and can either attract or drive-off foreign investors. It refers to the budget plans allocated for public spending, running economic operations and regulations, etc.

How can the Capital Flows numbers be used for analysis?

Money accompanies the growth period. Money always follows where there is growth or improvement. In the financial markets, this is called “hot money,” which refers to the funds from investors throughout the world. Whenever a stock market performs good, or an industrial sector improves or comes up with an innovation, it is followed by an increase in the inflow of Capital.

The capital flow can assess the relative strength of capital markets into and out of the markets or the liquidity of that stock market. As the United States is the world’s largest economy and accordingly, it is having the top two stock exchanges, i.e., the New York Stock Exchange (NYSE) and Nasdaq (NASDAQ) beating all the global stock exchanges.

At the corporate level, the flow of Capital helps investors assess the current financial stature of the company and their probable future plans. For example, Investments into expansionary plans are likely to generate more revenue in the future.

The Government’s Federal Budget can be used to analyze how much growth can be expected based on the current public spending and what portion goes into servicing debts. For instance, Higher budget allocation for public spending is indicative of an effort to stimulate the economy in a positive direction. Similarly, interest rates, bond yields can all determine Capital flow in and out of the economy.

Impact on Currency

When Capital flows into the country, the currency appreciates and vice-versa. For example, when the USA regularly imports foreign goods resulting in dollars going out of the country, this results in excess of U.S. dollars in the global economy due to which the value depreciates. On the other hand, if the USA continuously exports its goods, for this other countries send dollars into the USA, creating a deficit in the rest of the world. Accordingly, the demand for dollar increases and currency appreciates.

Generally, High yield rates (ex: Treasury Bonds), bank interest rates deposits relative to other economies attract Capital into the economy. When markets experience a slowdown or heading for a crash, it is amplified by the outflow of cash as it propels the de-liquefication and further drives down the confidence of people. Hence, healthy Capital inflow is essential to maintain the economy and for the currency to hold its value against other currencies. The same is illustrated in the below plot:

(Chart Credits – Market Business News)

Economic Reports

Capital Flow is a broad metric with several components, as discussed. The corporate balance sheets and press releases can be used to understand the Capital Flow within corporate sectors, which they usually release quarterly, or annually on their own official websites. The Federal Reserve System releases of the United States releases its Federal Budget and its recent revisions on its official website. There are many online platforms to track the status of the global stock exchanges themselves to observe the Capital Flow.

Sources of Capital Flows

Fed Balance Sheet Data & Information can be accessed here.

Information on major indices can be found here.

Capital Flow metrics with illustrative graphs for analysis can be found here.

Impact of the ‘Capital Flows’ news release on the price chart 

Now that we have understood the importance and significance of Capital Flows in a country, we shall study the impact of the same on the value of a currency. Capital Flows does not only mean the movement of funds across countries, but it is also measured in terms of investment in asset-classes, venture capital, federal budget, mutual funds, and government spending.

Capital Flows have quite an impact on the economy, if not a major effect. The revenue of the local Exchange Market, money supply and liquidity are some of the parameters which fall prey to any disturbances in the Capital Flows. Traders and Investors keep a watch on the Capital Flows data and monitor the trend of Flows. They will be interested in investing in the country only if they feel that there is growth potential looking at the monthly data.

In this section, we will be looking at the Capital Flows data of the U.S. collected in the Month of February and analyzed the impact on various currency pairs. This data is collected and published by the Department of Commerce’s Bureau of Economic Analysis. A higher than expected reading should be taken to be positive for the currency while lower than expected data is considered to be negative.

USD/CAD | Before The Announcement

Let us first analyze the USD/CAD currency pair. The above image shows the characteristics of the chart before the announcement was made, and we see that the pair in a strong uptrend moving aggressively higher. The uptrend could be due to another fundamental reason which we are not sure about. Thus, we should not be taking ‘short’ trades based on the forecasted data as we don’t see any signs of reversal on the chart.

USD/CAD | After The Announcement

After the Capital flows data is published, we witness a large amount of volatility in the market, and finally, the price closed as a bullish candle. Due to the increased volatility, the price initially went lower, but later, when traders apprehended the numbers, they bought U.S. dollars aggressively, and the ‘news candle’ closed with great strength. This reaction was because the Capital Flows data was largely above expectations and much higher than last time. However, one should not chase the market and enter for ‘buy’ but instead wait for a retracement to join the trend.

AUD/USD | Before The Announcement

AUD/USD | After The Announcement

These are the images of the AUD/USD currency pair, where the first image shows the state of the chart before the announcement is made. In the first image, we see that the price is mostly moving in a ‘range,’ and there is a fair amount of volatility on both sides. Just before the news release, the price is a little above the ‘support’ area, and one can expect some green candles from this point.

This means one should be cautious before taking any ‘sell’ trade from here. After the news announcement, the price sharply drops lower, and we see a rise in the volatility to the downside. Traders again bought U.S. dollars in this pair, and the price closed as a strong bearish candle exactly at the ‘support.’ One could use the supply point of the ‘news candle’ and then take a ‘short’ trade with a  stop loss above the recent high.

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

Next, we discuss the NZD/USD currency pair where before the announcement is made, the market is range-bound, and currently, the price is in the middle of the range. Aggressive traders who wish to ‘buy’ the currency pair based on the forecasted data can do so, but they do should be willing to close their positions after the release if there is a huge difference in the actual data.

But as the volatility is high to the downside, it is advised to wait for the news outcome and then trade based on the market reaction. After the news release, traders sell the currency pair owing to wonderful Capital Flows data for the U.S. economy, and here too, the price closes as a bearish candle. Now we are sure that the weakness could be increasing in the pair, and one can take a risk-free ‘short’ trade with a stop-loss above the ‘resistance’ of the range.

That’s about Capital Flows and the impact of its new release on the Foreign Exchange price charts. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

‘Consumer Confidence’ & The Impact Of Its News Release On The Forex Price Charts

Introduction

Introduction

Introduction

Changes in Consumer Confidence drives macroeconomic indicators like Consumer Spending, which is a significant driver for Gross Domestic Product. Understanding what Consumer Confidence Surveys mean and imply are essential for predicting current and upcoming economic conditions. When understood properly, Consumer Sentiment can give us a hint regarding the direction of economic activity as an advanced or leading indicator.

What is Consumer Confidence?

The Consumer Confidence Statistics reflects the outlook of consumers on the future economic conditions and their financial status. The uniqueness of this indicator lies in the fact that this is a very subjective indicator and may be biased to some extent as it depends largely on the people’s opinion. Two people having the same current job and financial status may give a different outlook on it, but since the scope of the survey is broad, it irons out such exceptions and inconsistencies.

Consumer Confidence reflects how positive or negative people are feeling towards their future in the context of financial security, income, and employment. It is essentially a measure of the Consumer Sentiment in economic and monetary terms.

The numbers shown by Consumer Confidence surveys are not some monetary numbers derived from calculations, but instead, they are opinions rated on a scale in a numeric form similar to how we give a rating to movies on corresponding websites with stars or a ranking from 0-10.

How is Consumer Confidence scaled and assessed?

There are two major survey reports which show Consumer Confidence:

Consumer Confidence Index

It is released monthly by the Conference Board and reflects the general public’s expectations about their economic prospects for the next six months. The Conference Board expertise in these types of surveys (watching Consumer Spending and Buying habits) and take into account a plethora of data and survey information into account (about 5000 households) for their indices. Hence, it is considered a very reliable indicator by many.

Consumer Confidence Index is composed of the Present Situation Index, intended to be a coincident or current economic indicator, and the Expectations Index, expected to indicate future financial health.

Consumer Sentiment Index

The University of Michigan releases a preliminary report on the second Friday and a final report on the fourth Friday of every month. Their Consumer Research center conducts a telephonic survey asking 500 consumers a series of questions on personal finances and their opinions on business conditions. Two components, namely, Expectations Index and Current Conditions Index, make up the questions of Consumer Sentiment Survey.

Is Consumer Confidence necessary for our analysis?

The idea behind Consumer Confidence Surveys is that when consumers are confident of their economic prospects, they will spend more on personal expenses beyond the basic needs. For instance, when you assuredly receive 100$ daily, and the necessary daily requirements are taken care of with 50$. Naturally, we will spend the remaining 50$ for personal enjoyment as the next 50$ take care of tomorrow’s primary needs. In another case, if we were to receive the same 100$ on alternate days, then that money goes only for basic requirements, which cuts off the personal enjoyment expenditure.

Consumer Confidence drives Consumer Spending, which is more than a two-third component of GDP. Consumer Spending is the maker of GDP, and Consumer Confidence is a prime component of Consumer Spending.

How can Consumer Confidence be Used for Analysis?

The University of Michigan’s Consumer Sentiment Index historical data goes back to 1978, which is pretty decent for an economic indicator. Historically it has shown an excellent 85% correlation with the GDP growth rate, and this is a remarkable percentage to rely on these survey indices as leading indicators for the economy’s direction.

A low Consumer Confidence Index is a danger sign showing what is the probable economic crisis ahead in extreme cases. Weak confidence indicates there is a threat to the economy, and a contraction is on its way. Central Authorities may also use this to take corrective measures to change this. On the contrary, A healthy Consumer Confidence Index signals an economic expansion on its way, which stimulates growth and improves the standard of living of the citizens. Consumer Confidence can also be used by businesses to identify recessionary periods and take appropriate steps to minimize their risk and adapt accordingly.

Traders and Investors will always benefit the most from the leading or advanced indicators in comparison to coincident or lagging indicators. With such strong confidence leading indicators, we can significantly reduce our risk on financial investments and come out of trades before the danger signals manifest in the economy or go into the market and ride the economic growth ahead of others.

Sources of Consumer Confidence Indices

The Conference Board, which is a not-for-profit organization, has excellent data analysis for Consumer Confidence Indices. We can go through their surveying methodologies, historical records, samples on their official website. A sample issue of Consumer Confidence Survey pdf file can be found here.

The Michigan Consumer Sentiment Index numbers and corresponding data can be found here. The same is available on the St. Louis FRED website, where we can perform graphical analysis and plot against GDP rates for better understanding.

Impact of the Consumer Confidence news release on the price charts 

After understanding the Consumer Confidence economic indicator, we will now extend our discussion and analyze the impact of the same on the currency. It is a leading indicator that measures the overall economic activity. The reading is compiled after carrying out a survey of about 5000 consumers, which asks them to evaluate future economic prospects. When respondents give high ratings, it shows consumer optimism. Consumer Confidence data does not have a major effect on the monetary policy and the decision of policy-makers. Hence it does not cause severe volatility in the currency pair.

For illustrating the impact, we have considered the Consumer Confidence data of Europe, which is published by the European Commission. The below figure shows the previous, forecasted, and actual Consumer Confidence data in the Euro Zone, which was collected for the month of March. It shows that there was a decrease in the value from the previous month but higher than what was expected. A higher than expected reading is believed to be positive for the currency while a lower than expected reading is considered to be negative.

EUR/AUD | Before The Announcement

We begin our analysis with EUR/AUD, where the above chart shows the state of the currency pair before the news announcement. We see that the market is moving in a range and currently is at the bottom of the range. Since the impact of the news release is less, we need to rely more on technical analysis and trade based on technical indicators, rather than on the outcome of the news. Technically we are at the bottom of the range, so positive Consumer Confidence data is the ideal case for going ‘long’ in the currency pair.   

EUR/AUD | After The Announcement

After the Consumer Confidence data is released, volatility in the market increases on both sides, and the candle closes, forming a ‘Doji’ pattern. The reason behind this indecision is that the Consumer Confidence numbers were better than before but lesser than the forecasted numbers. Some traders took this to be positive, while some felt the numbers were not too great. From the trading point of view, since the market does not break the ‘support’ area, one can enter for a ‘buy’ with a ‘take-profit’ near the ‘resistance’ area.

EUR/JPY | Before The Announcement

  

EUR/JPY | After The Announcement

The above images represent the EUR/JPY currency pair, and the characteristics of this pair appear to be very different from that of the above-discussed pair. Before the announcement, the market is in a strong uptrend and currently at a point from where the market had reversed earlier. As the market is at a critical point, it is better to wait for the Consumer Confidence data and then trade based on the change in volatility.

After the news release, the price initially goes up but later gets sold into and closes in red. We need to note here that even though the market reaction was bearish, the price did not break the moving average. Instead, volatility increases on the upside and results in a continuation of the trend. One can trade the above pair after price retracement to an appropriate Fibonacci level and then taking a ‘buy.’

EUR/NZD | Before The Announcement 

EUR/NZD | After The Announcement

Now we shall discuss the impact of Consumer Confidence data on EUR/NZD currency pair. The behavior of the chart is similar to that of the EUR/AUD pair where here also the price is moving within a range, and recently the price has broken below the range. Since the selling pressure has increased, it can be risky to go ‘long’ in the market, even if the data proves to be positive for the economy.

After the news release, the market moves higher as a consequence of positive Consumer Confidence data, and the price closes, forming a bullish candle. As mentioned earlier, going ‘long’ can be risky due to the increased selling pressure, and thus conservative traders should not take such trades. Another reason why the up move might not be sustainable is that the impact of Consumer Confidence data on currency is not as much.

