Trading Strategies Based on Forex Analysis

Perhaps the major part of Forex trading strategies is based on the main types of Forex market analysis used to understand the market movement. These main analysis methods include technical analysis, fundamental analysis and market sentiment.

Each of the mentioned analysis methods is used in a certain way to identify the market trend and make reasonable predictions on future market behaviour. If in technical analysis traders mainly deal with different charts and technical tools to reveal the past, present and future state of currency prices, in fundamental analysis the importance is given to the macroeconomic and political factors which can directly influence the foreign exchange market. Quite a different approach to the market trend is provided by market sentiment, which is based on the attitude and opinions of traders. Below you can read about each analysis method in detail.

Forex Technical Analysis Strategies

Forex technical analysis is the study of market action primarily through the use of charts for the purpose of forecasting future price trends. Forex traders can develop strategies based on various technical analysis tools including market trend, volume, range, support and resistance levels, chart patterns and indicators, as well as conduct a Multiple Time Frame Analysis using different time-frame charts.

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Buy and Hold Strategy

Buy and hold strategy is a type of investment and trading when a trader buys the security and holds it for a long time.

A trader who employs buy and hold investment strategy is not interested in short-term price movements and technical indicators. Actually, this strategy is mostly used by stock traders; however some Forex traders also use it, referring to it as a particular method of passive investment. They commonly rely on fundamental analysis rather than technical charts and indicators. This already depends on the type of investor to decide how to apply this strategy.

A passive investor would watch the fundamental factors, like inflation and unemployment rates of the country whose currency he has invested in, or would rely on the analysis of the company whose stock he owns, considering that company’s growth strategy, the quality of its products, etc.

For an active investor it would be more effective to apply technical analysis or other mathematical measures to decide whether to buy or sell.

Fundamental Analysis in Forex Trading

Applied to the currency market, fundamental analysis studies international economic, financial and political factors, their correlation and influence on the behavior of exchange rates. By this way, it sees what is absent in graphics. Technical and fundamental analysis is the market statistics. The main difference between fundamental analysis of Forex and technical analysis is that the fundamental analysis is based on positions; prices of the currencies in Forex market reflect the supply and demand, which in their turn depend on fundamental economic factors.

The changes in the economy of trading countries, political elections, regulatory actions of financial authorities, natural disasters influence the currency rate. And if one of these events is impossible to predict, the others are quite possible to plan. The date and time of the release of one or another indicator are known in advance. There are so called calendars of economic indicators and the most important events (indicating concrete dates, or approximate time of their release). Accordingly, if we want to create rational and contemporary prognosis, it is possible to predict the future of exchange rate shifts and to derive profit from it.

Don’t analyze going through too much details. Together with great amount of fundamental factors there exist the dangers of overloading yourself with too much information. Even the experienced traders fall into this trap and cannot take decisions about the price shift. The best approach for fundamentalists is considered to be dealing with some of the most influential indicators than to use an overall list of all fundamental factors.

Among the main macroeconomic indicators that influence the shift of the currency rate the following significant indicators can be distinguished:

Interest Rate

None of the economic and financial indicators track dynamics of the currency market so significantly, as interest rates.

First of all it is important to know that interest rate is considered to be means of influence of Central Bank on national currency and is considered to be one of the chains of state’s monetary policy. Short term interest rates determine the size of percentage by credits, issued by the Central bank for commercial banks. In case of observing a wave of inflation, the Central Bank, depending on set goals, will try to influence the national currency. It is done through regulating interest rates. If a decision is made to take counter inflation means, the Central Bank will increase the level of interest rates.

Thereby, the amount of monetary means, being in free circulation, will be shortened, which will bring to containment of the inflation level. If a decision of infusion of money in circulation is made, then accordingly the straps of interest rates will decrease. The higher is the interest rate of the given currency in comparison with the other currencies / large percentage differential/ the more there will be volunteers among foreign investors who will buy that currency in order to place funds on deposit with high interest rate. In short, high interest rates make the given currency attractive as an investment instrument, which means that demand on that currency increases in international exchange market and exchange rate of that currency grows.

