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now just to show you how important it is to know about and use fibs,the chart I posted in the previous post,look at the MACD..if I where on using indicators to trade from..I would have lost my shirt and pants on this trade,because I would have gone long on the trade..,because the indicators were showing an over- sold condition.
Here is an example:
http://investorshub.advfn.com/boards/read_msg.asp?message_id=26053365
since I knew from higher time frames the price was in a downtrend,I started my fib at the 159.99 mark ,and brought my end point to the begging of the down leg at 166.57...That gave me extension numbers below the 159.price...at that point price did as it should and retraced..when the price retraces,you never can tell how far it will go ,so its best not to trade until it u-turns,but in this case it u-turned at the .38....and if you read what I wanted you to ,in the earlier post ,you will know that the .38 is like a car traveling on the freeway and will usually retrace to the 1.618 retracement level or lower..now that chart was posted on the 16th,and we know price went even lower than the 1.618..
Now a word on fib placement.:
If the trend is in a downtrend,start your fib at the bottom of the leg and end it at the top of the starting leg..this way your extension numbers or support lines go below the price..,then wait to see at what ratio number the price stops at,the you will know at which speed you can expect ,and which extension price to shoot for before pulling the trigger on profit..and vice versa in and uptrend...you need to read page 3 of the fib secret pdf to understand what im saying...
another point of interest..
I find after going through the chart sequence to finding a trade,
since I mainly trade eur/jpy ..I stay on the 30 min chart with fibs and MA's to maximize my profits or pips.
Thanks for the kind words.....
The way I've been trading ,which as you can tell has been pretty accurate..re-read the pfd i put together on this link..
http://www.theforexclub.us/Website%20books/Fibonacci%20Secrets.pdf
pay close attention to page 3....its the ratio relationships,and also the speed chart for the ratio relationships...I've been experimenting or in technical terms back testing the fib placements.I've come up with a few interesting points..and that is they work on all time frames,but as in finding a trade,the sequence you follow by looking at the weekly on the week-ends..then daily..ect..to the 5 min..you also do it with using the fibs on each chart..try it ,you will like what you find...there will be no more guessing in your trading..the only time you will find that you will be wrong is when the trend reverses directions..so also keep in mind your chart patterns and candle relationships to spot the reversal before it takes you out..
"12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance."
hey...so there is hope for me ;)~
Ya know in genl & of course w/out knowing it....this is how I've been trading...lol....albeit a tad more conservatively...maybe 10-15% inside of what's explained as a true fib range....I guess you can consider my simplistic strat as trading w/fib training wheels ;)~
All I've been doing is looking for retraces primarily in the long term trend direction. Although because I've been having pretty good succees w/it, I've been getting less conservative....& this week that's proven to kill me.
Time to return back to a more conservative style...& possibly adjust my long term trend strat a bit....which has been greenback bear....perhaps the dollar is getting range bound here is finally close to its' bottom? Even w/the rate cuts looming (& gold in the high 800's) now I'm not so sure that the dollar is still poised for more significant moves to the south....we could very well see more continued bullish moves w/the dollar here....& that would stand to reason as its' been pounded quite hard over the last few Q's now.
Lotza great stuff here Bud ( & on all the other boards you've put up)....I know I've said it b4 but it can't be said enuff imo....I can't even begin to thank u enuff Kimosabe!
Cheers!!!
How to Read Futures Price Tables
Price is the key statistic generated by futures markets, although the volume of trade and the number of outstanding contracts (open interest) also are important. Prices are available from a variety of sources, including many daily newspapers. Most papers also report volume and open interest.
Since wire services and newspapers vary in their format and terminology, here we will describe price-reporting formats in general terms, using CBOT Corn Futures Prices as an example.
CBOT Corn Futures Prices
Est. vol 38,000; vol Wed 38,592; open int 348,967 + 987
The third line of the table reads as follows: "Corn (CBOT) 5,000 bu; cents per bu." and means that the table applies to the Chicago Board of Trade (CBOT) corn contract and the contract size is 5,000 bushels. The prices shown in the table are in units of cents per bushel, so 252.75 cents means $2.52 and three quarters of a cent per bushel.
The open or opening price is the price or range of prices for the day's first trades, registered during the period designated as the opening of the market or the opening call. In our example, this year’s May corn on the Chicago Board of Trade (CBOT) opened at $2.52 per bushel. Many publications print only a single price for the market open or close regardless of whether there was a range with trades at several prices.
The word high refers to the highest price at which a commodity futures contract traded during the day. The high price for this year's May corn was $2.52 and ¾ cents per bushel.
Low refers to the lowest price at which a commodity futures contract traded during the day. The low price for May corn was $2.50 and ¾ cents per bushel.
Some publications show a close or closing price in their tables. The closing price is the price or range of prices at which the commodity futures contract traded during the brief period designated as the market close or on the closing call—that is, the last minute of the trading day.
Because the last few minutes of trading are often the busiest part of the day, with many trades occurring simultaneously, the exchange computes a settlement price from the range of closing prices. The settlement price, which is abbreviated as settle in most pricing tables, is used by the clearing house to calculate the market value of outstanding positions held by its members. It is also frequently used synonymously with closing price; although they may, in fact, differ.
The change refers to the change in settlement prices from the previous day's close to the current day's close. The -.25 change for July corn indicates that the previous day's settlement price must have been 258.25 (i.e., 258 +).
The lifetime high and low refer to the highest and lowest prices recorded for each contract maturity from the first day it traded to the present.
Open interest refers to the number of outstanding contracts for each maturity month. Some newspapers do not include this information.
At the end of the table another line of information appears: Est. vol 38,000; vol Wed 38,592; open int 348,967 + 987. Est. vol indicates that the estimated volume of trading for that day was 38,000 contracts. Vol Wed means that the trading volume for the previous day was 38,592 contracts. Open Int refers to the total open interest for all contract months combined at the end of the day's trading session. The 348,967 open contracts represent an increase of 987 contracts from the open interest of the previous day at the close.
Some publications may differ slightly in their report format (for example, quoting grain prices in dollars per bushel rather than cents per bushel). Also, some newspapers group futures contracts by exchange, while others group them according to the type of commodity (for example, metals, grains, food-stuffs, or financial).
The Economic Purpose of Futures Markets and How They Work
Many people think that futures markets are just about speculating or “gambling.” Futures markets can be used for speculating, but they are designed as vehicles for hedging and risk management so that people can avoid “gambling” if that is not their choice. For example, a wheat farmer who plants a crop is, in effect, betting that the price of wheat won’t drop so low that the farmer would have been better off not planting at all. This bet is inherent to the farming business, but the farmer may prefer not to make it. The farmer can hedge this bet by selling a wheat futures contract. Futures markets can be used for both hedging and speculating.
Forward Contracts
Because a forward contract is similar to a futures contract from an economic standpoint, it is helpful to begin by defining a forward contract. A forward contract is an agreement between two parties (say, a wheat farmer and a breakfast cereal manufacturer) in which the seller (the farmer) agrees to deliver to the buyer (the cereal manufacturer) a specified quantity and quality of an asset or commodity (the wheat) at a specified future date at an agreed upon price. A forward contract can be distinguished from a spot contract, that is, a contract for immediate delivery of the commodity.
A forward contract is typically a privately negotiated bilateral contract that is not conducted on an organized marketplace or exchange. The contract terms are not standardized but are determined by what the parties agree on. The price generally is determined when the contract is entered into, although there are some forward contracts where the parties may agree to transact at a price to be determined later in a manner that is specified on the day the contract is entered into.
Forward contracts are primarily merchandising vehicles, whereby both parties expect to make or take delivery of the commodity on the agreed upon date. It is difficult to get out of a forward contract unless you can get your counterparty to agree to extinguish the contract. To enter into a forward contract, it is also necessary to find someone who wants to buy exactly what you want to sell when and where you want to sell it. As such, forward contracts are commonly used as merchandising vehicles in a variety of commodity and currency markets; however, forward contracts lack certain features that make futures contracts especially useful for hedging.
Futures Contracts
Futures contracts are very similar to forward contracts, but futures contracts typically have certain features that make them more useful for hedging and less useful for merchandising than forward contracts. These include the ability to extinguish positions through offset, rather than actual delivery of the commodity, and standardization of contract terms.
Futures contracts typically are traded on organized exchanges in a wide variety of physical commodities (including grains, metals, and petroleum products) and financial instruments (such as stocks, bonds, and currencies). Before around 1970, most futures trading was in agricultural commodities, such as corn and wheat. Today, successful futures markets exist in a variety of non-agricultural commodities, including metals such as gold, silver, and copper and fossil fuels such as crude oil and natural gas.
The most widely traded futures contracts are in financial instruments, such as interest rates, foreign currencies, and stock indexes. Single-stock futures, banned in the United States for many years, began trading in November 2002.
Traditionally, futures contracts were traded in an open outcry environment where traders and brokers in brightly colored jackets shout bids and offers in a trading pit or ring. While open outcry is still the primary method of trading agricultural and other physical commodity futures in the U.S., trading in many financial futures has been migrating to electronic trading platforms (where market participants post their bids and offers on a computerized trading system). Almost all futures trading outside the U.S. is conducted on electronic platforms.
Standardized terms. Futures contracts have standardized terms that are determined by the exchange, rather than by market participants. Standardized terms include the amount of the commodity to be delivered (the contract size), delivery months, the last trading day, the delivery location or locations, and acceptable qualities or grades of the commodity.
For example, the Chicago Board of Trade (CBOT) wheat futures contract provides for delivery of 5,000 bushels of any of several varieties of wheat during March, May, July, September, or December in Chicago or any of several other specified delivery locations. The exchange specifies that different varieties and grades can be delivered at various fixed differentials (premiums or discounts) to the contract price.
This standardization enhances liquidity, by making it possible for large numbers of market participants to trade the same instrument. This liquidity makes the contract more useful for hedging, but, on the other hand, the standardization reduces the usefulness of a futures contract as a merchandising vehicle.
A Nebraska farmer who wants to deliver wheat to his or her elevator near Omaha, might find the CBOT wheat futures contract useful for hedging, but would not want to make delivery on the futures contract, since the closest CBOT wheat futures delivery point is in St. Louis. Instead, he or she will buy back or offset the contract before the last trading day and sell the wheat on the spot market locally, as they would have if they had not used the futures market. Most futures contracts (by volume) are liquidated via offset and do not result in delivery. The purpose of the physical delivery provision is to ensure convergence between the futures price and the cash market price.
Clearing. Futures trades that are made on an exchange are cleared through a clearing organization (clearing house), which acts as the buyer to all sellers and the seller to all buyers. When you buy or sell a futures contract, you are technically buying from, or selling to, the clearing organization rather than the party with whom you executed the transaction on the trading floor or through an electronic trading platform. Since you ultimately buy and sell from the same party, if you buy a futures contract and subsequently sell it (probably to a different party than you bought it from but technically back to the clearing house), you have offset your position and the contract is extinguished. Compare this to the forward market: If you buy a forward contract and then sell an identical forward contract to a different person, you now have obligations under two contracts—one long and one short.
