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.

Forex Risk Managenent Strategy

The Forex market behaves differently from other markets. The speed, volatility, and enormous size of the Forex market are unlike anything else in the financial world. Beware: the Forex market cannot be controlled - no single event, individual, or factor rules it. As such, it is the closest market to what economists call ?a perfect market?! However, just like any other speculative business, increased risk entails chances for a higher profits as well as higher losses.

-Currency markets are highly speculative and volatile in nature-
Any currency can become very expensive or very cheap in relation to any or all other currencies in a matter of days, hours, or sometimes, in minutes. The unpredictable nature of currencies is what attracts an investor to trade and invest in this market.

-Exit the Forex market at profit targets-
Limit orders, also known as Take-Profit orders, allow Forex traders to exit the Forex market at pre-determined profit targets. If you are short (sold) a currency pair, the system will only allow you to place a limit order below the current market price, because this is the profit zone. Similarly, if you are long (bought) the currency pair, the system will only allow you to place a limit order above the current market price. Take-Profit orders help create a disciplined trading methodology and make it possible for traders to walk away from the computer without continuously monitoring the market.

Technical Strategy - Gann Numbers

W.D. Gann was a stock and a commodity trader working in the '50s, who reputedly made over $50 million in the markets. He made his fortune using methods that he developed for trading instruments based on relationships between price movement and time, known as time/price equivalents. There is no easy explanation for Gann's methods, but in essence he used angles in charts to determine support and resistance areas, and to predict the times of future trend changes. He also used lines in charts to predict support and resistance areas.

Technical Strategy - Recognizing the Trends

A trend refers to the direction of prices. Rising peaks and troughs constitute an up trend; falling peaks and troughs constitute a downtrend that determines the steepness of the current trend. The breaking of a trend line usually signals a trend reversal. Horizontal peaks and troughs characterize a trading range.

In general, Charles Dow categorized trends into 3 categories: (a) Bull trend (up-trend: a series of highs and lows, where each high is higher than the previous one); (b) Bear trend (down-trend: a series of highs and lows, where each low is lower than the previous one); (c) Treading trend (horizontal-trend: a series of highs and lows, where peaks and lows are around the same as the previous peaks and lows).

Moving averages are used to smooth price information in order to confirm trends and support-and-resistance levels. They are also useful in deciding on a trading strategy, particularly in futures trading or a market with a strong up or down trend. Recognizing a trend may be done using standard deviation, which is a measure of volatility. Bollinger Bands, for example, illustrate trends with this approach. When the markets become more volatile, the bands widen (move further away from the average), while during less volatile periods, the bands contract (move closer to the average).

Various Trend lines
Pattern recognition in Trend lines, which detect and draw the following patterns: ascending; descending; symmetrically & extended triangles; wedges; trend channels.

Technical Strategy - Waves and Gaps

Elliott's wave theory:
The Elliott Wave Theory is an approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave pattern shows a five-wave advance followed by a three-wave decline.

Trading Gaps
Gaps are spaces left on the bar chart where no trading has taken place. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release.

An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price of the day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. A breakaway gap is a price gap that forms on the completion of an important price pattern. It usually signals the beginning of an important price move. A runaway gap is a price gap that usually occurs around the mid-point of an important market trend. For that reason, it is also called a measuring gap. An exhaustion gap is a price gap that occurs at the end of an important trend and signals that the trend is ending.

Fundamentals Strategy - Interest Rates

Interest Rates are a tool at the central bank’s disposal used to accomplish certain fiscal goals.

By opting to increase interest rates, for example, the Federal Reserve is altering the cost of lending and borrowing money in a way that would make consumers less likely to spend and more likely to save, slowing down economic productivity and growth.

Fundamental Analysis of the Interest Rate
Interest rates play an important role in fundamental analysis. An increase in interest rates can typically increase the value of a currency; foreign investors must purchase the local currency in order to take advantage of favorable interest rates, thereby increasing demand and price.

Fundamentals Strategy - Non Farm Payroll

The Non-Farm Payroll (NFP) is a percentage that denotes the well-being of an economy through the strength of its labor market.
Of all economic indicators, employment figures are widely recognized as among the most important. The Non-Farm Payroll is a section of the larger US Employment or Labor Report; which includes Payroll Employment, Unemployment, and Average Hourly Earnings Growth. NFP shows the employment rate for non-agricultural industries, breaking down data into sections for employee, women, and production or non-supervisory positions. The information is compiled by the Current Employment Statistics Program, which takes a survey of a sample of businesses to arrive at the data used in the Labor Report. The data is fresh each month and approximately 400,000 businesses are used in the survey, spanning 810 industries.

