Tag: Trading Forex

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Forex Basics

Is It Safe (and Wise) to Trade Forex? Let’s Discuss…

The global Forex market has more than $5 trillion in daily trading volume, making it the largest financial market in the world. The popularity of Forex attracts traders at all levels, from novices learning about financial markets to more professional and experienced veterans. Because it is so easy to do Forex trading – with all-day […]

The global Forex market has more than $5 trillion in daily trading volume, making it the largest financial market in the world. The popularity of Forex attracts traders at all levels, from novices learning about financial markets to more professional and experienced veterans. Because it is so easy to do Forex trading – with all-day […]

The global Forex market has more than $5 trillion in daily trading volume, making it the largest financial market in the world. The popularity of Forex attracts traders at all levels, from novices learning about financial markets to more professional and experienced veterans. Because it is so easy to do Forex trading – with all-day sessions, access to high leverage, and relatively small costs – but it’s also very easy to lose when trading Forex. In this article, you will see 10 ways in which traders can avoid losing money in the competitive Forex market and can safely make Forex investments.

Do Your Homework

Just because it’s easy to get into the world of Forex doesn’t mean it’s easy to operate in this area. Learning about Forex is fundamental to a Trader’s success in foreign exchange markets. Although most of the learning comes from live trading and experience, a trader must learn everything possible about Forex markets, including geopolitical and economic factors that affect the currencies to be traded. The task is a continuous effort as traders need to be prepared to adapt to changing market conditions, regulations, and global events. Part of this research process involves the development of a trading plan.

Choose a Reputable Broker

The Forex industry has less oversight than other markets, so it is very likely to end up doing business with a reputable Forex broker. Because there is a concern about the security of deposits and the overall integrity of a broker, Forex traders must only open an account with a member company of the National Futures Association (NFA) and which is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Every country outside the United States has its own regulatory body with which legitimate Forex brokers must be registered.

This is basic and indispensable and cannot be emphasized further, only duly regulated Forex brokers should be traded. Traders should also investigate each broker’s account offers, including leverage amounts, commissions and spreads, initial deposits, and account withdrawal and financing policies. A representative of useful customer service should have all this information and be able to answer all questions regarding company services and policies.

Using a Practice Account

Almost all trading platforms have a demo account to practice, sometimes called a dummy account or demo account. These accounts allow traders to place hypothetical transactions without a funded account. Perhaps one of the most important benefits of a demo account is that it allows the trader to become an expert in order entry techniques.

Few things are as harmful to a real account (apart from the trader’s overconfidence) as pressing the erroneous button when opening or exiting a position. This is quite common, for example, for a new trader to accidentally add to a losing position rather than close the trade. Having many errors in order entry can lead to having large losses without protection. Apart from the devastating financial consequences, this situation is incredibly stressful. Practice makes perfect: experiment before placing real money online.

Keep the Graphics Clean

When a Forex trader has hired an account, it can be tempting to take advantage of all the benefits of technical analysis offered by the trading platform. Although most of these indicators are perfectly adapted to foreign exchange markets, it is very important to consider keeping analysis techniques to a minimum to be effective. The use of the same types of indicators-such as two volatility indicators or two oscillators, for example, can be redundant and may even give opposite signals. This must be avoided.

Any analysis technique that is not routinely used to improve the performance of the company must be removed from the table. In addition to the tools used for the chart, the overall appearance of the workspace should be considered. The colors, fonts, and types of price bars chosen (line, Japanese candle bar, distribution bar, etc.) should create an easy-to-read and interpret chart that allows the trader to respond more effectively to changing market conditions.

Protect Your Trading Account

While there is a lot of focus on making money in Forex trading, it is very important to know how to avoid losing balance in your account. The most appropriate techniques of monetary management are a very important part of successful negotiation. Many experienced traders would agree that anyone can enter a position at any price and still earn money – the important thing is how he leaves trade.

Part of this is knowing when to take your losses and move on. Using stop-loss protection is always an effective way to ensure that losses remain reasonable. Traders may also consider using a maximum amount of daily losses beyond which all positions would be closed and no new trading will start until the next trading session. While plans must be made to limit losses, it is equally essential to protect gains. Money management techniques, such as the use of stop drags, can help preserve profits.

Start Small

Once you’ve done your homework, spent time with a practice account, and have the Trading plan instead, it may be time to start live – that is, start trading with real money. No amount of trading in a demo account can accurately simulate actual trading, and as such, it is very important to start with a small amount when going live.

Factors such as emotions and slippage cannot be fully understood and accounted for until live trading is performed. In addition, a trading plan that was used as a champion in backtesting results or trading practice could, in fact, fail miserably when applied to a live trade. Starting small, the trader can evaluate your trading plan and emotions, and gain more practice in executing order entries – without risking the entire trading account in the process.

Use of Reasonable Leverage

Foreign exchange trading is unique in the amount of leverage offered to its participants. One of the reasons why Forex is such an attractive market is that traders have the chance to make high profits with a small investment – sometimes as little as 100 US dollars. Properly used, leverage provides growth potential; however, leverage can easily amplify losses. A trader can choose the amount of leverage he wants to use when basing the size of the position on the account balance. For example, if a trader has 20,000 USD in a Forex account, a position of 200,000 USD (two standard batches) would use leverage 1:10. While the merchant might open a larger trade if he were to take maximum leverage, a smaller position would limit the risk.

Leverage is you have a chance to use something small to control something bigger. In short, Forex trading means that you can have a small amount of balance in your account and be able to control a much larger amount in the market. In trading currencies, there is no interest charged on the margin used, and it doesn’t matter what kind of Trader it is or what kind of credit it has. If you have contracted an account and the broker offers the margin, you can trade on it.

The most obvious advantage of using leverage is that you can earn a significant amount of money using only a limited and small amount of capital. The problem is that, in the same way, you can also have a loss of a considerable amount of money in leverage trading. Everything depends on the prudence with which it is used and the conservativeness or aggressiveness of its risk management.

You have stricter control than you think; The advantage makes a pretty boring market incredibly exciting. Unfortunately, when your money’s on the line:

Exciting DOES not always = Good

But that’s exactly what leverage has brought to FX. If there was no leverage, traders would be surprised to see a 15% move in their account at a year. However, a trader who uses too much leverage can easily see 15% moving in his accounts in a day.

While typical leverage amounts tend to be too high, leverage trading five times more; it is very important for you to know that much of the volatility you experience when trading is mainly due to leverage of your Trade than the same movement in the underlying asset.

