|
What is
technical analysis in the FX market
Technical analysis comprises a number of different techniques:
Price data can be represented as lines, candles, bars or point and figure
(P&F) charts. Each representation yields unique information about the data.
Trend, channel, Fibonacci, Gann and other lines can be plotted on the charts
to delineate and clarify price trends, ranges or other patterns.
Technical indicators can be calculated and plotted on or under the charts.
Trend Lines
Trend lines are drawn by joining the lows (support line) or the peaks
(resistance line) of the price data. This helps to clarify existing trends
and produces clear exit criteria as the trend has ended when the price
breaks through a resistance or support line. The problem with trend lines is
that you are only able to draw them once a trend is well established, by
which time it is too late to enter a trade. Also, trend lines are very
subjective, no two people will agree on exactly where they should be drawn.
This allows emotion to creap into your trading.
What are technical indicators?
Technical indicators are mathematical constructs which aid the trader in
interpreting a graph of a particular currency pair. Indicators can be used
to gain more information about the price movement but can also provide entry
and exit signals in a trading system. There are two main kinds of
indicators: leading and lagging indicators.
Lagging Indicators
Lagging indicators usually smooth the price data and therefore produce
information which lags the movement of the currencies. These indicators are
most useful in trending markets. Some of the more popular examples of this
type include moving averages and Bollinger bands.
Moving Averages
Moving averages are simply averages of the price data over a certain period
of time. Averages calculated over shorter periods vary more greatly with
time than longer term averages. Where the shorter average crosses the longer
one, an entry/exit signal into/from a trend is denoted.
Bollinger Bands
Bollinger bands create an envelope
around the price movement based on the standard deviation or volatility of
the currency pair. Therefore the bands widen during times of violent market
movement and tighten when the markets range.
Leading Indicators
Leading indicators claim to predict market movement. They measure how
"overbought" or "oversold" a currency pair is and assume that they will
reverse, as is common in a ranging market. Following these indicators is
riskier than the lagging indicators as they attempt to predict price
behavior. This contrasts with one of our basic principles which states
"Don't predict the markets - rather follow their lead". Therefore, in our
opinion this type of indicator yields useful information but is not ideal as
a source of entry or exit signals in a trading system.
Therefore, If you wish to trade a figure release, you may need to place an
order time and always include a stop loss as you may not be able to access
the trade station if you need to close your trade.
Speeches and policy decisions
When Alan Greenspan, the Chief Banker of the United States, is expected to
talk the currencies normally range within a tight range until his speech
commences during which time they can move quite substantially, depending on
the topic and content of his speech. Other speakers in the USA who can move
the market include: Ben Bernake, John Snow and Janet Yellen.
Policy decisions such as those made at G11 meetings tend to initiate a trend
in the currency market which may last a few days or weeks.
How the Oil Price impacts on the currency market
When the price of oil increases the currencies are affected negatively,
especially the currencies of countries who need to import oil such as Japan
and America.
The influence of geopolitical events
Geopolitical events do not generally move the currency market as much as
important economic events do. However, major occurrences such as September
the 11th do cause extreme moves. It is therefore necessary to always trade
with a stop loss to protect your capital against such unexpected, large
movements.
FUNDAMENTAL ANALYSIS in Forex markets
What is fundamental analysis?
Fundamental analysis in forex broadly investigates how various governments'
economic policies influence the currency market. This study is generally
more appropriate to the longer time frame.
For the day trader, daily economic announcements are the only significant
fundamental events that could influence your trades. These announcements
comprise economic figure releases and speeches by prominent people.
Summary of the important economic announcements.
Generally, announcements relating to the economy of the USA are most
important. The top three market moving figure releases are:
Interest rates
Trade balance, budget and treasury budget
Employment situation
The following figures are less important but can be market movers if the
figure comes in very different from what was predicted by economists:
Retail sales
Durable goods
GDP (usually the most stable figure)
How to interpret economic calendars
Economic calendars usually list a forecast of the figure (predicted by
economists) and the value of the figure released the previous month. If the
forecast figure is expected to be better than the previous figure then the
US dollar generally strengthens against other major currencies and vice
versa if the figure is expected to be worse.
However, it sometimes happens that if we are currently in an environment
where the US dollar is presently favored (a trending environment), a
negative figure may cause a temporary drop in the dollars value before it
continues to strengthen, i.e. it reverts back to the pre-announcement trend.
Brokers trade stations and economic announcements
Brokers sometimes close their trading desk to new orders in the period
directly before an important figure is due to be released in order to limit
the high volume of trade which occurs at these times.
|
