The Forex Analysis Type

There are two main, but at the same time confronting schools in forex analysis. They are the fundamentalists and technicians.

There is no clear answer as to which is right. Sometimes it appears that the technicians make better picks. Other times it seems the fundamentalists are making the right call. One thing is certain, when one group of analysts is wrong the other will surely emerge saying, "We told you so." So, which is right for you? There are many potential answers to that question. Three variants of popular answers are:

If you are a "long-term" Forex investor looking for companies with solid foundation, growth and income potential, the fundamentals may sway you.

If you are a "short-term" Forex investor (Forex market trader) looking for companies who are "on the verge" of being discovered, fundamentals will be useful to you.

If you are a "long-term" investor who is not as concerned about one company's basics because you will diversify to minimize risk, or you are a "short-term" investor waiting for investor sentiment to change, then technical analysis will be helpful to you.

Today, many investors use both fundamental analysis and technical analysis. The technicians can tell you about the broad market and its trends. The fundamentalists tell you whether an issue has the "basics" necessary to meet your investment objectives.

The Forex Risks

Assuming you are dealing with a reputable broker, there are still risks to FOREX trading. Transactions are subject to unexpected rate changes, volatile markets and political events.

Any investments have the whole set of risks.

What factors define the risks? Many factors. Among them:

1) The Basic purposes of the company
2) The Organization (mechanism) of the purpose achievement
3) Management of the company, that defines its successful and long functioning
4) Presence of sufficient own company's resources for opposition various acts of God

All rest (duration of existence, the big building in the center of the town, big attractive office, the affable personnel) are not so essential. Forex market stand independently from other markets first of all because it is out of the exchange. Why so happens - probably because it formed rather recently, about 20 years ago, and banks became its participants. By virtue of development of a communication facility and automation banks began to trading "directly", not requiring in the special organizations - stock exchanges. Been born, this market became global at once, and in one country it was not possible to limit, "settle" it legislatively. Therefore there is such dislike and neglect for this market from many "classical" financiers. Nevertheless for a lot of the European and North American banks speculative operations on Forex market are the basic source of the income while the quantity of the personnel working in other markets, is constantly reduced.

So, Forex market practically has no legislative regulation in one country, and in the majority of the countries is equated to the organization of games. It follows from this that Forex market's broker does not require any licenses and certificates. It is the usual legal person.

Here is the second important fact - Forex market is not adjusted, despite of set of the confused problems and risks in addition to the risk connected with movements of the price of the market. These problems rotate around of trust, honesty of carrying out of operations, managed of Forex risks, a transparency and marketing of Forex brokers. But in the beginning we should understand, that, unlike highly adjustable exchange markets, broker firms cannot be carried to any separate stock exchange on character of problems and risks.

FOREX trading can be risky, but there are ways to limit risk and financial exposure.

Every FOREX trader needs to know at least the basics about technical analysis and how to read financial charts. He should study chart movements and indicators and understand how charts are interpreted.

Even the most knowledgeable traders, however, can't predict with absolute certainty how the market will behave. For this reason, every FOREX transaction should take advantage of available tools designed to minimize loss. Stop-loss orders are the most common ways of minimizing risk when placing an entry order. A stop-loss order contains instructions to exit your position if the currency price reaches a certain point. If you take a long position (expecting the price to rise) you would place a stop loss order below current market price. If you take a short position (expecting the price to fall) you would place a stop loss order above current market price.

As an example, if you take a short position on USD/CDN it means you expect the US dollar to fall against the Canadian dollar. The quote is USD/CDN 1.2138/43 - you can sell US$1 for 1.2138 CDN dollars or sell 1.2143 CDN dollars for US$1.

You place an order in the following way:
Sell USD: 1 standard lot USD/CDN @ 1.2138 = $121,380 CDN
Pip Value: 1 pip = $10
Stop-Loss: 1.2148
Margin: $1,000 (1%)

You are selling US$100,000 and buying CDN$121,380. Your stop loss order will be executed if the dollar goes above 1.2148, in which case you will lose $100.

However, USD/CDN falls to 1.2118/23. You can now sell $1 US for 1.2118 CDN or sell 1.2123 CDN for $1 US.

Because of the immense volume of FOREX, however, it is impossible for one force to control the market for any length of time. Market forces will prevail in the long run, making FOREX one of the most open and fair investment opportunities available.

