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| Forex Ebooks |
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| Learn Trading: Basics of Fundamental Analysis (5) |
| Tuesday, January 16, 2007 |
Dear Harun Azis,
My name is Nadia Fleischer and I work for Marketiva Corporation
(http://www.marketiva.com/). Marketiva is a foreign exchange (forex)
dealer where people can start trading with as little as $1 and learn
how to
successfully participate in the largest financial market in the world.
Two distinct analytical approaches are used in the currency markets to
examine price action. Fundamental analysis involves the study of all
relevant factors that drive the future course of a currency exchange
rate.
This approach entails the analysis of economic data and reports,
overall
economic climate in the specific country of the currency in question.
In
contrast, technical analysis refers to the study of all factors
associated with
the actual supply and demand forces of a certain currency. By utilizing
charts and indicators, the technicians, or chartists as they are
dabbed,
strive to measure the momentum of the market in their effort to predict
future currency rate movements. Technical analysis has considerable
weight although not every individual investor believes in it. A savvy
investor once said "if everybody bought at the bottom and sold at the
top,
the bottom would be the top and the top would be the bottom." By
wielding both principles of fundamental and technical analysis, an
investor
can discern the limitations of each and hence should have a leg up in
the
realm of currency investing. We will explain the basic charting
techniques
used today to analyze price action. We will also discuss The Money
Supply Indicator and the Non-Farm Payroll report (NFP).
BAR CHARTS
A currency pair's bar chart is a pictorial description of the price
history of
the relevant currency pair. It shows the currency pair's past price
action
and helps acquire new insights. Although there are several types of
charts,
bar charts are still nowadays the most popular charting technique in
the
West. A bar chart exhibits the price, or exchange rate, of a currency
pair
over a period of time usually measured in days, weeks, or months. A
daily
bar chart, for example, shows the highest, lowest, and opening and
closing
prices each day. Similarly, a monthly or weekly chart would show the
highest, lowest, opening and closing prices for the entire month or
week
respectively. To name only a few, Streamster allows you to construct
real-
time bar charts with five, fifteen, thirty, or one-hour price ranges.
The
opening price is designated by a dash pointing to the left from the bar
and
the closing price is designated by a dash pointing to the right from
the bar.
The highest and lowest points of the bar stand respectively for the
highest
and lowest prices in that specific time interval.
Japanese Candlestick charts are a variant of contemporary bar charts.
In
fact, candlestick charting is analogous to bar charting in that it also
shows
the opening, highest, lowest, and closing rates. A white candlestick,
for
example, indicates that the opening price is lower than the closing
price
(the body of the candlestick is formed by the opening and closing
prices).
Prices are ordered in the following fashion starting from the bottom to
the
top of a white candlestick: low for the day, opening price, closing
price
and high for day. However, when the candlestick is black, prices are
read
as follow from the bottom to the top of the candlestick: low for the
day,
closing price, opening price, high for the day. Black candlesticks
indicate
that the opening price in that time interval is higher than the closing
price.
The candlestick charting technique possesses its own descriptive
vocabulary. Price gaps are designated by the appellation "windows", an
intraday reversal can be designated by a "shooting star" or a "hanging
man" or a "hammer" as the Japanese name each symbol according to its
graphical appearance. Steve Nison is the most sought- after candlestick
charting expert and has written several books.
Finally, Streamster allows you to plot line charts and HL lines as well
(highest and lowest). For example, every point on a 5 minutes line
chart
represents the closing price in that specified time frame. HL lines
help you
visually plot the highest and lowest prices in a selected time interval
to
explore price volatility.
MONEY SUPPLY INDICATORS
Many currency investing professionals believe there is a strong
correlation
between currency prices and the expansion or contraction of the money
supply. In fact, a study of the four-decade period since the end of
World
War II indicates this correlation, notably when inflation is taken into
account as well. When money supply is increasing at a reasonably steady
rate and inflation is low or of very little concern, currency prices
have a
tendency to increase. On the other hand, when the supply of money, or
the
inflation rate, or both grow at disproportionate rates, unfavorable
developments might be lurking. The Money Supply is calculated monthly.