That’s about Consumer Confidence and its impact on the Forex Market. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Course

102. Brief Introduction To Momentum Indicators

Introduction

Introduction

Introduction

Leading and lagging indicators are not the only categorizations of technical indicators. If we dig deeper, we can find more classifications and momentum indicators are one such classification in leading indicators. Before getting into momentum indicators, let’s first define the term momentum. Momentum, in general (physics), is the product of mass and velocity. The meaning of momentum is not different in trading too.

What are the Momentum Indicators?

Momentum indicators are a type of indicator that determines the velocity or the rate at which the price changes in security. Unlike moving averages, they don’t depict the direction of the market, only the rate of price change in any timeframe.

Calculating Momentum

The formula for the momentum indicators compares the most recent close price with the close price of a user-specified time frame. These indicators are displayed as a separate line and not on the price line or bar. Calculating momentum is simple. There are two variations to it but are quite similar. In both, momentum is obtained by the comparison between the latest closing price and a closing price ‘n’ periods from the past. The ‘n’ value must be set by the user.

1) Momentum = Current close price – ‘n’ period close price

2) Momentum = (Current close price / ‘n’ period close price) x 100

The first formula simply takes the difference between the closing prices while the second version calculates the rate of change in price and is expressed as a percentage.

When the market is moving upside or downside, the momentum indicator determines how strongly the move is happening. A positive number in the first version determines strength in the market towards the upside, while a negative number signifies bearish strength.

How are Momentum Indicators useful?

As mentioned, momentum indicators show/predict the strength of the movement in prices, regardless of the direction, be it up or down. Reversals are trades where one can make a massive killing with it. And momentum indicators help traders find spots where there is a possibility of the market to reverse. This is determined using a concept called divergence, which is discussed in the subsequent section.

Momentum indicators are specifically designed to show the relative strength of the buyers and sellers. If these indicators are combined with indicators that determine the direction of the market, it could turn out to be a complete strategy.

Concept of Divergence

Consider the chart of EUR/USD given below. The MACD indicator (momentum indicator) is plotted as well. From the price chart, the market was in a downtrend, but the divergence was moving upward. It means that the indicator has diverged from the price chart and is indicating that the sellers are losing strength.

In hindsight, the market reversed its direction and started to move upwards. Hence, the MACD predicted the reversal in the market. Moving forward, when the market laid its first higher low, the MACD too was inclined upwards, indicating that the buyers are strong, and the uptrend is real. And yet again, the MACD proved itself right.

This concludes the lesson on momentum indicators. In the coming lessons, let’s get more insights over this topic. Don’t forget to take the below quiz before you go.

[wp_quiz id=”70612″]
Categories
Forex Course

101. What Are Oscillators & How To Interpret Them?

Introduction

Introduction

Introduction

Technical Indicators are primarily used to confirm a price movement and the quality of a candlestick pattern, and also to create trading signals with them. Indicators are a great source of strength to confirm an existing analysis. Moreover, some indicators solely help in analyzing the trend, momentum, and volatility of the market.

As discussed previously discussed, there are two types of indicators, leading and lagging. And oscillators fall under the leading indicators. That is, they determine the trend of the market before-hand.

Indicator construction

There are two ways through which indicators are designed:

  1. Non-bounded
  2. Oscillators

Non-bounded, as the name suggests, they are the indicators that are not bound in a specific range. They usually display the strength and weaknesses, and to an extent, generates buy and sell signals.

Oscillators, on the other hand, are indicators that are bound within a range. For example, 0-100 is the range they oscillate between. However, based on the type of oscillator, the range varies.

Oscillators

Oscillators are technical indicators that are mainly used to determine the oversold and overbought conditions. These non-trending indicators are used when the market is not showing any certain trend in either direction. They are unlike the moving averages (MA), which determine the trend and overall direction of the market.

When security is under an overbought or oversold situation, the oscillators show its real value. It indicates that one of the parties is losing its strength, and the other is slowly starting to gain together.

Interpreting Oscillators

Oscillators are constructed with lower and upper bounds. And these bounds form a range. In the below oscillator, the purple region represents range-bound, where 30 is the lower bound, and 70 is the upper bound. The upper and lower bounds are also referred to as peaks and troughs. Typically, the peaks and troughs in the oscillator correspond to the peaks and troughs in the market as well.

Extreme Regions

The oversold and overbought regions are the extreme regions. That is, when the oscillator line shoots above the upper bound, the market is considered to be overbought. On the contrary, if the oscillator falls beneath the lower bound, the market is said to be overbought.

An overbought market means that the buying volume has diminished over a few trading days. So, there could be a possibility for investors to sell their positions. However, note that this interpretation holds true when the market was in a predominant uptrend and is currently consolidating.

An oversold market indicates that the selling volume, which was high in the past days, has now diminished. This could mean that the sellers are done selling with the security and might begin closing their positions. Hence, indicating a turn-around in the market.

Midpoint Line

A crossover at midpoint region of the range depicts the gain in strength of the buyer or sellers. From the oscillator given, 50 is the midpoint line. So, if the oscillators cross above the 50 mark, it indicates bullishness in the market. And if cuts below 50, it could indicate bearishness in the market.

This concludes the lesson oscillators. In the coming lessons, we shall discuss some strategies using a few oscillators. Stay tuned. Happy trading!

[wp_quiz id=”70529″]
Categories
Forex Fundamental Analysis

What Should You Know About ‘Income Tax’ As A Fundamental Indicator?

What is the Income Tax?

What is the Income Tax?

What is the Income Tax?

An Income Tax is a percentage of our income that the government takes in the form of taxes. Income Tax is paid by individuals and entities depending on the level of earning and gains during a financial year. In most of the countries, a single income tax does not usually apply to the entire income, but rather various rates apply to different portions of the “taxable income.” The different tax rates and the income levels at which they apply vary widely.

Types of Income which attracts Tax 

Income Tax is a direct tax that is levied on the income and other types of earnings of an individual in a financial year. Below are some types of incomes and taxation rules.

Income from Salary: This includes basic salary, taxable allowances, and profit in lieu of salary, pension received by the person who himself has retired from the service. They all fall under the category of taxable income.

Income from business/profession: This includes presumptive incomes from business and professions that individuals do in their capacity and maybe their part-time work. This is also added to the taxable income after adjustment of the allowed deductions.

Income from properties: A taxable person may also own one or more house properties. These properties can be self-occupied or rented out or even vacant. The rules of Income Tax state that rent from house properties is to be treated for the purpose of calculation of taxable income. An income tax assessee can, however, claim certain deductions for house maintenance in certain areas.

Capital Gains: They are the gains that one makes from selling capital assets like Gold, house properties, stocks, mutual funds, securities, etc. Although capital gains are a part income tax, they are not added to taxable income, as they are taxed at different rates.

Economics and Income Tax

Tax plays a major role in maintaining a balance between people, businesses, and governments,  which broadly represents the economic activity of a country. Here are two ways in which changes to Income Tax affects the economic activity and well being of people.

Tax Incentives

By granting incentives, taxes can affect both supply and demand in an economy. Reducing marginal tax rates on wages can motivate workers to work more. Expanding the income tax credit can bring more low-skilled workers into the labor force. Reducing Tax rates can also encourage to employed persons to invest in stocks and bonds, which improves the capital flow of companies.

Budget Deficit

Large Tax cuts can slow economic growth by increasing budget deficits. When the economy is operating at its potential, a sudden reduction in tax rates may provoke the government to borrow capital from foreign investors and institutions. They will also divert some funds allocated to private investment, reducing productive capacity relative to what it could have been. Either way, deficits increase and thus reduce well-being.

The Economic Reports

The Income-tax rates are announced every year by the Finance Ministry during a press release, which puts out all the slabs and tax brackets based on the income level. This is usually the Central Government tax rate, but there is also a yearly announcement made by all the states, which impose income taxes in the same way the federal government does. In some countries, a single tax rate is applicable to everyone, regardless of the income level. This is called a “flat tax.”

Analyzing The Data

Investors, when analyzing a currency Fundamentally, give extreme importance to the Capital Gains tax of that country. Income Tax is not a major concern for investors when taking a position in the market. But a major deviation from the standard Income Tax rates catches the attention of investors. However, if the Federal government has been maintaining a fixed rate over the years without any major changes, there is no reason to worry, as they fell, the economy is stable. However, an increase in Capital Gains tax is not taken well by the institutional investors, which changes their stance on the economy and the currency, mostly to negative.      

Impact on the currency

A study conducted by economists examined the impact of taxes on the real exchange rates through their effects on economic activity. Their report says that an increase in the capital interest tax rate leads to depreciation in the currency, while an increase in the wage or consumption tax leads to a real domestic currency appreciation. This hypothesis is supported by the data estimations of annual data from 10 OECD countries over 17 years.

A marginal increase in Income Tax is considered to be good for the economy as it increases the revenue of government organizations, but a substantial increase in tax rate can have a reverse effect on the economy, and this will be unbearable for salaried persons.

Source of information on Income Tax rates

Income Tax rates are available on the official website of the finance department of the country, where one can also find the rates for previous years as well (of more than 30 years). Using this information, a trader can analyze the trend in the Income Tax rates over the years. Here is a list of major countries of the world with their Income Tax rates.

Links to Income Tax information sources

GBP (Sterling) | USD | EUR | CHF | CAD | NZD | JPY

Income Taxes is a compulsory contribution to state revenue, levied by the government on workers’ income and business profits. This gives the ability to the government to provide basic safety and community systems for the public. This ensures freedom and basic living standards that citizens expect. Therefore, it is the duty of citizens to timely file Income Tax returns and be a responsible civilian.  

Impact of the Income Tax news release on the price chart 

After having a clear understanding of the Income Tax and its role in the economy, we will now extend our discussion and study the impact of the same on the value of a currency. Investors and traders mainly consider the Capital Gains tax rates, which is also a form of Income Tax. Any major changes to the Capital Gains tax cause extreme volatility in the currency pair and a change in the outlook for that currency. Thus, the income tax alone is not explicitly taken into account by traders.

In the upcoming sections, we will analyze the change in volatility in the currency pair due to the announcement of Income Tax rates. The above image shows the Federal Tax rates of Canada for 2020, where we can see the percentage of income that will be levied as Income Tax on individuals of the country. This is also known as ‘Tax Bracket.’ The maximum Income Tax rate stood at 33%, and this rate has been maintained from the past four years. This data is published by the Canada Revenue Agency, where one can find other tax rates as well.

GBP/CAD | Before The Announcement

We start our discussion with the GBP/CAD currency pair, where the above image shows the behavior of the chart before the news announcement. Price action suggests that the price seems to be retracing the big uptrend and is at a key ‘support’ level. If the Income Tax rate announcement comes out to be negative for the Canadian economy and not per expectations, one can take a ‘buy’ trade in the above pair. Whereas positive data might not result in a trend reversal as the overall trend is up.

GBP/CAD | After The Announcement

After the announcement, we see that the price moves higher, and it closes with a fair amount of bullishness. The increase in volatility to the upside is a sign of continuation of the trend, and this shows that the data was not very positive for the Canadian dollar. The bullish ‘news candle’ indicates a weakness in the currency where traders find the data to be negative for the economy. As the market moves higher, once can go ‘long’ in the market with a stop loss below the ‘news candle’ and ‘take profit’ at the recent ‘high.’

EUR/CAD | Before The Announcement

  

EUR/CAD | After The Announcement

The above images represent the EUR/CAD currency pair. In the first image, we see that the price is moving within a range, and just before the announcement of Income-tax rates, the price is at the bottom of the range. Since the price is at an optimal place for going ‘long’ in the market, aggressive traders can buy the currency pair with a strict stop loss of a few pips below the ‘support’ area.

We are essentially advantage of the increased volatility and movement in the pair. After the Income Tax rates are published, the market moves higher similar to the GBP/CAD pair, but later, the market gets sold into, and the candle closes with a large wick on the top. We can say that the news data was neutral to negative for the economy. Thus, there some confusion among traders can be seen. As the ‘news candle’ is not a bullish candle, it is wise to wait for the price to cross above the moving average and then a ‘buy’ trade.

CAD/JPY | Before The Announcement

CAD/JPY | After The Announcement

Lastly, we discuss the CAD/JPY currency pair, where the characteristics of the chart appear to be different from the above two pairs. Since the Canadian dollar is on the left-hand side, an uptrend in the first image signifies a great amount of strength in the currency. As the market is continuously moving higher before the announcement, we need a lot of confirmation from the market in order to go ‘short’ in the market. I

f the news data is positive for the economy, the move gets accelerated to on the upside and, in that case, once can join the trend after a retracement. After the news announcement, the market crashes, and volatility increases to the downside, thereby indicating a possible reversal. The bearish ‘news candle’ shows that the Income Tax rates were not very positive for the economy, and thus traders sold Canadian dollars. One should take ‘short’ trade only after the price goes below the moving average.

That’s about Income Tax and the impact of its new release on the Forex Market. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Basic Strategies

Pairing The ‘Gravestone Doji’ Pattern With Significant Resistance Levels

Introduction

Introduction

Introduction

Gravestone Doji is a bearish reversal candlestick pattern that occurs at the top of an uptrend. This pattern helps the traders to visually see where the significant resistance level is located on the price chart. The most important aspect of the Gravestone Doji pattern is its long upper shadow. The candlestick’s open, close, and low are all the same in this pattern.