Amounts of Leverage Provided

Leverage usually occurs in a fixed amount that may vary depending on the broker. Each broker grants leverage based on its rules and regulations. The amounts are usually 1:50, 1:100, 1:200, and 1:400.

Leverage of 50:1 Percent

Leverage of fifty to one means that for every $1 you have in your account you can place a value of $50. For example, if you deposited $500, you could trade amounts up to $25,000 on the market using leverage 50:1. It’s not that you should trade the full $25,000, but you would have the ability to trade up to that amount.

Leverage 100:1 Percent

Leverage of a hundred to one means that for every $1 you have in your account, you can place a commercial value of $100. This is a standard amount of leverage suggested in a standard account. The typical minimum deposit of 1000 USD for a standard account would give you the ability to control 100,000 USD.

Leverage 200:1 Percent

A leverage of two hundred to one means that for every $1 you have in your account, you can place a value of $200. This is a frequent amount of leverage suggested in a mini lot account. The typical minimum deposit on that account is around 250 USD. With 250 USD you would be able to open operations up to the amount of 50,000 USD.

Leverage 400:1 Percent

A leverage of four hundred to one means that for every $1 you have in your account, you can place a value of $400. Some brokers offer 400:1 in mini-batch accounts. I would personally take care of any broker that offers this kind of leverage for a small account. Anyone who makes a $300 deposit into a Forex account and tries to trade 1:400 leverage could be wiped out in a matter of minutes. Not that Brokers force the Trader to deposit only $300, but if they make it possible, the suspect doesn’t?

Professional Traders and Leverage

For the most part, professional traders trade very low leverage. Having lower leverage has the ability to protect your balance when you do business mistakes and keeps your returns more consistent. Einstein once said that the definition of Madness is: “Always do the same and expect different results.” Without a business log and a meticulous log book, traders are likely to be able to continue making the same mistakes, minimizing the chances of being a profitable and successful trader in the future.

Understanding Tax Implications

It is very important to have clear tax implications and how it deals with the foreign exchange trading activity that will be prepared at the time of filing taxes. Consulting with a qualified specialist or tax specialist can be beneficial and help avoid surprises when paying taxes and can be great to help people take advantage of an existing diversity of tax laws. As tax rules often change, it is prudent to maintain a relationship with a trusted professional who can handle all tax-related matters.

Treat Trading Like a Business

It is very important to consider foreign exchange trading as a business and to keep in mind that gains and losses are not important in the short term. As such, the operators must avoid becoming overly emotional beings, no matter what the gain or loss, and treat each as one more day at the office. As with any other business, Forex trading incurs losses, expenses, taxes, risks, and uncertainty. Also, just as small businesses rarely succeed overnight, so it is for the vast majority of currency traders. Planning, setting realistic goals, being organized, and learning from both successes and failures are key to achieving a long and successful career as a foreign exchange trader.

In Conclusion

Forex trading around the world is attractive to many traders because of their low account requirements, 24-hour trading, and access to large amounts of leverage. When approached as a business, foreign exchange trading can be profitable and rewarding. In short, traders can avoid losing money in currencies and make a safe Forex trading, as long as they:

  • Are well prepared
  • Have the patience and discipline to study and investigate
  • Apply money management techniques
  • They resemble their trading activity as if they were running a business
Categories
Forex Course

171. The Best Timeframe for Forex Markets

Introduction

Introduction

Introduction

In our previous lesson, we looked at which timeframes you should trade in the forex market. We established that the timeframes you trade depend on the type of forex trader that you are. This lesson will cover the best timeframes to trade using illustrations depending on the type of forex trader you are.

Best Timeframe for Forex Position Trading

1-Month EUR/USD Primary Trend Timeframe

The monthly timeframe shows a downtrend in the pair.

1-Week EUR/USD Trigger Timeframe

For a forex position trader, the 1-week timeframe can be used to establish the support level. This level will make the best entry point when the price trends below it.

Best Timeframe for Forex Swing Trading

Daily EUR/USD Primary Trend Timeframe

Forex swing traders trade in the direction of the preceding trend, which in this example, is a downtrend.

4-hour EUR/USD Trigger Timeframe

For a forex swing trader, using the 4-hour timeframe is the best to identify the ideal entry and exit points.

Best Timeframe for Forex Day Trading

1-hour GBP/USD Primary Trend Timeframe

For a forex day trader, the dominant market trend is a downtrend. With this chart, the day trader can establish multiple support and resistance levels. The 15-minute timeframe is used to establish the best market entry positions.

15-minute GBP/USD Trigger Timeframe

With the 15-minute timeframe, multiple entries and exit points can be established.

Best Timeframe for Forex Scalping

15-minute EUR/USD Primary Trend Timeframe

For a forex scalper, the 15-minute timeframe shows an uptrend. The 5-minute timeframe will be used to establish the best points of entry into the market.

5-minute Trigger Timeframe

The 5-minute timeframe presents the forex scalper with the best points for entry into the uptrend market.

Best Timeframe for Fundamental Forex Traders

Fundamental forex traders can also use timeframe analysis to establish the magnitude and volatility resulting from the release of an economic indicator. Therefore, depending on whether the indicator is high- or low-impact, you can determine which timeframe is best to trade.

With high-impact indicators, you can trade from the 30-minute timeframe.

30-minute timeframe for Australia’s GDP data release. September 2, 2020, 1.30 AM GMT

Furthermore, the price action from the release of a high-impact economic indicator can persist in the market for the long-term.

30-minute timeframe for Australia’s GDP data release. September 2, 2020, 1.30 AM GMT

The 4-hour chart shows that the AUD/USD pair continued trending downwards due to the less than expected GDP growth data.

For low- to medium-impact economic indicators, it is best to trade shorter timeframes from 1-minute to 15-minutes.

5-minute timeframe for Australia’s retail sales data release. August 21, 2020, 1.30 AM GMT

At longer timeframes, the effects of these indicators on the price action dissipates.

1-hour timeframe for Australia’s retail sales data release. August 21, 2020, 1.30 AM GMT

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Categories
Forex Course

159. Understanding Forex Assets Classes

Introduction

Introduction

Introduction

The forex market is the world’s biggest financial market, where daily turnover is more than 6 trillion dollars. The most exciting feature of the forex market is that it has an enormous number of trading instruments that allow traders to diversify their portfolio. Besides significant currency pairs, cross pairs are very profitable as it can make e decent move.

What is the Currency Pair?

In the stock market, investors’ trade in a particular stock of a company. This is not similar to the currency market. In the forex market, traders usually trade on a currency pair instead of a single currency.