It shows the year-to-year percent change in M2, which is defined by the
Federal Reserve as currency plus demand deposits plus deposits at
commercial banks other than large CDs, adjusted for the year-to-year
percent change in the Consumer Price Index (CPI). In order to calculate
this indicator, the percent change of M2 and the inflation rate, as
measured
by the CPI percentage change, are added to or subtracted from 100. For
example, if last month M2 increased 6.5% over the same month a year ago
and the Consumer Price Index increased 4.0% in that same time period,
the Money Supply indicator would be 102.5 for that month: 100 + 6.5 -
4.0. Alternatively, if M2 advanced 3.0% while the CPI increased 5.8%,
the
Money Supply Indicator would only be 97.2 for the month: 100 + 3.0 -
5.8. The Money Supply Indicator was persistently under 100 during the
late 40s because the rate of inflation was greater than the growth of
money
supply. As a general rule, currency rates are susceptible to downward
pressures when the indicator declines, but apparently tend to perform
well
when it is steady or rising. An investor should particularly be alert
to a
declining indicator while currency prices are advancing. Substantial
rate
declines occurred shortly thereafter as experienced in the stock market
in
1972 and 1987. On the contrary, if the indicator is rising sharply when
currency rates are declining, the market could be signaling a reversal.
The
Money Supply Indicator is a reliable tool during uncertain economic
periods when money supply and inflation rate figures are the center of
public attention, which seems to be the case more often than not. There
is
one more Money Supply Indicator that is simple to calculate and is also
of
worth noting. By subtracting and plotting the difference between M3 and
M2, an investor can create another indicator that shows a reasonably
good
correlation with currency exchange rates. The Federal Reserves defines
the difference between M3 and M2 as "institutional money funds, and
certain managed liabilities of depositaries i.e. large time deposits,
repurchase agreements and Eurodollars."
NON-FARM PAYROLL
Non-Farm Payroll is also called Employment Situation. This report is
produced and released by the U.S. Bureau of Labor Statistics. It is
published monthly on the first Friday of the month at 8:30 Eastern
Time.
The NFP report lists all the payroll job activities at all non-farm
business
establishments and government agencies. This report includes key labor
market health barometers, such as the unemployment rate, average hourly
and weekly earnings and the length of the average workweek. NFP is very
closely watched by investors and policy makers as it constitutes a
window
into measuring economic growth. More jobs creations in the economy
signal strong economic growth. A rising unemployment rate denotes a
contracting economy and lower interest rates. On the contrary, a
diminishing unemployment rate is associated with an expanding economy
and more demand for money which brings about higher interest rates.
However, a zero unemployment rate does not exist (due to economic
structural factors). If this were the case, wages would rise because
labor
supply would be less than labor demand. There is, however, a level that
is
considered to be a natural level of unemployment. This level is not a
constant but varies according to business cycles. It is 4% for the U.S
economy. The US economy is considered to be at full employment when
the unemployment rate is in the range of 5.5%-6.0%. Average earnings
rapid increases may indicate potential upward inflationary pressures.
In
addition, a higher trending average work week may suggest employment
expansion. NFP data are revised every month for the preceding month and
these revisions can be significant. The NFP report is also revised
annually
in June. Fore more detailed information about the NFP report, please
visit
the http://www.bls.gov/news.release/empsit.toc.htm page.
Again, we suggest you to trade with virtual money for as long as
possible,
before trading your own funds. We will continue this practice of
sending
educational e-mails in order to help you obtain further knowledge about
the foreign exchange market.
If you need more information, please reply to this e-mail and we will
provide you directions on where to get more education material.
Best Regards,
Nadia Fleischer
Relations / Manager
Marketiva Corporation
nadia.fleischer@marketiva.com
http://www.marketiva.com/
----
This electronic communication is intended for information purposes
only.
Nothing contained herein constitutes an offer or acceptance of any
agreement, nor establishes, modifies or amends any contractual or
professional relationship between Marketiva Corporation, and any
recipient
of this communication. As such, it should not be used as a substitute
for a
written and signed agreement between the parties.