The psychology behind the long upper shadow is this – In an ongoing uptrend, when the price action hits the significant resistance line, buyers exit their positions, and the price action is smacked down by the sellers. In short, the appearance of this pattern represents the losing momentum of the buyers and essentially indicates a bearish reversal in the market.

Most of the traders place their trades as soon as this pattern appears on the price chart. But that’s definitely not the right approach. Instead, we must wait for the next candle to close for the confirmation and only then take the trades. The opposite of the Gravestone Doji is the Dragonfly Doji, which appears at the bottom of a downtrend or the major support area. The below image represents the Gravestone Doji Pattern.

Trading Strategies – Gravestone Doji Pattern   

The Gravestone Doji pattern indicates that the buying trend is ending, and the market is reversing to the selling side. However, this doesn’t hold true all the time. We will be finding this pattern quite often in all the types of market conditions, and if we start trading every time we find them, we will end up on the losing side. We always need to ask our self the reason why this pattern appears in certain conditions. Is it going to reverse the market or not?

Pairing the pattern with a significant resistance level

If you find this pattern at the bottom of the range, do not trade it. But if the price action prints this pattern at the top of a range, it can be considered a sign for us to go short. Similarly, find the trending markets and look for a major resistance level where the price could possibly react. So when the price action prints a Gravestone Doji at the major resistance level, it’s a strong sign for us to go short.

In the below USD/CHF Forex chart, we can see that the price action has printed the Gravestone Doji pattern at the significant resistance level. We should be going short as soon as the Doji candle closes.

In the below image, we can see that we took a sell entry when the market printed the Gravestone Doji pattern. We have placed the stop-loss just above the resistance level. It is safer to put the stop-loss above the pattern or at the resistance line because if the price goes above the pattern, the pattern gets invalidated. We know that the Gravestone pattern indicates a market reversal, and most of the time, these reversals travel quite far. That is the reason why we go for deeper Take Profits.

In the above chart, we can see that we had exited our full positions when strong buyers showed up. This indicates that the sellers are losing their momentum, and there is no logic to continue holding our positions.

Gravestone Doji + Stochastic Oscillator

The strategy that we shared above is for aggressive traders who like to take risks. However, if you are A type of trader who needs more confirmation to pull the trigger, we suggest you follow this strategy to trade this pattern. Most of the conservative traders do have a fear in their minds that one single candle does not have the potential to reverse the market. And it is completely okay to think like that. The truth is that sometimes even a single candle can move the market, and sometimes it doesn’t. Ultimately it is your money management system that makes all the difference.

But to filter out some poor signals and to get an additional confirmation, it is advisable to use the Stochastic oscillator to confirm the probability of our trading signal. Stochastic is a range-bound indicator that oscillates between the 0 & 100 levels. When the Stochastic goes above the 70 level, it means that the market is in an overbought condition, and we can expect a change in the trend. Likewise, when it goes below the 30 levels, it means that the market is oversold are we can expect a reversal anytime soon.

The Stochastic indicator also shows the bearish and bullish divergence, which helps the traders in trading the upcoming reversals. The divergence is when the market moves in one direction, but the indicator is signaling a different direction. Now we believe that you understand the basics of trading with the Stochastic indicator. Now let’s dive into the strategy.

The strategy here we are using is simple and straight forward. First of all, identify the Gravestone Doji pattern at a significant resistance level in an uptrend. Then, apply the Stochastic indicator to the price chart and check if the indicator is at the overbought area, indicating a downside reversal. If yes, go short and place the Stop-Loss just above the pattern.

The GBP/CAD chart below indicates the appearance of the Gravestone Doji pattern in an uptrend. When the price is approaching the upper resistance level, it got smacked down immediately, and the market ended up printing the pattern. The next six candles tried very hard to break the pattern & resistance line, but nothing worked, and the price ended up rolling down. We can also observe the Stochastic indicator was at the overbought area, which is a confirmation sign for us to go short.

We have entered for a sell when both the conditions are met, and placed the Stop-Loss just above the pattern. For the Take-Profit, we choose to go for deeper targets. When the selling trend started to struggle, the Stochastic indicator was at the oversold selling conditions. At that point, we have closed our full positions for obvious reasons.

Conclusion

The trades taken based on the Gravestone Doji pattern are pretty reliable. But do not make the mistake of identifying the pattern everywhere on the price chart. The psychology behind this pattern says that the bulls drove the price to a peak point, and the sellers are comfortable in reversing the market. For booking profits, you can expect an equal move to that of a previous trend. If you are an intraday trader, make sure to exit your positions at any significant level. Although this pattern appears on all the timeframes, the reliability is higher on higher timeframes to that of lower timeframes.

We hope you find this article informative. Try trading this pattern on a demo account and master it before applying the above-mentioned strategies on the live market. Cheers.

Categories
Forex Fundamental Analysis

What Impact Do ‘Building Permits’ News Release Have On The Forex Market?

Introduction

Introduction

Introduction

The building permits monthly reports is one of the major indicators closely watched by economists and Fundamental analysts. It is also one of the most misunderstood numbers even by experienced traders. Understanding the difference between building permits report, housing starts report, and housing completion reports and what they imply is key here. It is important to understand the building permits report because it plays a key role in predicting GDP growth.

What is a Building Permits Report?

Building Permit Report

It is an official authorization by the local governing body to allow construction of a new building or the reconstruction of an old one. An individual owning land cannot simply build a house or a commercial store without any approval from the concerned legal authorities. The building which has obtained its permit implies that it has received the planning permission by the local state planning department.

The governing body dictates construction rules and regulations, which will be specific to that geographical location. For example, a state which is vulnerable to earthquakes is likely to have a mandate which dictates that building should be able to tolerate a certain level of seismic activity. A coastal region-building permit might require the builders to construct the building to tolerate high-velocity winds etc.

Housing Starts Report

It is a monthly report which tells the number of houses that have started their construction activity recently and are at the beginning stage of the construction process.

Housing Completion Report

It is also a monthly report which tells the number of houses that have reached their finishing stage with the majority of the construction work completed recently.

How is the Building Permits Report obtained?

In the United States, the United States Housing Sector monitors building permits. The Housing Sector releases the U.S. Housing Starts report from which the United States Census Bureau releases the monthly building permits report. The report is released every month in the second or third week for the previous month (eighteenth working day to be precise).

As per the Census Bureau, the organization conducts a voluntary mail survey, to which the officials give a response with their reports and figures from which they generate the final report. They cover almost the entire country through the individual permit offices, which in most cases, are the municipalities. Based on geographical locations, the reports can be categorized for area-specific analysis. 

Is the Building Permits Report important?

The number of building permits applied is genuine, as it costs around 500 to 2000 dollars on the type of building, which can be a residential home or a commercial store. All the numbers are, in actuality, going to translate into real newly constructed buildings.

Construction of a building involves a lot of economic activities like the hiring of the labor force, preparing raw materials, purchasing construction items, hiring engineers, etc. Because of the scale and nature of the activity, more money gets circulated into the economy. A large increase in the number of building permits can indicate an increase in employment, increased consumption of goods and services, flourishing businesses, etc.

Construction permits also indicate that the population has enough funds or has the necessary means, which is usually bank loans. Most people construct a home through a mortgage, which implies that banks are ready to lend money; this again implies that money was injected into the economy to stimulate economic activity.

An increase in building permits can also mean that the population has more confidence in their economic prospects and trust the solvency of the plan. Since the construction of a home or a commercial store involves a significant amount of money, we can also give an insight into the nation’s liquidity and health of the economy. An increase in building permits also gives us an idea about the country’s lending environment, i.e., whether the health of the banking sector for the monetary base of the nation will expand or contract, which can be inflationary or deflationary respectively.

How can the Building Permits be Used for Analysis?

The data set goes back to the 1960s, which is a fairly decent range to rely on its correlation with economic activity with good confidence. The U.S. Census Bureau publishes building permits report, housing starts report, and housing completion report. Among these, the building permits report is the most closely watched reports as it indicates an upcoming economic activity. Whereas the housing starts report tells us about the current economic activity, while the housing completion report tells us of the past economic activity.

An increase in the building permit report tells that the construction sector people are confident about an increase in demand for house sales, which implies more money will be in circulation soon. Conversely, decreased building permits report tells us that the economy is slowing down or contracting due to which people are not ready to buy new houses or do not have sufficient funds to afford the cost.

The building permits report is an advanced indicator, whereas the housing starts report is a current indicator, and the housing completion report is a trailing indicator. The building permit indicates first of an upcoming economic surge or plunge while the housing starts report reflects the current economic condition, and the housing completion report shows the effect of a past economic surge or plunge.

It is noteworthy to mention that the housing completion follows the housing starts numbers, and the housing starts number follow the building permits numbers. An increase in the building permits will automatically result in a rise in the housing starts number in the subsequent months, and a few more months later, the same numbers will appear in the housing completion report. Hence, understanding which reports implies what economic activity is key here.

Sources of Building Permits Reports

We can browse through the historical building permits survey reports on the official website of the United States Census Bureau here. You can also find the construction-related statistics here.

Impact of Building Permits news release on the price chart 

In the first part of the article, we understood the importance of Building Permits in a country, which is a key indicator of demand in the housing market. The ‘Building Permits’ indicator, also known as ‘Building Approvals’, is one of the most impactful events in the forex market.

Traders and investors around the world pay a lot of attention to this data and keep close on its numbers. The ‘Building permits’ data is released on a monthly basis and is said to cause a fair amount of volatility in the currency pair. In the following section, we shall see how the data of ‘Building Permits’ affects the price charts and notice the change in volatility.

For illustrating the impact of the news, we will be analyzing the latest month-on-month ‘Building Permits’ data on Australia and measure the impact of the same. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative. In this case, the ‘Building Permits’ of Australia was reduced to -15.3% from +3.9%, which is a reduction of a whopping 19.2%. One would already imagine this to be very bad for the Australian economy but let us see what it meant for currency traders.

AUD/CAD | Before The Announcement

We shall begin with the AUD/CAD currency pair, where the above chart shows market action before the news announcement. We see a decrease in volatility as the announcement is nearing as the market players are eagerly waiting for the ‘Building Permits’ data. We already have an idea from what is forecasted by economists that the data is going to much worse than before due to a fundamental factor that has affected the Australian economy. Instead of predicting what the numbers are going to be, it is better to wait for the actual news release and trade based on the shift in momentum.

AUD/CAD | After The Announcement

In the above chart, after ‘Building Permits’ data is released, the market collapses, and the price goes below the moving average. The market reaction was as expected, where there was a sudden increase in volatility on the downside. The data shows that there was the least confidence in the housing market of Australia in the month of February. As the market falls and given that the ‘Building Permits’ data was very bad, we can ‘short’ the currency pair with certainty.

A few hours later, we see that the market shot up and reversed completely.  This move was influenced by the announcement of ‘Interest Rate’ by the Reserve Bank. We need to always be aware of such events, especially when we are already in a trade. This teaches us the importance of trade management, which crucial for every trade.

AUD/CHF | Before The Announcement

AUD/CHF | After The Announcement

The above images represent the AUD/CHF currency pair, where it seems like the market has factored in weak ‘Building Permits’ data before the news announcement. After a big downward move, the market has retraced from the ‘lows,’ which is the ideal use case for going ‘short.’

Also, at present, the price is below the moving average, which shows the weakness of the Australian dollar. After the data is released, the price goes lower but leaves a spike on the bottom, and we see increased volatility on both sides. But this shouldn’t scare us, and we need to stick to our plan of going ‘short’ in the currency pair as the data was really bad.

EUR/AUD | Before The Announcement

EUR/AUD | After The Announcement

In the EUR/AUD currency pair, the Australian dollar is on the right-hand side, which means a news release positive for the currency should take the price lower and vice versa. The characteristics of this pair are different from the above-discussed pairs since the price has retraced the major uptrend by a lot. This means the Australian dollar is very strong against the Euro.

Therefore, any news release that is negative for the Australian economy may not collapse the Australian dollar here. Therefore, it needs to be traded with caution. After the news announcement, the price does go up because of the weak ‘Building Permits’ data, but after a couple of candles, the price goes below the ‘news candle.’ We see that the news data does not have much impact on this currency pair and not suitable for trading based on news.

That’s about Building Permits and the impact of its new release on the price charts. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

The Momentous ‘Consumer Price Index’ & How It Impacts The Forex Market

Introduction

Introduction

Introduction

Consumer Price Index, in short, known as CPI, is one of the most closely watched Fundamental Indicators. It is the most direct measure of the current inflation in the economy that a citizen can look at and find out. Hence, Understanding the Consumer Price Index, its history, and the resultant effect it has on the market is very important to build an understanding of the macroeconomics of a nation.

What is the Consumer Price Index?

As the name suggests, the calculation of this index is from the viewpoint of the end consumer, i.e., a regular citizen who buys his/her daily needs from a local grocery store or market. Consumer Price Index, in the simplest sense, is the average of the most commonly purchased household goods and services like toothpaste, milk, grocery, petrol, etc. But instead of a simple average here, each good and service is assigned a certain weightage based on their importance or usage degree amongst the population.