The combination of two currency indicates the economic condition of two separate countries. Therefore, if we want to trade on a currency pair, we should know at least two countries’ economic conditions. For example, if we want to buy EURJPY pair, our analysis should indicate that the European economy will be more durable than the Japanese economy.

Major vs. Cross Currency Pair

US Dollar is the most traded currency in the world. Therefore, any currency pair from the developed country with the US Dollars will represent the major currency pair.

A list of 6 major currency pairs are mentioned below:

  1. EURUSD
  2. GBPUSD
  3. USDJPY
  4. USDCAD
  5. USDCHF
  6. AUDUSD

If we eliminate the USD from these major pairs, we will find the cross currency pairs. Let’s say the value of EURUSD is 1.0850, and the value of AUDUSD is at 0.7150. Therefore, the value of EURAUD would be 1.39 (1/1.085X 1.085/0.7150).

Other examples of Cross currency pairs are EURGBP, EURCAD, GBPCHF, GBPAUD, CADJPY, EURJPY, etc.

The condition for cross currency pairs are-

  • The currency should be from the major pairs.
  • The cross pair should eliminate the US dollar.

Is Cross Currency Pair Trading Profitable?

Trading cross currency pairs is similar to trading major currency pairs as both technical and fundamental analysis work well in cross currency pairs.

For example, we can make a decent profit from the GBPJPY pair if we can evaluate the UK and Japan’s economic condition.

Conclusion

Trading in a currency pairs means to anticipate the price based on the technical or fundamental analysis. Therefore, if we know the two countries’ economic conditions, we can make a decent profit from cross-currency pairs.

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Categories
Forex Fundamental Analysis

Understanding ‘Employment Trends Index’ and The Impact Of Its News Release On The Forex Market

Introduction

Introduction

Introduction

In any economy, the employment rate can be said to be the primary driver of economic growth. Due to its importance, several fundamental indicators track the labor market changes and many more attempting to predict the future of the labour market. Government and central banks’ policymakers may feel comfortable poring through all these economic indicators for the labour market, but for regular forex traders and households, keeping track of all these labour market indicators can be tiresome and even confusing. The Employment Trends Index (ETI), one of the most relevant labour market indicators, is making it easier to understand the labor market trends.

Understanding the Employment Trends Index

The Employment Trends Index is made by aggregating eight labour market economic indicators. The ETI report breaks down which labour market indicators positively impact the ETI and ranks them from the most positive to the least. Through the aggregation of these indicators, the “noise” in the labor market trend is filtered out. It is worth noting that these labour market indicators have shown to be accurate in their areas. These indicators are explained below.

Initial unemployment claims: This labour market indicator is collated and published by the U.S. Department of Labor. The indicator is published the Thursday of every week, and it shows the number of people who filed for the unemployment benefits for the first time. It is thus considered the latest indicator of unemployment.

Job openings: The U.S. Bureau of Labor and Statistics publishes this economic indicator. These job vacancies show the gap in the labour market that needs to be filled. It indicates the unfulfilled demand in the labour market and the desirable skills sought by employers. It further shows the potential of households to be gainfully employed in the short term.

Number of Employees Hired by the Temporary-Help Industry: The U.S. Bureau of Labor Statistics publishes this statistic. It shows the relationship between the labour market and business cycles since most businesses hire more temporary workers during peak periods and expansion phases.
The ratio of Involuntarily Part-time to All Part-time Workers: Published by the U.S. Bureau of Labor Statistics, this indicator shows the number of employees who are forced to work part-time. The indicator can be correlated to sub-optimal economic conditions, which would make filling positions full time uneconomical. An increasing ratio indicates worsening economic conditions.
Industrial Production: This indicator shows the level of output in sectors such as mining, manufacturing, and energy. The U.S. Federal Reserve Board publishes it. An increasing industrial production indicates that the employment levels are increasing while dropping industrial production levels signals higher levels of job loss.

Source: St. Louis FRED

Percentage of Respondents Who Say They Find “Jobs Hard to Get”: This indicator shows the scarcity of employment opportunities in the economy. Higher percentage signals either a stagnating or a shrinking economy. The Conference Board Consumer Confidence Survey publishes it.
Percentage of Firms With Positions Not Able to Fill Right Now: This statistic shows the lack of particular expertise in the labour market. It is published by the National Federation of Independent Business Research Foundation.
Real Manufacturing and Trade Sales: This indicator shows the level of engagement in the labour market, and the U.S. Bureau of Economic Analysis publishes it.

How to use the Employment Trends Index an analysis

The fact that the ETI aggregates most of the crucial labour market indicators makes it an ideal tool for analyzing the economy.

Since the labour market is considered one of the primary drivers of the economy, monitoring its trend can be used to detect the onset of recessions or recoveries. Here’s how. When the ETI is continually dropping, it indicates that the labor market conditions are worsening progressively. This condition is accompanied by a constant drop in the aggregate demand and supply, most consumer discretionary industries will go out of business, and the economy will progressively contract. Conversely, during a period of economic recession, an increase in the ETI signifies that the economy is on a recovery path.

An increase in the ETI does not necessarily mean that each of the underlying eight labour maker indicators improved. A higher ETI could mean that most of these indicators were positive, or they all were. In either of these instances, it means that the overall labour market is improving – it shows that labour conditions are improving. One of the most notable impacts of an improving labour market is the improvement of households’ welfare, which increases the aggregate demand and supply in the economy.

Source: St. Louis FRED

Conversely, a dropping ETI could be caused by a majority of the underlying labour market indicators being negative or all of them being negative. In either of these instances, the labor markets’ conditions are deteriorating, a condition usually punctuated with higher unemployment levels.

Impact on Currency

The ETI could be associated with contractionary and expansionary monetary and fiscal policies. Here are some of the ways that the ETI could impact a country’s currency. A continually increasing ETI means that the labour market has been enjoying a long period of constant growth. Such an instance signifies that the economy has been expanding, the welfare of households improving, and the unemployment levels low.

In any economy, if these conditions are not sustainable, an overheating economy with unsustainable levels of inflation becomes prevalent. In this case, the governments and central banks may be induced to implement contractionary monetary and fiscal policies. Thus, in the forex market, an increasing ETI can be a precursor for higher interest rates, which makes the currency appreciate relative to others.

A constantly dropping ETI is negative for the currency. The dropping ETI means that the overall labour market has been performing poorly. It means that more people are losing their jobs, wages are low, overall aggregate demand is dropping, and the economy is shrinking. With higher unemployment levels, governments and central banks tend to implement expansionary fiscal and monetary policies to stimulate demand and prevent the economy from sinking into a recession. These expansionary policies, such as lowering interest rates, makes the currency drop in value relative to others. In the U.S., the ETI data is published monthly by The Conference Board.