Prices of foreign exchange are indicated by FOREX quotes in pairs of currencies. The first currency is the 'base' and the second is the 'quote' currency. In this example:

USD/EUR = 0.8419

...the currency pair is US dollars and European euros. The base currency (USD) is always at '1' and the quote currency shows how much it costs to buy one unit of the base currency. In this example, 1 US dollar costs 0.8419 euros.

Conversely...

EUR/USD = 1.1882

...tells us that it costs 1.1882 US dollars to buy 1 euro.

When the price of the quote currency goes up it indicates that the base currency is becoming stronger – one unit of the base currency will buy more of the quote currency. If the quote currency falls, however, the base currency is becoming weaker.

FOREX quotes are seen in 'bid' and 'ask' prices. Bid is the price that buyers will pay for the base currency (while selling the quote currency), and ask is the price that sellers will sell the base currency (while buying the quote currency).

Symbol Bid Ask

USD/CAD 1.2392 1.2397

This chart tells us that we can buy one American dollar for 1.2397 Canadian dollars, or sell one American dollar for 1.2392 Canadian dollars. The most commonly traded currencies pairs are the "Majors": GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.

We often see exchange rates listed in cross currency charts that list many different currencies and their values against each other. An example of such a chart is seen here:
US $ Ca $ Euro UK ?
US $ 1.00000 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.47805 1.00000 0.67755
UK ? 1.75840 2.18147 1.47591 1.00000

In this chart, the currencies listed down the left side of the chart are the base currencies and the currencies at the top are the quote currencies. We can convert the chart above into currency pairs by following the row beside the base currency. Using US dollars as the base currency we get the following currency pairs:
USD/CAD = 1.24060
USD/EUR = 0.83935
USD/GBP = 0.56870

...which tells us that one US dollar is equal to the corresponding value of the quote currency. To find the opposite pair e.g. CAD/USD follow the Canadian dollar row to the US dollar column - CAD/USD = 0.80606 (one Canadian dollar is worth 0.80606 US dollars).

There is no standard for cross-currency charts: some have the base currency on the top and some have it on the side. How to tell which is which? You need to know at least one pair of currencies and which one of the pair is more valuable.

To minimize your forex risks you may use stop and limit orders.

The Quotation and spreads

Quotation (forex quote) is the actual price or the bid or ask price of either cash commodities or futures or options contracts at a particular time. Quote is an indicative market price, normally used for information purposes only.

Currencies are quoted in pairs. The first listed currency is known as the base currency, while the second is called the counter or quote currency. In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip.

Like all financial products, forex quotes include a "bid" and "ask". By quoting both the bid and ask in real time, FXCM ensures that traders always receive a fair price on all transactions. As in any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45; this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

It's really quite simple to read a foreign exchange quote 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 main currency of the Forex market and is considered the 'base' currency for quotes. 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. Note (three exceptions): the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.

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.

Cross currencies are the currency pairs that do not involve the U.S. dollar. 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).

Direct and indirect quotes

On the Currency exchange market in every country, the local currency is quoted directly or indirectly against the American dollar and the other foreign currencies. The direct quoting is the amount of the local currency that is needed to buy one unit of the foreign currency and respectively the amount of local currency that is due to be received when one unit of foreign currency is being sold. In Japan, for example:

120.44- 120.52 USD/JPY

signifies that the dealers are buying one dollar for 120.44 yen, but are selling the very same unit for 120.52 yen.

Alternatively the indirect quote is the amount of the foreign currency needed to buy one unit of the local currency. The amount of foreign currency that is received if one local currency unit is sold to a dealer. This type of indirect quote is used for British pounds versus the US dollar, for example:
1.3600 – 1.3610 GBP/USD

This means, that you have to pay 1.3610 USD to buy 1 GBP and if you want to sell 1 GBP, you will receive 1.3600 USD for it.

Bid Price, Ask Price (Spread)

Like all traded instruments (stocks, bonds, futures etc.) there is a selling price (known as the “bid” price) and a buying price (the “ask” price). The difference between the two is called the “spread”.

The Spread - the cost a trader incurs when taking a position
GBP/USD 1.6545/1.6550 Sell Price/Buy Price

If you decide to long the currency pair (buy the base currency) because you think it will appreciate in value. You would enter the trade at the buy price, which means that if you wanted to immediately turn around and sell the same currency you just bought, you would have to sell it at the sell price, which is always lower than the buy price and you would lose the difference of that spread. In other words, the price of the currency you just bought would have to appreciate the value of the spread for you to break even.