Margin. Futures traders are not required to put up the entire value of a contract. Rather, they are required to post a margin that is typically between 2 percent and 10 percent of the total value of the contract. Margins in the futures markets are not down payments like stock margins, but are performance bonds designed to ensure that traders can meet their financial obligations.
When a futures trader enters into a futures position, he or she is required to post initial margin of an amount specified by the exchange or clearing organization. Thereafter, the position is "marked to the market" daily. If the futures position loses value when the market moves against it—if, for example, you are buying and the market goes down—the amount of money in the margin account will decline accordingly. If the amount of money in the margin account falls below the specified maintenance margin (which is set at a level less than or equal to the initial margin), the futures trader will be required to post additional variation margin to bring the account up the initial margin level. On the other hand, if the futures position is profitable, the profits will be added to the margin account. Futures commission merchants (FCMs) often require their customers to maintain funds in their margin accounts that exceed the levels specified by an exchange.
Hedging Examples
These examples are simplified for ease of understanding and they do not consider “basis.”
Hedging Example One: a Chicago Board of Trade wheat futures contract. The CBOT contract provides for delivery of 5,000 bushels of wheat in Chicago and various other locations during the contract month. The available contract months are July, September, December, March, and May.
Suppose a farmer near Omaha, Nebraska plants wheat with an expected yield of 50,000 bushels during the spring at a time when the CBOT contract for delivery during December (the first new crop contract month for spring wheat) is trading at $3.50 per bushel. While the price of wheat in the Omaha area may differ from the futures price (which reflects wheat prices in one of the delivery locations: Chicago, St. Louis, Toledo, Ohio, or Burns Harbor, Indiana), it is reasonable to assume that the prices are closely related.
The farmer knows that if he or she can sell the wheat at $3.50 per bushel, there will be a reasonable profit. By planting the wheat, the farmer is in effect betting that the price of wheat will not decline between now and harvest time. Such bets are intrinsic to the business of farming, since farmers have no control over the prices they receive for their crops.
A farmer can hedge this bet by establishing a short futures position at the current quoted price of $3.50 per bushel. Since each futures contract provides for delivery of 5,000 bushels and the expected harvest is 50,000 bushels, the farmer would sell ten futures contracts.
In this example, the initial margin for a hedger and the maintenance margin on the wheat contract are both $650 per contract. The farmer must deposit at least $6,500 with the clearing organization through a futures commission merchant (FCM) to cover the margin for the ten contracts sold. Each day the position is marked to market. This means that if the market moves in the farmer's favor—the futures price declines on a particular day—the farmer’s margin account is credited with the accrued profit for that day. On each day that the futures price rises, the margin account is debited with the accrued loss. On any day when the margin account falls below $6,500, the farmer is required to post variation margin to bring the account back up to at least $6,500.
At harvest time, the weather has been ideal and the farmer does harvest 50,000 bushels of wheat. In general, there has been a bumper crop and the futures contract has declined to $3.00 per bushel. The farmer now has 50,000 bushels of wheat in his silo and is short 50,000 bushels of wheat on the futures market. The farmer now needs to unwind this hedged position—there are two ways to accomplish this.
One way is to make delivery pursuant to the terms of the futures contract at one of the specified delivery locations during the delivery period. This would require paying to transport the wheat to one of the locations specified in the futures contract, which would be cost prohibitive from Nebraska.
The vast majority of futures contracts are liquidated via offset rather than delivery, in part because the delivery mechanism is inconvenient for most market participants.
In our example, the farmer is better off taking an equal and opposite position in the futures market by buying ten contracts at the current price of $3.00 per bushel. The ten contracts the farmer bought offset the ten contracts previously sold. The farmer no longer has a futures position.
Assuming that there have been no deposits or withdrawals, the farmer’s margin account has increased by $25,000 (50 cents per bushel times 50,000 bushels). The futures trade has given the farmer a profit of 50 cents per bushel. The farmer can complete the unwinding of the hedged position by selling the 50,000 bushels of wheat at the local elevator for the current spot price of $3.00 per bushel. Considering the 50 cent profit on the futures trade, the farmer has effectively received $3.50 per bushel for the wheat. The hedge in this instance was successful.
Summary of Hedging Example One
Activities in the Commodity
Futures Transactions
During the spring, plant 50,000 bushels of wheat. Expected selling price $3.50 per bushel.
On May 1, sell ten CBOT wheat futures contracts for delivery next December at $3.50 per bushel.
During autumn, harvest 50,000 bushels of wheat.
Still holding short futures position.
On December 1, sell 50,000 bushels of wheat at $3.00 per bushel on local spot market.
On December 1, buy 10 December CBOT futures contracts for $3.00 per bushel.
Spot market loss 50 cents per bushel or $25,000.
Futures market gain 50 cents per bushel or $25,000.
It is of course possible that after the farmer hedges his position on the futures market the price of wheat will rise rather than fall. If the price of wheat rises to $4.00 per bushel, the farmer will lose 50 cents per bushel on the futures trade, but will be able to sell the wheat on the spot market for $4.00 per bushel. His effective price is $3.50 per bushel. This does not mean that the hedge was not successful. The farmer considers himself to be in the business of growing crops, rather than betting on the price of wheat. Sometimes the price of wheat goes up and sometimes it goes down, but hedging provides the farmer with the peace of mind of knowing what his profit will be, regardless of price changes.
Hedging Example Two: The producers and food manufacturers who purchase grain can use futures contracts to hedge the risk that grain prices will go up—known as a long hedge. For example, a breakfast cereal manufacturer who uses wheat and expects to purchase 50,000 bushels in December (which is several months away) can purchase ten December Chicago Board of Trade futures contracts for $3.50 per bushel. The manufacturer will post margin with the clearing organization just like the farmer in Hedging Example One.
By purchasing the futures contracts, the manufacturer effectively locks in a price of around $3.50 per bushel, whether the price of wheat goes up or down between now and December. When December rolls around, the manufacturer will probably buy wheat on the spot market and sell and offset the futures contracts rather than taking delivery.
Summary of Hedging Example Two
Activities in the Commodity
Futures Transactions
On August 1, breakfast cereal maker expects to need 50,000 bushels of wheat in December and wants to lock in price now. Current price is $3.50 per bushel.
On August 1, buy ten CBOT wheat futures contracts for delivery next December at $3.50 per bushel.
On December 1, buy 50,000 bushels of wheat at $4.00 per bushel on local spot market.
On December, sell ten December CBOT futures contracts for $4.00 per bushel.
Spot market loss 50 cents per bushel or $25,000.
Futures market gain 50 cents per bushel or $25,000.
Other Uses of Hedging. Hedging can be extended to other types of futures contracts. An oil producer can sell crude oil futures contracts to hedge against the possibility that oil prices will decline. An electricity-generating firm that uses natural gas for fuel can buy natural gas futures contracts to hedge against the possibility that natural gas prices will rise. A pension fund with a portfolio of stocks can use stock index futures to manage the risks associated with stock price fluctuations. Importers and exporters can use currency futures contracts to hedge the risk of adverse changes in exchange rates.
Short-term interest rate futures contracts (such as Eurodollar futures or Federal funds futures contracts) and long-term interest rate futures contracts (such as Treasury note and bond futures contracts) can be used to hedge a variety of risks associated with rises and falls in interest rates. A bank with variable-rate assets (for example, variable-rate credit card accounts) can use short-term interest rate futures to hedge the risk that the yield on these assets will decline due to a decline in interest rates. By buying short-term interest-rate futures, the bank can effectively convert these variable-rate assets to fixed-rate assets. An insurance company with a portfolio of Treasury notes can sell Treasury note futures contracts to hedge against the risk of long-term interest rates rising (which would cause the value of the Treasury note portfolio to decline).
Basis and Basis Risk
Basis. The hedging examples we used are simplified because we ignored basis—the difference between the futures price and a specified cash market spot price.
For example, in August, the December Chicago Board of Trade wheat contract is trading at $3.50 per bushel and the spot price in Chicago is $3.45 per bushel. In this case, the basis is 5 cents futures over cash.
The basis can be affected by a number of factors, including interest rates and the cost of storing the commodity. If you buy a futures contract rather than the commodity itself, you do not pay the total value of the contract, but instead post a margin deposit that is typically a small fraction of the total value of the contract.
In part, the basis is determined by the fact that you can collect interest on the difference between your margin deposit and the total value of the contract. The basis also is determined in part by the fact that by not holding the actual commodity, you save on storage costs. Futures prices for physical commodities are thus typically higher than spot prices, a situation known as contango.
Differences in quality and grade as well as expectations about future supply (for example the expected crop yield) also can affect the basis. If expected future supplies greatly exceed current supplies (for example, last year’s crop was poor and this year’s crop is expected to be excellent), futures prices may be lower than spot prices, a situation known as backwardation.
Basis Risk. Returning to Hedging Example One, the Omaha farmer who was hedging his wheat crop with the Chicago Board of Trade wheat futures contract that provides for delivery in Chicago, Burns Harbor, St Louis, or Toledo at various differentials specified by the CBOT. Any short position holder who does want to deliver will want to do so at whichever location is cheapest given the differentials and actual transportation costs. At delivery time the futures price will converge with the spot price in one of those locations. Since the farmer plans to sell his wheat in Omaha, he is more concerned with the spot price in Omaha than spot prices in any of the other locations. While the spot price of wheat in the Omaha area is closely related to the CBOT wheat futures price, the correlation is not perfect and the basis between the Omaha spot price and the futures price can change. For example, Omaha wheat prices may go down 55 cents from $3.50 per bushel to $2.95, while the futures price declines only 45 cents from $3.50 to $3.05. If the basis changes adversely in this way, a futures market hedge will not cover all of the farmer’s cash market loss. This possibility is known as basis risk.
Price Discovery or Price Basing
Futures contracts are often relied on for price discovery as well as for hedging. In many physical commodities (especially agricultural commodities), cash market participants base spot and forward prices on the futures prices that are “discovered” in the competitive, open auction market of a futures exchange.
This price discovery role is considered an important economic purpose of futures markets. In financial futures contracts such as stocks, interest rates, and foreign currency, the price discovery role of futures occurs in tandem with the cash markets, which also contribute significantly to price discovery.
The Role of the Speculator
A speculator is one who does not produce or use a commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes. While speculation is not considered one of the economic purposes of futures markets, speculators do help make futures markets function better by providing liquidity, or the ability to buy and sell futures contracts quickly without materially affecting the price. Long and short hedgers may not be sufficient to create a liquid futures market by themselves. The participation of speculators willing to take the other side of hedgers' trades adds liquidity and makes it easier for hedgers to hedge.
Types of speculators include:
* Position traders have an opinion about general price trends and will hold a position for several days or weeks.
* Day traders will close out positions by the end of the trading day (and avoid overnight margin calls).
* Scalpers are exchange members who only hold positions for a few minutes or even seconds. These members “make markets,” that is, they post or shout bids and offers for the contract. The bid (the price at which a market maker is willing to buy the contract) is a little bit lower than the offer (the price at which the market maker is willing to sell the contract). For example, the bid for CBOT December wheat might be $3.50 and the offer might be $3.50½. Scalpers endeavor to profit from the difference between the bid and the offer, generally referred to as the bid-ask spread.