How the Employment Trends Index Report Release Affects Forex Price Charts

The latest release of the ETI report was on September 8, 2020, at 10.00 AM ET and accessed at Investing.com. The screengrab below is of the monthly ETI from Investing.com. To the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, low volatility is to be expected.

In August 2020, the ETI was 52.55 and increase from 51.37 in July 2020.

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

EUR/USD: Before the ETI Report Release | September 8, 2020. Before 10.00 AM ET

As seen in the above EUR/USD chart, the pair went from trading in a neutral trend to a steady downtrend. The 20-period M.A. is steeply falling with candles forming further below it.

EUR/USD: After the ETI Report Release on September 8, 2020, at 10.00 AM ET

After the ETI report release, the pair formed a bearish 5-minute “Doji” candle. Subsequently, the pair adopted a weak bullish trend with candles forming just above the 20-period M.A.

Bottom Line

In the forex market, traders rarely pay close attention to the ETI. Most traders prefer gauging the underlying aggregated indicators separately, which explains the lack of impact by releasing the ETI report since the index shows what traders already know. It only serves to show the trend.

Categories
Forex Basic Strategies

How to Profit Using The ‘Gap and Leave’ Forex Trading Strategy

Introduction

Introduction

Introduction

Gap and Leave is an interesting trading strategy that utilizes one of the most distressing phenomena of the forex market, a weekly gap between the last Friday’s close and the current Monday’s open price. The gap takes its origin in the fact that the interbank currency market continues to react on the fundamental news during the weekend, which results in a kind of opening on Monday at the highest level of liquidity. Today’s strategy is based on the assumption that the gap is a result of speculations and excess liquidity. Therefore, a position in the opposite direction should become profitable after a few hours.

In the past few articles, we discussed strategies that were pertaining to ‘trend pullback.’ Now, we will shift our focus and talk about a strategy that is best suited for trading a ‘range.’

Time Frame

This strategy works well on the 15-minutes and 1-hour time frame. Traders looking to trade intraday should use the strategy on the 15-minutes time frame. While traders looking for swing trading opportunities should look at 1-hour charts.

Indicators

No indicators are being used in this strategy. It mostly relies on price action and market speculation.

Currency Pairs

This strategy is suitable for trading in currency pairs, which are volatile and liquid. Also, since the Asian market is the first one to open for trading after the weekend, we would suggest applying this strategy in currency pairs involving the Japanese yen, Australian dollar, and the New Zealand dollar.

Strategy Concept

Gap and Leave is an easy strategy that is based on simple price action and speculation. It is observed that events and occasions that occur during the weekend give rise to unfilled orders in the market, which leads to a gap on Monday. This gap is a result of speculation and sudden infusion of liquidity in the market, as an outcome of the event. Most of these events are not of great importance, which means they do not have long-lasting on the value of a currency.

This characteristic can be used to our advantage by entering at discounted prices. Here it is important to note that the gap should coincide with a technical level of support and resistance. As mentioned earlier, this is a ‘range’ trading strategy. The price must reach the extremes of the ‘range’ as a result of the ‘gap.’ The idea is to go ‘long’ at support and ‘short’ at resistance. But this is done by following all the rules of the strategy.

The strategy offers a high risk-to-reward since we are executing our trades at the lowest prices, keeping a target at the other end of the ‘range.’

Trade Setup

In order to explain the strategy, we shall consider an example where we will execute a ‘long’ trade-in GBP/NZD pair on the 15-minutes time frame. Here are the steps to execute the strategy.

Step 1

Firstly, we should identify a ‘range’ that is newly formed. By this, we mean, the price should have reacted from the top or bottom of the range at least twice and moved to the other end. At the same time, we need to also ensure that the ‘range’ is not very old. We should not be considering ‘ranges’ where the support and resistance levels have been respected more than 5-6 times.

In our example, we have identified a ‘range’ on the 15-minutes time frame where the price has reacted twice from the resistance and four times from the support.

Step 2

The next step is to watch for Friday’s closing price. The candle must close somewhere in the middle of the range. This is because if the market has to gap on Monday, the gap will take the price at one of the extremes of the range. If the candle closes at support or resistance on Friday, the price gap will lead to a breakout or breakdown that will violate the ‘range’ trade. Then we should look for a breakout strategy.

In the case of GBP/NZD, we can see that the price almost closes in the middle of the range.

Step 3

This is the most important step in the strategy. In this step, we watch the market’s behavior on Monday and see if it opens with a gap or not. If the market gaps down to the support of the range, we will look for taking a ‘long’ trade after a suitable confirmation. On the other hand, if the market gaps up to the resistance, we will take a ‘short’ trade provided we have followed all the steps discussed earlier. A bullish candle after ‘gap down’ is the confirmation for a ‘long’ trade, and a bearish candle after ‘gap up’ is the confirmation for a ‘short’ trade.

In the below image, we can see that the price forms a bullish candle after gapping down on Monday. Hence, we enter for a ‘buy’ at this close of the first candle.

Step 4

Lastly, we need to determine the stop-loss and ‘take-profit’ for the strategy. Stop-loss placement is pretty simple, where it is placed below the support when ‘long’ in the market and above the resistance when ‘short.’ We take our profits when the price reaches the other end of the range. This means at resistance when ‘long’ and at the support when ‘short.’ The risk-to-reward of trades using this strategy is above average, which is quite attractive.

Strategy Roundup

Gaps are one of the most common tools used by institutional traders due to the high probability of winning trades. This strategy is based on market movement that is only a consequence of speculation, which does not hold any value. If we are looking for a gap trading strategy in forex, the Gap and Leave strategy is a good one to start with because it is great for beginners who want a relatively easy entry, at a slow pace and not involving complex indicators.

Categories
Forex Fundamental Analysis

Everything You Should Know About ‘GDP Per Capita PPP’ Macro Economic Indicator

Introduction GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis. GDP and its related metrics […]

Introduction GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis. GDP and its related metrics […]

Introduction

GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis.

GDP and its related metrics are the most important economic indicators for macroeconomic analysis, especially for traders’ fundamental analysis. Hence, it is imperative to understand GDP per Capita PPP to better understand relative economic prosperity in the international market place.

What is GDP Per Capita PPP?

GDP

Gross Domestic Product helps in measuring a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

The commonly used term “size of the economy” refers to this economic indicator. The USA has the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Per Capita

It is a metric obtained by dividing a country’s GDP by its population count. Here, “per Capita” translates to “per average head” or “for one individual.” Hence, GDP per Capita is the measure of economic output per person. It tells us how much economic output is attributed to a citizen. Hence, it is a measure of national wealth. On the other hand, it can also tell us the economic productivity of the people.