Any comments or statements made herein do not necessarily reflect those
of
Marketiva Corporation, its subsidiaries and affiliates. For more
information
please visit our corporate web site at http://www.marketiva.com.
This communication may be sent to you because you are on our list of
current
or prospective customers. If you are not interested in receiving this
type
of communication in the future, you may remove your name from the list
at
http://www.marketiva.com/?page=mailing-list. Please enter 65599 as
your identification number when submitting form at the referenced
location |
| posted by Harun Azis, A.Md. @ 7:31 PM |
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| About The Forex Trading System and Market |
| Wednesday, January 03, 2007 |
About The Forex Trading System and Market
Defination of FOREX (Foreign Exchange) Market
The foreign exchange (currency or forex) market exists wherever one currency is traded for another. Forex market is the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (small speculators) are a small part of this market may only participate indirectly through forex brokers or market maker like MoneyForex Financial or banks.
The Foreign Exchange Market
With international trade, the currency of one country must be exchanged for that of another for settlement of a transaction. Institutions and corporations in the international market place oftentimes need a certain currency to complete a deal, or to guard themselves from the effects of currency swings and rate changes. This system involving the exchange of different currencies has created the Foreign Exchange market, or FOREX, or FX. and more correctly known as the Global Interbank Currency Exchange Market.
Like stocks, gold and real estate investments, Foreign Exchange has become a very important tool for the investment community. Forex trading provides certain additional advantages:
Margin System
You can enjoy the benefits of leverage on contracts up to fifty times your margin deposit. That is, with 1% of the absolute value of contracts, you can enter the largest marketplace in the world. As long as you are able to maintain your margin requirements on the full contract value, you can remain indefinitely in the market.
Maximum Liquidity
Being the largest market in the world with over $1.6 Trillion bought and sold daily, huge volume of transactions are readily executed and cleared. Unlike futures or the stock market, there is never a lack of buyers or sellers on the forex market. Therefore, it gives the investor the prerogative to open or close a position at will.
Attractive Pricing
Forex quotes are based on spot prices regardless of the transaction size. Prices are quoted on a net basis.
Effective Execution
Forex trade orders are executed and confirmed online or manually via a recorded phone call. Customers know immediately the rate at which the order is executed. Confirmed orders will always receive a single price execution.
Flexible Settlement
Forex system contracts opened can be rolled over daily for an indefinite period subject to roll-over fees.
Hedging Tool
Investors involved in international trade can minimize their currency exposure risks by using a Forex trading system.
Operation Of The Forex Market
The International Forex Market is a non-physical market and has no central exchange. The major participants in this foreign exchange trading market are Central Banks, prime multinational banks, large corporations, brokerage houses and individual investors. Forex agents offer various services to investors, including financial analysis, information gathering and market situation updates. Most transactions are conducted via the telephone or through online forex trading systems.
The high liquidity in the forex market is due to the enormous volume of transactions generated by the primary market called the "interbank market" where banks, large financial institutions, insurance companies and other large corporations deal with each other in huge quantities to manage their own currency risks. The secondary over-the-counter market, where retail clients participate in forex transactions, has benefited from this liquidity provided by the big institutions.
The growth of the average daily volume of Forex trading has been phenomenal and is now currently trading currency to the tune of $1.6 trillion a day, having grown 50% in the last decade from an already large $1.0 trillion a day in 1992. It reached a high level in 2001 with approximately $2.2 trillion but adjusted back to the current $1.6 trillion by 2003. This was likely due to the birth of the single Euro currency in place of the then existing 12 European currencies.
The largest part of the largest financial market in the world consists overwhelmingly of speculation, in the form of spot forex trades (95%). The remaining 5% consists of companies swapping currencies back to their home currency to repatriate profits, forwards moves, and all other transactions.
The Traded Currencies
The six major currencies of Forex dominate the overall market share. 76% of all trades have both currencies in the currency pair as a major, and more than 98% of all trades involve at least one major.