GDP

Gross Domestic Product is the cost of all goods and services produced by that country for an estimated period of time (month, year). GDP data is updated per quarter. It is one of the most important indicators, according to which it becomes possible to judge the economic situation of that country. Mostly, GDP influences the exchange rate when the published and expected results do not coincide. GDP growth speaks about the country’s stable economy and is accompanied by the growth of national exchange rate.

Nonfarm payrolls (NFP)

The quantity of new workplaces created in non-agricultural industries in a month.

The indicator is being estimated by Labor Statistics Office and reflects employment dynamics in the US per month.
Payroll is a pay sheet based on which employees are given wages. The indicator includes approximately 500 industries (production, construction, trading, services, real estate, finances, insurance), with the sample of 400000 firms. This is so called establishment employment. For estimating the indicator a survey of 50000 households is carried out. The growth of this indicator characterizes the increase in employment and in dollar exchange rate. It is called an indicator ‘driving the market’. There is an empiric rule, that the increase in its value for 200 000 per month equals the increase of GDP per 3.0%. It is being published, as a rule, on the first Friday of each month at 80:30 EST (New York).

Consumer Prices Index

The Consumer Prices Index reflects shift of price level of a group of goods and services for the reporting period (a month, 3 months, a year). It is created for analysis and comparison of the value of consumer basket of goods and services of the current month in comparison to the value of the consumer price a month or a year before. In the basket of indices goods form approximately 44% and services- 56%. It is considered to be an early indicator of consumer inflation. It is considered to be the best indicator of cost of living. The rise of this index, as a rule, warns about the rise of interest rate in the country, which brings with it growth of national currency interest rate. The indicator is considered to be one of the most volatile economic indicators in the Forex market, at the moment of its publication the responsive currency exchange rate can reach up to 50-100 pips in a minute.

Production Price Index

The Production Price Index reflects the changes of value of consumer basket, consisting exclusively from industrial products. PPI index calculation includes all phases of production; raw materials, intermediate stage, ready product as well as all the sectors; industry, mining, agriculture. When calculating the index, the prices of imported goods and services are not being calculated: however, they influence it through the prices of imported raw materials and components. The dynamics of industrial prices usually is ahead of the CPI index and because of that it is used by many analytics as an indicator of estimating inflation level for the future.

Employment Cost Index

The Employment Cost Index shows the changes of earned salary and unemployment aid. It is an important indicator of possible inflation in economy. The index is fixedly tracked by the Fed and the ECB when deciding over their future monetary-credit policy. The index has a weak influence on the Forex market. If rise of interest rates is expected, the growth of index value causes the rise of exchange rate. As a rule, the sphere of applying ECI is considered to be prediction, which has two types in particular; medium and long lasting.

Durable Goods Orders

The Durable Goods Orders is an indicator showing the report on goods orders for long term use, terms of usage of which is more than 3 years –furniture, cars etc. According to industries, the orders are divided into 4 basic categories - primary metals, machinery, electrical equipment and transport. DGO is considered to be a leading indicator as many entrepreneurs plan production based on the orders they have, the fall of DGO occurs prior to the fall of production and vice versa. As durable goods are quite expensive, the increase of orders on them will show consumer’s readiness to spend their means on them. This way, the growth of this indicator is a positive factor for the development of the economy and will lead to the growth of national currency exchange rate. The fall leads to the opposite results. The Report about the level of the index of Durable Goods Orders is being published by Statistical Bureau of the USA. The publication takes place in the beginning of the 4th week each month. Time; New York 8:30.

Jobless Claims

The indicator shows the change of the quantity of jobless claims for a week. On the basis of the change of the average during 4 weeks it becomes possible to conclude about the unemployment in the country. Stable decrease of jobless claims quantity states about the improvement in the labor market, the growth of economy and stimulates dollar growth. Inverse relationship exists between the indicators of Jobless Claims and Nonfarm payrolls. In case when jobless claims increase it is quite possible to predict decrease of Nonfarm payrolls Index. The publication of the index takes place each Thursday at 08:30 EST (New York).