Purchasing Power Parity (PPP)

It is an economic theory that compares different countries’ purchasing power through a basket of goods common in both countries. By evaluating the cost of a particular good in both countries, the PPP is calculated. For example, comparing the price of 1 gallon of milk in two countries would help us know the purchasing power parity. Parity means a state of being equal, and all things being equal, how much currency is required to procure identical goods in both countries helps understand the purchasing power of that country.

It measures how much a particular set of goods and services cost in each country, instead of the exchange rates that can be manipulated by speculative trading, or central authorities’ intervention.

A wide range of goods and services are taken into account to develop the PPP, and hence the process is complicated, but once generated, the PPP remains mostly constant in the long run.

GDP Per Capita PPP

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

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

Using nominal GDP values for economic growth comparisons would be misleading as currencies are often manipulated in favor of countries by the governing agencies. For example, China frequently devaluates currencies to increase their income through exports and offer their goods at a competitive price in the international markets.

Hence, using the GDP per Capita PPP is a more sensible approach as PPP values stay stable over more extended time frames and better understand and analyze economies with different currencies. The below table proves our above analysis.

It is important to understand we use PPP for making a fair comparison, but PPP is not perfect, it has the following limitations:

Taxes: Tax policies differ from country to country and consequently affects the price of goods and services, thereby making the PPP skewed.

Transportation: Goods need not be available across the planet at the same level. The import of goods from the manufacturing site would add to the prices of the goods differently to different countries. 

Tariffs: Governments can intervene to impose tariff barriers for economic reasons like protecting domestic businesses, which may again impact the imported product prices, making it costlier in the concerned country.

Non-Traded Services: Cost of Labor, utility, or equipment costs variation can also induce price differences in the reference goods.

Market Competition: Popularity in particular areas can give companies an edge and enable them to price higher than in other countries. Established reputation can change prices, which varies from its market presence duration. On the international scale, the popularity of a good is not the same across all economies and hence can skew prices.

All the above factors limit PPP in some ways, but PPP is still better than nominal GDP comparisons. So, GDP per Capita PPP may not be perfect, but currently, there is no better metric for economic prosperity comparisons amongst countries.

Impact on Currency

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

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

The PPP value can be used to base exchange rate fluctuations and identify signs of strengthening or weakening of currencies. 

It is a proportional high impact indicator. Higher GDP per Capita PPP is good for the currency and the economy and vice-versa. Although for trading decisions, GDP Growth Rate serves as a more relevant metric for comparisons amongst different currency countries. Also, GDP per Capita PPP is a yearly statistic and is more relevant for long term investment decisions than short-term currency trading decisions.

Economic Reports

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of most countries’ GDP figures on their official website. The World Bank maintains the GDP per Capita PPP for most countries. Every three years, the World Bank announces a report comparing the productivity and growth of different countries based on PPP. It is a yearly data.

Sources of GDP per Capita PPP

GDP per Capita PPP – World Bank

GDP per Capita PPP – CIA World Factbook

GDP per Capita PPP – the United States – FRED

We can find a consolidated list of the same here as well.

Impact of the ‘GDP Per Capita PPP’ news release on the price charts 

In the previous section of the article, we understood the definition of GDP based on PPP and how it is different from the nominal GDP. PPP based GDP is converted to international dollars using purchasing power parity rates and divided by the total population. 

Purchasing Power Parity (PPP) between two countries, X and Y, is the ratio of several units from country X’s currency required to purchase in country X. The same quantity of an excellent/service as one unit of country Y’s currency will purchase in country Y. It can be used mostly to compare inflation in two and, to some extent, the economic growth. But the nominal GDP is one that taken into consideration while making investment decisions.

In today’s example, we will observe the impact of GDP on various currency pairs and witness the change in volatility due to the official news release. The below image shows the GDP in the Euro Zone during the fourth quarter, where we see the GDP was as in the previous quarter. Let us find out the reaction of the market. 

EUR/USD | Before the announcement:

We shall start with the EUR/USD currency pair to analyze the impact of GDP on the Euro. It is clear from the preceding illustration that the market is not trending in any direction, which means there is confusion concerning the market trend. Therefore, until we have clarity in the market, it is smart not to take any trade.

EUR/USD | After the announcement:

After the news announcement, the price gets volatile as it moves in both the directions and finally, closes near the opening price. The GDP data did not strengthen or weaken the currency where the ‘news candle’ closed, forming an indecision candlestick pattern. As the news release did not bring about any significant change to the currency pair, one should analyze the currency based on technical indicators.    

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

The above images represent the EUR/JPY currency pair, where we see that the overall trend of the market is up, and recently it is has shown signs of reversal before the news announcement. One needs to wait for confirmation before taking a trade as the news event can cause significant changes to the existing chart pattern, resulting in an unnecessary loss. Until the price is below the moving average, the uptrend shall not continue.

After the news announcement, the price initially moves lower, but it gets immediately bought and closes with a wick on the bottom. There is some volatility seen, which eventually takes the market lower. The GDP data came out to be as expected, where it was the same as before. Since there was no improvement in the GDP, we can ascertain that it was negative for the currency.    

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images are that of EUR/AUD currency pair, where we see that before the news announcement, the market is in a strong downtrend, and currently, the price is on the verge of continuing the downward move. However, since a significant news announcement is due, there is a possibility that it can change the trend, hence need to take a position based on the impact of the news.

After the news announcement, market shoots up, and volatility increases to the upside. Here we see that the GDP data has a positive impact on the Euro, and the currency strengthens after the news release. Now it is clear that selling the currency pair is no longer valid.

We hope you understood all about the ‘GDP Per Capita PPP.’ Do let us know your thoughts in the comments below. Happy Trading!

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Forex Fundamental Analysis

The Impact Of ‘GDP Constant Prices’ News Announcement On The Forex Market

Introduction

Introduction

Introduction

GDP Constant Prices is the primary indicator used by Government Agencies, Economists, Investors, Traders for year-to-year analysis of economic progress. GDP Constant Prices is the real scorecard for a country’s progress. 

It is a national level indicator and is closely watched by the market. The most important fundamental indicator Real GDP Growth Rate is derived from GDP Constant Prices. Hence, overall it is very critical for us to understand GDP Constant Prices and its nuances for correct interpretation.

What is GDP Constant Prices Indicator?

