Fundamental Analysis
online forex
2 types of analysis are used for the market movements forecasting: fundamental, and technical (the chart study of past behavior of commodity prices). The fundamental one focuses on the theoretical models of exchange rate determination and on the major economic factors and their likelihood of affecting the foreign exchange rates.
4.1. Economic Fundamentals
Theories of Exchange Rate Determination
Fundamentals may be classified into economic factors, financial factors, political factors, and crises. Economic factors differ from the other three factors in terms of the certainty of their release. The dates and times of economic data release are known well in advance, at least among the industrialized nations. Below are given briefly several known theories of exchange rate determination.
Purchasing Power Parity
Purchasing power parity states that the price of a well in one country should equal the price of the same well in another country, exchanged at the current rate—the law of one price. There are 2 versions of the purchasing power parity theory: the absolute version and the relative version. Under the absolute version, the exchange rate simply equals the ratio of the 2 countries’ general price levels, which is the weighted average of all wells produced in a country. However, this version works only if it is possible to find 2 countries, which produce or consume the same wells. Moreover, the absolute version assumes that transportation costs and trade barriers are insignificant. In reality, transportation costs are significant and dissimilar around the world.
Trade barriers are still alive and well, sometimes obvious and sometimes hidden, and they influence costs and wells distribution.
Finally, this version disregards the importance of brand names. For example, cars are chosen not only based on the best price for the same type of car, but also on the basis of the name (”You are what you drive”).
FOREX. On-line Manual For Successful Trading
to sit in front of a computer monitor for hours watching the markets.
Of course, you can use automated orders such as limits and stops. These allow you to walk away from your computer with the knowledge that your losses will be kept to a minimum, but by doing so, you may miss out on potential profits because your limit order kicks in too soon.
If you don’t have the time to watch your computer monitor and still wish to achieve as much profit as possible, consider signing up for a FOREX signal service. These services monitor and analyze the market for you and send their findings directly to your computer desktop, email, or SMS on your cell phone or pager.
Companies that offer FOREX signals do so on a paid basis, so you have to sign up and pay a monthly or yearly fee. Some brokers may offer this service as an extra which integrates into their trading software. You can receive signals as a popup on your screen or by any of the other methods described above.
There are usually a limited number of currency pairs that are available for FOREX signals. Most services offer signals on EUR/USD, USD/JPY, GBP/USD, USD/CHF, but specialized services may offer other currency pairs.
Technical analysis is based on three assumptions:
1. Price movements are a result of all market forces combined. Things that can affect currency prices include political events, economic conditions, supply and demand, seasonal variations and weather conditions. The technical analyst, however, is not concerned with the reasons for market movement, but rather, the movements themselves.
2. Currency prices follow trends. Many market patterns have been recognized as having predictable consequences.
3. Price movements follow historical trends. FOREX data has been
collected for over 100 years and patterns have emerged over time. These patterns are based on human psychology and the way people react to certain sets of circumstances.
Is Technical Analysis Necessary?
Most FOREX day traders rely heavily on technical analysis and may use fundamental analysis to support their trading strategy. A major advantage of technical over fundamental analysis is that it can be applied to many different markets and currencies at the same time.
Fundamental analysis requires in-depth knowledge of the political and economic conditions of a certain country; therefore it is less likely that any one trader can do proper fundamental analyses on more than a few countries.
FOREX forecasting helps a trader predict price movements in the highly volatile FOREX market. The trader can forecast market behavior either through technical analysis or through fundamental analysis, though some traders use a mixture of both to get the best results.
Fundamental analysis is used to forecast future price movements. It uses economic, political, environmental and other relevant data that can impact the supply and demand of a financial instrument.
This type of analyst has to be well versed with the market as they has to strategically assess where a currency should be trading based on external factors – which are always unpredictable — and not on the current price of a currency.
Technical analysis uses the past market action to create charts that can be used to forecast market movements. Thus, it is strictly based on facts rather than hypothetical analysis.