Basics of Futures Trading
What is a Futures Contract?
A futures contract is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price. Most futures contracts contemplate actual delivery of the commodity can take place to fulfill the contract. However, some futures contracts require cash settlement in lieu of delivery, and most contracts are liquidated before the delivery date. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract. Futures and options must be executed on the floor of a commodity exchange—with very limited exceptions—and through persons and firms who are registered with the CFTC.
Who Uses Futures and Options Markets?
Most of the participants in the futures and option markets are commercial or institutional users of the commodities they trade. These users, most of whom are called "hedgers," want the value of their assets to increase and want to limit, if possible, any loss in value. Hedgers may use the commodity markets to take a position that will reduce the risk of financial loss in their assets due to a change in price. Other participants are "speculators" who hope to profit from changes in the price of the futures or option contract.
History of Futures Trading in the U.S.
Futures contracts for agricultural commodities have been traded in the U.S. for more than 100 years and have been under Federal regulation since the 1920s. In the last 20 years, futures trading has expanded rapidly into many new markets, beyond the domain of traditional physical and agricultural commodities. Futures and options now are offered on many energy commodities such as crude oil, gasoline heating, oil, and natural gas, as well as on a vast array of financial instruments, including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices. In recent years, new futures contracts have been offered in non-traditional commodity areas such as electricity, seafood, dairy products, crop yields, and weather derivatives. Significant Dates in CFTC History gives more information about the history of futures trading.
Contract Review and Market Surveillance
To ensure the financial and market integrity of the nation's futures markets, the CFTC reviews the terms and conditions of proposed futures and option contracts. Before an exchange lists a new futures or option contract for trading, it must certify that the contract complies with the requirements of the Commodity Exchange Act (CEA) and the Commission’s regulations, including the requirement that the contract terms reflect commercial trading practices and that the contract not be readily susceptible to manipulation. The Commission conducts daily market surveillance and, in an emergency, can order an exchange to take specific action or to restore orderliness in any futures contract being traded.
PURE LOGIC AXIOMS
Provided by Pure Logic Trading
Know thyself...trading is a reflection of what you believe about yourself; it is the ultimate mirror of yourself. Your virtues and vices will be exposed. You must master your ego and beliefs to be successful in trading.
NEVER EVER TAKE A BIG HIT
Large losses are the number one account killer. Never let a trade get away from you. I always say "LOSE YOUR OPINION, NOT YOUR MONEY"
TRADING INSANITY
Is doing the same thing over and over again and expecting different results. Take the road less traveled. The "herd" is almost always on the wrong side of the trade.
TRADING IS 90% MENTAL
The other 10% is in your head. We always get what we focus on. Trade in the PRESENT moment and focus on correct action.
THE MARKET OFTEN MOVES IN THE DIRECTION THAT WILL INFLICT THE MOST PAIN ON THE GREATEST NUMBER OF TRADERS
Yes, the professionals are out to take your money. Often the harder trades to take are the ones that reward you the most. Think outside the box.
TRADE FROM A BLANK MIND; UNBIASED, UNEMOTIONAL, AND UNIMPULSIVE
It�s worth repeating "Lose Your Opinion, not your money."
EXPECT THE UNEXPECTED
To be a great trader you have think outside your comfort zone. Have a plan to take advantage of market jolts (the trade action that normally takes your money from you).
EXPECT AND ACCEPT LOSING TRADES
Losing trades are natural phenomena to the business of trading. Good traders know from experience that profitable trades are just around the corner.
WHEN IN DOUBT GET OUT
Sometimes market action and news etc. get traders confused about their original intent and purpose in a trade. Then they tend to "hope" the trade will work or come back. This leads to paralysis and trades getting away from you.
DON'T SHOULD ON YOURSELF
Stay away from the market victim mentality at all costs. Wish I would have should have etc. is defeating language to yourself. Traders need to stay in a positive mindset.
DO NOT OVERTRADE
Novice traders feel a need to have a trade(s) on and often are jumping in and out of the market randomly. Overtrading will kill your account and your mindset.
HAVE A BUSINESS PLAN FOR EVERY TRADE
Know your entry, stop-loss, and target price for every trade. Write your plan down and stick to it.
THERE ARE NO ACCIDENTS IN TRADING
The market is always right. If you are not getting the results you want, you must change your beliefs about trading and yourself. What you fear you create!
DO NOT TRADE THE MONEY
Focus on correct action in the present moment and not on your P/L. When traders focus on the money they become emotional and usually make poor decisions.
KEEP A TRADE JOURNAL
There is no better teacher than your own experience with your winners and losers. Review your journal daily, weekly, and monthly. It is very important to stand accountable for all your results.
THE OLD AXIOMS AND THE TRUTH ABOUT THEM
THE TREND IS YOUR FRIEND
Can�t argue with this; trading on the side of a defined trend has the most consistent history and rewards.
CUT YOUR LOSSES SHORT AND LET YOUR PROFITS RUN
Sounds great (and it is) however is much more difficult to do in the real world of trading. This is exactly why each trade set up begins with a well-defined plan for all possibilities.
NEVER BUY A FALLING ROCK
Or step in front of a freight train. This axiom warns against trying to pinpoint tops and bottoms and fading strong moves.
NEVER AVERAGE DOWN
This policy is good for beginning to intermediate traders. However, the pros do love to average into a position over time at specific levels.
How Does an NDD Actually Work?
There are many keys to understanding the Forex markets, and there are many parallels between the Forex markets today and the stock market back in 1995 and 1996 when ECN technology like ISLD and ARCA were coming about. The non-deal-desk system is the really the beginning step of the process of making the Forex markets a truly “transparent” market with “best pricing” available electronically straight to the customer. In order for there to ultimately be a true market for Forex (such as exists for stocks and futures); companies will need to take several steps to move away from the traditional deal desk systems. I’d like to discuss many of those steps now.
I do want to say up front that I work for a non-deal-desk platform (EFX GROUP / MBTF). I don’t want there to be any confusion about that. If someone thinks that any of my points are biased because I work for a NDD platform and not a traditional deal desk platform, I’d be happy to discuss it with them here or in private, and I will respond to any comments/questions.
These are the things that I think separate a true NDD platform, such as ours, from other platforms, and then I have some comments about the Forex market and the average Forex trader beyond that.
1) Direct access to the biggest piece of the market possible. When an NDD platform executes a trade, it is executed purely electronically, without bias, without human intervention, and at the best price that our system could find at the time. I think this little fact is something that people overlook. We are paid on the commission on the trade, just like in the stock, futures, and options markets. Our incentive is therefore to get the best price possible to keep the customers happy. We have interest in the spreads being tight and the executions being the best that they can be. In fact, the better that we do for our clients, the better that we do overall.
2) A related point here is therefore anonymity. Execution should be no different whether you are closing or opening a trade. The system should not care where the trade is coming from. It should not care whether that person is starting a new position or closing an existing one in the same direction. A true NDD platform shouldn’t care who the trade is coming from when it executes. I can tell you right now that when it comes to the EFX GROUP / MBTF system, a sell order to close a long position and a short order that are put in simultaneously on the EURUSD will be filled at the prevailing market price together, period.
3) No requoting. A non-deal-desk system lets you know everything that they are making from the trade. Personally, I would rather trade on a system that lets me get executed by the true market, which includes customers and banks, with the narrowest spreads possible, and get charged a fee.
4) ECN vs. STP vs. Deal Desk. It needs to be made clear that there are really more than two types of platforms. A deal desk is a fixed spread platform where the desk makes their money in the spread or by taking on the risk by absorbing the position into its book. STP (Straight Through Processing) platforms execute directly from the retail client to the banks. The more banks and liquidity in the system, the better the fills for the customer. ECN (Electronic Communications Network) platforms let customer orders interact with other customer orders. Non-deal-desk (NDD) platforms are either the second or third type of platform. EFX GROUP / MBTF are both. We have over a dozen banks in our network which customers execute against directly (STP), but we now also allow customers to hit other customers (ECN) inside of the standard pip increments of the banks. We do not shave anything against customer executions.
Having said all of that, I’d like to make a few additional points about the Forex markets, execution, and our platform. In reality, the retail Forex world is made up largely of unsophisticated traders who have not traded anything before. You can usually recognize these people because they are looking to trade at higher margin levels and expect executions that the market cannot provide. The Forex markets are more highly leveraged than the futures market. We offer 100 to 1 leverage. Professionals rarely use 20 to 1 leverage. Retail traders with no experience are constantly looking for higher leverage, up to 400 to 1, which shows their lack of experience. Few of these traders last long in the Forex markets. In addition, there are many people who think that they are “entitled” to fills because they want to buy at certain prices. This happens most commonly on “news spikes” due to economic data. People try to place market orders on the news and then are surprised if their fills arrive within a split second, but 30 or 40 or 50 pips away from where the market was before the news. Few of these people actually understand what they are trading. Let’s consider a few points.
In exchange rate terms, $0.01 of movement between the Euro and USD is 100 pips. That means that if news comes out and the EURUSD moves 30 pips in a second, that’s $0.003. In other words, it is not measurable in real terms. However, a trader trading at 100 to 1 margin may expect that they should be filled at a price that existed before the news hit. When I ask traders if they would be willing to sell the EURUSD at the price it was trading at before news hit that caused a 30 pip spike, they say no. But they expect that banks will make those prices available. In other words, they aren’t willing to accept the consequences of a “market.” Trading on economic news in the Forex world is the most dangerous type of trading that one can do. Having said that, let’s consider what NDD platforms offer to protect the trader.
STP and ECN platforms (which are both NDD platforms) execute any marketable orders instantaneously. That means if you are a buyer at the market and there is a seller at a price and no one has bought from him/her ahead of you, you are filled at that price. It is a true market. There is nothing that says that you deserved to get filled 20 pips back because that would have made you money.
The Forex market has come a long way in the last two years. Traders should look for platforms that offer the following:
1) Fraud protection in the form of Fidelity bonds.
2) Segregation of client money.
3) True executions.
4) Lots of liquidity.
5) A good variety of order types, which professional traders should use to control their risk. No one should EVER place a market order when they can limit themselves to fills 5 or 10 pips above the market.
On a true STP/ECN Forex platform, no trader that understands executions should ever have issues with getting extremely bad fills (slippage). Everything should be in-line.
I have spent a lot of time watching thousands of people trade the Forex markets. Forex is a very exciting market with massive liquidity. With platforms like EFX GROUP / MBTF, which offer true STP and ECN technology, it should be a true “trader’s market,” as long as that doesn’t suggest to traders that they are entitled to fills that don’t exist in fast markets or that reckless use of market orders should always be rewarded.