Fundamental Analysis of the NFP
Although it may seem counterintuitive to analyze such a small section of the Employment Report when other figures - particularly Unemployment Rate with its widely proclaimed socioeconomic implications - seem to have a tighter grip on the economic situation, analysis of the NFP is well worth the time.

An increasing trend in NFP indicates a strong economy.

A decreasing NFP is a sign of looming unemployment and thus a weaker economy.

The NFP is an indicator of labor market strength. If the economy is in a downturn and employment is hard to come by, the NFP will be lower. The unemployment figures are not observed as closely by most investors since the manner in which unemployment is calculated makes it more of a lagging indicator of changes in employment. Why look at a delayed re-hash of the NFP's ramifications in the Unemployment figures when you could just look straight at the NFP?

As the NFP technically measure the change in the number of workers for a given month, it is best to observe it on a 6 to 9 month moving average to take in any consequential trends.

NFP and the Labor Report are part of the Current Employment Statistics Survey conducted by the U.S. Department of Labor. Numbers are released by the Bureau of Economic Analysis on a month basis on the 1st Friday of the month at 8:30 am EST.

Fundamentals Strategy - Producers Price Index

The Producer Price Index (PPI) is a measure of the prices charged by producers as it changes over time. An early indicator of upward pressure on prices on the supply side, this indicator is closely connected to the Consumer Price Index (CPI), which takes into account both supply and demand side inflationary pressures.


Fundamental Analysis of the PPI

Fundamental Analysis of the PPI resembles that of the CPI. As inflationary pressures show signs of increasing, so does the likelihood of an increase in interest rates—a rise in the lending rate increases capital inflows and leads to higher demand for a particular currency, increasing its value.

The PPI is released by the Conference Board on a monthly basis around the 11th of each month at 10:00 am EST.

Fundamentals Strategy - Gross Domestic Product

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

Fundamentals Strategy - Consumer Confidence Index

The Consumer Confidence Index (CCI) is widely considered one of the most accurate indicators of consumer confidence.
The Federal Reserve looks closely at consumer confidence when determining interest rates. Data for the index is collected from 5,000 consumer interviews that include questions regarding assessments of current business conditions, and expectations for future conditions, family wages, and employment.

Given the report is conducted regionally, the results also tend to have an effect on the values of local real estate areas.

Fundamental Analysis of the CCI
As the consumer confidence rises, so does propensity for consumers to spend, boosting Gross Domestic Product and other performance indicators. As future prospects regarding an economy improve, so does the value of its currency.

A high CCI indicates a stronger currency.

A low CCI is a sign of a weakening currency.

A low CCI is indicative of lower consumer spending and high interest rates, since high interest rates cause an economic slowdown for everyone from big businesses to individual consumers by making it expensive to borrow money. That is how CCI loosely correlates with interest rates. Consumers are more likely to save when the cost of borrowing increases to ride out dismal economic performance. High employment levels, low interest rates, and increased wages will usually have an encouraging effect on the CCI, although if confidence is increasing too steeply it may be a precursor to inflation.

It is crucial to note that lowering interest rates does not necessarily lend itself to an immediate boost in consumer confidence - the effect of changes in other economic indicators lags in the CCI, it may take 6 to 8 months before ramifications are reflected in spending.

Given that there are no hard figures collected in the formation of the CCI - that is, raw data is just in survey form and "planned spending" is recorded, rather than actual figures - it is helpful to look at broad charts when using this indicator. Month to month changes are not considered crucial enough to trend. A 3 ton 6 month Moving Average chart is recommended; a breach of the MA can be considered significant movement.

The consumer confidence report, published by The Conference Board, is released on a monthly basis on the last Tuesday of the month at 10:00 am EST.

Fundamentals Strategy - Consumer Price Index

The Consumer Price Index (CPI) tracks the cost of a fixed set of goods that are considered representative of a typical consumer’s purchasing actions by comparing current prices with prices from an earlier period.
Mathematically, it represents changes in prices of all goods and services purchased by an average household for consumption. Costs of living and sales and excise taxes paid by the consumer are included in the measure; however, investment tools - stocks and bonds - and income taxes are not. Proliferate use of this measure of inflation is attributed to the fact that all of the factors of production that determine the inflationary forces from both the supply and demand side are considered.