The same thing applies if you want to sell the base currency, only you would enter the trade at the sell price which means that if you wanted to buy back what you just sold before the exchange rate had a chance to move, it would cost you the spread (in this case, 5 pips).

When you open a trade, the trading platform will show you the price you bought or sold the currency pair at. If, for example, you go long (buy) a currency pair, it will show the price you bought at, as well as the current sell price (the buy price minus the spread). In order to get into profit, the market will have to move at least the number of pips in the spread for you to break even. What this obviously means is that the tighter the spread, the better, because it means that the currency has a smaller value to rise before you’re into profit.

Standard Spreads

The good news is that, because we have the advantage of dealing directly with the market makers, most spreads in the currency market tend to be very tight (much tighter than any other financial market), not to mention, we also avoid round-turn commissions that traders in other markets pay to the brokerage houses on each and every trade.

The standard spread can vary from currency pair to currency pair. The more heavily a currency pair is traded, the less volatile it tends to be. Therefore, the most heavily traded currency pairs (the majors) tend to have the tightest spreads, whereas, the less traded, more volatile currency pairs (the crosses & exotics) tend to have wider spreads. The standard spread is 4-5 pips on the Majors and 5-20 pips on the Crosses & Exotics.

The closer the two prices are to each other, the “tighter” the spread, and the further they are from each other, the “wider” the spread.

In all cases, the bid (sell) price is always lower then the ask (buy) price.

In the forex market, the sell/buy price is usually expressed with sell price first in following way:
GBP/USD 1.6545/1.6550 Sell Price/Buy Price

However, the buy price is often abbreviated by only showing the last two decimal places as follows
GBP/USD 1.6545/50

The buy price is what has to be paid in the secondary currency to obtain one unit of the base currency. The sell price is what will be obtained in the secondary currency when selling one unit of the base currency. In this case, the spread is 5 pips.

Technical Strategy - Victoria Secret

Victoria secret is a trick to make profit from bullish market which is nearly close to top levels (saturated levels) in Eur/Usd and Gbp/Usd pairs. I developed the trick at 2005. Some were fails, but most of them are ended with great profit.

I booked profit of 200 pips in Eur/Usd at the last week of January 2006 with using only 1 order and 1 overnight. But unfortunately, I was loss for -35 pips at the first week of January 2006 in Eur/Usd. And I was succeed to take profit of 300 pips in Gbp/Usd in December 2005. Therefore, I strongly recommend you to use stop loss in implementing this trick. I use 35 pips gap from open position for Eur/Usd and 50 pips gap from open position for Gbp/Usd.

When the Dollar is weakening against the Euro and Pounds and enters its saturated levels, then it’s time for us to wait for its correction. Will correction occur (due to economic data impacts or just for technical rebound), usually it will make significant movement. And this is a good opportunity to enter market.

The easiest way to predict saturated levels and find Victoria Secret opportunity is by looking at RSI (14) indicator at time frame of 1D. When bullish market is reaching 65 level (crossing above 65), then it’s time for us to look forward to waiting for Victoria Secret opportunity.

Use candlestick mode on your chart. When RSI (14) at time frame of 1D crosses above 65, take a good look at market price. If market price forms ‘empty candlestick’ (closing price above opening price), then we’ll wait for ‘shaded candlestick’ (closing price below opening price) on the next days.

When you got the ‘shaded candlestick’, then the day after that would be our Victoria Secret day.

So the pattern would be: Empty candlestick-shaded candlestick-victoria secret candlestick

Yup, I know… you might need to be patience to make profit from this trick. But considering its reward, it is worth to wait for the opportunity.

When market price at Victoria Secret candlestick is equal to high level at shaded candlestick, then it’s time to sell. And do not forget to use stop loss.

When market price moves nearly our stop loss, then we’re not going to do anything. If our stop loss is hit, then let it go. It means that this is not our lucky day. But if market price moves downward then we’re so close to big victory.

Its main purpose is to earn big victory and usually the opportunity occurs in low volatile market. Therefore, I named it Victoria Secret trick.

One trick that will make you feels comfortable with your profit and makes you please to ‘see’ it. Just like ‘the other’ Victoria Secret. You know what I mean.