When the exchange rate between the Euro and the US Dollar moves $0.01 in a day, that’s 100 pips. This is a microscopic move that is only remotely tradable because of the leverage used in the Forex markets. I think a lot of people have expectations that go well beyond reason when it comes to the Forex markets. I think that things are moving closer to a centralized market place with good regulation about the limits to which a seller or buyer can price themselves away from the market but still fill a retail client. I think within a year or two, platforms like EFX GROUP / MBTF will have completely altered the landscape of Forex just like ISLD and ARCA did in the US stock market back in 1995-7. In the meantime, stick to the platform that safeguards your money, gives you the most options, and provides you with direct, unhindered access to the liquidity that is out there. Make sure that your funds are secure from fraud and protected from co-mingling with your platform. Make sure that your funds are held on-shore, not off-shore. With all of that, it’s just about your trading skills.
Justin LeBlang
V.P. of Business Development
EFX Group
Common Sense Guidelines for the Average Trader
Look for a reputable broker
* Ability to trade effectively depends on consistent spreads and ample liquidity
* Anyone can establish a position
* Ability to close out a position at a fair market price is more important
Live to trade another day
* Apply prudent money management skills
* Avoid using excessive leverage that puts your investment capital at risk
* Always trade with a stop!
Don�t trade emotionally, stick to your plan and maintain discipline
* Establish a trading plan before initiating a trade
* Set reasonable risk/reward parameters
* Don�t override your stops for emotional reasons
* Don�t react to price action � means don�t buy just because it looks cheap or sell because it looks too high, Have supporting evidence to back up your trade
Don�t punt
* Don't punt ( Punting is trading for trading sake without a view)
Don�t leave stops at obvious levels such as �big figures� (e.g. eur/usd 1.20, usd/jpy 110)
* i.e. JUBBS stops = stops at obvious levels and thus are more likely triggered
Don�t add to a losing position in unless it is part of a strategy to scale into a position
* In other words, don�t double up in the hope of recouping losses unless it is part of a broader trading strategy
Trading with and against the trend
* When trading with a trend, consider the use of trailing stops.
* When trading against the trend, be disciplined taking profits and don�t hold out for the last pip
Treat trading as a continuum
* Don�t base success on one trade
* Avoid emotional highs or lows on individual trades
* Consistency should be an objective
Forex trading is multi-currency
* Watch crosses as they are key influences on spot trading
* Crosses are one currency vs. another, such as eur/jpy (euro vs. jpy) or eur/gbp (eur vs. gbp)
* Crosses can be used as clues for direction for spot currencies even if you are not trading them
Be cognizant of what news is coming out each day so you don�t get blindsided
* Be cognizant of what news is coming out each day so you don�t get blindsided
* Beware of trading just ahead of an economic number and be wary of volatility following key releases
Beware of illiquid markets
* Beware of illiquid markets
* Adjust strategies during holiday or pre-holiday periods to take into account thin liquidity
* Beware of central bank intervention in illiquid markets
GARTMAN'S 20 "NOT-SO-SIMPLE" RULES OF TRADING
Provided by Dennis Gartman, Editor/Publisher of The Gartman Letter
1. Never, ever under any circumstance add to a losing position.... not ever, never!. No more need be said; to do otherwise is illogical and will absolutely lead to ruin... Count on it and count on it again!
2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides immediately when one side has gained the upper hand.
3. Capital comes in two varieties: Mental and Actual. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital .
4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." We can, however, have a modest, reasonable chance at knowing what the trend is and acting upon that trend.
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, however.
6. "Markets can remain illogical longer than we can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish we need to throw our rocks into the wettest paper sacks, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than lesser ones.
8. Try to trade the first day of a gap (either higher or lower), for gaps usually indicate violent new action. We have come to respect "gaps" in our twenty five years of watching markets; however in the world of twenty four hour trading, they are becoming less and less important, especially in forex dealing. None the less, when they happen (especially in stocks) they are usually very important.
9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.
10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but that we understand the market's technicals also. When we do, then and only then can we, or should we, trade.
11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them. Even more respect must be paid to "weekly" and "monthly," reversals. Pay heed!
12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
13. Respect, expect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the retracement.
14. In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.. at least much, if not most, of the time.
15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend
to be working. Henceforth, subsequent additions are to be added on retracements.
16. Bear markets are more violent than are bull markets and so also are their retracements..
17. Be patient with winning trades; be enormously impatient with losing trades.
18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than that we have learned very much indeed.
19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are more often then not to be bought; new lows are to be sold.
20. ALL RULES ARE MEANT TO BE BROKEN: The trick is knowing when... and how infrequently this rule may be invoked.!
Calculating Profit and Loss
For ease of use, most online trading platforms automatically calculate the P&L of a traders' open positions. However, it is useful to understand how this calculation is derived.
To illustrate a typical FX trade, consider the following example:
The current bid/ask price for USD/CHF is 1.6322/1.6327, meaning you can buy $1 US for 1.6327 Swiss Francs or sell $1 US for 1.6322.
Suppose you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF). To execute this strategy, you would buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
So you make the trade: purchasing US$100,000 and selling 163,270 Francs. (Remember, at 1% margin, your initial margin deposit would be $1,000.)
As you expected, USD/CHF rises to 1.6435/40. You can now sell $1 US for 1.6435 Francs or buy $1 US for 1.6440 Francs.
Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.
You sell US$100,000 at the current USD/CHF rate of 1.6435, and receive 164,350 CHF. Since you originally sold (paid) 163,270 CHF, your profit is 1080 CHF.
To calculate your P&L in terms of US dollars, simply divide 1080 by the current USD/CHF rate of 1.6435.
Total profit = US $657.13
Leverage: Trading With Borrowed Funds
Simply put, leverage is the ability to trade with borrowed funds. Leverage is a tool by which traders can determine the level of risk - and thus, the potential reward -- they assume in the market. The more leverage used, the more volatile the trader's percentage return of profit or loss can be.
An example of how leverage used in trading is as follows:
Suppose a trader purchases 1 lot of USD/JPY - a trade that involves the purchase of 100,000 US dollars - at a rate of 116.65. Instead of depositing 100,000 US dollars into his account to place the trade, though, the trader deposits 10,000 US dollars - and uses the leverage afforded by his trading firm to purchase the remainder of the position. Mathematically, a trader's leverage ratio is the value of the position they assume divided by the value of their account balance. In the example above, the position size is $100,000 and the account balance is $10,000 - thus making leverage 10:1 (100,000/10,000).
Now assume the market moves in favor of the trader, and that the rate jumps to 117.65 - 100 pips above his rate of entry. The trader now seeks to exit the trade. At the exchange rate of 117.65, his 100 pips on the USD/JPY are worth approximately $850. On the total $100,000 investment, this amounts to a paltry return of just 0.85%. On a $10,000 investment, though, the return is 8.5% -- an impressive amount for a single trade. Clearly, leverage can be a critical tool in determining the amount of risk traders assume and the ultimate return on investment they receive.
Margin: A "Deposit of Good Faith" in Trading
In most FX trading, clients are not required to pay for the entire value of the lot, or currency, they purchase. Instead, they are only required to pay for a portion; the rest is given to the trader on the basis of good faith. The required amount that is needed to put up is referred to as margin. Often, it is expressed as a percentage; for instance, if a trader purchases 1 lot of USD/CAD - which is the equivalent of 100,000 US dollars - and his FX trading firm requires a deposit of $1,000 per lot, the margin requirement as a percentage is simply 1%, as the dollar value of the margin requirement ($1,000) is 1% of the total value of the position ($100,000).
Margin Call: Protection When Trading With Leverage
A margin call occurs when the trader's account equity - the total value of the account, including balance and open positions - falls below his margin requirement. At this point, dealers may begin to close out positions, thus ensuring that clients can never lose more than they deposit.
account balance + value of open positions < margin requirement = MARGIN CALL
One of the obvious dangers of trading on margin is that should the value of the position fall substantially, the trader's deposit could easily be wiped out. Meanwhile, the position could continue to fall, thus exposing the trader to substantial liability. Such scenarios are common in futures and equities market, and thus margin trading is more dangerous in those arenas.
When clients trade foreign exchange directly with the market maker, the danger of liability beyond what was deposited does not exist. Instead, FX market makers can immediately close out a client's position once the account equity has fallen below the required margin. As a result, FX traders can utilize margin trading with a much higher degree of safety.
Spread: The Fundamental Cost of the Trade
The difference between the price you at buy at (also known as the ask) and the price you sell at (also known as the bid).
In all traded instruments - stocks, bonds, futures, commodities, foreign exchange, etc. - there is what is known as a spread. The spread is the required cost of the trade; it is the cost imposed by the party that actually executes your trade. The more directly you interact with the party that executes your trade, the lower your cost will be.
Unlike more commonly recognized financial service charges, like commissions, the spread is not a fixed dollar cost market participants pay. Instead, a spread requires the creation of two prices by the firm you are trading with: the price you buy at, and the price you sell at. The firm that executes your trade will buy at one price, and sell to you at another price. Thus, if you wanted to buy a position and sell right away, you would have to sell at a lower price, since you have to sell at the sell price (which is lower than the buy price). This essentially creates a scenario in which the price of the product you are speculating on must rise by a certain amount before you can close your position, as the sell price must rise enough so that it is equal to the buy price that you bought at if you wish to at least break even.
Thus if a buyer bought at 50 and wanted to sell right away, he/she would have to sell at 45. In this example, the rate needs to move up 5 pips - meaning the quote would be 55-50 -- before the buyer can break even by selling at the sell rate of 50. Clearly, the spread is the cost of the trade: the rate moved 5 pips, but the client's net P/L at that point was still zero.
Transparent Spread: Knowing the True Cost of the Trade
The ability to sell the buy price (ask) and the sell price (bid) at all times.
Historically speaking, most individual traders have not been able to "see" the spread when they are trading. Instead, they are given only one quote: the price they can buy at, or, if they are selling, the price they can sell at. As a result, the spread has historically been a "hidden" cost, concealed by the firm that executes your trade. Conveniently, this allows the executing firm to widen the spread when necessary, thus effectively increasing the cost of the trade without really notifying the majority of market participants.
With the proliferation of democratizing technology such as the Internet, though, the market has become more transparent: finally, the individual trader can see the spread, and thus will know exactly what the cost of the trade is prior to entering a position.
Quoting Conventions: What the Numbers Mean
Currencies are always quoted in pairs. One unit of the base currency (first currency in the pair) represents the number of units of the second currency of the pair as indicated by the exchange rate.
Example: USD/CHF @ 1.4000. This means 1 US dollar purchases 1.4000 Swiss francs.
Example: USD/JPY @ 120.50. This means that 1 US dollar purchases 120.50 Japanese yen.
In the OTC spot FX market, currencies are always quoted in pairs: for instance, a trader cannot simply trade the US dollar (USD); instead, he/she must trade the US dollar against another pair, such as the Japanese yen (JPY) or Swiss franc (USD/CHF). The spot FX market involves speculation upon the exchange rate between two currencies, and hence the two currencies whose exchange rate is being speculated upon must be identified via the quoting conventions.
Suppose a trader purchase 1 lot of EUR/USD at a rate of 1.0795. What does this mean? The quoting convention in the OTC spot FX market essentially means that 1 unit of the base currency (first currency in the pair) purchases the number of units measured by the exchange rate of the counter currency (second currency in the pair). So, in the aforementioned example, 1 euro purchases 1.0795 US dollars.