Gross Domestic Product (GDP) 

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

Nominal GDP is also called Current Dollar GDP. It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

The commonly used term “size of the economy” refers to this economic indicator. USA has the world’s biggest economy, which means it has the highest nominal GDP or highest economic output.

GDP Constant Prices

It is the inflation-adjusted GDP value. It is the total monetary value of all goods and services produced, excluding the effects of inflation in prices. It is also called Real GDP, Constant Dollar GDP, Inflation-Corrected GDP, or only Constant Prices. The raw value of the economic output is called the Nominal GDP, whereas Real GDP accounts for inflation effects and is a more accurate measure of growth.

GDP Constant Prices or Real GDP is obtained by dividing the Nominal GDP with a GDP deflator. The GDP deflator is an inflation measurement from a fixed base year. Real GDP is inflation-adjusted to compare on an as-if basis with the base year GDP. It means GDPs are compared as if the prices remained the same as the base year and see if the GDP has improved due to increased economic activity.

Calculating GDP Deflator is a bit tedious process, that is best left to the experts like the Bureau of Economic Analysis. The Real GDP is made up of the following components and is affected by them:

A) Consumer Spending: It represents spending associated with the end-consumers or the general population. It makes up about 69% of the total GDP in the United States.

B) Business Investment: Economic Output of the Business Sector makes up 18% of the total GDP in the United States. 

C) Government Spending: It involves all the expenditures incurred by the Government to maintain and stimulate economic growth and run its operations. It accounts for 17% of the total economic output for the United States.

D) Net Exports: It is the difference between the total exports and imports. The United States has a -5% Net Exports of the total GDP, meaning it is a net importer.

How can the GDP Constant Prices numbers be used for analysis?

Inflation is the underlying fire that drives capitalist economies. In general, a low inflation rate of 2-3 % a year is good for the economy. A stable inflation rate of 2-3% will stimulate economic growth to achieve a 3-5% annual GDP growth for developed economies.

As prices increase year-over-year, the economic output will also seem inflated even though it is the same as the previous year. Hence, Real GDP is a more accurate measure of scoring the economic output of a country.

Nominal GDP is useful when comparing economic output within a year among different quarters, while it is more sensible to use Real GDP for year-over-year comparison. Policymakers use both Nominal and Constant Prices GDP for economic assessment and implementing policy reforms as deemed necessary.

When inflation is positive (which is the cast most of the time), the GDP Constant Prices will be lesser than Nominal GDP. When there is deflation in the economy (during slowdowns or recessions), the GDP Constant Prices may be higher than the nominal GDP value.

GDP Constant Prices is better for assessing long-term growth, or knowing whether the economy has grown over the previous year or not. With Nominal GDP, it is difficult to tell whether an increase in the figures is due to an expanding economy or just a factor of inflating prices of goods and services.

Impact on Currency

GDP data is essential for almost everyone. Economists use for macroeconomic analysis and Central Bank planning. Policymakers are committed to maintaining a steady Real GDP Growth. Hence, Central Authorities also watch it tightly.

Investors make decisions based on GDP data. Businesses hold their expansion plans based on economic stability and market stability, as indicated by GDP. Traders heavily trade once GDP estimates and actual figures are published.

Hence, overall it is a high impact indicator. It is a proportional macroeconomic indicator, meaning higher GDP Constant Prices are suitable for the overall economy and currency. The opposite also holds. 

Lower Real GDP prints indicate weakening economy, businesses hold hiring or investment plans, spending is reduced, and in extreme cases, it can lead to a recession. All of this leads to currency depreciation.

Economic Reports

In the United States, the Bureau of Economic Analysis publishes quarterly and annual Nominal and Real GDP reports on its official website. It is released almost 30 days after a quarter ends. The schedule of release is available on the website. The headline number is the GDP Constant Prices figure, GDP Growth Rate figure.

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

Sources of GDP Constant Prices

For the United States, the BEA reports are available here 

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website here:

GDP & GNP – FRED

Real GDP – FRED

The World Bank GDP Constant Prices with base year as 2010 in US Dollar terms are available here:

GDP Constant Prices (2010 US$) – World Bank

OECD – GDP Constant Prices and other variants

We can find a consolidated list of most countries’ GDP Constant Prices here.

Impact of the ”GDP Constant Prices” news release on the Forex market

GDP Constant Prices, also known as real GDP, is a measure of GDP that has been adjusted for the price level. Current prices measure the GDP using the actual prices we notice in the economy. Current prices make no adjustments for inflation. However, constant prices adjust to the effects of inflation. Using persistent prices enables us to measure the actual change in the outcome and not just rise due to inflation’s effects. The real GDP is calculated by dividing nominal GDP over a GDP deflator. When nominal is higher than real, inflation is occurring, and when real is higher than nominal, deflation is occurring. Fundamentally speaking, nominal GDP matters to investors when taking a position in currency or the stock market.      In today’s lesson, we will analyze the impact of GDP on various currency pairs by observing the change in volatility before and after the news announcement. For that purpose, we have collected the GDP data of Canada, where the below image shows the month-on-month GDP data released recently. Let us find out the market’s reaction to this data.

USD/CAD | Before the announcement:

We will start with the USD/CAD currency pair to observe the impact of GDP on the Canadian dollar. The above image shows the state of the chart before the news announcement, where we see that the market is in a downtrend, and recently the price has reversed to the upside. Either could result in a reversal of the trend or a continuation of the current trend. The impact of GDP will decide the direction of the market and so our position. 

USD/CAD | After the announcement

After the news announcement, the price drops below the moving average, and the market falls considerably owing to the positive GDP data. Even though there was a decrease in the GDP, it was only a tad bit lower and much around the market expectations. Hence, it proved to be bullish for the Canadian dollar, and the market goes lower. One should confirm the continuation of the trend using technical indicators before taking a ‘short’ trade.

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images represent the GBP/CAD currency pair, where we see in the first image that the market has broken out from a downward ‘channel’ and is moving higher and higher from then on. It very likely that the up move will continue further, which makes us wait for a price retracement to take a buy trade. Based on the volatility caused by the news release, we will have a clear idea about the direction of the market.

After the news announcement, volatility slightly increases to the downside, and the market falls by a few pips. The bearish ‘news candle’ is a consequence of the positive GDP data, mostly on expected lines. We need to note that the news release did not change the overall trend of the market, where the uptrend is still intact.    

CAD/CHF | Before the announcement:

CAD/CHF | After the announcement:

The above images are that of CAD/CHF currency pair, where we see that before the news announcement, the market has reversed from an uptrend to a downtrend and is currently on the verge of continuing the downward move. Since the GDP has a high impact on the currency (indicated by the red box), it is advised not to take any position before the news release.