For example, milk, which is a daily need for many consumers, will have a higher weightage in the mean price calculation than that of furniture, which we do not purchase daily or frequently. Also, when we say most commonly purchased goods and services, it covers a wide range of goods and services (over 80,000 items) and does not include rarely purchased items like stocks, bonds, foreign investments, or real estate.

How is the Consumer Price Index CPI calculated?

The Bureau of Labor Statistics (BLS) surveys the prices of 80,000 consumer items to create the index and publishes it monthly. The Consumer Price Index has two subcategories; one is CPI-W, which stands for Consumer Price Index for Urban Wage Earners and Clerical Workers. CPI-W statistics are published first, and later the CPI-U (Consumer Price Index for Urban Consumers) values are released. CPI-U is a broader statistic in terms of population and goods & services coverage.

CPI-U is the more accurate and complete statistic relatively as it takes the urban population, which represents about 93% of the United States population into account. While the CPI-W covers only about 29% of the population. Hence, It is the measure of an aggregate weighed in the price level of most commonly bought goods and services. The list includes items like food, clothing, shelter, fuel, transportation fares, service fees (water and sewer service), etc.

Consumer Price Index, whenever released, is given out as a percentage change, and here the change is concerning the previous number, which can be monthly, quarterly, or yearly.

Note: Here, the base year cost amounts to 100, and this base year is in the year 1982 to 1984, where the average amounted to 100. But the data released monthly is shown as a percentage increase or decrease concerning the previous period (usually the previous month).

Why is the Consumer Price Index important?

The importance of the Consumer Price Index is many-fold. First are the range and history of the data. With such a huge data set, the reliability is pretty high, and it usually depicts the macroeconomic picture of a country. For example, the history of CPIAUCSL (Consumer Price Index for All Urban Consumers: All Items in U.S. City Average) goes all the way back to 1947. Second is the frequency & direct ground-level nature of the statistic meaning this data brings out. CPI is a real-time reflection of the current economic situation faced by the end customer or citizens.

Thirdly, the change in CPI is useful to ascertain the retail-price changes associated with the country’s cost of living. Hence it is used widely to assess inflation in the United States. In this Index, there are many subcategories, wherein certain goods and services get included or excluded from the basket to give a more accurate picture of inflation in absolute or relative terms. For example, Core CPI strips away food, gas, and oil prices from the equation as the prices of these items are relatively volatile.

How can the Consumer Price Index be Used for Analysis?

Due to the diversity in the statistics, different sectors of economists can isolate and use the Consumer Price Index for their purpose. For example, the United States Bureau Of Labor Statistics provides indexes based on various geographic areas also. Moreover, they even release average price data for select utility, automotive fuel, and food items, which gives this Index the status of a key indicator in gauging multiple economic indicators.

Consumer Price Index is a widely used indicator for inflation measure. For other economic indicators like hourly wages and currency worth within the nation (dollar’s purchasing capacity to procure goods and services), CPI can be considered as a regulator. On average, for a developed nation like the United States, 0.2-0.5% of Consumer Price Index increase is common, and any number beyond these figures usually indicates volatility in the growth of the economy in either direction.

Sources of Consumer Price Index

The U.S. Bureau of Labor Statistics releases all the indexes that are mentioned above. This data can be found here – Consumer Price Index

You can also find the same indexes along with many others with a comprehensive summary and statistics on the St. Louis Fed website as given below.

CPIAUCSL (CPI for All Urban Consumers: All items in U.S. City Average)

This is a broadly used statistic for measuring the overall inflation. It includes Food and Energy prices, unlike CPIFESL. The information related to this index can be found here.

CPIFESL (CPI for All Urban Consumers: All items minus the Food and Energy in U.S. City)

It excludes volatile components like Food and Energy (Oil Prices) and gives more of a Core CPI change within the United States. The information related to this index can be found here.

Impact due to news release

In this section of the article, we will analyze the impact of the Consumer Price Index (CPI) on a currency right when the announcement is being made and see where the market finally gets to. The image below shows that the CPI data has a huge impact (Red box indicates high impact) on the currency, which means it might cause a drastic change in the volatility after the news announcement. Ideally, if the actual CPI numbers are greater than the forecasted numbers, it is good for the currency and vice versa.

We have taken the recent CPI data of Australia, which is quarter-on-quarter. The quarterly data is more important and impactful than the monthly numbers. The below image gives the 4th quarter data of CPI that was measured in January, and the next quarter data will be released in April. We see below that the CPI data for the 4th quarter was 0.7%, which is 0.2% greater than the previous reading. It is also 0.1% greater than the forecasted number. But, let us see how the market reacted to the data.


AUD/USD | Before The Announcement

The above image represents the chart of AUD/USD, where we see that the market is in an uptrend showing the strength of the Australian dollar. One of the reasons behind the uptrend is that traders and investors forecast the CPI data where they are expecting a 0.1% increase in the same. If the CPI numbers are increased more than expected by the ‘Australian Bureau of Statistics,’ it could be the best-case scenario for going ‘long’ in the market. However, if the numbers are below expectations, volatility could increase on the downside.        

AUD/USD | After The Announcement

Here, we see a sudden surge in volatility on the upside that after the news announcement is made. The reason for this is that the CPI got increased by 0.2%, where the market was expecting a 0.1% rise. The large green candle shows how impactful the CPI data is on the currency. From a trading point of view, one should not be chasing the market but instead, wait for a pullback at the nearest support and resistance area and then take suitable positions. The CPI data was so positive for the Australian dollar that the price does not even come below the moving average. Take Profit‘ for the trade can be at the new ‘high’ with a stop-loss below the opening of the news candle.

AUD/CAD | Before The Announcement

AUD/CAD | After The Announcement

The AUD/CAD currency pair appears to be in a ‘range’ just before the news announcement and is at the bottom of the range. An interesting way of positioning ourselves in the pair is by having small ‘buy’ positions before the news announcement. Because the forecasted CPI data is greater than the previous reading, and we are at a technically important level that is supporting our ‘buy’ positions. The news outcome makes the ‘support’ area work beautifully as the market shoots up to the resistance area. Here too, the data proved to be very positive for the Australian dollar as a higher CPI data drives the currency higher. We can hold on to our trades even if the price is at ‘resistance’ since the news data is very good for the currency, and it has the potential to break the ‘resistance’ and move further.

EUR/AUD | Before The Announcement

EUR/AUD | After The Announcement

In this currency pair, the Australian dollar is on the right-hand side, which means a positive CPI data should take the currency lower. We can see that the Australian dollar already strong as the market is in a downtrend, and the market participants are optimistic about the CPI data of Australia. After the CPI announcement, the volatility increases on the downside, taking the price to a new ‘low.’ Again, when we witness better than expected data of any economic indicator, we should not be chasing the market but wait for a retracement to key levels. In this case, since we don’t see a retracement after the red ‘news candle,’ only aggressive traders can take ‘short’ positions with the confidence that the CPI numbers were exceedingly better than before and that it will take the currency lower.

That’s about CPI and its impact on the Forex market. We hope you find this information useful and if you have any questions, shoot them in the comments below. Cheers.

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Forex Course

95. Adding Pivot Points to Your Range Strategy

Introduction

Introduction

Introduction

In the previous two lessons, we completely understood the basics of pivot points as well as how to calculate and interpret them. And now, we can move on and start applying this indicator to our charts and find trading opportunities using it.

In this lesson, we shall use the pivots points in our range trading strategy. We will be giving you a complete guide on the trading range with the assistance of pivot points.

Incorporating Pivot Points into Ranges

The Basics

As we already learned, pivot point has S1, R1, S2, R2, etc. which represents Support and Resistance whose working principles are the same as the typical Support and Resistance. According to the definition, support is the area in which the market tends to hold and move up, and resistance is the area where the market holds and typically moves downwards.

Talking about a range, it is the state of the market which moves in a sideways direction and repeatedly bounces off from support and resistance level. So, we shall be testing the pivot points as the place where the market can hold and possibly reverse.

The Thumb Rule

When the market is at any of the upper Resistance levels, we look to go Short on the security. When the price is at any of the lower Support levels, we look to go Long on the security.

Live Chart Example

Below is the chart of GBP/CAD on 15min timeframe. We can see that currently, the market is in a range (as shown in the box). The market was ranging on the 16th of March. With these values of 16th March, we calculate the pivot points for the next day and find trading opportunities.

Now consider the same chart after we’ve determined the P, S1, R1, S2, R2 pivot levels. Following up range, we can see that the S1 level was formed exactly at the bottom of the range. Now, both S1 and the bottom of the range is indicating a Buy a signal. Hence, when the price touches the S1 level, we can go long on this pair.

From the chart, we can clearly see that we found two opportunities to hit the buy at the first Support level S1.

Placements

Having a predetermined take profit and stop loss is vital in trading. In this particular example, the take profit can be placed at the pivot point (P) and stop loss below the S1 such that the trade yields 1:1 Risk Reward. Note that there are times when the take profit can be placed at the R1 level as well. But this requires expertise in technical analysis as well as in pivot points.

The above example is the way for traders to get the hang of how to trade pivot points. To do it more professionally, one must use other technical analysis tools to have a confirmation on the pivot levels. For instance, if there appears a Doji candle at the S1 level and also the stochastic indicator is indicating that the market is in the oversold area, then there are more odds in our favor that the support will work in the direction we predicted.

So, to sum it up, one must use the pivot point levels by clubbing it with other technical tools to find optimum results. We hope you comprehended this lesson to the best of your ability. Cheers!

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Categories
Forex Fundamental Analysis

Understanding ‘Foreign Exchange Reserves’ & Its Impact On The Forex Market

Introduction To Foreign Exchange Reserves

Introduction To Foreign Exchange Reserves

Introduction To Foreign Exchange Reserves

Foreign Exchange Reserves are foreign assets held by a country’s central bank. Most of the foreign reserves are held in the form of currencies, while the other reserves include deposits, bonds, treasury bills, other government securities. There are plenty of reasons why central banks hold reserves. And the most important reason is to control their currencies’ values. The reserves act as a backup for their liability. From an economic point of view, it essentially influences the monetary policy.

When a country’s currency falls considerably, the foreign exchange reserve acts as a backup of their economy. Typically, countries hold the US dollar as their forex reserves because it is the most traded currency in the world. Apart from that, the Great Britain Pound, Chinese Yuan, Euro region’s Euro, and Japanese Yen are the currencies that are held as FX reserves.

Understanding Foreign Exchange Reserves

Let us understand with an example, how exactly are the forex reserves accumulated.

Consider two countries, the United States and Great Britain Pound. In the present situation, let’s say the value of USD and the GBP is the same with stable economies. Now let’s say the investors start believing that the USD is going to perform exceptionally well in the coming years. So, they begin flowing in cash into the US’s real estate and the stock market. This brings up a massive demand in the US dollar, while supply in Pound.

In such a situation, people must pay more Pounds to purchase one US Dollar. Or in USD’s perspective, people must pay lesser US dollars to buy one Pound. Moving further, let’s say the US does not want its currency to get very strong. This is because it has led to high volatility in the price and dramatic moves in the market.

With this concern, the central banks start printing more of their currency (US Dollar). And this money is deployed into buying the GBP. In doing so, the supply and demand of both the currencies stabilize again. Now the Pounds that the US central banks own are the foreign reserves. This hence appears on the balance sheet of the US.

What is the Purpose of Foreign Exchange Reserves?

There are several ways central banks use FX reserves for different purposes.

The countries use their foreign reserves to keep their currency’s value at a fixed rate. An example of the same is given above. Countries with a floating exchange rate system use FX reserves to keep the value of their currency less than the US dollar. For example, Japan follows a floating system. The central bank of Japan buys US treasury so that the Yen stays below the Dollar.

Another critical function of the reserves is to maintain liquidity in case of economic crises. For instance, a natural calamity might bring a halt to local exporter’s ability to produce goods. This cuts off their supply of foreign currency to pay for imports. In such scenarios, central banks can get their local currencies in exchange for the foreign currency they have. Hence, this allows them to pay for and receive imports.

The foreign currencies are supplied by the market to keep markets steady. It also buys the local currency to prevent inflation and support its value. Central banks provide confidence to investors through reserves. They assure their foreign investors that they’re ready to take action to protect investors’ investments. This will prevent the loss of capital for the country.

Some countries use their foreign reserves to fund sectors. For example, China has used its reserves for rebuilding some of its state-owned banks.

How Forex Reserves impact the currency?

Foreign exchange reserves are important to investors as it controls the supply and demand of the currency in the forex market. Knowing that central banks try keeping the currency values stabilized, we take advantage of this and try predicting the value of a currency pair.

Let’s say the US is buying large quantities of Australian goods, bonds, etc. This would create a demand in the Australian Dollar against the US dollar. That is, the value of AUD/USD would rise in doing so. Now, if the value rises to a significant amount, the central banks will buy back the US dollars from them, which creates a demand in the USD. And this hence will bring down the value of AUD/USD to keep it stable again. Therefore, traders can look to go short on AUD/USD knowing that USD would buy back their currency to keep both the currencies stable.