From a speculation viewpoint, it is beneficial to think from the perspective of the first currency in the pair (the base currency). If you believe the base currency will rise in value, then you would buy the pair; alternatively, if you believe the base currency will fall in value, then you would sell the pair and profit as the exchange rate moved down.
Understanding Forex Quotes
Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
Fibonacci Secrets:
http://www.theforexclub.us/Website%20books/Fibonacci%20Secrets.pdf
Example::
Discount rate
http://en.wikipedia.org/wiki/Discount_rate
Baltic Dry Index :
is a good gauge of global growth sentiment and expected commodity demand.
http://investmenttools.com/futures/bdi_baltic_dry_index.htm
A Measure of Inflation:
When the price of goods and services rise it is called inflation. Certain levels of inflation in the economy is considered normal and healthy. In contrast, accelerating inflation can cause severe problems, sometimes sparking recession. The Consumer Price Index and the Producer Price Index (PPI) are touted as timely and detailed inflation indicators. The Bureau of Labor Statistics (BLS) calculates and reports on the CPI and the PPI. These reports are released around the middle of the month following the record month, and the PPI is usually at least one business day before the CPI. These reports are published at 8:30 am ET and can be found on the BLS website.
Not Generally Considered Leading Indicators:
The CPI tracks the change in price at the consumer level of a weighted basket of a few hundred goods and services. The PPI, also referred to as the wholesale price index, tracks changes in the selling prices of some 3,450 items at various stages of manufacture.
The PPI and CPI indices aren’t generally considered leading indicators. Changes in the price levels do tell a great deal about the microeconomic conditions of individual commodities or industries, however experts warn not to read too much into a single month’s activity.
[Suppressed Sound Link]
The Yen's Presence Globally
[This Paragraph is KEY to Understanding this course]
The Japanese economy is one of the strongest in the world, with a GDP (Gross Domestic Product) ranking among the top 3 – 4 globally. Their currency, the Yen, is the primary Asian representative in the off exchange retail foreign currency market.
The Bank of Japan is the stabilizing force behind the Yen and is central to Japan’s financial infrastructure. Some of the relevant economic indicators to the Yen are released directly through the Bank of Japan, while others may be released from private data analysis firms. Each of the economic indicators listed and described below have the potential to affect the price and stability of the Yen upon their release. There are other indicators that are directly relevant to the Yen, but that have been excluded because their impact on the price of the Yen is generally very insignificant.
[This Paragraph is KEY to Understanding this course]
The economic indicators outlined below can potentially move the price of any currency pair the Yen is involved with. These currency pairs include:
USD/JPY ~ EUR/JPY ~ GBP/JPY ~ CHF/JPY ~ AUD/JPY ~ NZD/JPY
Some of the below reports are commonly released by most economic powers around the globe, others are specific only to Japan. The reports are listed in alphabetical order, for more on the report and its strength ranking take a look at each individual indicator description below. For the date and time of the next release for each report please browse our current economic calendar.
Reports Listed in Alphabetical Order
(+) Bank of Japan Outlook Report
The BOJ (Bank of Japan) publishes a semi-annual report in April and October that outlines the Bank’s stance and feelings on economic issues. The report includes an overall gauge of the economy, a look at inflation (which ultimately relates to interest rates), and a detailed look at economic policy. Because the report is semi-annual its outline projections are for the coming six months.
(+) Core CPI
CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. Core CPI as released by the Japanese government excludes fresh food items from collected data, as they are considered more volatile and can thus skew overall inflation trends. With the exclusion of volatile food items, Core CPI is considered a more reliable calculation of CPI. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.
(+) Core Machinery Orders
Core Machinery Orders is a measurement of the sum value of new orders for machinery related products placed with machine manufacturers. An increased trend seen in this indicator is a sign of a strengthening economy and thus a strengthening currency. An increase in orders placed from manufacturers implies that the manufacturing industry is poised for expansion.
(+) GDP y/y
Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.
(+) GDP Deflator q/q
Aside from basic GDP (Gross Domestic Product) figures some governments also releases GDP deflators. The GDP Deflator report publishes the difference between nominal and actual GDP. The report takes a measurement of annualized quarterly inflation rates as applicable to all economic activity.
(+) Industrial Production
Industrial production is a measurement of the cumulative dollar amount of product produced by factories and other industrial production facilities. Increased levels of production would of course signify a strengthening economy, thus an increased trend seen in this indicator should positively affect the position of a nation’s currency. Industrial production is closely tied with personal income, manufacturing employment and average earnings in that its quick reaction to the business cycle often allows for a preemptive leading look into these indicators.
(+) Interest Rate Statement
Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The Bank of Japan’s (BOJ) Monetary Policy Committee publishes its interest rate statement monthly. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “overnight call rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.
(+) Manufacturing PMI
PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.
(+) Monetary Base
This indicator is a measurement in changes seen annually to Japan’s total currency in circulation. This would include current account balances and of course banknotes and coins. Essentially the report exposes the total amount of additional currency being issued by the Bank of Japan each year. When the monetary base increases in the course of a year, or over the course of a few years, the result is usually a higher rate of inflation for the Yen.
(+) Overall Household Spending
Overall household spending measures the total amount of consumer expenditures on household goods and services. Rising trends seen in this indicator tend to strengthen the position of a nation’s currency. Quite obviously, an increase in consumer spending will positively impact an economy. Important to note is the correlation between consumer spending and GDP (Gross Domestic Product), namely that consumer spending accounts for approximately half of GDP, which of course is considered a very key economic indicator.
(+) Retail Sales
Retail Sales is a measurement of the total value of retail sales in a given period. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP. Rising trends seen within this indicator should positively affect the standing of a nation’s currency.
(+) Tertiary Industry Activity Index
The British Pound's Presence Globally
[This Paragraph is KEY to Understanding this course]
The British Pound is third only to the US and the Euro in terms of the currency reserves held in GBP around the globe, of course making its global standing very influential. The Bank of England has been operating since the late 1600s, but wasn’t nationalized until the mid 1900s. The Bank of England is responsible for determining England’s monetary policy, which among other obvious responsibilities of a central bank is key to the positioning of the Pound on a global level. Various economic and political factors combine to drive the ever-changing value of the GBP, but key to traders are the many economic indicators pertinent to the British economy. Some of the relevant economic indicators to the GBP are released directly through the Bank of England, while others may be released from private data analysis firms.
Each of the economic indicators listed and described below have the potential to affect the price and stability of the GBP upon their release. There are other indicators that are directly relevant to the GBP, but that have been excluded because their impact on the price of the GBP is generally very insignificant.
[This Paragraph is KEY to Understanding this course]
The economic indicators outlined below can potentially move the price of any currency pair the GBP is involved with. These currency pairs include:
GBP/USD ~ EUR/GBP ~ GBP/JPY ~ GBP/CHF
Some of the below reports are commonly released by most economic powers around the globe, others are specific only to the British Economy. The reports are listed in alphabetical order, for more on the report and its strength ranking take a look at each individual indicator description below. For the date and time of the next release for each report please browse our current economic calendar.
Reports Listed in Alphabetical Order
(+) Average Earnings Index + Bonus q/y
AEI (Average Earnings Index) is a measurement of averages wages + bonuses paid to employees on a quarterly basis. The indicator compares the results of a new quarter not to that of the most recent quarter, but rather to that same quarter the year prior.
(+) BOE Inflation Rate
The Bank of England publishes an Inflation Rate Statement each quarter. The purpose of the statement and data included therein is to outline the various methods of economic analysis that will be used by the bank’s Monetary Policy Committee to later determine potential changes to interest rates. The publication will also include projections for the coming two years and potential inflation rates.
(+) BOE Meeting Minutes
BOE Meeting Minutes is an exact transcript of the Bank of England’s meeting, usually held about two weeks prior. The transcript offers a record of official voting as it pertains to changes in interest rates and other fiscal policy. Though very straightforward in its content, this report is considered one of key importance to the British economy and the strength of the Pound.
(+) BRC Retail Sales Monitor y/y
BRC stands for British Retail Consortium. In conducting the Retail Sales Monitor the BRC surveys retailers in an effort to gauge sales increases or decreases seen over the previous year. Retailers that have been open for less than are of course excluded from the survey. This indictor examines annual trends seen in retail sales.
(+) CBI Distributive Traders Expected q/q
CBI stands for the Confederation of British Industry. In this indicator executives are surveyed on expected sales numbers for the coming year. As is the case with most economic indicators, specifically those that are considered leading indicators, expectations are often everything. Though simply stated, a positive trend seen in this indicator should positively affect the nation’s economy; high expectations for the coming year may have positive short term implications for the economy, but if sales numbers in fact do not increase and thus expectations are not met, overzealous numbers seen in this indicator could potentially damage the economy.
(+) CBI Distributive Trades Realized
CBI stands for the Confederation of British Industry. In this indicator executives are surveyed on the sales numbers of their firms. More specifically, they are asked whether their firm saw an increase or a decrease in sales in comparison to the previous year. The collected data of this indicator gives traders a look at the economy in relation to the retail sector. An increasing trend would of course positively affect an economy, as Retail Sales account for a large portion of consumer spending; and consumer spending is a very key source of economic strength, or if consumer spending is low, economic instability.
(+) Claimant Count Change
This indicator is a measurement of the number of people within the British economy claiming unemployment related benefits (data is for the month prior). A drive down in the trends of this indicator would of course positively impact the position of the nation’s currency. This is because of the simple fact that those who are employed tend to spend more than those who are not. Low unemployment rates translate to increased levels of consumer spending, which of course accounts for a large portion of many other economic indicators.
(+) Core CPI y/y
CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. Core CPI as released by the British government excludes energy, food, tobacco and alcohol items from collected data, as they are considered more volatile and can thus skew overall inflation trends. With the exclusion of volatile food and energy items, Core CPI shows a smoother trend than does normal CPI. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.
(+) CPI y/y
CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.
(+) GDP q/q
Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.
(+) Industrial Production
Industrial production is a measurement of the cumulative dollar amount of product produced by factories and other industrial production facilities. Increased levels of production would of course signify a strengthening economy, thus an increased trend seen in this indicator should positively affect the position of a nation’s currency. Industrial production is closely tied with personal income, manufacturing employment and average earnings in that its quick reaction to the business cycle often allows for a preemptive leading look into these indicators.
(+) Interest Rate Statement
The Monetary Policy Committee of the Bank of England (BOE) publishes an Interest Rate Statement every month. Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “bank rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.
(+) Manufacturing PMI
PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.
(+) Manufacturing Production
This indicator is a measurement of the total value of output (produced materials) by manufacturers within the sub-sector of production. It is important to note that while this indicator is very similar to Industrial Production, it differs slightly because it is specific to only manufacturing industries, which by most estimates account for approximately 80% of total Industrial Production.
(+) MPC Treasury Committee Hearings
The Monetary Policy Committee (MPC) of the Bank of England (BOE), along with Governor Mervyn King, will speak on the standing of the British economic picture. The testimony is given before Parliament’s Treasury committee.
