Fundamental analysis involves examining the intrinsic value of a nation’s currency based on economic news releases that reflect the strength, or weakness, of a country’s economy. Fundamental traders follow these news announcements, known as “fundamental indicators,” because they paint a picture of a currency's strength in relation to other countries.
Fundamental indicators are reports that include statistical data on things such as employment, gross domestic product (GDP), international trade, retail sales, housing, manufacturing, and interest rates. The stability, growth, or decline in any of these sectors may have an effect – direct or indirect – on the value of a country’s currency.
Central banks play a key role in the Forex market because they have the responsibility of changing the country’s “base” interest rate. A central bank has to find a fine balance when setting interest rates as it wants to maintain growth in the economy, but at the same time it has to be careful to curtail inflation. The bank’s decisions on whether to raise, cut, or hold the interest rate fuels speculation in the Forex market, where the value of a currency, or group of currencies, changes in real time.
In addition to information about a country’s economy, the value of a currency is connected to national and international political events, elections, and changes in government trade policies. The prices of sensitive commodities like oil and gasoline are an important fundamental indicator as high prices can hurt consumer spending and confidence, and curtail the activities of certain businesses and government services.
Natural disasters, terrorist attacks, and militarily actions in a sensitive region cause instability in the world and have a significant impact on the Forex market as they develop. These types of evens can be hard to predict in advance.
The ability to identify trends in macroeconomic indicators and reading central bank’s current and future actions is a valuable tool that comes from following financial news, watching the markets, and trading Forex.
Using fundamental and technical analyses, the individual trader attempts to determine trends in the price movements of currencies, and by buying or selling currency pairs, attempts to gain profits. The most often traded currencies, the major currencies, are those of countries with stable governments and respected central banks that target low inflation. Currencies that often trade along with the U.S. Dollar include the European Euro, the Japanese Yen, and the British Pound as they are the most liquid. A trader can trade these currencies in any combination. CMS Forex also offers the Swiss Franc, and the Canadian, Australia and New Zealand Dollars making for 19 total trading instruments when accounting for all the cross pairs. More "Exotic" currencies are not offered as they are often tightly regulated and simply too illiquid.
Buying and Selling Currencies
Traders can generate profits (or losses) whether a currency is rising or falling by buying one currency, which is anticipated to gain value against another currency or selling one currency, which is anticipated to lose value against another currency. Taking a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. Alternatively, a short position is one in which the trader sells a currency that he anticipates to depreciate and aims to buy the currency back later at a lower price.
Diagram illustrating how a position is opened and closed generating a profit. Position is closed based on speculated downward market movement. Forex trading involves a substantial risk of loss.
Buying or selling currencies in response to economic or political events which occur are reactive, whereas buying or selling currencies on anticipated events is speculative. The bulk of currency activity is generated by market participants anticipating the direction of currency prices. In general, the value of a currency versus other currencies is a reflection of the condition of that country’s economy with respect to the other major economies.
It is the trader’s option to take either a conservative or a more risk-taking approach. Employing a conservative approach, the trader establishes and liquidates positions quickly and efficiently to capitalize on even the slightest of price fluctuations, using limit and stop orders to manage risk. A limit order is placed to ensure a position is established once a price level in the market has been reached.* A stop order is placed to automatically liquidate a position at a chosen price level in order to limit potential loss on a particular trade. By placing orders in relation to technical support and resistance levels, the trader may profit incrementally from the minor price fluctuations that occur each day.
The Time in the Major Financial Centers Impacts Market Players
Foreign exchange is a continuous global market, providing participants with 24-hour market access. The only breaks in trading occur during a brief period over the weekend. Although foreign exchange is the most liquid of all markets, the fact that it is an international market and trading 24-hours a day, the time of day can have a direct impact on the liquidity available for trading a particular currency.
The major dealer centers and time zones are that of Sydney, Tokyo, London, and New York. Therefore, traders must consider which players are in the market, since in the modern interconnected financial world, events that occur at any hour, in any part of the globe, can affect some or all parts of the investment community.
The market's 24-hour nature is a substantial attraction to traders that prefer to trade at all times of the day, or night.
Posted by jaya at 11:36 AM
Minggu, 2007 September 30
what is FOREX, an acronym for Foreign Exchange, is the largest financial market in the world. With an estimated $1.5 trillion in currencies traded daily, Forex provides income to millions of traders and large banks worldwide. The market is so large in volume that it would take the New York Stock Exchange, with a daily average of under $20 billion, almost three months to reach the amount traded in one day on the Foreign Exchange Market.