Both of these figures are well beyond what would be expected if foreign currency trading were based solely on the majors' share of world GDP (74.5%), demonstrating the value the majors command abroad relative to other currencies. Another way thinking about the majors' predominance in the currency markets is to compare the rest of the world's economic output (25.5%), to the less than 2% share of Forex speculation that does not have a major on either side of the currency pair.
The most common currency pairs are EUR/USD (30%), USD/JPY (20%), GBP/USD (11%), and USD/CHF (5%), which together totals 66% (two-thirds) of all Forex spot trades.
The Dollar, Euro, Yen, and Pound are the most traded currencies. The six majors combine for a huge bulk of the trading transactions in a single day. Corporations and banks have known this for years, and have often used Forex for hedging purposes. With the increase in global trade, multinational corporations have likewise used the forex market to manage their risk in changes in currency rates.
Source: SGFS; Bank of International Settlements, Triennial Central Bank Survey.
Why Trade Forex?
The transformation of the world economy into a global dimension and the dawn of technological advancement create unprecedented opportunities particularly with the emergence of new markets with considerable growth potential. This scenario likewise underscores the fact that up-to-date information in this modern age is a valuable commodity made possible by breakthroughs in information technology. Now world events are digested in a matter of seconds providing the backbone for vital investment decision making. Among the most dynamic of the markets which is highly sensitive to political and economic changes is the Foreign Exchange Market (FOREX).
Whether we like it or not, radical changes in forex exchange rates affect an individual's or institution's overall investment portfolio. If your holdings are all in US Dollars, you have chosen to hold the dollar and give up other major currencies. Indirectly, this makes you a currency investor. By investing in, and with, the US currency, then your portfolio becomes dependent on the integrity and value of the US Dollar. Without realizing it, this may have worked against you due to the decline of the value of the US Dollar against other major currencies.
The FOREX market provides the investor a valuable tool in managing the effects of the foreign exchange risk by taking advantage of fluctuations in exchange rates. It is a means by which one can readily access this global market 24 hours a day and be able to hedge his/her outstanding US Dollar-based holdings. In a time when the speed of business increases on a daily basis, you need the ability to react swiftly. This change has created a condition that may leave investors out of the game without being aware of lost opportunities or erosion in their capital assets |
| posted by Harun Azis, A.Md. @ 5:26 PM |
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| Fundamental Analysis |
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Fundamental Analysis
Aside from technical analysis, another primary approach to analyzing currency market fluctuations is called fundamental analysis. Fundamental analysis is the examination of economic indicators, asset markets and political considerations when evaluating a nation's currency in terms of another. The key to fundamental analysis is to gather and interpret this information and act before the information is incorporated into the currency price. The lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist.
Here some major fundamental factors that can affect currency prices:
Decisions on interest rates made by central banks such as the US Federal Reserve or the European Central bank (ECB) monthly.
Quarterly GDP figures. Only preliminary national GDP figures generally have the effect of changing market sentiment.
Market sentiment data. Market expectations are formed from one week to two days before the event. Participants become well positioned based on expectations. If the figures are not a surprise, profit taking is often the only result.
Political Events. National elections, the September 11th attacks, and the war in Iraq are examples of events that have affected currency values.
Major indices. Inflation indices, Institute of Supply Management (ISM) in the US and the Purchasing Management Index (PMI) in Europe are also carefully followed by traders.
National industrial production figures.
US nonfarm payrolls (indicating new jobs created), Michigan sentiment figures in the US, the western German business climate or IFO index, and the Tankan quarterly survey in Japan.
There are times that governments through their Central Banks stand in the way of market forces impacting their currencies, and hence, intervene to keep currencies from deviating markedly from undesired levels. Currency interventions have a notable and oftentimes temporary impact on FX markets. A central bank could undertake unilateral purchases/sales of its currency against another currency; or engage in concerted intervention in which it collaborates with other central banks for a much more pronounced effect. Alternatively, some countries can manage to move their currencies, merely by hinting, or threatening to intervene.