(+) Nationwide House Prices m/m
The Nationwide House Prices report in the UK acts as a preemptive inflation indicator within the housing market. The report includes data collected on any monthly changes of average sale prices for houses in the UK.
(+) PPI Input m/m
PPI stands for Producer Price Index, a fundamental indicator that establishes the rate of inflation, or in other words, the rate of price changes as seen by manufacturers who must purchase goods and services. As PPI relates to the GBP it is broken into two separate economic indicators; PPI Input (measure of goods and services bought) and PPI Output (measure of goods and services sold). Of the two, PPI Input is generally more closely watched by traders. The Producer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in PPI will positively impact a nation’s currency. Logically enough, when manufacturers are forced to pay higher prices for the goods and services they need, these higher prices are then soon seen by the consumer. As such, the PPI is considered an indication of consumer inflation. The potential impact of PPI in the market is well respected by traders, though it is generally not thought to have as large of an impact as does its closely related cousin; Consumer Price Index (CPI), which is usually released shortly after PPI.
(+) Public Sector Net Borrowing
Public Sector Net Borrowing as its name suggests measures borrowing in the public sector, including government corporations. Increased trends seen in the amount of borrowing are said to imply economic expansion (investment flows), thus a positive or rising trend seen in this indicator should positively affect a nation’s economy and their currency.
(+) Retail Sales m/m
Retail Sales is a measurement of the total value of retail sales in a given period. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP. Rising trends seen within this indicator should positively affect the standing of a nation’s currency.
(+) RICS House Price Balance
RICS stands for the Royal Institute of Chartered Surveyors; their House Price Balance indicator is a measurement of price increases or decreases seen within the housing market in the UK. The information used to report this indicator is gathered through the means of survey; chartered surveyors report on price changes seen in their area. The percentage reading of the indicator would indicate that more surveyors saw an increase in price. 25%, for example, would indicate that 25% more surveyors saw an increase in price than did those who reported declining prices.
(+) Rightmove House Price Index m/m
This indicator may be noteworthy simply because it is reported in the same month that figures are gathered. This is important when considering that most fundamental indicators released concerning the housing market are lagging indicators. Rightmove is a leading property website in the UK; their publication of same month housing data, specifically changes seen in the average asking price of residential properties, leads well into potential inflation that might be seen soon thereafter in the housing sector.
(+) RPI y/y
RPI – Retail Price Index is much like CPI in that it measures inflation rates as seen by consumers. However, RPI differentiates itself in the sense that it looks only at goods and services bought for the purpose of household consumption.
(+) Services PMI q/q
Measuring essentially the same information as normal PMI, the Services PMI simply focuses on the services sector. PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.
(+) Trade Balance
Major US - Indicators List
Index of Leading Economic Indicators
Compiled by the Conference Board and published in its monthly Business Cycle Indicators report. Released to public at 10:00 am ET four to five weeks after the end of the record month. www.conference-board.org has historical data and explanations of the methodology behind the indices.
Because the indices’ components are all released earlier than the indices themselves, the markets generally don’t react strongly to the indicator report.
Coincident Index
4 Components
(1) Nonfarm Payrolls: obtained from a survey of about 160,000 businesses, conducted by the Bureau of Labor Statistics.
(2) Personal Income Less Transfer Payments: Derived from the Personal Income and Outlays report, produced by the Bureau of Economic Analysis (BEA). The largest source is wages and salaries, transfer payments – government disbursements and food stamps.
(3) Total Industrial Production Index: published by the Federal Reserve and constructed of 295 components that are weighted according to the value they add during the production process.
(4) Manufacturing & Retail Trade Sales: Collected as part of the National Income and Product Accounts calculations. Found in the Manufacturing and Trade Inventories and Sales (MTIS) report published by the Department of Commerce.
Leading Economic Index
10 Components
(1) Average weekly hours worked in manufacturing
(2) Average weekly initial claims for unemployment insurance
(3) Manufacturers’ new orders for consumer goods and materials
(4) Slower deliveries diffusion index of vendor performance
(5) Manufacturers’ new orders for nondefense capital goods
(6) Monthly building permits for new private housing
(7) Stock prices, 500 common stocks
(8) The M2 money supply (in 1996 dollars)
(9) The interest rate spread between the 10-year Treasury bond and the federal funds rate
(10) The Index of Consumer Expectations
The individual indicators composing the Leading Economic Index differ considerably in their abilities to predict economic turning points. Some are very far seeing, others relatively near sighted. The composite index combines in such a way that the whole is designed to outperform any of its parts.
Laggin Economic Index
7 components
(1) Average duration of unemployment
(2) Ratio of manufacturing and trade inventories to sales
(3) Manufacturing labor cost per unit of output
(4) Average prime rate
(5) Commercial and industrial loans outstanding
(6) Ratio of consumer installment credit to personal income
(7) Change in the consumer price index for services
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The Lagging Economic Index follows downturns in the business cycles by about three months and expansions by about fifteen. This index was designed to confirm turning points in economic activity that were identified by the leading and coincident indices have actually occurred, thus preventing the transmission of false signals.
Major US - Gross Domestic Product
Combination of Economics & Accounting
DGP is the broadest, most comprehensive barometer of a country's overall economic condition. Sum of all the market values of all final goods and services produced in a country (domestically) during a specific period using that country's resources, regardless of the ownership of the resources.
[This Paragraph is KEY to Understanding this course]
GDP is calculated and reported on a quarterly basis as part of the National Income and Product Accounts (NIPAs). NIPAs were developed and are maintained today by the Commerce Department’s Bureau of Economic Analysis (BEA). NIPAs are the most comprehensive set of data available regarding US national output, production, and the distribution of income. Each GDP report contains data on the following:
- personal income & consumption expenditures
- corporate profits
- national income
- inflation
To calculate GDP, the BEA uses the aggregate expenditure equation:
GDP=C+I+G+(X-M)
C - is personal consumption expenditures
I - is gross private domestic investment
G - is government consumption expenditures & gross investment
X-M - is the net export value of goods and services (exports - imports
C (Personal Consumption Expenditures)
The total market value of household purchases during the accounting term, including items such as beer, telephone service, golf clubs, CDs, gasoline, musical instruments and taxicab rides.
These fall into 3 categories; durable goods, nondurable goods, and services.
- Durable goods have shelf lives of three or more years
- Non durable goods are food, clothing, energy products, and items like tobacco, cosmetics, prescription drugs, and magazines.
I (Gross Private Domestic Investment)
Spending by businesses, expenditures on residential housing and apartments, and inventories. Inventories are valued by the BEA at the prevailing market price.
G (Government Consumption Expenditures & Gross Investment)
All money laid out by federal, state and local governments for goods and services.
X-M (Net Exports of Goods & Services)
The difference between the dollar value of the goods and services sent abroad and those it takes in across its borders.
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The GDP report is a mother lode of information about a nations economy. The GDP is released on a quarterly basis. One commonly used strategy is calculating the output gap of the GDP. The output gap is the difference between the economy’s actual and potential levels of production. This difference yields insight into important economic conditions, such as employment and inflation.
The economy's potential output is the amount of goods and services it would produce if it utilized all its resources. Economists estimate the rate at which the economy can expand without sparking a rise in inflation. It is not an easy calculation, and it yields as many different answers as the economists who calculate it. Luckily, a widely accepted estimate of potential output is reported relatively frequently by the Congressional Budget Office (www.cbo.gov). This website has information about methodology, underlying assumptions in computing the trend level as well as a detailed historical data.
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Why Study by Currency or Region?
In continuing your journey through the world of fundamental analysis, consider the approach taken when outlining the entire fundamental analysis section of this university; a strong emphasis on the US economy followed by a very close look at the following currencies – and the countries that impact their place in the market:
GBP – Great Britain Pound
JPY - Japanese Yen
EUR - European Dollar
CHF - Swiss Franc
NZD - New Zealand Dollar
AUD - Australian Dollar
CAD - Canadian Dollar
The key to understanding global economics can perhaps be found within the core economic indicators that drive market sentiment. Often, these indicators are not exclusive to the US economy. Many economic indicators are used by multiple countries, while others are specific only to certain economies. Most currency traders are aware of indicators key to the US, but even more traders probably haven’t the slightest clue or education concerning economic indicators specific to other economies. Such a view of fundamental analysis is tunnel vision at best.
A Global Economic Game Plan
The truth of the matter is that without a game plan attempting to master global economics would exhaust the most brilliant of minds. So, instead, look at it in the following manner: Every currency that you trade is paired with another currency for the purpose of establishing a comparative value. Consider it a battle of economies if you like, but however you choose to look at it, the point is that if trading the GBP/USD you had better know about not only the economic indicators that move the Dollar, but also of the key indicators that move the Pound. The dollar might be gathering strength across the board, but perhaps the Brits just released a Trade Balance report showing an increase in exports. As most economists know, increased exports tend to precede an increased demand for a nation’s currency.
The following is an excerpt from ‘FA1036 – Economics of the GBP’:
An increased number of exports translate to an increase in the demand for said nation’s currency, as other countries will be forced to exchange currency in order to purchase the exports. GDP (Gross Domestic Product) is also largely impacted by the trade balance, as an increase in the demand for exports will increase the work load of domestic factories, thus increasing employment levels.
The point is to have an eye on both of the economies, or currencies, that you are dealing in. A trader looking at only the economic indicators pertinent to the USD might have assumed that the Dollar would strengthen versus the Pound, as in our example it had been strengthening versus other currencies. But, given the announcement of increased exports in Britain, the dollar may in fact weaken versus the Pound simply as a result of the Pound’s reaction to the GBP Trade Balance report. Had a trader been focused solely on the US economy, and solely on US economic indicators, this key fact would have been overlooked.
Continuing Your Fundamental Analysis Education
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As the Fundamental Analysis section of the university continues you will notice heavy emphasis is placed on the US economy. This is not an issue of pride, but rather is the case because of the position of the US economy globally; few can argue its place as an economic world super-power. Also, note that the Dollar is either the Base or the Cross currency in 7 major pairs:
USD/CHF ~ USD/JPY ~ EUR/USD ~ GBP/USD ~ USD/CAD ~ AUD/USD ~ NZD/USD
However, one should of course never focus on just the US economy. After a very close look at the USD the rest of fundamental analysis section of the university dissects (one course at a time) the economies that drive the currencies already listed above (GBP, JPY, EUR, CHF, NZD, AUD, CAD). Each currency has a very unique place in the global market, and moreover, each currency is impacted by various economic indicators. In the case of the EUR, many countries can potentially impact the standing of the EUR, meaning that traders should be aware of the economic indicators released by each of these nations.
Taken from ‘FA1038 – Economics of the EUR’ consider the below:
Listed in alphabetical order the Euro is the official currency of the following countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain – these countries comprise what is known as the Eurozone. The economic standing of any of the aforementioned countries can potentially impact the stability and price direction of the Euro.
Don't Forget:
Traders need to be aware of major economic indicators around the entire globe… no other approach to fundamental analysis is completely sound. That said; push forward with your study of fundamental analysis; begin with the US economy, and then take a look at economics of each currency or region as they are outlined in this university!