In the United States, the report itself is broken down into multiple aggregate groups, allowing industry dissection with greater convenience. The CPI's are available by:

Location - for the four Census regions of the US, city classifications of various sizes and classes, and down to 26 local area classifications.
Category - namely Energy, Food, and Core (Goods and Services).
Population Group - the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners (CPI-W). The CPI-U takes into account 87% of the population, including professionals, the self-employed, and the unemployed. The CPI-W at 32% converts only hourly wage earners and clerical workers.
Prices for the CPI are collected from a gamut of urban areas, stores, and service establishments and items are weighted according to expenditures on that item as reported by the Consumer Expenditure Survey. Changes in the price level, expressed in percentage terms, are weighted appropriately.

As the CPI is extremely diversified, it is difficult to see consequential movements given the "noise" created by volatile factors like energy and food prices. Keeping your attention to the "core rate" is recommended - this eliminates much noise. In the United States, the average increase in CPi is about 1 to 2%; if the increase if more dramatic than this it is a warning of plummeting purchasing power and possible inflation.


Fundamental Analysis of the CPI

The value of the CPI in fundamental analysis rest heavily on its reliability as an indicator of inflation - it is often used as a deflator to find the purchasing power of a currency. The information it provides with regard to price changes is utilized by consumers as in aid to making economics decisions, and by governments as a guide for structuring and implementing fiscal and monetary policies. In particular, national banks tend to see a rising CPI as a harbinger of high inflation, which they battle by raising short term interest rates. As such:

When prices increase and the CPI is therefore high, the purchasing power of a currency declines and there may be an increase in interest rate.

When prices decrease and the CPI is low, purchasing power increases.

Using the CPI, one can predict future interest fluctuations and the resulting changes in currency exchange rates. Changes in interest rate are a trigger for trading techniques like carry-trades. For more information, check Strategies.

When used in conjunction with a report on a nation's exports, the CPI is useful in checking on the country's position in international trade. Along with basic knowledge of the economic condition of a given country, the CPI will help in answering the question of whether the country making or losing money on its products and services:

When the CPI is high, exports are expected to be on the rise.

When the CPI drops, exports will fall and imports are expected to take the spotlight.

For example, Japan has a massively export-oriented economy. When Japan's CPI began to fall and the yen started rising, the government was in a panic trying to lower the value of the yen in order to keep its exports high. Relative economic health can be determined using these two indicators.

As a side note, it is extremely useful to keep track of a country's exports regardless; it is a highly observed indicator. Prices of exports often change relative to a currency's strength.

For more information concerning the report published in the United States, or to obtain it, visit the U.S. Department of Labor webpage. A comparable report can be downloaded from the European Central Bank, which publishes its monthly bulletin regarding the HICP (the EU’s CPI equivalent) and other economic indicators.

The CPI is released by the Bureau of Labor Statistics at 8:30 am EST on the 15th or each month, several days after the Producer Price Index’s (PPI) release.

Fundamentals Strategy - Economic Indicators

FX Traders frequently reference this data, which are important measures of growth, inflation, and productivity, to assess the value of a currency.
Through the use of these figures, countries can by looked at more like companies - their values are quantitative expressions of a country's well being much like the figures in a company's quarterly earning report are indicative of its prosperity. With these numbers, assessing a currency becomes more methodical.

Here are a few helpful hints about how to maximize your use of these figures:



Start keeping an economic calendar on hand. Indicators are usually released at given intervals with pre-set release dates. Keeping track of when a figure will come out gives you the advantage of foresight, allowing you to predict when rates will experience the greatest change. You will start noticing correlations between the figures.


Stay aware of which indicators are drawing the most attention. The figures with the most eyes on them are the most likely to trigger the largest shifts in price and volume. The reason many trading techniques work is that there are large numbers of traders following certain numbers and philosophies at the same time. Know why certain figures are being followed and you will be able to stay ahead of the game.


Make sure to buffer your quantitative assessments by keeping yourself updated on the international news. It is important to keep in mind that while these indicators usually carry the most weight when it comes to assessing a country's economic health, they may not be the only things affecting a change in a currency rate.