Central Banks
Board of Governors of the Federal Reserve System
(http://www.federalreserve.gov/)
Bank Of England
(http://www.bankofengland.co.uk/)
European Central Bank
(http://www.ecb.int/)
Bank Of Japan
(http://www.boj.or.jp/en/index.htm)
Reserve Bank Of Australia
(http://www.rba.gov.au/)
Banque de France
(http://www.banque-france.fr/gb/home.htm)
Bank Of Canada
(http://www.bankofcanada.ca/en/)
Deutsche Bundesbank
(http://www.bundesbank.de/index.en.php)
Swiss National Bank
(http://www.snb.ch/e/index3.html)
Highlights
Contact Us
Now
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Trading Account
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| posted by Harun Azis, A.Md. @ 5:25 PM |
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| Technical Analysis |
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Technical Analysis
Technical analysis is the examination of past price movements to forecast future price direction. Technical analysts are sometimes referred to as "chartists" because they rely almost exclusively on charts for their analysis.
Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low or close for a given commodity/security over a specific timeframe. The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume and/or open interest figures with their study of price action.
Money managers, traders and investors who find ways to outperform the market must also remain flexible and innovative. A method that works today does not mean it will work tomorrow.
The Beginning of Technical Analysis
At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis. Dow Theory was not presented as one complete amalgamation, but rather pieced together from the writings of Charles Dow over several years.
Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, market strategist, technical analysts, fundamental analysts and many others. It would be folly to disagree with the price set by such an impressive array of people with impeccable credentials. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.
A technician believes that it is possible to identify a trend, and market turning points, invest or trade based on the trend and make money as the trend, or turning points unfolds. Because technical analysis can be applied to many different timeframes, it is possible to spot both short-term and long-term trends.
The IBM chart below illustrates a view on the nature of the trend. The broad trend is up, but it is also interspersed with trading ranges. In between the trading ranges are smaller uptrends within the larger uptrend. The uptrend is renewed when the stock or commodity breaks above the trading range. A downtrend begins when the stock or commodity breaks below the low of the previous trading range.
What is more important than Why?
It's been said, "A technical analyst knows the price of everything, but the value of nothing". Technicians, as technical analysts as they are called, are only concerned with two things:
What is the current price?
What is the history of the price movement?
The price is the end result of the battle between the forces of supply and demand for any particular item. The objective of analysis is to forecast the direction of the future price. By focusing on price and only price, technical analysis represents a direct approach. Fundamentalists are concerned with 'why' the price is what it is. For technicians, the 'why' portion of the equation is too broad and many times the fundamental reasons given are highly suspect. Technicians believe it is best to concentrate on 'what' and never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any item is only what someone is willing to pay for it. Who needs to know why? You may never know why.
Many technicians employ a broad-based, longer term, macro, long-term analysis first. The larger parts are then broken down to base the final step on a more focused/micro short-term, perspective. Such an analysis might involve three steps:
Broad market analysis through the major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite, or Commodity Futures Index, or other broad indexes of various types.
Group analysis to identify the strongest and weakest groups within the broader market groupings, i.e. Indexes, Meats, Grains, Currencies, Metals, Energies, etc.
Individual analysis to identify the strongest and weakest within each group.
The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are universally applicable, each of the analysis steps above can be performed using the same theoretical background. You don't need an economics degree to analyze a market index chart or commodity group. Charts are charts. It does not matter if the timeframe is 2 days or 2 years. It does not matter if it is a, market index, currency or commodity. The technical principles of support, resistance, trend, trading range and other aspects can be applied to any chart. While this may sound easy, technical analysis is by no means easy. Success requires serious study, dedication and an open mind. Technical analysis can be as complex or as simple as you want it.
Overall Trend:
The first step is to identify the overall trend. "The trend is your friend". This can be accomplished with trend lines, or moving averages, or both. A Moving Average (MA) is an average of data for a certain number of time periods. It "moves" because for each calculation, we use the latest "x" number of time periods' data. As long as the price remains above its uptrend line, or selected moving average or previous lows, the trend should be considered bullish. The trend theory holds that an uptrend remains intact as long as each successive intermediate high is higher than those preceding it and each reaction low stops and holds at a higher point than did earlier reaction lows. Conversely, a downtrend prevails when each intermediate decline allows prices to fall below previous lows and rallies fall short of earlier rally highs.