Good E-book.
Trading in the Zone.
Trading in the Zone is an in-depth look at the challenges that we face when we take up the challenge of
trading. To the novice, the only challenge appears to be to find a way to make money. Once the novice
learns that tips, brokers' advice, and other ways to justify buying or selling do not work consistently, he
discovers that he either needs to develop a reliable trading strategy or purchase one. After that, trading
should be easy, right? All you have to do is follow the rules, and the money will fall into your lap.
At this point, if not before, novices discover that trading can turn into one of the most frustrating
experiences they will ever face.
This experience leads to the oft-started statistic that 95 percent of futures traders lose all of their money
within the first year of trading. Stock traders generally experience the same results, which is why
pundits always point to the fact that most stock traders fail to outperform a simple buy and hold
investment scenario.
So, why do people, the majority of whom are extremely successful in other occupations, fail so
miserably as traders? Are successful traders born and not made? Mark Douglas says no. What's
necessary, he says, is that the individual acquire the trader's mindset. It sounds easy, but the fact is, this
mindset is very foreign when compared with the way our life experiences teach us to think about the
world.
That 95-percent failure rate makes sense when you consider how most of us experience life, using
skills learned as we grow. When it comes to trading, however, it turns out that the skills we learn to
earn high marks in school, advance our careers, and create relationships with other people, the skills we
are taught that should carry us through life, turn out to be inappropriate for trading. Traders, we find
out, must learn to think in terms of probabilities and to surrender all of the skills we have acquired to
achieve in virtually every other aspect of our lives. In Trading in the Zone, Mark Douglas teaches us
how. He has put together a very valuable book. His sources are his own personal experiences as a
trader, a traders coach in Chicago, author, and lecturer in his field of trading psychology.
My recommendation? Enjoy Douglas's Trading in the Zone and, in doing so, develop a trader's
mindset.
http://www.theforexclub.us/Website%20books/Mark_Douglas_-_Trading_in_the_Zone__complete_and_formatted_.pdf
Understanding Fundamental Analysis
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Fundamental analysis is the study of the core underlying elements that influence the economy of a particular currency. This method of study attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors. Imagine financial markets as a large clock, the gears inside this clock that move the hands, or drive the clock would be these "fundamentals". Although you can look at the clock and know what time it is, only by looking at the fundamentals can you truly understand how it became the time it is now. By knowing this, you might better understand the movement of time and be better able to predict what time it will be in the future. As a Forex investor you can better understand why the market is where it is today and where it might be tomorrow (or at a future point) based on studying these fundamentals.
Keep in mind that Fundamental analysis is a very effective resource to forecast economic conditions, but not exact currency prices. For example, you might get a clear understanding of the health of the US economy by studying an economist's forecast of an upcoming Employment Cost Index (ECI), but how does that translate into entry and exit points? You need to develop a method that you use to decipher this raw data into usable entry and exit points based on your personal unique trading strategy. These methods are known as forecasting models. Forecasting models are like fingerprints - unique to every trader. Every trader may look at the exact same data, yet conclude completely different scenarios on how the market will react. It is important to analyze the fundamentals and apply your findings to your model.
Fundamentals for each currency might include, but not limited to; interest rates, central bank policy, political figures/events, unemployment/employment reports, and Gross Domestic Product (GDP). These economic indicators are snippets of financial and economic data published by various agencies of the government or private sectors for each country. These statistics, which are made public on a regularly scheduled basis, help market observers monitor the pulse of the economy. Therefore, almost everyone in the financial markets religiously follows them.
With so many people poised to react to the same information, economic indicators in general have tremendous potential to generate volume and to move prices in the markets. While on the surface it might seem that an advanced degree in economics would come in handy to analyze and then trade on the glut of information contained in these economic indicators, a few simple guidelines are all that is necessary to track, organize and make trading decisions based on the data.
The Business Cycle
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Economic indicators are classified according to how they related to the business cycle. An economic indicator will do one of the following:
- Reflect the current state of the economy as coincident
- Predict future conditions are leading
- Confirm a turning occurred and conditions are lagging
The organization responsible for an indicator generally distributes its reports about an hour before the official release time to the financial news outlets (Reuters, CNBC, Dow Jones Newswires, Bloomberg).
The reporters, who are literally locked in a room and not permitted to have contact with anyone outside, ask questions of the agency officials and prepare headlines and analyses of the report contents. These stories are embargoed until the official release, at which time they are transmitted over the newswires to be dissected by the Wall Street community. Most Wall Street firms employ economists to provide live broadcasts of the numbers as they run across the newswires, together with interpretation and commentary regarding likely market reaction. This is known as the hoot and "holler" or tape reading. The more an indicator deviates from Street expectations, the greater its effect on the financial markets.
absolutely..
and who-ever says they didn't ,they are lairs,and don't trust a word they tell you..
its all part of paying your dues..
:)
have you ever had a margin call?
their site looks very good
Alot of traders like Oanda
its a safer way to go in the begging..the highest margin allowed is 50/1.
I like fxcm because I like to trade abit riskier with 200/1
and its quicker to add money to your account if need be.
thanks a lot, I'll look into it
I updated it to audio..
sit back and listen now..
:)
can you give us a link, TIA
thanks a lot, it's still fuzzy but I will re-read until it makes sense. I'll get it though.
I trade with FXCM with a 200/1 leverage..
I like it.
Understanding Contract Sizes
Understanding contract sizes (lots) is a necessary precursor to understanding the need for high leverage in the Forex market. Each standard lot traded in the Forex market is a $100,000 contract. In other words, when trading one lot in a standard account, a trader is essentially placing a $100,000 trade in the market. Without leverage, most investors would not be able to afford such a transaction. Leverage of 100 – 1 would allow a trader to place the same one lot ($100,000) trade with the post of $1,000 in margin. $100,000 divided by 100 equals $1,000, thus 100 – 1 leverage means that $1,000 of margin is able to control a $100,000 position.
Many retail Forex traders today begin their trading in a Mini account. Because standard contracts in the Forex market are rather large, even with 100 – 1 leverage, $1,000 of margin per contract traded is still a bit expensive for some investors. For this reason most retail brokers offer the option of a mini account.
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Mini accounts are essentially 10% the value of standard accounts, meaning that mini contracts are $10,000. A trade of one mini lot would be a $10,000 trade, whereas a standard lot is of course a $100,000 trade. It is not unusual for brokers to offer higher leverage in mini accounts, 200 – 1 is very common. Trading with 200 – 1 leverage would mean that $50 of margin would control a $10,000 contract.
Calculating Margin
Margin is calculated 2 ways: Used Margin and Free Margin. Used margin is the amount of money used to hold open positions. Free margin is the amount of funds available to place additional positions. ( view figure 1 )
As seen in figure 1, $250 is used to hold their current positions, totaling 5 mini lots. $4,736.00 is available for the trader to open additional positions.
Calculating a Margin Call
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Because institutions are loaning 99% of the value of a contract to a trader, fail-safes have been put in place to help prevent a trader from going into the negative and owing the institution additional funds. This is commonly referred to as a Margin Call, where typically a client is called upon to send additional funds or the position(s) will be closed at market price. At 50% margin level the trader will be subject to a margin call, the automatic close of open positions so as to bring the margin level back to a suitable percentage.
The margin level is calculated by dividing the current equity in an account by the current amount of margin in use (used margin). ( view figure 2 ) After dividing the equity by the margin move the decimal two places to the right. A trader whose equity is at $1,000 and who is using a $500 of margin would divide 1,000 by 500 which of course equals 2. Then move the decimal two places to the right; this trader’s current margin level or percentage is thus 200%. At 100% margin level a trader is essentially using their entire available margin. When this level drops to 50% trades will automatically be closed to help ensure that a trader is not subject to losing more money than is held in their account.
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How is money used here meaning in pennies you want to trade $1000 for a stock at say .0023. The equation is $1000/.0023 and you get 434782 shares.
are units calculated as say $1000/ say Japan 160 or 1/160=.000625 so $1000/.000625 1.6 million units. probaly not but I am having problems figuring it out and can't really find anything on the net on it.
TIA
MACD (Moving Average Convergence / Divergence)
After delving into the world of moving averages there is no better place to go next than into the world of MACD. Why? Simple, the MACD is comprised of two moving averages. Some traders argue that there is no better technical indicator than that of the MACD, more often than not, this author tends to agree. The theory behind MACD is really the same theory behind trading any other form of a moving average cross. Generally a technical analyst can learn more from the interaction of two moving averages than he or she can learn from a single moving average in and of itself.
The MACD uses two exponential moving averages, more specifically a 12 day EMA and a 26 day EMA. The 12 day EMA is of course going to react to the market more quickly than will the 26 day EMA. When prices in the market begin to rise or trend upwards the 12 EMA will of course increase faster than will the 26 day. Visually this results in a MACD that is slanted upwards. Conversely when prices fall or trend downwards the opposite will occur and the 12 day EMA will decrease faster than will the 26 day, creating an obvious visual slant downwards. The MACD does oscillate at what would be considered a zero line. In other words, the MACD is either above or below the level that can be considered the third part of the equation. Some analysts refer to this line as the signal line, or the trigger line. Essentially this line is usually a 9 day exponential moving average of the actual MACD itself.
Whether you are a mathematician or not is hardly the point. One need not really understand the complexities of the calculations within a MACD, but rather it is only crucial to understand the basics of the math and what the MACD is trying to tell us as technical traders. For that reason, we will not further dissect the math. Instead, let us get to the point; how does a MACD forecast successful trades?
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As is the case with trading moving average crosses, buy and sell signals derived from a MACD will come from the crossing of two lines. However, these two lines are not your two EMA lines, rather one is the combined level of the two EMA lines and the second is the signal, or trigger line (the 9 day exponential moving average of the actual MACD itself). The MACD crossing the signal line from above would indicate a buy order and conversely the MACD crossing the signal line from above would indicate a sell order. ( view figure 1 )
MACD as a Histogram
The lines plotted on the bottom of the MACD are trying to tell a story as well, and traders had better listen up! Moving Average Convergence Divergence was not randomly chosen as this indicator’s name. Through the histogram we can visually gauge convergence (moving average lines of MACD moving towards one another) and divergence (moving average lines of MACD moving away from one another). ( view figure 2 )
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Notice – as the moving average lines cross the histogram will show no lines whatsoever, indicating to traders that lines (prices) should now start in a new direction. ( view figure 3 ) Very rarely does the histogram reach the point of a cross (two lines crossing and no line plotted on the histogram) and then plot lines in the same direction as the previous section of the histogram. In other words, if there is a legitimate cross, the histogram should begin indicating a new price direction.
