Introduction to Forex Trading

The foreign exchange (FOREX) market is the purchase or sale of a currency against sale or purchase of another. The object in Forex is to exchange one currency for another in the expectation that the price will change so that the currency you bought will increase in value compared to the one you sold. Through Forex education and training it is possible to speculate the direction of the market and receive a good return on your investment.

The major participants in the FOREX include commercial and investment banks and central banks. Other participants include corporations, hedge funds, and millions of speculation traders like you. Some of the top banks in the world such as Bank of American, Credit Suisse, and Morgan Stanley are major players when it comes to the FOREX. In order to make money within this realm, you will be competing against all of the major banks as well as individual traders.

When beginning in the FOREX, it’s important to select a reputable broker. After all, the broker is going to be the one paying you when it’s time to cash out. A broker acts as a middle man between you and the FOREX. When you place a trade in the FOREX, your position is filled by the broker and the broker sends the order off to the banks. When it’s time to be paid, your money is with the broker and they need to be able to cover your positions in the market. Most brokers offer a 3 to 5 pip spread on all the major currencies pairs, such as the ERU/USD, GBP/USD and the USD/JPY. A 3 to 5 pip spread basically means that the FOREX must move 3 to 5 pips before your trade is in profit. One pip can be worth any amount, depending on how much money you’re willing to risk per trade. There are two types of traders, fundamentalist and technical traders.

Fundamentalist study the cause of market movement, whereas technicians study the effect. Most traders identify themselves as both a technician and fundamentalist. Most fundamentalist will have knowledge of charts, indicators and chart analysis. Similarly most technicians are aware of the fundamentals. However, the problem is that the charts and fundamentals are often in conflict one another. It’s usually a wise decision to have a bit of training in both fundamentals and technical analysis. One of the most important factors in the FOREX is learning to manage your money.

Traders will experience losses in the FOREX; therefore it is essential that a trader utilizes proper money management. In many cases money management is a simple concept, yet to practice money management consistently is very challenging. Generally speaking money management is knowing when to cut your losses. For each trade, a trader should be looking to make three times the amount they plan to lose. This way a trader only has to be right 33% of the time in order to be in profit

Fundamentals Strategy - Gross Domestic Product

Wednesday, November 14, 2007

The Gross Domestic Product (GDP) is a calculation that measures the total production output of goods and services by a given country.
It has proved to be the most thorough gauge of economic performance. Measured in both nominal and real (or inflation-adjusted) terms, GDP is the sum of four main components: net exports, private investment, private consumption, and government purchases. In terms of country analysis, the GDP is similar to the Gross Profit Margin of a company in that both account for change in growth.

Both the real GDP - calculated with regard to the changes in inflation - and the nominal GDP - calculated using only current dollar values without taking into account any deflators or multipliers - are reported. Nominal GDP is useful for observing the market value of goods and services produced in a given year or quarter. Real GDP is the quantity of economic output, a factor in the calculation of the overall rate of economic growth. The key figure within the mass of data contained in the GDP is the percentage growth over the previous quarter and over the previous year.

The complete report consists of three releases: 1) advanced, 2) preliminary and 3) final. The preliminary and final releases come out in the months before the final, and have a greater impact on the Forex market.


Fundamental Analysis of the GDP
Fundamental Analysis of GDP is critical, since central banks monitor this indicator to identify increasing inflation.

An increase in GDP indicates a strong economy, but may signal inflation and thus an increase in interest rates.

A decrease in GDP is a sign of lowering productivity and thus a weaker economy.

Average GDP growth clocks in at 2.5 to 3% annually; any higher than that is an indication of possible inflation, since with greater economic productivity inevitably comes inflation. If such is the case, central banks like the FED and the ECB tend to tighten monetary policy by increasing interest rates in an attempt at slowing the economy’s rate of growth. A decrease in GDP is often pre-empted by an increase in nation-wide inventories - common factors like slowing growth and changing consumer demands affect both.

Because it is released quarterly, the GDP's data often lags a bit behind, diminishing its use as a predictive indicator. Most traders focus on the Advance Report and the Preliminary Report since they are released in the months before the final figure - large discrepancies between the earlier and final GDP reports often cause significant volatility.

GDP numbers are released by the Bureau of Economic Analysis on a quarterly basis on the 25th of the month at 8:30 am EST

Posted by nineangels at 2:01 PM

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