Reliable Source of information on Foreign Exchange Reserves

Traders and investors need the data of foreign exchange reserves to make their investments. And this data is publicly available for free. Below are the portals to access the reports on the Forex reserves of different countries. Apart from the current data, one can access the historical data with graphical charts as well.

USD | CAD | GBP | AUD | EUR | JPY | CHF

Impact Of Foreign Exchange Reserves’ News Release On Forex

From the above topics, it is evident that Foreign exchange reserves affect the currency of an economy. Now, we shall see how the price charts are affected when the reports are released. Typically, the impact of the news after its release is low. The Forex reserves of a country are released on a monthly basis and usually at the beginning of a moth. However, the source of the announcement is different for different countries.

For analysis, we will be considering the data released by Japan. The reports on the FX reserve is announced by the Ministry of Finance of Japan. Specifically, we will be considering the reserves that are held as USD. Consider the below report of Foreign exchange reserves (USD) held by Japan’s central bank. The news was announced on 5th March 2020. We can that the newly released data was higher than the previous month by 16.7B.

Source: Investing.com

USD/JPY | Before the Announcement | 5th March 2020

Below is the chart of USD/JPY on the 15min timeframe before the release of the news. Currently, the market is showing some strength from the buyers.

USD/JPY | After the Announcement | 5th March 2020

Below is the same chart, but after the release of the news. We can see that a green candle popped at first but was eaten up by a red candle. Basically, the up move was nullified by the sellers. Also, we cannot really say that the up and down move was due to the news because the volume didn’t show any sudden spike up. Typically, for impactful news, the volume increases drastically, which did not happen for this news. However, the volatility rose a little above the average but dropped below in a few minutes. One of the reasons we could account for the low volatility and volume is that the report was almost the same as the previous month’s report.

EUR/JPY | Before the Announcement | 5th March 2020

EUR/JPY | After the Announcement | 5th March 2020

Consider the chart of EUR/JPY on the 15min timeframe given below. The news candle is marked by a rectangle around it. We can see that the price action of this pair is very similar to that of USD/JPY. Initially, the market showed a bullish move but dropped the next candle. Speaking of volatility, it was a pip or two above the average volatility. The Volume, too, did not increase during the announcement of the news, which usually happens for other impacting news. Hence, in this pair too, the FX reserves did not have an immediate impact on the currency pair.

GBP/JPY | Before the Announcement | 5th March 2020

GBP/JPY | After the Announcement | 5th March 2020

Below is the chart of GBP/JPY on the 15min timeframe. Similar to the above two pairs, in this pair too, the price action is almost the same. In 30 mins after the release of the news, the market showed a little bullish but ended on a bearish note. The volatility at this time was at the average line, and the volume was feeble. In fact, it was lesser than the time when the London or New York market opens. Hence, with this, we can come to the conclusion that the impact of Foreign exchange reserves on GBP/JPY was insignificant.

Conclusion

Foreign exchange reserves are the assets of other countries held by the central bank of a country. The reasons for doing so are plenty. The Foreign Exchange Reserves has its influence in determining the monetary policy. FX reserves can control the rate of a currency and can use to stabilize the same.

However, if we were to see its immediate impact on the price charts, it is low. The impact on the currency pair is usually when it is significantly overvalued or undervalued. FX reserves are also helpful to central banks in bringing up the economy to an extent. This indicator may not predict the future economy but can help economists in several other ways.

That’s about Foreign Exchange Reserves and their impact on the price charts. If you have any questions, let us know in the comments below. Cheers!

Categories
Forex Course

93. Introduction to Pivot Points

What is a Pivot Point?

What is a Pivot Point?

What is a Pivot Point?

The pivot point is a technical indicator that shows the levels typically used to determine the overall trend of the market in different timeframes. These points are essentially used by professional traders to identify support and resistance levels. As a retail trader, one must keep an eye on these levels to identify potential buy/sell signals. To put in simple terms, the pivot points and its corresponding support and resistance levels are places at which markets can possibly change its direction.

The reason this indicator is very enticing is because of its objective. Unlike other technical indicators, there is no decision making involved. The Pivot Points are very similar to the Fibonacci levels. This is because these levels are pretty much self-fulfilling. However, there are some differences in some respects, which shall be discussed in the next section.

It is important to know that the pivot point indicator is mostly designed for short-term traders who wish to take advantage of small price movements. The technique to trade this is similar to that of trading support and resistance, where we participate in the market on a break or bounce from these levels.

The Difference between Pivot Points and Fibonacci Retracements

Though Pivot points and Fibonacci retracements are made by drawing horizontal lines to depict potential support and resistance levels, there vary in few aspects. In Fibonacci levels, there is subjectivity involved in picking the swing lows and highs. But, in pivot points, there is no discretion involved.

In Fib retracements, the levels can be constructed by connecting any price points on a chart. Once the levels are determined, the lines are then drawn at percentages of the selected price range. In the case of pivot points, fixed numbers are used instead of percentages. And the fixed values are the high, the low, and the close of the prior day.

Interpreting Pivot Points

Pivot points indicator is typically used by traders who trade the market using technical analysis. This indicator can be applied to the Stock, Forex, Commodity, Futures as well as the Cryptocurrency market. This indicator is unique from the other indicators because it doesn’t move with the price action.

It is static, and the levels drawn remain at the same prices throughout the day. This means that traders can plan their strategy much in advance. For example, in most of the approaches, if the price falls below the pivot point, traders will go short on the security. And similarly, if the price goes above the pivot point, they will look for buying opportunities.

How do Pivot Points look?

When the standard pivot points are applied to the charts, it will look something like this (as shown below).

In the above chart, P stands for Pivot Point | S stands for Support | R stands for Resistance

There are R1, S1, R2, S2, etc. as well, but it shall be explained in the upcoming lessons. Stay tuned!

[wp_quiz id=”69068″]
Categories
Forex Course

Introduction To Forex Course 4.0

Hello People,

Hello People,

Hello People,

As you all know, we have completed Course 3.0 successfully. Thanks a lot for the brilliant response and great job on the quizzes you all have taken. We have covered some of the most critical fundamentals pertaining to technical analysis in course 3.0. Please make sure to practice all the concepts we have discussed in a demo account. Without practice, it is impossible to ace the Forex Market using technical analysis. We have also made a quick navigation guide for Course 3.0 so that it’ll be easier for you to get a quick recap whenever required. You can find that guide in the link below.

Quick Navigation Guide – Forex Academy Course 3.0

With all these learnings in mind, we will be moving on to the Forex Academy Course 4.0. We have discussed most of the basics concerning technical trading in the previous course. Hence, we will be exploring some sophisticated strategies and intermediate to advanced concepts of technical analysis in Course 4.0. It is crucial to have acquired the knowledge of whatever we have studied in the previous course to catch up with these complex concepts. So it is highly recommended to finish the previous course before starting off with this one.

Topics that will be covered in Course 4.0

✫ Forex Chart Patterns & Their Importance

✫ Trading The Most Popular Chart Patterns

✫ Oscillators

✫ Momentum Indicators

✫ Pivot Points & their importance

Each of these topics will have about 7 to 10 course articles with corresponding quizzes. The USP of this course are the writers who prepared TOC and the related content. They are professional technical & price action traders who have a combined experience of 20+ years in the Forex market. So make sure to follow all the concepts that are discussed in this course and practice them well to become a successful Technical Trader. Also, try to answer the quiz questions until you get all the questions right. We wish you all the luck. Cheers!

Categories
Forex Basic Strategies

Trading The ‘London Session’ Like A Professional Technical Trader

Introduction

Introduction

Introduction

In total, there are five major trading sessions in the Forex market, and we have already discussed the New York Breakout Strategy. In this article, let’s learn the best way to trade the Forex London session.   The London session is one of the biggest market movers because a lot of trading volume for instrument trading occurs in this session. The volume of the instrument essentially means the total amount of money that moves the market in any particular session.

Most of the financial centers and major banks start their day around the London session. These banks and institutions try to accommodate their clients in this session alone. This is one of the reasons why the price action is quite volatile and aggressive in this session. In other words, for retail traders, the London session is a prime window to make huge profits from the market. Because of the higher the volatility, the more the trading opportunities.

In this article, we will be sharing some of the proven techniques that can you can use to trade the London Session. The key to finding success while trading the London session is to be extremely disciplined. It is crucial to follow the rules of the strategy and do the required analysis before the London opening. If we miss our entries at the time of the London opening, we can’t expect a second chance to get back with the trend.

London session opens at 8 AM GMT. If you are not aware of the exact time when the London sessions open, you can make use of the Forex Time Zone Converter to accurately find the opening of this session in your local time.

London Session – Breakout Trading Strategy

We have backtested the strategies that have been mentioned below. The results revealed that most of the time, these strategies provide trading opportunities during the first three hours of the London session. Sometimes, the volatility picks up 30 minutes before the opening of the London suggest. But we always recommend you activate your trades only after the opening of the London session.

  1. Find out any currency pair which is in a strong uptrend.
  2. Price action must hold below the resistance line if the market is ranging before the opening of the London session.
  3. Wait for the breakout to happen in the London session.
  4. Let the price action hold above the breakout to confirm if the breakout is valid.
  5. Take a buy entry.
  6. Place the stop-loss below the breakout line.
  7. Take-profit can be placed at the next resistance area.

The same is the opposite in a down-trending market and when we are willing to go short.

Identifying The Currency Pair

The below AUD/CHF Forex pair represents an up-trending market.

Confirming The Breakout

We can see a breakout happening at the opening of the London session. This indicates that the big players are now ready to move the market. The price action held above the breakout line, indicating that the breakout is real. Going long at this point will be a good idea.

Entry, Stop-Loss & Take-Profit

In the below image, you can see that we have taken a buy position right after the breakout in the London session. The stop-loss is placed just below the recent low, and we chose the higher timeframe’s major resistance area to place our take-profit. A lot of traders believe that if they use this strategy to trade the London session, they must close their positions on the very same day. But that’s a wrong perception as we should be deciding that depending on the market conditions. It is logical to hold your positions until the price reaches our desired take-profit area.

London Breakout + MACD Indicator

In this strategy, we have used the MACD indicator to trade London breakouts. MACD is a celebrity indicator which is popular among most of the professional traders. MACD stands for Moving Average Convergence and Divergence. This indicator consists of two lines; the first one is the MACD line, and another one is known as the second line. MACD is a trend following indicator which is used to identify the overbought and oversold market conditions.

The strategy here is to wait for the breakout to happen right after the opening of the London session. At the time of breakout, check if the MACD indicator is at the oversold area. If yes, it is a clear indication for us to go long. If the MACD is above the zero lines, it is even a greater sign as it indicates that the ongoing trend is strong. Anticipating bullish moves from this point will be a good idea.

The below price chart represents the AUD/CAD Forex pair, and we can see the market is in an uptrend.

In the below image, it is clear that the MACD lines crossed over precisely when the breakout happened at the London opening. This is a clear indication for us to look out for buy opportunities in this currency pair.

We went long right after the breakout in the London session as it was confirmed by the MACD crossover.  We have placed the stop-loss just below the resistance line. We can set the stop-loss order according to our trading style. If you are a confirmation trader, wait for the things to be in your favor to make an entry and use a wider stop-loss. If you are an aggressive trader, the stops below the recent candle are good enough.

If you are a conservative trader, the stops we placed in the below example is good enough. We always suggest you close your positions at the next resistance area. You can follow that process for this strategy as well. Here in this example, we tried to be a bit creative and closed our positions when the MACD indicator gave us an opposite signal. When the MACD indicates that the market is in an overbought condition, it means that the buyers are exhausted now, and it’s time for us to go short. You can see the bearish moment in the market right after we have booked our entire profits.

Conclusion

Both of the strategies mentioned above are simple and easy to use to trade the London market. If you are a beginner, we suggest you practice them first on a demo account. London breakout often gives reasonable risk to reward trades, and most of the trade results can be seen within a few hours. Make sure to follow all the rules of the above strategies to have the edge over the market. All the very best.

Categories
Forex Fundamental Analysis

Understanding ‘Core Inflation’ & It’s Impact On The Forex Price Charts

Introduction

Introduction

Introduction

Core inflation is the change in the price of the goods and services that do take food and energy into account. It is referred to as ‘core’ because it represents the most accurate illustration of the underlying inflation trends. The reason for the exclusion of food and energy is due to its high volatility. They change so often that they may depict an inaccurate reading of the inflation rate. And the commodity market is the sole cause behind the volatility, as it extensively traded all day.

Why Exactly Food and Energy are Excluded

As already mentioned, Food and Energy are exempted from the calculation of core inflation because the volatility in these markets is too high. This reduces the accuracy of the core inflation rates. Food and energy are considered as the most necessary staples; that is, their demand does not change even if there is a price hike. For instance, let’s say the gas prices rise due to the rise in oil prices. But this rise will hardly affect you as you’ll still need to fill up your tank in order to drive your vehicle. Similarly, you will not become hesitant to go to the grocery store because the prices have risen.