Balance of Payments

Balance of Payments is a record showing the flow of financial means in the form of payments coming from abroad and going abroad. If the sum of payment received by the country exceeds the payments paid to other countries and international financial structures, the balance of payments is considered to be active (Positive surplus), if the opposite –passive (negative surplus). The maintenance of the balance of payments is one of the goals of the state macroeconomic policy. A favorable factor for the rise of exchange rate is considered to be the positive surplus and the decline- the negative surplus.

Productivity

Productivity is an Index showing the amount change of output per employee in a given period of time. It is considered to be an important indicator for evaluating the economic situation of a country. For example, during strikes or other disasters the number of employed in industry decreases, as a result of which the productivity of each employee increases, which is quite a positive fact. The increase of index value is considered to be a positive factor for the development of economy and will lead to the growth of dollar.

Industrial Production Index

The Industrial Production Index shows the business standing in industry- the amount of production in the manufacturing and mining industries as well as in the sector of utilities not including construction. It is considered to be one of the most important indicators reflecting the state of national economy. The rise of the index leads to the rise of the exchange rate.

Trade Balance

Trade Balance is the relationship between the sum of all exported and imported goods. If the sum of the costs of exported goods exceeds the sum of imported goods, the trade balance is considered to be active (positive surplus), if import exceeds the export it is considered to be passive (negative surplus). Positive surplus speaks about the economic growth of the state and the increase of the national currency rate.

Unemployment Rate

It shows the relationships between the quantity of unemployed people in percentage and working-age population. It is considered to be one of the most important macroeconomic indexes of ‘’ the market engine’’. Because employment indicators are difficult to predict, the declared value often doesn’t correspond to the expected ones and requires an immediate correction. The rise of unemployment, as a rule, is accompanied by the fall of national currency exchange rate. As a rule, they are being published each month with the index of “Nonfarm payrolls”.

Import Prices

The index reflects the shift of prices on the import for a month and is considered to be an indicator of inflation. As in calculation the prices of imported goods and services are being taken into consideration, the given index characterizes contribution of import prices to the common image of shifting the retail prices in the ‘’basket’’ of goods and services. The rise of the value of the index in the conditions of awaiting the rise of basic interest rates leads to the rise of the dollar exchange rate.

Export Prices

The given index shows the monthly dynamics of export prices and represents the index of inflation. While waiting for the rise of key interest rates the rise of the index value leads to the rise of the exchange rate of the dollar. It is being published each month with the value of Import Prices.

Retail Sales

Retail Sales shows shift of the amount of the sales volume in the sphere of retail sales. One of the most important indicators showing the state of economy of the USA as the consumer demand is not considered to be the most important driving force. The indicator is divided into 2 main groups; ‘car sale’ and ‘the sale of everything’.

Building Permits

The indicator shows the quantity of permits for the construction of new houses on corrected seasonality. It is very sensitive towards the changes of key interest rates, as for the construction it is necessary to take bank loans. The statistics of construction is considered to be flagship for the housing market and is connected directly with the income of population. The rise of the construction amount characterizes improvement of welfare and economic development. The rise of its value has a positive influence on the national currency exchange rate.

How to trade in the Stock Market?

Stock market can be considered as the most important part of the global financial system. In contrast to currency market, trading on this market requires considerable investments. In order to trade successfully in the stock market, you need thorough professional knowledge, experience and serious capital. Before you start trading you need to get theoretical knowledge about trading in stock market and determine which method of investments is best for you:

• Classical trading on the stock exchange involves long-term and medium-term investments in the stocks of large companies in order to get a stable income in the form of interests and dividends.
• Online trading in the Stock Exchange gives you an opportunity to earn money quickly on the price changes. But how to trade stocks? In order to trade stocks it is necessary to turn to the services of a brokerage company, which will provide you with a trading platform and brokerage services.
• Fund management guarantees you a stable but moderate income. This method of investment involves transfer of funds to the management of the investment company, which itself generates and manages your portfolio of stocks.