As we have seen the FOREX market is the biggest currency market in the world with everyday transactions totaling $2 trillion. Yet there are very few
– a measly five per cent of the traders — who make large profits. The reason is simple. Most people try to trade on instincts and intuition than on
meticulous FOREX research.
They don’t realize that the FOREX market moves in a wave pattern — up, down or remains neutral. The trader therefore has to catch the wave at the right time to make money, and the only way that the trader can locate this wave is through research.
Almost every online FOREX broker has a software package for their clients to make transactions and get information about market prices. Due to the relative maturity of online trading there is a consensus among FOREX brokers about what clients need in terms of software tools. There are two main classes of FOREX software – web based and client based.
All FOREX software needs to provide up-to-the-second market information. The fast moving pace of the FOREX demands real-time data delivery for making decisions about when to enter and exit the market. FOREX dealers claim their software performs well with a minimum of delay, but in fact there can be a number of factors that could delay data transmission.
Many beginning FOREX traders are captivated by the allure of easy money. FOREX websites offer ‘risk-free’ trading, ‘high returns’ ‘low investment’ – these claims have a grain of truth in them, but the reality of FOREX is a bit more complex.
There are two common mistakes that many beginner traders make – trading without a strategy and letting emotions rule their decisions. After opening a FOREX account it may be tempting to dive right in and start trading. Watching the movements of EUR/USD for example, you may feel that you are letting an opportunity pass you by if you don’t enter the market immediately. You buy and watch the market move against you. You panic and sell, only to see the market recover.
A FOREX tutorial is a good way to acquire knowledge about the working of FOREX markets. The beginner learns the market terms, the basic trading skills and the techniques to chart market movements. These are useful skills to acquire for any individual who wants to be a FOREX trader.
A few years ago there were very few FOREX trading courses available. This was because only banks and large financial institutions were authorized to trade in foreign currency. The arrival of online trading and the consequent opening up of the FOREX market has increased the demand for FOREX courses.
Today, several individuals and institutions provide comprehensive tutorials in FOREX trade. These courses are available both offline and online, and a beginner can select a course that suits his needs most.
FOREX trading is one of the most high-risk businesses in the world. The trading is done in real time, and decisions are made in split seconds. That is why brokers or traders who have undertaken FOREX trading education are able to handle the pressures and demands of FOREX trading better
than those who work on blind instincts.
They not only need to understand market mechanics but also need to know how the different software tools work, how a trade is closed or when a bid should be made.
An important skill is reading FOREX charts. Every trader should know how to chart the market movement. They should also know the reasons that make the markets behave in such a volatile manner. Such an education may not guarantee profits on every trade but it can surely reduce the risks of FOREX trading.
There are many tools available to the FOREX trader for analyzing the market as well as for buying and selling currencies. Software tools are a necessary part of FOREX because of its volume and volatility. Software can be used to automate some of the trading procedures and safeguard against losses.
In order to make rational, successful trades, the FOREX trader needs information – lots of information. Current exchange rates are the tip of the iceberg – the trader needs historical data as well as current information about political and economic conditions that could affect currency prices. All this information is provided by many FOREX brokers on their web sites.
Knowledge is the key to successful FOREX trading. The knowledgeable trader has greater awareness of how the market moves and more chances of making profitable transactions. Without knowledge you are shooting in the dark. You may succeed on a few deals but the odds are that you are going to lose in the long run.
Thankfully there’s lots of information available about the FOREX and how to trade. You can find hundreds of web sites with useful advice and there are just as many books about all aspects of FOREX trading. If self- learning is not your style, there are training courses available that guide you step-by-step through the intricacies of Foreign Exchange.
If you have the time and the inclination, you can find all the facts you need on the Internet or in your public library. The problem with Internet sources, however, is that the information is generally unstructured. You may find bits and pieces of useful data, but finding a source that presents it in a step-by-step fashion is more difficult.
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