After the news announcement, the price moves higher by a small amount and manages to close on a bullish mark. The GDP data was close to what was expected, it leads to bullishness within a currency, and hence the Canadian dollar gains strength for a short while.

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

Categories
Forex Fundamental Analysis

Everything About ‘Changes in Inventories’ Macro Economic Indicator

Introduction

Introduction

Introduction

Changes in Inventories are one of the primary business leading economic indicators that can give us insight into economic prospects for the coming months. Understanding of Inventory Changes and Sales can help us forecast economic growth, which is our primary objective through Fundamental Analysis.

What are Changes in Inventories?

Inventory: It is the stock of goods that retailers, wholesalers, and manufacturers hold with them. Inventory is measured in their appropriate dollar values. Businesses often keep stock of their finished goods when they predict an increase in sales in the coming months so that they are ready to meet the increased demand and can lock in profits.

The Monthly Retail Trade Survey, the Manufacturer’s Shipments, Inventories, and Orders Survey, and the Monthly Wholesale Trade Survey are the primary sources from which Business Inventory is compiled.

At the level of Retail Merchandise, Inventories are measured at cost level at the retailers as per the FIFO (first-in, first-out) method of valuation. At the Wholesalers who distribute goods to retailers, the inventories’ values are added to the business inventories every month. At the manufacturer level, the inventories, whether in raw material, work-in-process or finished, are valued at cost, primarily by the FIFO method of valuation.

How can the Changes in Inventories numbers be used for analysis?

Business owners and retailers have a certain kind of acquaintance with market trends, and due to their years of experience running their business, they know the subtle trends of increase in sales, demand, etc. Hence, Businesses stocking up on inventories is not a joke, as it costs them real money for producing as well as holding the stocks. If they did not forecast an increase, they would not have increased inventories in the first place.

Seasonally Adjusted Inventory Changes can thus act as a leading indicator for the increase in consumer consumption, which is good for business, and the economy. On the other hand, increased inventory figures could also indicate that the sales have fallen, and thus creating an inventory stockpile, which indicates decreased consumer spending, which signals terrible times for the economy are ahead.

Hence, it is often essential to combine Inventory figures with Retail Sales figures to correctly gauge the economic trend. Retail Sales figures indicate actual consumption of goods by consumers and hence is the more accurate figure when compared to Changes in Inventories.

An increase in Manufacturing Production is followed by an increase in Inventory. It is then followed by an increase in Retail Sales. The first two stages, i.e., increase in Manufacturing Production and Inventory Changes, are still forecast, i.e., the rolled dice can turn either way. But Retail Sales is a guaranteed economic indicator, as money comes back into the pockets of retailers and manufacturers.

Hence, the more commonly watched statistic out of the business inventories figures is the Inventory-to Sales Ratio. It is the ratio of Inventory value to Retail Sales figures. It gives us an indication, by how many times the inventories outpace the Retail Sales. The lesser the number, the better.

For example, an Inventory-to-Sales Ratio of 2.5 indicates that there is enough inventory stock to supply 2.5 months of Retail Sales. When the ratio increases, it is an indication that the inventories are increasing in contrast to the sales, which indicates the economy is slowing down. The upcoming Production activity would be reduced until the current Inventory stock starts to deplete off. On the other hand, when the ratio is falling, it is indicative of manufacturers to increase production activity to the oncoming increase in demand.

Inventories are primarily concerned with the Manufacturing Sector, which accounts for 20% of GDP in the United States. It drives a significant portion nonetheless.  An increase in manufacturing activity as a consequence of decreasing ratio figures can add to employment, or even wage growth, which is good for the economy. Increased employment further stimulates Consumer Spending as more people have the cash to spend, which cyclically boosts the economy.

Impact on Currency

Changes in Inventory figures can be leading indicators. If correctly put, way too leading. It means that the changes in inventories are figures at the start of the manufacturing process-consumer purchase lifecycle. The indicator has two-way conclusions to be drawn, as discussed above. Hence, the traders who are not well versed with the industry should use this indicator with caution, as an increase in Inventory can mean slowdown or expected growth both.

Only investors or traders who have a historical perspective of the figures can use this indicator effectively to predict growth months ahead of the market. In general, the market follows Retail Sales and Ratio as reliable metrics, and hence there are significant moves in the market around these figures. Hence, although a leading indicator of economic growth, it is advised to combine it with Retail Sales figures to affirm your assessment of economic activity.

Economic Reports

In the United States, the Bureau of Economic Analysis releases quarterly reports of the GDP, wherein the section of “Key Sources and Assumptions” contains the details of “Changes in Private Inventories.” The BEA publishes quarterly reports on its official website after every quarter. The release dates are also posted on its official website.

The United States Census Bureau maintains the Manufacturing & Trade Inventories on its official website.

Sources of Changes in Inventories

BEA – Gross Domestic Product

The St. Louis FRED website makes the search and analysis of Inventories data from BEA a lot easier. The links are given below

Change in Private Real Inventories – FRED

Change in Private Inventories – FRED

Census Bureau – Inventory

Census Bureau – Shipment, Inventory, and Orders

Inventory data for various countries are available in statistical and list format here.

Impact of the ‘Change in Inventory’ news release on the Forex market

The Change in Inventory measures the value of change in producer-owned inventories between the beginning and the end of the calendar year. For businesses, the build-up of inventories can be a threat. The problem is that these inventories will probably be cut in the future, depressing demand for goods and leading to production cutbacks. In hard times, managers work hard to cut back on inventories. All companies need to be prepared for business cycles, which is driven by inventory swings. Companies must try to reduce their inventories by reevaluating their practices.

In today’s lesson, we will analyze the change in inventory levels of many agricultural commodities, particularly grains, that are produced in a given year and stored or held until they are marketed. The annual value of inventory change represents the gross value of agricultural production. The below image shows the net Change in Inventory from 2017 to 2018 in the agricultural sector of Canada. This value has been estimated for durum wheat, oats, rye, corn, soybean, potatoes, tobacco, and many other commodities. Let us find out how the market responds to this data.

USD/CAD | Before the announcement:

Let us start with the USD/CAD currency pair in order to observe the impact of the Change Inventory on the Canadian dollar. In the above image, we see that the market is in moving within a ‘range,’ and currently, the price is at the top of the ‘range.’ Since the impact of this news event is less on a currency, aggressive traders can take ‘short’ positions with a large stop loss.