Oil and gas are commodities that are traded on the exchange market where people can buy and sell them. The commodity traded bid on the oil prices when they suspect a fall in supply or a rise in demand. Also, the thick that war will bring down the supply of oil. With this assumption and analysis, they buy at the present price and anticipate a higher price in the future. And this is enough to pump up the oil prices in the market. And if things don’t go as per the plan, the prices fall when they sell. Hence, this creates high volatility in the market.

The food prices are dependent on the prices of gas. The food prices tend to rise along with the gas prices because transportation of the food is dependent on trucking. When the oil prices rise, the effect can be seen in the gas price a week later. And if the gas prices maintain its uptrend, the effect of it can be observed on the food prices a few weeks later.

Measuring Core Inflation

The core inflation is measured by both the Consumer Price Index (CPI) and the core Personal Consumption Expenditure Index (PCE). The PCE is the depiction of the prices of goods and services purchased by consumers in the United States. Also, since inflation determines the trend in trend in the rising prices, the PCE is a vital metric in assessing inflation. However, both PCE and CPI are considered to be very similar as both help in determining the inflation in the economy.

CPI and PCE – Which is the Preferred Measure?

It is observed that PCE tends to provide inflation rates that are less affected by the short-term price changes, which is why the Federal Reserve prefers the PCE index over the CPI. The Bureau of Economic Analysis (BEA), a division of the Department of Commerce, measures the rates by using the existing gross domestic product (GDP) data, which helps in determining the overall trend in the prices. The GDP gives the measure of the total production of goods and services. In addition, BEA takes in the monthly Retail Survey data and compares it with the consumer prices generated by the CPI. In doing so, the data irregularities are removed, which helps in providing long-term trends.

Why is Core Inflation Important?

It is important to asses core inflation because it determines the relationship between the price of the goods and services and the level of the consumer income. If there is an increase in the price of the goods and services and no proportional increase in consumer income, consumer buying power will decrease. So, we can conclude that inflation causes the value of money to depreciate compared to the prices of goods and services.

However, if the consumer income increases, but the price of the goods and services remains unchanged, consumers will theoretically have money buying power. Moreover, there will be an increase in the investment portfolio, which leads to asset inflation. And this can generate additional money for consumers to spend.

Core Inflation and its Impact on the Economy and Currency

Core inflation has both a subtle and destructive effect on economic growth. It is said to be subtle because an increase of one or two percent takes quite a while. However, this can have a positive effect at this rate as well. People purchase goods and services beforehand, knowing that price will rise in the near future. Hence, this increase in demand stimulates economic growth. And since currency depends directly on the economy, the price of the currency rises as well.

Inflation can have a negative effect on the economy, as well. That’s because people will have to spend how much ever high price on food and gas, as they are the essentials. This brings down other consumer sectors in the market because people tend to spend less here. Their businesses are less profitable now. This imbalance in the market lowers the economic output.

Reliable sources of data for Core Inflation

The core inflation rate is released by the countries’ statistics board. For most countries, it is released on a monthly basis. And the reports are in terms of percentages. Below is a list of sources of core inflation data for different countries.

EUR | USD | AUD | GBP  For other world countries, you may access those reports here.

How does Core Inflation Affect the Price Charts?

Until now, we understood the definition of Core inflation and its impact on the economy and the currency. Here we shall see the immediate effect of the currency pair when the reports are released. For our example, we will be taking the U.S. dollar for our reference. The core inflation rate in the U.S. is released by the U.S. Bureau of labor statistics. The frequency of the announcement of data is monthly.

Below is the core inflation data released by the U.S. Bureau of labor statistics for the month of February. But, the data for it is announced in the first week of March. We can see that the core inflation has turned to be 2.4 percent, which is 0.1 percent higher than the previous month and the forecasted value. Now, let’s see how this value has affected the U.S. Dollar.

EUR/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

Below is the chart of the EUR/USD on the 15min timeframe just before the release of the news.

EUR/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the same chart of EUR/USD on the 15min timeframe after the release of the news. The news candle has been represented in the chart as well. It is evident from the chart that the news did not have any effect on the currency pair. Though the reports showed an increase in the core inflation, there was hardly any drastic pip movement in the pair. Also, the volatility was below the average, and the volume was low. With this, we can come to the conclusion that the core inflation rate did not impact the EUR/USD.

GBP/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

GBP/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Consider the below chart of GBP/USD on the 15min timeframe. We can see that the news candle was a bearish candle. That is, the news was positive for the U.S. Dollar. However, if we were to check on the volatility of the market, the volatility when the news came out was at the average value. Seeing the volume bar corresponding to the candle, it wasn’t high as such. Hence, the core inflation did not impact the GBP/USD.

Traders who wish to trade this pair can freely go ahead with their analysis as the news has a very light impact on the USD.

USD/CAD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

USD/CAD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the USD/CAD candlestick chart on the 15min timeframe after the release of the news. The news showed an increase in the core inflation rate by 0.1 percent. In the chart, we can see that the report turned out to be positive for the USD. In fact, the news candle actually broke the supply level and went above it. Compared to EUR/USD and GBP/USD, the core inflation had a decent impact on USD/CAD. However, the volatility was at the average mark, and the volume didn’t really spike up.

Conclusion

Core inflation is an economic indicator that measures the inflation of an economy without considering food and energy. This is because of the high volatility in the food and energy market. The core inflation rates are usually taken from the CPI or the PCE. This is an important indicator as it determines the relationship between the price of goods and services and consumer income.

It also gives an idea of the current economy of a nation. However, when it comes to its effect on the currency, there is not much impact on it. So, conservative traders can trade the markets without fearing the release of the news, as there is no drastic rise in the volatility of the markets.

Categories
Forex Course

88. Trading The Forex Market Using The Amazing ‘Parabolic SAR’ Indicator

Introduction

Introduction

Introduction

Parabolic SAR is a trend following indicator that was developed by ‘Welles Welder.’ The SAR in the name stands for the ‘Stop and Reverse.’ Welder introduced this indicator in his 1978 book “New Concepts in Technical Trading System.” In this book, he also introduced many of the revolutionary indicators like RSI, ATR, and Directional Movement Concept.

As the trend of the currency pair extends over time, this indicator trails the price action. If the indicator is below the price action, it means that the price of the currency is rising, and when it goes above the price, it indicates that the market is in a downtrend. In this regard, the Parabolic SAR stops and reverses when the trend of the instrument changes its direction.

During the volatile market, the gap between the price action and the indicator widens. In a choppy or consolidation market, the indicator interacts with the price quite frequently. Most of the technical indicators represent the overbought and oversold market conditions, whereas the Parabolic SAR visually provides us an insight on where to exit our position.

Parabolic SAR – Trading Strategy

The basic strategy while trading with this indicator is to go long when the dots move below the candlestick and go short when the dots go above the candlestick. It is advisable to use this way only in a strong trending market. If the trend is choppy or if the price action is continuously being pulled back, this indicator will continuously give us the buy-sell signal. All of these trading signals won’t be genuine and can produce many losses if we trade all of those signals generated.

As we can see in the below EUR/NZD price chart, the market was in an uptrend. But the momentum of the buying trend was quite weak. That’s the reason why this pair gives a lot of buying and selling opportunities in this pair. If we trade every opportunity, we will end up on the losing side. This is the reason always we must always find the pair which is in a strong uptrend or downtrend.

Buy Example

First of all, find a currency pair that is in a strong uptrend. While the price is in an uptrend wait for the indicator to go below the price action when the price pulls back. If this happens, we can take buy entry. We can expect a ~ 50+ pip movement if the market is trending. Place the stop-loss just below the dots of the Parabolic SAR.

As we can see in the above image of the EUR/USD Forex pair, the market was in a strong uptrend. We have identified two trading opportunities, and both the trades gave us 150+ pip profit. One crucial thing to remember is, in an uptrend, only go for the buying trades and ignore all the sell signals. Place the stop-loss just below the parabolic dots and book the profit when the market gives an opposite signal.

Sell Example

For identifying sell opportunities, we must first find out a strong downtrend. When the indicator goes above the price action, we can activate our sell trades.

In the below chart, we have identified a couple of selling opportunities in the EUR/USD Forex pair. We can see that each trade travels a significant amount of time before we see the next trading opportunity. This is because the sellers were super strong. Parabolic SAR provides amazing trading opportunities in strong trending markets only. This is the only way to use this indicator for buying and selling.

That’s about the Parabolic SAR indicator and how to use it to trade the markets. This indicator can be combined with others to find the accuracy of the trading signals generated. Try using this indicator and let us know if you have any questions in the comments below. Cheers.

[wp_quiz id=”67826″]
Categories
Forex Fundamental Analysis

‘Labor Force Participation Rate’ & It’s Impact On The Forex Market

What is the Labor Force Participation Rate?

What is the Labor Force Participation Rate?

What is the Labor Force Participation Rate?

Labor force participation rate can be defined as the group of the population who are between the age of 16 and 64 in the economy that is currently employed or unemployed (seeking employment). The other set of the population, including the ones who are still undergoing studies, people who are above the age of 64, and the housewives, do not fall into the labor force participation rate. As far as the formula for this concerned, it is the sum of all the employed people and the people seeking employment divided by the total noninstitutionalized, civilian working-age population*.

LFPR = Labor Force / Civilian Non-Institutionalized Population

Where Labor Force = Employed + Unemployed

Working-age population – this is the population of people in an area that is considered to be capable of working in a predetermined age range criterion.

More about Labor Force Participation Rate

The LFPR is a measure to evaluate the working-age population in an economy. This working-age population is a dataset of only those people who are between the age of 16-64.

Since the LFPR involves the calculation of the number of employed and unemployed people, this indicator is closely related to the unemployment rate. The LFPR is a vital metric when the economy is under recession or is slowing down. This is when the people get their eye caught into the unemployment data.

When the market is under recession, the labor force participation rate tends to go down. The reason to account for it is simple. At the time of recession, the economic activity is feeble, which results in fewer jobs across the nation. This, in turn, discourages the people from focusing on their employment and hence leads to a lowering of the participation rate. In addition, the participation rate is an important factor in understanding the unemployment rate.

The group of people who are not interested in working or are in some sort of insignificant type of job is not included in the participation rate. But, when it comes to the understanding of the unemployment rate in detail, we do take the participation rate into account. A population that has a majority of them who are aging, it can have a negative impact on the economy of any country. And this is when the labor participation rate comes into play. If the value is on the higher side, this is a good sign for the economy. But, for smaller values, the countries need to be cautious of their economies. This is the reason, both participation rate, as well as the unemployment rate, must be looked carefully into and simultaneously to get a clear understanding of the overall employment status in the economy.

What do the trends have to say?

Consider the above chart representing the labor force participating rate in the U.S. for two over two decades from 2000 to the present year. Defining as per the chart, the labor force participation rate is the population of people who are able to work as a percentage of the total population.

Going behind the specified period, the rate increased from 1960 to 2000, as women came into the picture of the workforce. At the beginning of 2000, the rate peaked at 67.3 percent. But, due to the recession that happened the very next year, the rate dropped to 65.9 percent by April 2014. Similarly, the recession in 2008, lowered the labor force participation rate even more to 62.3 percent by October 2015. In the coming years, though there wasn’t any significant financial crisis, the rate had risen only to 62.9 percent.

The primary implication to drop could be the falling of the supply of workers. So now, fewer works should manage to negotiate for higher wages. But things turned out to be different. The income inequality increased, and as a result, the average income workers were hit hard. And understandably, they could not put up a competition with robots. Moreover, businesses replaced capital equipment instead of hiring more labor as they found it be cost-effective.

The consistent falling rates of the labor force participation can be boiled to the four points listed below:

  • An aging population
  • Long-term unemployment, leading to structural unemployment
  • Increased opioid dependency
  • Sickness to the extent that they cannot work

How the ‘Labor Force Participation Rate’ Impacts the Economy?

The countries whose population has a skilled and mobile labor force that can adapt to the changing business needs, tend to have a good labor force and stable participation rate.

Investment in human capital plays a role in the valuation of the LFPR. When countries invest more in human capital and stand better than the crowd (rest of the countries), their economy tends to stay above the average mark.

Labor mobility acts as a great add-on to the labor force as well as the economy. The nations with mobile workers have the skill set to negotiate workers, change employers, and start new businesses. The U.S. is one such example of the same. They are much better than other developed countries when it comes to moving to find a job.

Impact of Labor Force Participation Rate on the Currency

The labor force participation rate determines the population in an economy who are employed and unemployed in a certain predefined age range. And this goes hand in hand with the unemployment rate of an economy. Hence, we can conclude that the impact of the currency from LFPR correlates with the unemployment rate.

A rise in the labor force participation rate implies an increase in the participation rate. And this is a positive sign for the economy of a country. Thus, an increase in the participation rate can lead to an appreciation in the value of a currency.

Contrarily, a downfall in the labor force participation rate implies that the labor force is dropped due to the bad performance of an economy. This typically happens during recession times. Therefore, to sum it up, a decline in the LFPR could indicate a negative effect on the currency.

Reliable Sources for Statistics on Labor Force Participation Rate

Firstly, the frequency of release of reports on the Labor Force Participation Rate is 30 days. All the data is expressed as a percent.