Stock Markets with the most liquid stocks

The liquidity of the stock market is provided by the large number of market participants, who simultaneously buy and sell financial instruments. High liquidity allows buying and selling stocks without extra cost. Any exchange maintains the liquidity of the stocks with the help of market makers and well-designed tariff policy.

Actually the most highly liquid exchange is the New York Stock Exchange (NYSE), which annual turnover is around $15 trillion. It is followed by NASDAQ (New York City), Tokyo Stock Exchange, London Stock Exchange and Shanghai Stock Exchange.

More than half of the global turnover of trading on the market provide US stock markets, where not only American major investment companies and pension funds trade, but also foreign traders.

Beginners’ mistakes

Nowadays trading in the Stock Market is the most profitable business and is available to everyone. No other business gives an opportunity to earn money in a short period, but sometimes with the same success and the same short period of time, most traders leave their money in the market. What is the reason and how to trade in the stock market to make a profit?

Having theoretical knowledge, enthusiastic beginners start online trade with the desire to get a lot of money, ignoring the existing market trends. They do not like to wait patiently for the formation of a pronounced trend and trade according to it, so every spread for them is unexpected, which leads to the loss of funds.

Trading on the Stock Exchange without clearly elaborated strategies leads to nothing good. It is also very important to control the emotions and stop in time.

The most difficult and demanding part of trading on the Stock Market is good knowledge and great experience in order to identify the entry and exit points. Every trader fights with the temptation to continue trading when the profit grows and break a big jackpot, or to confine to small but guaranteed profit.

The instruments of Foreign Exchange market

All the diversity of world currencies, as well as various derivative instruments of currencies existing today can be attributed to the instruments of Foreign Exchange market. The main trading instruments of Foreign Exchange market are the currencies of various countries. Currency rates, that is to say their relation to the U.S. dollar (or to other currencies) are formed by the supply and demand of the market and also by various fundamental factors. As a rule, the most liquid and freely converted currencies are involved in trading on the Forex market.

The instruments of Foreign Exchange market can be divided into the following two categories:

Currency agreements

Spot - the exchange of currencies no later than the second working day after the date of agreement. These kind of transactions are also referred to as cash. Transactions based on the conditions of spot are made on Over-the-Counter (OTC) interbank market on the basis of the establishment of currency exchange rates (quotes). Speculative currency transactions of banks, hedge funds, financial companies and other participants of Foreign Exchange market are made on spot conditions. Up to 65% of the overall turnover of the Foreign Exchange market falls on trading with the delivery of currencies on the spot conditions.

Outright forwards – the exchange of currencies at the rate of “forward” within a range of days strictly established by parties of the transaction. Such transactions are beneficial in case of instable exchange of currency rates.

Currency swap – the simultaneous buying and selling of currencies with different value dates. 
Outright forwards and currency swap form Forward Exchange market, where the exchange of currencies takes place in the future.

Derivatives

– financial instrument derived from the underlying asset (the main product). Any product or service can be an underlying asset.

Synthetic Agreement for Foreign Exchange (SAFE) – these are derivatives of the Over-the-Counter (OTC) market, which function as an agreement on the future rate of interest (FRA) in case of currency forward transactions. In other words, this is a guarantee of the exchange rate for a specific period of time, which starts in the future.

Currency futures – these transactions provide the exchange of currencies on a specific date in the future at the predetermined rate.

Interest Rate Swap – an agreement between two parties on the exchange of obligations for one currency to the obligations of the other one, in which they pay each other interest rates on the loans in different currencies. In case of the realization of obligations, currencies are being exchanged to original.

Currency Options – an agreement between a buyer and a seller, granting a buyer the right, but not the obligation to buy a certain amount of currencies on a predetermined price within a specific period of time, regardless of the market price of the currency.

What is Forex Market?