Forex, unlike other financial markets, is not tied to an actual stock exchange. Currencies are traded directly through networks of banks and brokers via an electronic network or the telephone. The Foreign Exchange Market is, therefore, also referred to as an "Interbank" or "Over the Counter (OTC)" market.
Traders generate profits, or losses, by speculating whether a currency will rise or fall in value in comparison to another currency. A trader would buy the currency which is anticipated to gain in value, or sell the currency which is anticipated to lose value against another currency. The value of a currency, in the simplest explanation, is a reflection of the condition of that country's economy with respect to other major economies. The Forex market does not rely on any one particular economy. Whether or not an economy is flourishing or falling into a recession, a trader can earn money by either buying or selling the currency. Reactive trading is the buying or selling of currencies in response to economic or political events, while speculative trading is based on a trader anticipating events.
Whereas there are thousands of securities on the stock market, on the FOREX market most trading takes place in only a few currencies; the U.S. Dollar ($), European Currency Unit (€), Japanese Yen (¥), British Pound Sterling (£), Swiss Franc (Sf), Canadian Dollar (Can$), and to a lesser extent, the Australian and New Zealand Dollars. These major currencies are most often traded because they represent the countries with esteemed central banks, stable governments, and relatively low inflation rates.
Currencies are also always traded in pairs (i.e. USD/JPY or Dollar/Yen) on a floating exchange rate.
The foreign exchange market operates 24 hours a day and has no official openings and closings like the stock market. It moves in response to geopolitical events or press releases from key central bank officials or reports on the economy from government statistical bureaus, among other factors. These fluctuations occur at any point throughout the day. When traders are inactive in one part of the world due to nightfall, there are traders elsewhere who are actively engaging in trades as it is daytime in that location.
The daily session "ends" at 5PM EST, but the market does not actually close. The Forex market only closes on Friday at 4PM for the weekend, and re-opens at 5 PM EST on Sunday. Each day, trading begins in Sydney, Australia, and progresses to the next major financial center (Tokyo, London, New York), as the business hours of that city's time zone begin.
Trading volumes are always higher for a region during their business hours as traders at financial institutions are busy filling and placing orders. The most active times, meaning the times of most liquidity and movement in the markets, is the London open (3 AM EST), and the overlap between London/Euro close and New York's open (8-11 AM EST).
The hours below correspond to someone living in the EST time zone.
- New York session opens at 8:00 am and ends around 5:00 pm.
- Sydney session starts at 5:00 pm and ends around 2:00 am.
- Tokyo session begins at 7:00 pm and ends around 4:00 am.
- Frankfurt session opens at 2:00 am and ends around 11:00 am.
- London opens at 3:00 am and ends around 12:00 am.
Below is a figure showing the same business hours for the various regions, also for someone in the EST time zone. In this figure you can see the overlap between the European/London session and the New York session, between 8 am and 11 am EST. The currency markets experience the highest volatility and volume during that overlap, which also coincides with the releases of important US economic releases.
Aspects of Trading
Most trades on the forex market are a result of traders speculating price movements of certain currencies. Although, good instincts and speculation skills are invaluable to any trader, there are also other, more scientific factors that traders use to tell whether they will buy or sell a certain currency. These factors are very important aspects of trading on the market and are known as fundamental and technical analyses. A trader may utilize both technical and fundamental analyses before making any forex trades.
These factors include economic and political events (i.e. elections, wars) that occur worldwide. Fundamentals include monetary and fiscal policy, government reports such as GDP, CPI, PPI, and measures such as the unemployment rate. A trader that bases his or her market decisions in response to these releases and events is using fundamental analysis. The value of a currency in the Forex market is essentially an indication of the state of one nation's economy in comparison to another nation's.
A nation's political condition, along with its inflation and interest rates, impact the price of the nation's currency. Traders that use fundamental analysis can speculate on currency price movements by paying attention to the world news, economic reports, and indicators issued by the government. By interpreting that data, traders can make better decisions on the market. It is important to note that it is the outlook of an event that impacts the Forex market, rather than the actual event itself. If the report or news matches expectations it should have already been priced in to the present market price. If a report or news item is unexpected, or is different from the anticipated results, then there will be a reaction by the currency markets to "price in" this new information
Posted by jaya at 2:39 PM