Do not be tempted into short-tem trades based on fundamental analytics. These fundamental assessments are conducted to determine long-term strategies and positions. Placing trades in the short-term basis, particularly in the case of establishing a position just prior to a numbers release, is considered an extremely risky proposition. Fundamental analysis aims for larger and more predicable profits by relying on long-term positions. There are a variety of techniques to manipulate short-term positions in technical analysis.


In order to avoid heavy losses, short-term traders will often close positions or set conservative stops on their open positions to minimize losses. As any good trader would do, be sure to set reasonable stops. Consider the money invested in Forex risk capital - be sure it can survive a heavy loss.


Practice. Even for experienced equity traders, there are unique qualities in the Forex market that demand some Forex experience in order to draw out maximum profit. A few brokers will allow you a limited free trial on their software to let you get a feel for the market. Check another posts for details.

Fundamentals Strategy - Introduction

Forex fundamental analysis is one of two widely recognized approaches to foreign exchange market analysis.
An alternative to technical analysis, which makes use of market trends (i.e. chart analysis) to determine the future value of a particular currency in the FX market, fundamental analysis describes methods of present and future valuation determined by social, economic, and political variables. While technical analysis is praised for its effectiveness at predicting short-term trends (under 3 months), the fundamental analysis approach is better suited at forecasting long-term movement in the FX market.

Employing fundamental analysis strategies requires a basic understanding of supply and demand, the underlying force behind all financial markets. In the case of the FX market, the commodity being exchanged is a particular currency. Because the value of a currency is derived from the economic health of its respective country, global (or local) macroeconomic changes can invariably have an impact on currency rates. Fundamental analysis itself is broken down into two broad subcategories: capital flows and trade flows.

The Fundamental Analysis

A fundamental trading strategy consists of strategic assessments in which a certain currency is traded based on virtually any criteria excluding the price action. These criteria include, but are not limited to, the economic condition that the country the currency represents, monetary policy, and other elements that are fundamental to economies.

The focus of fundamental analysis lies on the economic, social and political forces that drive supply and demand. There is no single set of beliefs that guide fundamental analysis, yet most fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. Several theories prevail as to how currencies should be valued.

Alone, fundamental analysis can be stressful when dealing with commodities, currencies and other "margined" products. The reason for this is that often fundamental analysis does not provide specific entry and exit points, and therefore it can be difficult for risk to be controlled when utilizing leverage techniques.

Currency prices are a reflection of the balance between supply and demand for currencies. Interest rates and the overall strength of the economy are the two primary factors that affect supply and demand. Economic indicators (for example, GDP, foreign investment and the trade balance) reflect the overall health of an economy. Therefore, they are responsible for the underlying changes in supply and demand for that currency. A tremendous amount of data is released at regular intervals, and some of this data is significant. Data that is related to interest rates and international trade is analyzed very closely.

Technical Strategy - The Bollinger Bands

Bollinger Bands measure the relative price levels over a period time. The study is comprised of three lines. A simple moving average in the middle, an upper band and a lower band. The upper band derived from simple moving average plus 2 standard deviation. The lower band derived from simple moving average minus 2 standard deviation.

20 day simple moving average is recommended for the study. Bollinger Bands become wider when the market is more volatile while narrows during less volatile periods

Technical Strategy - Stochastic Slow

The Slow Stochastic is an indicator measures overbought and oversold conditions in the market. It is comprised of two lines, the %K and the %D line. The range of oscillate is between 0% and 100%.


%K is the number of periods in the chart. If the chart is a daily chart, then the %K number denotes days. If the chart is a weekly chart, then the %K number denotes weeks.

%D is the number of periods used in the Moving Average calculation.

Stochastic above 80% often indicates an overbought condition while below 20% indicates oversold condition.

Technical Strategy - Parabolic SAR

Parabolic SAR

Developed by Welles Wilder, creator of RSI and DMI, the Parabolic SAR sets trailing price stops for long or short positions. Also referred to as the stop-and-reversal indicator (SAR stands for "stop and reversal"), Parabolic SAR is more popular for setting stops than for establishing direction or trend. Wilder recommended establishing the trend first, and then trading with Parabolic SAR in the direction of the trend. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.

The formula is quite complex and beyond the scope of this definition, but interpretation is relatively straightforward. The dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable direction.

There are two variables: the step and the maximum step. The higher the step is set, the more sensitive the indicator will be to price changes. If the step is set too high, the indicator will fluctuate above and below the price too often, making interpretation difficult. The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the price. Wilder recommends setting the step at 0.02 and the maximum step at 0.20.