Forex Market has become one of the most important and most liquid financial markets on the globe, which was founded in 1976. This is a “place” where the main trading instrument is the currency. Year by year, Forex trading becomes more popular and attracts thousands of people from all over the world. Nowadays, Forex trading has become more comfortable and available to anyone, regardless of their social status, due to the emergence of the Internet. With a simple mouse click, traders and investors can easily enter the boundless world of finance and make transactions. Online Forex trading gives the opportunity to conduct secure trading anytime and from any part of the world.

How to become a successful forex trader?

Forex market is certainly one of the most appealing financial markets existing in the world. The opportunity of generating a large amount of money has resulted in a great increase in the number of Forex participants. However, being that much attractive, Forex market is also very risky and in order to become a successful forex trader, it is essential to pay attention to a number of key features:

• Be confident and believe in the power of your knowledge;
• Take Forex trading seriously since it is not a gambling;
• Control your emotions and do not let them affect your trading decisions;
• Study the Forex market carefully and never stop enlarging your knowledge on currency trading;
• Start trading Forex with a small amount of money;
• Examine the examples of the world’s most famous and successful forex traders and develop your own trading strategy;
• Choose the right brokerage company and start trading Forex.

Trade Forex with IFC Markets

IFC Markets is a leading Forex and CFD broker in the international financial markets, which has been steadily operating in the market since 2006 in full accordance with international standards of brokerage services. IFC Markets offers one of the best and the most competitive conditions for currency trading: tight fixed spread, leverage of up to 1:400, alongside with the famous MetaTrader trading platform, a unique trading-analytical platform NetTradeX developed by the company and many more. The company provides its customers not only with various currency pairs (including major, minor and exotic ones), but also with other trading instruments such as precious metals, CFDs on stocks, indices and commodities, gold instruments and a unique opportunity of creating your own trading instruments through the PCI (Personal Composite Instrument) technology. IFC Markets continues to increase the number of the instruments to meet all traders’ expectations and needs.

How to trade in the Stock Market ?

Stock market can be considered as the most important part of the global financial system. In contrast to currency market, trading on this market requires considerable investments. In order to trade successfully in the stock market, you need thorough professional knowledge, experience and serious capital. Before you start trading you need to get theoretical knowledge about trading in stock market and determine which method of investments is best for you:

• Classical trading on the stock exchange involves long-term and medium-term investments in the stocks of large companies in order to get a stable income in the form of interests and dividends.
• Online trading in the Stock Exchange gives you an opportunity to earn money quickly on the price changes. But how to trade stocks? In order to trade stocks it is necessary to turn to the services of a brokerage company, which will provide you with a trading platform and brokerage services.
• Fund management guarantees you a stable but moderate income. This method of investment involves transfer of funds to the management of the investment company, which itself generates and manages your portfolio of stocks.

Stock Markets with the most liquid stocks

The liquidity of the stock market is provided by the large number of market participants, who simultaneously buy and sell financial instruments. High liquidity allows to buy and sell stocks without extra cost. Any exchange maintains the liquidity of the stocks with the help of market makers and well-designed tariff policy.

Actually the most highly liquid exchange is the New York Stock Exchange (NYSE), which annual turnover is around $15 trillion. It is followed by NASDAQ (New York City), Tokyo Stock Exchange, London Stock Exchange and Shanghai Stock Exchange.

More than half of the global turnover of trading on the market provide US stock markets, where not only American major investment companies and pension funds trade, but also foreign traders.

Beginners’ mistakes

Nowadays trading in the Stock Market is the most profitable business and is available to everyone. No other business gives an opportunity to earn money in a short period, but sometimes with the same success and the same short period of time, most traders leave their money in the market. What is the reason and how to trade in the stock market to make a profit?

Having theoretical knowledge, enthusiastic beginners start online trade with the desire to get a lot of money, ignoring the existing market trends. They do not like to wait patiently for the formation of a pronounced trend and trade according to it, so every spread for them is unexpected, which leads to the loss of funds.

Trading on the Stock Exchange without clearly elaborated strategies leads to nothing good. It is also very important to control the emotions and stop in time.

The most difficult and demanding part of trading on the Stock Market is good knowledge and great experience in order to identify the entry and exit points. Every trader fights with the temptation to continue trading when the profit grows and break a big jackpot, or to confine to small but guaranteed profit.