Below is a list of links through which one can access the participation rate data for different countries. The information that can be retrieved from the sources are as follows:

  • Actual, previous, highest, and lowest data
  • Graphical statistics for a period of more than 25 years
  • Forecast

USD | GBP | EUR

For the rest of the countries, you may click the link here to access the reports.

Impact of Labor Force Participation Rate Announcement on the Price Charts

Now that we’ve understood pretty much on the theoretical concepts of Labor Force Participation Rate, let’s get a little technical and see how the reports of this economic indicator affect the prices of the currency. Basically, we will be seeing the movement in the charts before the release of the news and then observe its effects after the release of the news.

As already mentioned, this data is released on a monthly basis for most of the countries. For our discussion, we shall be considering the LFPR of the United States. That is, we will be analyzing how the LFPR affects rates of the U.S. Dollar.

Consider the below report released by the U.S. Bureau of Labor Statistics. The Labor Force Participation Rate in the United States has remained unchanged at 63.4 percent in February 2020. Note that, though the data is released in March, in reality, it is the reports for the month of February.

Now that we know the actual value is the same as the previous data, as well as the forecasted data, let us examine how it has affected the prices of the U.S. Dollar.

EUR/USD | Before the Announcement (March 6, 2020)

Consider the EUR/USD chart on the 15min timeframe. At this point in time, we can see that the market is in an uptrend and is presently moving sideways. Let’s see how the price is affected when the news comes out the next candle.

EUR/USD | After the Announcement (March 6, 2020)

Below is the same chart, but after the announcement of the news. The news candle is clearly represented in the chart as well.

We can see that after the news was released, the candlestick left a small wick on the top and a long wick on the bottom and closed a few pips below the open price. We can infer that the news didn’t much create a drastic move in the market. This is because the actual rate was the same as the previous rate. However, the volatility of the market showed an increase. The ATR indicator indicated that the current market volatility was ten pips. But, the volatility after the news release jumped to 27 pips. The volume too increased after the release of the news, which can be seen at the bottom of the chart.

This also means that the news could not really affect the current trend of the market. So, traders can still look out to buy entries after the release of the news. For instance, the wick in the bottom could be interpreted as the strength of the buyers in the market.

GBP/USD | Before the Announcement (March 6, 2020)

Below is the chart of GBP/USD on the 15min timeframe. The market is in an uptrend and currently is at the support (black line). We need to see if the news will respect the support or will break through it.

GBP/USD | After the Announcement (March 6, 2020)

Below is the same chart of GBP/USD after the announcement of the news. We can see that the news was positive for the USD. However, the USD wasn’t strong enough to break below the support. And this was because the actual value was the same as the previous value.

Coming to the volatility, the average volatility was ten pips, and when the news came out, the volatility increased 16 pips, which was decently above the average value. There was a slight increase in the volume as well.

As far as trading this pair is concerned, we can prepare to go long when a doji-like candle was formed at the support area.

Conclusion

Labor Force Participation rate is that economic indicator that measures the workforce of a country by considering a specific age group. As mentioned, the LFPR and the unemployment rate are closely related to each other. That is, for assessing the unemployment rate, having an idea about the participation rate is quite vital. The labor force participation rate has a good weightage in the valuation of the economy of a nation. It has its effects on currencies as well. So, this indicator turns to be handy for economists as well as traders and investors.

Categories
Forex Course

86. Learning To Trade Using The Dependable ‘Stochastic Oscillator’

Introduction

Introduction

Introduction

Stochastic is a momentum indicator that was developed in the late 1950s by ‘George Lane.’ This indicator does not follow the volume or price of the underlying instrument; instead, it measures the speed and momentum of the price action. As a result, the indicator changes its direction before the price itself. This makes the Stochastic a leading indicator in the market.
We can change the sensitivity of this indicator to the market movement by adjusting the settings. Stochastic is a bounded indicator which oscillates between the 0 to 100 level. When the indicator reaches the 70-level, it indicates the overbought markets, and when it goes below the 30-level, we can assume that the market is in an oversold condition. The bullish and bearish divergences on the Stochastic indicator help us in anticipating the upcoming price reversals.

Trading Strategies Using The Stochastic Oscillator

Oversold & Oversold Areas

This is the basic yet powerful Stochastic strategy that is widely used by most of the traders. The idea is to go long when the indicator reverses at the oversold area and go short when it reverses at the overbought area. Let’s understand this with an example.

The image below is an NZD/CAD Forex price chart. It represents two buying and one selling opportunity in an uptrend. These trades are solely taken based on the strategy that we discussed above.

We have placed the stop-loss just below the recent candle and close our position when the market gave an opposite signal. The market circumstances don’t matter as this indicator can be used in any situation. The crucial thing is to follow the rules of the indicator very well.

If the indicator generates a buy signal, only take buy entries, and when it says sell, only consider selling opportunities. If we are in a buy trade and if the indicator represents a sell trade, that is the time to close our position. Never be rigid and ignore the indicator signals to hold the position for extended targets. If that happens, we will be on the losing side.

Stochastic Indicator + Bollinger Bands

Bollinger band is a leading indicator, and it consists of two bands, which are above and below the price action. This indicator also has the centerline, which is a Moving Average. The bands of the indicator expand and contracts according to market volatility. They expand if the volatility is more and contract when the volatility is less.

Buy Example

First of all, find an uptrend in any Forex pair. When the price action hits the lower Bollinger Band, see if the Stochastic indicates the oversold market condition. If it does, it means that the sellers now have a hard time to go lower and taking buy entries from here will be a good idea.

As you can see in the below image, the EUR/AUD was in an uptrend. During the pullback phase, the Stochastic reaches the oversold area, and the price action hits the lower Bollinger Band. This is an indication to go long in this pair. As we have activated our trade, the price action blasts to the north. We can close our position when the Stochastic indicator reaches the overbought area. If you want to ride longer moves in the trending market, exit your position at the major resistance area.

Sell Example

First of all, find a downtrend in any Forex pair. When the price action hits the upper Bollinger Band, see if the Stochastic is indicating overbought market conditions. If it does, it means that the buyers now have a hard time to go higher and taking sell entries from here will be a good idea.

The image below is the EUR/CHF Forex pair, and the pair was in an overall downtrend. During the pullback phase, the price action turned sideways. But when the price action hits the upper Bollinger Band and the Stochastic indicator reverses at the overbought area, it is a sign to go short in this pair.

We can place the stop-loss just above the upper Bollinger band, and the take-profit must be at the higher timeframe’s support area. If you are an intraday trader, close your positions when both the indicators give an opposite signal.

That’s about Stochastic indicator and related trading strategies. If you have any doubts, let us know in the comments below. Cheers.

[wp_quiz id=”67442″]
Categories
Forex Assets

Understanding The EUR/EGP Exotic Currency Pair

Introduction

Introduction

Introduction

The Euro Area’s euro against the Egyptian Pound is abbreviated as EUREGP. This is an exotic-cross currency pair in the forex market. In this pair, the EUR is the base currency, and the EGP is the quote currency.

Understanding EUR/EGP

The market price of the EUREGP depicts the value of EGP that is equivalent to one euro. It is simply quoted as 1 EUR per X EGP. So, for example, if the market price of this pair is 17.8341, then exactly 17.8341 Egyptian Pounds is required to purchase one Euro.

Spread

The difference between the bid price and the ask price is referred to as the spread. These two values are set by the brokers. Hence, it is different for different brokers. The spread also varies based on how the orders are executed.

ECN: 100 pips | STP: 111 pips

Fees

The fee is simply the commission paid on the trade. There is no fee on STP execution model but a few pips on the ECN execution model. However, the fee absence on STP accounts is usually compensated by higher spreads.

Slippage

Slippage is the difference between the price which was wanted by the trader and the price the broker actually gave the trader. It is typically not possible for brokers to give the exact price intended by the traders due to reasons:

  • Broker’s trade execution speed
  • Market volatility

Trading Range in EUR/EGP

Trading range is an illustration of the pip movement in a currency pair for different timeframes ranging from 1H to 1M. These volatility values help in assessing the risk involved in a trade. Basically, it acts as an effective risk management tool. Another application to it is discussed in the subsequent section.

Procedure to assess Pip Ranges

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

EUR/EGP Cost as a Percent of the Trading Range

This is a very helpful application of the trading range. In the cost as a percent of the trading range, we combine the volatility values with the total cost on the trade and observe how the cost varies for changing volatilities.

ECN Model Account

Spread = 100 | Slippage = 10 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 10 + 100 + 3 = 113

STP Model Account

Spread = 111 | Slippage = 10 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 111 + 0 = 114

Trading the EUR/EGP

The EUR/EGP is an exotic-cross currency pair. This pair is highly volatile, but the trading volume is pretty low. However, this pair can still be traded in certain situations.

Firstly, we can see that the spreads on this pair are high. This is because the volatility in this pair is very high. For example, the average pip movement in the 1H timeframe is over 400 pips. So, we can’t really say that the spread of this pair is high.

Consider the table representing the variation in the costs. We can see that the percentages are highest in the min column. And the values are considerably small in the average and max column. If we were to interpret this, the cost of the trade reduces as the volatility of the market increases. So, based on the type of trader you are, you can choose to enter the market. For example, if you’re concerned about the high costs, then you may trade when the volatility of the market is at its peak. If you’re a conservative trader who needs petty low volatility, then you may use it during low volatilities, but you’ll have to bear high costs for it.

Furthermore, there is a way through which you can bring down your existing cost on the trade. This is simply by executing trades using limit or stop orders instead of the market. In doing so, the slippage will be nullified. So, in our example, the total cost would reduce by ten pips.

Categories
Forex Basic Strategies

Scaling Positions Using The Pyramid Trading Strategy

Introduction

Introduction

Introduction

You would have heard most of the successful traders and market gurus say ‘let your winning trades run.’ That is very true, but do you know how to do that? You would have probably asked this to yourself many times. In today’s article, let’s understand a strategy that helps you in turning your small trades to big ones using a strategy called Pyramiding.

This Forex Pyramid Strategy helps you in increasing the chances of making consistent returns as a Forex trader. Using this strategy, we can scale our winning position and make the most of the trend. This strategy cannot be used in every market situation. If you do that, it will be the most destructive thing you do to your trading account.

Pyramiding our trades work very well in trending market conditions only. To make consistent returns from the market, we need to buy or sell strategically to add to an existing position. Always remember that when we are right, we must be really right, and when we are wrong, we must cut our trades immediately. The concept of this strategy can be applied to both long and short positions.

We can get a basic idea of the pyramid strategy from the below image. Here, we can see the price action printing brand new higher highs and lower highs continuously. The market is clearly breaking the resistance line and taking that line as a support. Note that the price action must break the resistance line with strong power. The price should also show the sign of holding at the support line.

The key to successful Pyramiding is to have a proper risk to reward ratio in place. That means our risk should never be greater than the reward. So if our target is 50 pips, our stop-loss must not be greater than the 25 pips.

Rules to Trade the Pyramid Strategy

🏁 Pick a market that is in a strong uptrend and wait for the price action to break the significant resistance area. Let the price test that resistance line as support.

🏁 Go long when the market gives you a buy signal. You can even look out for the appearance of any bullish candlestick patterns like Engulfing, Dragonfly, or a Bullish pin bar, etc.

🏁 Let that trade run because the market is in a strong uptrend.

🏁 Then wait for the price to break through the second resistance line and retest it as strong support.

🏁 Notice if the price is holding at the support line, and if it prints any buying candlestick pattern, go long again by extending your buy position. Make sure to trail your stop-loss after taking the second position.

🏁 Repeat the same, and do not forget to place your trailing stop-loss orders just below the entry points.

The same is vice-versa when the market is in a downtrend and when we are going short. By following this, we have built a good amount of buying position with minimum risk involved. Also, as discussed, the key to successful Pyramiding is to maintain proper risk to reward in each of the trades. As a thumb rule, our risk must never be greater than half the potential reward.

Trading The Pyramid Strategy

Market Identification - Strong Uptrend or Downtrend.

The below price chart represents the AUD/CAD Forex pair, which is in a strong uptrend.

To understand the strategy better, let’s consider a $10,000 trading account. In this particular pair, we decided to buy two mini lots on a retest of each of the levels. The take-profit for each trade is varied as per the market conditions, but the stop-loss for each new position should not be more than 15 pips.

Market Entries

In the below chart, we can see the market broke through a resistance level. We have decided to buy 20,000 units right after the price took the broken resistance line as support. In a few hours, we have observed the price action blasting to the north and broke a new resistance level. The price again started to retest the level as new support.

At this point, we decided to buy 20,000 more units. You can see that the buy order 2 in the below chart indicates the second trade, and we have trailed the stop-loss below the second position. We found the trend to be super strong still, so we let this trade to run for the deeper targets.

On the 5th of February, the price again broke through a new resistance level and retests as a support area. By seeing the uptrend’s strength, we have bought another 20,000 units and placed the trailing stop-loss order just below the third position.

We did a lot of buying up until this point and built 80,000 units in one single pair. So the real question by the end of the third position is how much of our money is at risk? Nothing. The worst-case scenario would be us making 10% profit by the end of the third position.