USD/CAD | After the announcement:

After the news announcement, the market moves lower, and the price reaches to the moving average. The bearish ‘news candle’ indicates that the Change in Inventory data was positive for the Canadian economy, which resulted in the strengthening of the currency. The close of ‘news candle’ is a confirmation sign of a down move. Thus, one could take a risk-free ‘short’ position soon after the news release.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where we see that before the news announcement, the market seems to be moving in a ‘channel’ with the price presently is at the bottom of the ‘channel.’ Since the Canadian dollar is on the left-hand side of the currency pair, an upward channel signifies strength in the currency. Therefore, traders who trade channel can buy the currency pair with a stop loss below an appropriate technical level.

After the news announcement, the price moves higher, and volatility expands on the upside. The ‘news candle’ closes with a fair amount of bullishness as a result of better than expected Change in Inventory data. At this point, once could confidently take a ‘long’ position with a target up to the higher end of the ‘channel.’

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images are that of GBP/CAD currency pair, where we can see in the first image that the market is in a strong uptrend, which signifies the great amount of weakness in the Canadian dollar. Technically, we should be looking to buy the currency pair after a price retracement to a ‘support’ or ‘demand’ area. Until then, we will be monitoring the impact of the news release.

After the news announcement, volatility slightly increases to the downside, and we witness a fall in the price. However, the Change in Inventory does not have a major on the currency pair where the Canadian dollar strengthens only momentarily. One needs to still wait for a pullback in order to join the uptrend.

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

Categories
Forex Course

59. Trading The Candlestick Charts Using Support and Resistance Levels

Introduction

Introduction

Introduction

In the previous few lessons, we have discussed many candlestick patterns and how to trade them. Those basics are very important for us to master Technical Analysis. Before leaving the Candlestick topics, let’s discuss THE most important concept in technical trading i.e., Support & Resistance. We shall first understand what Support and Resistance are, and will learn how to trade them on the Candlestick charts.

What Is Support?

Support is the level at which the price finds it difficult to fall below. Eventually, the price will bounce back up at this particular level. The support level acts as a floor that restricts price action to go down further. Some technical traders describe ‘Support’ as an area where demand overcomes supply. Because at this level, the demand for any currency will be more, hence the selling stops, and buying continues. The price reaction of any given asset would look something like the image below at the Support level. We can clearly see the price bouncing back up once it reaches the support level. (Blue Line = Support Level)

What Is Resistance?

Resistance is just the opposite of the support level. It is the level where price finds it difficult to break through to rise above until it is pushed back down. It acts as a ceiling restricting the price action to go up further. Basically, it is an area where supply overcomes demand. The price reaction of any underlying currency at a resistance looks something like the image below. We can see the price reaching the resistance line many times but unable to break through it. We must remember that at any point, Support can turn into Resistance and Resistance can turn into support. Hene, it is called S&R.

Pairing candlesticks with S&R

The fundamental method of technical trading is to buy at Support and Sell at Resistance. But this does not always work as there is no sure shot assurance that the Support and Resistance levels will hold for long. Hence traders need to look at other important factors while trading at Support and Resistance.

When buying near Support, we must wait for the consolidation at that area and only buy when the price breaks above that small consolidation. In that way, we can be sure that the price is respecting that level and is starting to move higher. The same concept applies when selling at resistance. Wait for consolidation and then enter a short trade when the price drops below the low of the small consolidation.

Below is an example of a short trade.

After entering the trade, make sure to place the stop-loss just below the low and above the high of Support & Resistance, respectively.

According to technical analysis principles, if a Support level or Resistance level is broken, their role is reversed, i.e., Support becomes Resistance and Resistance becomes Support. The psychology behind this phenomenon is that, when price breaches a key area, some will get out, and some hold on to their trades to see what happens. When price retraces back to the key area, people who have held it, go out and making the price bounce at the previous Support and Resistance.

Conclusion 

Traders always suspect a reversal at the key Support and Resistance as there is a high probability that price will reverse at these key levels. Some traders who had open positions exit at these price levels and others initiate new positions at these levels, depending on which side the price are they. Support and resistance levels are psychological levels at which many traders place orders to buy (support) or sell (resistance) making them supply or demand levels. That is why it is crucial to learn about Support and Resistance.  Also, support and resistance levels can be identified more easily using candlesticks, as a candle is very graphical, displaying wicks when the price bounces back from bottoms or tops. Identifying these significant levels forms the basis for Technical Analysis. Cheers!

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Categories
Forex Course

17. What Is The Best Time To Trade The Forex Market?

Introduction
The Forex market is open 24 hours daily and is traded from Monday to Friday. This feature makes it feasible for traders all around the world to trade it.

Introduction
The Forex market is open 24 hours daily and is traded from Monday to Friday. This feature makes it feasible for traders all around the world to trade it.

Introduction

The Forex market is open 24 hours daily and is traded from Monday to Friday. This feature makes it feasible for traders all around the world to trade it. However, it is not quite ideal to trade anytime in Forex. There are specific times of the day and week that offer greater liquidity. These are the times when the professional traders step into the market as well. So, let’s dive right into the topic.

The preferable time to enter the forex market

Liquidity and volatility are the two vital factors a trader must consider before choosing the best time to trade. Because, with the absence of liquidity and volatility, it is not possible to grab big moves in the market. Hence, one must look out for the times when there is a high volume of trading happening in Forex.

As far as liquidity is concerned, liquidity is excellent (as well as volatility) when two sessions overlap. During these times, the volume of orders double, making significant movements on major pairs. Hence, getting in-depth knowledge about how pairs behave during session overlaps is very important.

The overlapping sessions

The Tokyo-London Overlap

During the Asian session, there is not much movement in the market. But, when the London market opens, the Tokyo markets are still running. Hence the volume during the overlap time segment increases as both the markets are actively traded. Having said that, most of the volume comes from London, which ends up suppressing the Tokyo market. Hence, trading this overlap session is highly recommended.

The London-New York session

The London market and the New York market alone bring in considerable volatility. And when both these markets combine, the liquidity rises significantly. Hence, this becomes the ideal time to trade the forex market. Moreover, due to the high liquidity, the spreads during this time are incredibly tight.

Now that we’re clear with the preferable time to trade the markets let us discuss the preferred weekdays to engage in trading.

What are the days of the week best to trade?

Let us answer this question by considering the average pip movement of currencies pairs on all trading days of the week.

From the above table, we can ascertain that the pip movement on Monday is lesser when compared from Tuesday – Friday. Also, on Friday, once the afternoon sets off, the liquidity reduces considerably. Hence, to get the best from the Forex pairs, it is best to work during the middle of the week and near the time of the market openings.

This brings us to the end of this lesson. To get a recap of the above lesson, you can take up the quiz given below.

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