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Consider the following strategy: watch the histogram for points where no lines or very small lines are drawn (indicating a cross), then look for strong lines up or down from that point. If after a cross, the histogram begins to plot lines at a sharp angle up or down, such should be considered an indication of a strong directional change in the market. ( view figure 4 ) If the MACD crosses, but the histogram plots a series of lines at a weak angle, perhaps the market it momentarily retracing, but overall trends may not be changing. ( view figure 5 )
Now take a look at the complete picture, figure 6 ( view figure 6 ) shows an example of two trades that should have been avoided on the MACD and one opportunity that shouldn’t have been overlooked. The first directional change is weak, lines essentially move sideways. The second directional change is strong, prices dive immediately and just three lines into the histogram a trader wise enough to short the market still has 70 pips left in this downward move. The third directional change is again weak, and is nothing more than a retracement… and indication to the trader that shorted the second move that he or she might want to secure profits… but not enter a new trade.
The concept of support and resistance
in the charts is basic to the understanding of price patterns and their implications.
Edwards & Magee defined support as the “buying, actual or potential, sufficient in volume to halt a downtrend in prices for an Appreciable period.” Resistance, of course, is the antithesis of this and consists of selling, actual or potential, in sufficient volume to keep prices from rising for a time. “Support and resistance, as thus defined, are nearly but not quite synonymous with demand and supply, respectively."
Further expounding this concept, Edwards & Magee tell us:
“A support level is a price level at which sufficient demand for a stock appears to hold a downtrend temporarily at least, and possibly reverse it. i.e., start prices moving up again. A resistance zone by the same token, is a price level at which sufficient supply of stock is forthcoming to stop, and possibly turn back, its uptrend. There is, theoretically, a certain amount of supply and a certain amount of demand at any given price level... But a support range represents a concentration of demand, and a resistance range represents a concentration of supply.”
Support and resistance – in their basic forms – are represented on the charts as follows:
In a trending market, especially one in which prices travel within the confines of a clearly defined channel, the support and resistance lines will tend to keep prices within the channel, bouncing from support to resistance in an alternating “zigzag” pattern.
Support and resistance are more than just an upward trending or downward trending channel lines. They may be encountered from a variety of chart patterns and other places of price congestion on the charts.
One rule of thumb for determining where a market or security will meet with either support or resistance on the charts is to find previous chart areas where consolidation has occurred. If, for example, a particular stock has stalled out in a net sideways or other congestion pattern at a certain level in the recent past before falling to a lower level, it is all but likely that the stock will encounter difficulty in penetrating that same level later on as it rallies and tries to overcome it. This, of course, does not necessarily mean the former area of consolidation (in this case, resistance) will prove impenetrable; to the contrary, it will probably be overcome eventually. But not without considerable effort on behalf of the buyers. The greater the congestion, the greater the effort required to overcome that congestion, whether it is in the form of support or resistance. Thus support and resistance serve as checks in the development of a trend (be it a rising or a falling trend) to keep the trend from moving too far, too fast and thus getting out of hand and eliciting violent reactions. (This does not apply, of course, in market crashes or “buying panics,” in which case support and resistance levels become meaningless. But such instances are fortunately quite rare.
This leads us to the next related principle of support and resistance which Edwards & Magee elucidate for us:
“…here is the interesting and the important fact which, curiously enough, many casual chart observers appear never to grasp: These critical price levels constantly switch their roles from support to resistance and from resistance to support. A former top, once it has been surpassed, becomes a bottom zone in a subsequent downtrend; and an old bottom, once it has been penetrated, becomes a top zone in a later advancing phase.”
Thus, if a certain security breaks through an overhead resistance level at, say $50, then the moment prices are above the$50 level, it automatically becomes a support. Conversely, if the $50 in our hypothetical security had been a support checking prices from moving below it and the $50 level is suddenly penetrated then $50 automatically becomes resistance. This principle, which we call the “principle of interchangeability", hold true for older levels of support and resistance as well, not just recent levels.
Other instances of support and resistance can be found not only in areas of chart congestion but in geometric chart patterns as well. The symmetrical triangle affords just such an example. Throughout the formation of the triangle, the upper and lower boundary lines serve as resistance and support, respectively. However, an even stronger level of support level of support and resistance (depending on which direction prices take upon breaking out from the triangle) is provided by the apex of the triangle. By drawing a horizontal line from the apex and extending it across the chart an analyst will be provided with a reliable support/resistance level. However, such levels usually become weak as time passes. Thus, a chartist will want to regard this as a strong support/resistance only in the days/weeks immediately following a price breakout from the triangle.
Concerning volume, it is sufficient merely to point out that the power of a resistance (or support) range is estimated by using the criterion of volume. In other words, the greater the amount of volume was recorded at the making of a top (resistance) or bottom (support) in a given market or security, the greater the strength of that top or bottom will be and the more effort will be necessary to penetrate it in the future. As Edwards & Magee put it:
“In brief, a single, sharp, high-volume bottom offers somewhat more resistance than a series of bottoms with the same volume spread out in time and with intervening rallies.”
Another criterion Edward & Magee discuss that is worth noting here is the extent of the subsequent decline from a resistance zone. Or, to phrase it differently, how far will prices have to climb before they encounter the old bottom zone whose resistance potential the analyst attempt to appraise? “Generally speaking,” Edwards & Magee write, “the greater the distance, the greater the resistance.”
In other words, the higher that prices must travel before breaking the previous top, the stronger the resistance that top is likely to hold.
Finally, in answer to the oft-asked question as to what exactly constitutes a legitimate “break” of either support or resistance, we would refer the analyst back to the old Edwards & Magee “three percent rule,” which states that a break above a support or resistance level (or through a corresponding chart pattern) by distance of at least 3 percent, and accompanied by increased trading volume, should be viewed as the start of a new trend and therefore followed.
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Here is my first post here..I wont waste it by saying Hello,or... maybe I will.
but........
I'll also say hello with a little education to start the board off..
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Forex Education Is being created for a place in our Hub for topics on Forex education..
Here we will be posting links ,video's ,audio clips,Pdf's..ect,
To help Forex Traders understand the Forex Market and a place for other forex traders to share and to teach others what they have learned in order to trade the Forex Market with confidence. I personally find myself sharing and teaching other Forex traders what I have learned ,and by doing so ,keeps me refreshed and at the top of my Game.After almost 2 years, I still learn something new everyday about the forex market ,and you will find as you get better and better at Forex trading ,your quest for knowlege never ends.
This board is another extension of the Hub which includes ,
Forex Traders #board-5125
Forex News Traders #board-11629
Forex Technical Review #board-11630
Forex Trading Strategies #board-11628
This Board is open for all interested in the Forex Market..Also feel free to post a topic or a subject you want to know about.We will do our best to answer.
History of Forex
Barter http://en.wikipedia.org/wiki/Barter
Currencies based on Gold
Paper money exchanged for gold (reserves)
“Run on the Bank” http://en.wikipedia.org/wiki/Bank_run
Bretton Woods http://en.wikipedia.org/wiki/Bretton_Woods_system
Created IMF, World Bank, GATT
European Monetary System http://en.wikipedia.org/wiki/European_Monetary_System
Maastricht Treaty http://en.wikipedia.org/wiki/Maastricht_Treaty
SE Asia 1998 Crisis http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis
It used to be that the value of goods and services were expressed in terms of other goods. This was called the barter system. Carrying around goods as a medium of exchange can be a little cumbersome, so some economies began to use specific goods, such as feathers, polished stones, special metals (gold & silver) as a medium of exchange. The first coins were made from gold and silver. During the Middle Ages, economies began to use paper money to exchange value as an I.O.U.
Prior to WWI, central banks supported their currencies through convertibility to gold. Paper money could be converted into gold by request to the bank. Because it was likely that all holders of paper money would request gold at the same time, banks only needed to keep a determined amount on hand to handle normal exchange requests (gold reserves). Therefore, the amount of money outstanding was increasing relative to the amount of actual gold on hand. During times of crisis, when the confidence of the financial system was low, we had such events as a “run on the bank.” That was when a large amount of currency holders requested conversion into gold at the same time, especially if it
was more gold than the bank had on hand. Political instability and inflation were the results of an increased supply of paper money (IOUs), relative to gold reserves. Foreign exchange was affected by such events due to its impact on the economy.
Subsequently, foreign exchange controls were introduced to control the forces of supply and demand’s. In July 1944, towards the end of WWII, the Allied countries (U.S., Great Britain, France) met at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Their intent was to structure a world economic system that would stabilize the volatility in the foreign exchange markets that had occurred previously. The result was the Bretton Woods Accord which determined a system for pegging currencies and created the International Monetary Fund. The Accord fixed the US Dollar at $35 per ounce of gold and fixed other currencies to the dollar.
Subsequently, there were other changes that took place in regards to the Accords. During the 1960s the volatility between different country economies became more extreme, making it difficult for some to maintain the pegging system. Bretton Woods collapsed in August, 1971, when President Nixon suspended the gold convertibility standard. The dollar had lost its attraction as the sole international currency due to the impact of growing trade deficits and government budget deficits.
Since then the foreign exchange market has grown into the world’s largest market. In 1979, the European Economic Community introduced a new system of fixed exchange rate call the European Monetary System. This system almost disintegrated in the early 1990s when a number of European countries were forced to devalue their currencies.
In their continued attempt to stabilize foreign exchange, the European Community signed the Maastricht Treaty. The treaty was designed to fix exchange rates that would eventually evolve into a single European currency, called the Euro. The Euro replaced many of the member currencies in 2002.
The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exchange rates but also actually replace many of them with the Euro in 2002. Today, Europe is currently in the Euros third and final stage, where exchange rates are fixed in the 12 participating Euro countries but still use their existing currencies for commercial transactions. The physical introduction of the Euro will be between January 1, 2002 and July 1, 2002. At that point the old countries currencies will be obsolete. In Asia, the lack of sustainability of fixed foreign exchange rates has gained new relevance with the events in South East Asia in the latter part of 1997,
where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable. While commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The size of the FOREX market now dwarfs any other investment market. It is estimated that more than USD 1,600 Billion are traded every day, that is the same amount as almost 40 times the daily USD volume on the American NASDAQ market.
How to post a chart on Ihub
http://www.theforexclub.us/ihubposting.htm
Money Masters Video
http://video.google.com/videoplay?docid=-515319560256183936
Forex Terminology and Concepts to Know
http://www.pfxglobal.com/index.php?option=com_content&task=view&id=2051&Itemid=253
Indicator Interpretation
http://www.theforexclub.us/indicatorinterpretation.htm
Secrets of Fibonacci
http://www.theforexclub.us/Website%20books/Fibonacci%20Secrets.pdf
Five Fib Tricks
http://www.theforexclub.us/fibtricks.htm
Fibonacci video's
http://www.theforexclub.com//Fibonacci.htm
Patterns and indicators video's
http://www.theforexclub.com/patterns.htm
Links of Interest.
http://www.theforexclub.us/bootcamp.htm
http://www.babypips.com/school/
http://wfhummel.cnchost.com/index.html#4
http://www.theforexclub.com/education1.htm
http://www.theforexclub.us/ebook.htm
http://www.theforexclub.us/candlesticks.htm
http://new.quote.com/global/forex/home.action
http://www.theforexclub.us/goldrush.htm
Forex Charts
http://www.freedownloadmanager.org/downloads/forex_software/
Beginner Trading Course
http://www.informedtrades.com/trades.php?page=freetradingcourses
Download forex stategy builder here
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