Final Trade Set-Up

In the above chart, we can see the final trade setup of all the three trades we took. By the end of all the three trades, we made a profit of 28 percent. The profits on each of the trades have compounded throughout the process, where the risk in each trade remains the same. Overall, we have generated 12R, 10R, and 6R in the first second and third trades, respectively.

Conclusion

Never forget that the pyramid strategy works very well only in the trending markets. Also, try to avoid using this strategy in volatile markets. Pyramiding is a great way to compound our profits in a winning trade. Knowing when to use and when not to use the pyramid strategy is the crux here. Hence it is advisable to read the different market situations on a demo account first before using this strategy on a live account.

Categories
Forex Basic Strategies

Trading The New York Breakout Forex Strategy

Introduction

Introduction

Introduction

Forex is a 24 hours market, and it is open five days a week. So there are a hell lot of opportunities this market offers to the traders across the world. However, to make more profits and be successful in this market, we don’t have to trade 24 hours on all the days it is open. On any given day, the Forex market shuts down in some continents and opens in some other continents. This leads to the opening and closing of different Forex sessions.

The two most essential sessions are the New York session and the London session. Most of the traders across the globe prefer trading the New York session because, in this session, instruments often have less spread. Also, the markets are quite volatile during this session, and prominent players prefer making most of the significant trades in this session only. In this article, let’s understand different trading techniques to catch the more notable moves that occur during the opening of the New York Session.

We will also be trading the Forex market when the New York session overlaps with the London session. At this point, the volatility will increase furthermore as it is an overlap of the two biggest Forex sessions. The idea is to trade in the direction of the larger players. For each country, the New York session opens at different times. For instance, if you are trading the Forex market from England, the US Session opens for you at around 13:00 GMT. Likewise, if you are trading the market from India, the US session begins at 18:30 IST.

If you are not sure of the exact time of the opening and closing of different trading sessions, you can follow the below link to accurately identify the opening and closing of the New York session according to your local time.

|Forex Time Zone Converter|

Breakout Trading Strategy

During the New York session, all the major, minor, & exotic currency pairs move very fast. Some traders believe that we must trade the currency pairs according to the corresponding session. For example, in the Asian session, we must trade only AUD, NZD, and JPY. In the London and Frankfurt session, we must only trade GBP, EUR, & CHF. Finally, in the New York session, go for USD and CAD currency pairs.

There might be a valid reason behind this, but this shouldn’t be taken seriously. Currency pairs do not move according to the session. Instead, they move according to market circumstances. So in the New York session, we can choose any pair, but we must follow the below rules in order to trade this session profitably.

  1. Before the opening of the New York session, find a currency pair that is in a strong uptrend.
  2. Price action must be held at the major resistance area.
  3. Wait for the breakout to happen in the New York Session.
  4. Let the price action hold above the breakout.
  5. Go long.
  6. Stop-loss below the breakout line.
  7. Take-profit must be at the next major resistance area.

The same is vice-versa for a currency pair if the market is in a strong downtrend.

Buy Example

In the below image, we can clearly see that the EUR/AUD Forex pair is in a strong uptrend.

We can see the price breaking out at the opening of the US session. This indicates that the big players are ready to take over the market. The price action then holds above the breakout line, and this suggests that the breakout is real. Hence we can anticipate buy trades in this Forex pair.

Entry, Stop-loss & Take-profit

We have gone long in this pair as soon as the prices started to hold above the breakout line. The stop-loss is placed just below the support line. We can go for smaller stops when the price action respects the breakout line as it essentially indicates the opposite party giving up. Overall, it was swing trade, and we book the whole profit at the higher timeframe’s resistance area. This entire trade resulted in 150+ pip profit.

Most of the traders believe if they activate the trade in the New York session, they must close the trade in the New York session only no matter what. That’s just another myth. It is always advisable to milk the markets when there’s an opportunity to do so.

Breakout Trading Using Bollinger Bands

In this strategy, we are going to use the Bollinger Bands to trade the New York session. Bollinger Bands, as most of us know, is a quite popular indicator created by John Bollinger. This indicator consists of three lines, which are named as middle, upper, and lower band. These bands expand and contract according to market volatility. Most importantly, this indicator works very well in all types of market conditions.

The below image represents the NZD/CAD Forex pair, which was in an overall uptrend. The price action breaks the major resistance level at the opening of the New York session on the 11th of February 2020. After the breakout, prices started to hold above the breakout line, which tells that the breakout is real, and any long trade anticipated from here will lead to a fruitful result.

Entry, Stop-loss & Take-profit

In the below image, you can see that we have taken a buy entry in the 2nd half of the New York session. Sometimes, the price action breaks the major S&R level in the morning, and it goes sideways for a while before blasting out in the evening. As professional technical traders, we must trust our analysis and be patient enough even when the market is not going in the anticipated direction. We must always let the price action to tell us what is going to happen next and act accordingly.

So right after the breakout, the momentum of sellers is very weak (can be seen in the above chart). So the stop-loss can be placed just below the breakout line. The take-profit was at the higher timeframe resistance area. At first, prices failed to break the resistance line, and during the second try, prices again failed to go higher. The failed second attempt is a clear indicator to close our winning position. Overall it was a good trade, which gave us nearly 90+ pips in just a couple of hours.

Conclusion

Both of the strategies mentioned above are simple and straightforward. Did you observe that in both of our examples, we didn’t choose USD pairs? Instead, we went for minor pairs, and both of the pairs performed really well in the New York session. This proves that it is not about the currency pair of that particular session. It is about what is happening in that pair. It is critical to follow all the rules first and then make a trading decision. It is always advisable to try these strategies on a Demo account and then use it in the live markets. Happy Trading.

Categories
Forex Assets

Trading The USD/HRK Forex Currency Pair

Introduction

Introduction

Introduction

USDHRK is the abbreviation for the United States Dollar against the Croatian Kuna. Thw USDHRK is an emerging currency pair. Unlike the major/minor currency pair, this pair has high volatility and low liquidity. The volume is less too. Here, USD is the base currency, and HRK is the quote currency.

Understanding USD/HRK

The value of this pair determines the value of HRK equivalent to one USD. It is simply quoted as 1 USD per X HRK. For example, if the value of this pair is 6.6123, then 6.6123 Kuna is required to buy one US Dollar.

Spread

Spread is the way through which retail brokers make money from their clients. And it is through the difference between the bid price and the ask price in the market. This value is set by the brokers and varies from the type of execution model they use.

ECN: 25 pips | STP: 30 pips

Fees

A fee is basically the commission that you are liable to pay one each trade you make. This is similar to the one that is levied by stockbrokers. However, the fee is charged only by ECN brokers. There is no fee as such in STP accounts.

Slippage

In market orders, when you execute a trade, you don’t get the exact executed price. The actual executed price is different. This difference between the prices is what is known as slippage. Market volatility and the broker’s execution speed are two factors that affect the slippage on the trade.

Trading Range in USD/HRK

The minimum, average, and maximum volatility can be used to determine the risk of a trade. The profit/loss can be simply calculated by multiplying the volatility value with the pip value (per standard lot).

Procedure to assess Pip Ranges

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

USD/HRK Cost as a Percent of the Trading Range

The total cost of the trade can be found as the sum of spread, slippage, and trading fee. This total cost is variable and is dependent on the volatility of the market. Below is the representation of the variation in the costs for different volatilities and timeframes.

ECN Model Account

Spread = 25 | Slippage = 3 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 3 + 25 + 3 = 31

STP Model Account

Spread = 30 | Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 30 + 0 = 33

The Ideal way to trade the USD/HRK

The percentages in the above tables depict how the cost varies on the trade. The higher the value, the higher is the cost of the trade. Similarly, the smaller the percentages, the lower is the costs.

From the above tables, it can be ascertained that the costs are high for low volatilities, as the percentage values are high in the min column. And the costs are lower for high volatilities. So, the ideal way to trade this pair is dependent on the type of trader you are. For instance, a trader who is particular about costs may trade when the volatility of the currency pair is high. The traders who wish to keep a balance between the two may trade during those times when the volatility is around the average values.

Moreover, one may reduce their costs by trading using limit or stop orders instead of market orders. This will cut off the slippage factor on the trade and bring down the total costs pretty much. An example of the same is given below.

Spread = 25 | Slippage = 0 |Trading fee = 3

Total cost = Slippage + Spread + Trading Fee = 0 + 25 + 3 = 28

Categories
Forex Course

74. Using Moving Averages To Identify The Trend

Introduction

Introduction

Introduction

In the previous lessons, we have understood the two types of Moving Averages and the difference between them. We have also seen which Moving Average should be used in different market conditions and the one that must be preferred most of the time. From this crouse lesson, let’s explore the real-time applications of Moving Averages and how we can find accurate trades using this indicator.

One of the simplest, yet important use of Moving Average is to determine the direction of the trend. This can be done by plotting the indicator on the chart and then deciding the position of candlesticks with respect to the line of Moving Average.

The ideal way of identifying a trend using MA is this – If the price action tends to stay above the moving average line, it usually signals an uptrend. Likewise, if the price action remains below the moving average line, it indicates a downtrend.

This approach of establishing the trend is too simplistic and also has a significant drawback. Let us understand that with the help of an example.

Below is the EUR/USD price chart, and we have added a 10-period MA line to it. According to the rules of MA, since the price is above the MA, we should be going ‘long’ in this currency pair.

Due to a news event, price drops suddenly and closes below the MA (in the below chart). So, this changes our plan, which means now we should be thinking of going ‘short’ in the currency pair. But before we do that, let us see what happens to the price in the next few candles.

The below image shows that the price fakes out and does not continue its downward trend. Hence, if we would have gone short, that would have resulted in the price hitting our stop-loss resulting in a loss. Let’s understand the problem with this setup.

The strategy mentioned above is right, but the problem is that we are using a single period MA line stand-alone and not combining it with any other indicator. The best way to use MA for determining a trend is by plotting an extra Moving Average line on the charts instead of just one. It will give us a clearer idea if the pair is trending up or down depending on the sequence of the MAs.

The best way is to check if the ‘faster’ moving average is above the ‘slower’ moving average for an uptrend, and vice versa for a downtrend. In the below chart, we can see that the ‘faster’ SMA is above the ‘slower’ SMA, and this shows the strength of the uptrend. Also, the fake-outs that happen because of news releases will also have less impact on the indication given by the Moving Averages. Combining this knowledge with trendlines can help us decide if we have to go ‘long’ or ‘short’ in the currency pair.

Conclusion

Moving Averages can be useful for establishing the direction of a trend, but it should never be used stand-alone. If not other indicators, additional moving averages itself can be combined with an existing moving average to decide the direction of the trend. In the next article, we will be discussing how we can enter a trade using moving averages and profit from this indicator.

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Categories
Forex Course

70 – Introduction To Moving Averages

Introduction

Introduction

Introduction

After understanding various applications of the Fibonacci indicator, it’s time to learn about the next best indicator in technical analysis – Moving Average. MA is one of the most popular indicators in the technical trading community. This indicator, just like the Fibonacci Indicator, has a lot of applications and is commonly used by traders for different reasons.

A moving average smoothens the price movements and its fluctuations by eliminating the ‘noise’ in the market. By doing this, MAs shows us the actual underlying trend. A moving average is computed by taking the average closing price of a currency for the last ‘X’ number of candles. There are many moving averages depending on the number of periods (candles) considered.

Below is how a 5-Period Moving Average looks on the price chart.

One of the primary applications of the Moving Average indicator is to predict future price movements with high accuracy. As we can see in the above chart, the slope of the line determines the potential direction of the market. In this case, it is a clear uptrend.

Every Moving Average has its own level of smoothness. This essentially means how quickly the MA line reacts to the change in price. To make a Moving Average smoother, we can easily do so by choosing the average closing prices of many candles. In simpler words, higher the number of periods chosen, smoother is the Moving Average.

Selecting the appropriate ‘Length’ (Period) of a Moving Average

The ‘length’ of the Moving Average affects how this indicator would look on the chart. When we choose an MA with a shorter length, only a few data points will be included in the calculation of that MA. This results in the line overlapping with almost every candlestick.

The below chart gives a clear idea of a small ‘length’ Moving Average.

The advantage of a smaller length moving average is that every price will have an influence on the line. However, when a moving average of small ‘length’ is chosen, it reduces the usefulness of it, and one might not get an insight into the overall trend.

The longer the length of the moving average, the more data points it ll have. This means every single price movement will not have a significant effect on the MA line. The below chart gives a clear idea of a long ‘length’ moving average.

On the flip side, if too many data points are included, large and vital price fluctuations will never be considered making the MA too smooth. Hence we won’t be able to detect any kind of trend.

Both situations of choosing ‘lengths’ can make it difficult for users to predict the direction of the market in the near future. For this reason, it is crucial to choose the optimal ‘length’ of the Moving Average, and that should be based on our trading time frame and not any random number.

Conclusion

Moving Averages generate important trading signals and especially when two MAs are paired with each other. They give both trend continuation and reversal signals with risk-free trade entries. A simple way of reading the MA line is as follows – A rising MA indicates that the underlying currency pair is in an uptrend. Likewise, a declining MA means that the currency pair is in a downtrend.

In the next article, we will be learning two critical types of moving averages – Simple Moving Average and Exponential Moving Average, along with their applications on the charts. Stay Tuned!

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