An Order Book

An order book is a list of current orders for one asset set by traders, which displays the buy and sell orders for an asset on an exchange in real time. Based on the analysis of an order book, it is possible to make a short-term market outlook.

How is an order book formed?

In order to make a deal on an exchange, the trader sends an order through the trading terminal specifying the parameters of the future transaction: buy or sell, necessary volume of the asset and the desired price. When an exchange receives the order, the automatic search for a counter order starts, and in case it is detected, the deal is made. In case of the absence of a counter order, the received order is entered into an order book and waits for a counter order. A large number of orders is made in sequence depending firstly on the offered price and then, on the time of entering an exchange. An order book consists of two columns: the first column includes the Bid or Ask price of the asset and the second one includes the volume of orders offered by participants.

In the upper section of the following order book are displayed orders for sale, and on the bottom – orders for the purchase of an asset. Market prices or the best prices offered by sellers and buyers are between the orders of sellers and buyers. The difference between the best Bid and Ask prices is called the spread.

Orders can be divided into the following types:

• Limit orders – these are common orders, which indicate the type of the asset, the price and the desired volume of the transaction;
• Market orders – these are buy or sell orders for an asset at the best current market price and desired volume.
• Conditional orders – any order, except limit orders, which requires the execution of certain conditions set by participants.

Only limit orders are included in the order book, since market orders are executed instantly at the current market price, and conditional orders remain invisible until set conditions are fulfilled and then they become either limit or market orders.

The usage of an order book

By analyzing the order book, a trader will be able to understand how the current price was formed, how the buy and sell orders of an asset are currently distributed, what is the best price level and volume to enter the market.

For instance, if there is a disproportionate number of sell orders near the upper boundary of the price channel, this may mean (but not necessarily) that traders have bought assets at the lower boundary of the channel and are going to sell them at the upper boundary. This means that the market will soon rise to the upper boundary, and then it will fall under the pressure of high sell volumes. Thus, if there is a noticeable accumulation of orders in the order book, then there is a high probability of “attraction” of prices to this accumulation, and then a price bounce.

Quants: The Kings of Wall Street (part II)

In the middle of the 2000s, the Quants of Wall Street helped to regulate the chaos on the financial market. Thousands of companies, pension funds, banks entrusted their money to hedge funds, which were mainly engaged in algorithmic trading. In August 2007, there was a peak of activity of trading robots since the proportion of their orders reached to 70%.

During the crisis of 2007-2008, the high-frequency trading sharply reduced because of the financial problems of large institutional investors.

The crisis

The great hedge-fund bubble burst in August 2007. As a result, there happened the strongest, the strangest and the most prompt financial collapse in the whole history of the mankind, and the global economic crisis began. At the same time, no one of the Quants, in spite of their abilities and experience, noticed the signs of upcoming catastrophe. The reason for the stock exchange collapse has become the exclusion of probability of large fluctuations in the financial market. The model, which has been built on the hypothesis that the market is predictable and rational, is doomed to failure. When this model is controlled by millions of dollars, where the loan funds form the major part, the catastrophe is inevitable.

The USA mortgage crisis resulted in the reduction of the world’s stock indices by 20%. Two leading US investment banks went bankrupt and the three ceased their existence in the former quality. The panic seized the market. The high-frequency mechanism of Citadel failed and by the end of 2008, its leading hedge funds lost 50% of their assets. Griffin has become the most unlucky hedge fund manager.

By commenting on the situation of the market, James Simons said that many hedge funds did not know, whether they could survive or not. Moreover, in August 2007 his hedge fund Medallion lost 7%, but then restored the balance and by 2008 increased its assets by 80% using the extreme volatility of the market. By the results of 2008, James Simons became the most successful hedge fund manager earning $2.5 billion.

Isaac Newton, who lost 20,000 pounds sterling during the collapse of the “South Sea Company”, once said: “I can calculate the motion of heavenly bodies, but not the madness of people”.