Support and Resistance Areas:
Support and resistance levels are unquestionably among the most important of all technical considerations. They are areas, which prices are expected to have difficulty moving above and beyond (resistance and support), and they therefore deserve especially careful considerations in buying and selling decisions. Support areas are areas of price congestion or previous lows, below the current price, which mark support levels. A break below support would be considered bearish. Resistance areas are areas of congestion or previous highs above the current price which mark resistance levels. A break above resistance would be considered bullish. The basic idea behind resistance and support theory is simply that price levels that were significant in the past will have significant impact on price action in the future.
Random Walk Theory:
The basic "random walk premise" is that price movements are totally random. Prices move at random and adjust to new information as it comes available. The adjustment to this new information is so fast that it is virtually impossible to profit from it. Furthermore, news and events are also random and trying to predict these (fundamental analysis) is also a lesson in futility. While there are some good points to be gleaned from the random walk theory, it appears to be a bit dated and does not accurately reflect the current investment climate. Random walk theory was introduced over 25 years ago when institutions dominated the market. These institutions had superior access to resources and the individual was at the mercy of the large brokerage houses for quality research. With the advent of online trading, power and influence are shifting from the institutions to the individual. Resources are now widely available to all at minimal cost, if not free. Not only can individuals access information, but the internet ensures that everyone will receive it almost instantaneously. They also have access to real time data and can trade like the pros. With the availability of real time data and almost instant executions, individuals can act on information like never before.
General Chart Analysis:
What Are Charts?
A price chart is a sequence of prices plotted over a specific timeframe. In statistical terms, charts are referred to as time series plots, usually containing the open, high, low, and closing prices.
Chart Patterns:
Much of our understanding of chart patterns can be attributed to the work of Richard Schabacker. His 1932 classic, Technical Analysis and Stock Market Profits, laid the foundations for modern pattern analysis. In Technical Analysis of Stock Trends (1948), Edwards and Magee credit Schabacker for most of the concepts put forth in the first part of their book. We would also like to acknowledge Messrs. Schabacker, Edwards and Magee, and John Murphy as the driving forces behind our understanding of chart patterns.
Pattern analysis may seem straightforward, but it is by no means an easy task. Schabacker states: §The science of chart reading, however, is not as easy as the mere memorizing of certain patterns and pictures and recalling what they generally forecast. Any general chart is a combination of countless different patterns, some being continuation patterns and some reversal patterns, and its accurate analysis depends upon constant study, long experience and knowledge of all the fine points, both technical and fundamental, and, above all, the ability to weigh opposing indications against each other, to appraise the entire picture in the light of its most minute and composite details as well as in the recognition of any certain and memorized formula.
To name just a few there are; Double tops and bottoms, Head and Shoulder tops and bottoms, Wedges, Flags, Triangles, Channels, Gaps (four types), Key Reversals, Island reversals, and more. There are also Candlestick charts which provide a different way of looking at, and analyzing, the same basic price data, open, high, low, and close.
A few other tools used on charts are Trend Lines, Support and Resistance areas, percentage retracements, Fibonacci retracements, Time cycles, Elliot Wave Theory Analysis, Gann Analysis, and more. Technical Indicator Analysis:
There are many ways to crunch the numbers and endless combinations. Here is a list of some of the more popular Technical Indicators:
Accumulation Distribution
Advance-Decline lines and ratios
Arms Index (TRIN)
Bollinger Bands
Commodity Channel Index
Moving Averages (of various types)
Moving Average Convergence Divergence
McClellan Osc
Momentum
On Balance Volume
Parabolic SAR
Relative Strength Index (RSI)
Stochastic (fast and slow)
Volatility
Markets move on anticipation, and often reverse on realization! A twist on the old stock market adage buys the rumor, sell the news.
Trade the expectation, reverse on the realization |
| posted by Harun Azis, A.Md. @ 5:20 PM |
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| Getting Started: Learn to Trade Forex in 7 Steps |
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Getting Started: Learn to Trade Forex in 7 Steps
Step 1 - Maximize Your Tools
FXCM provides multiple tools to help you become a better currency trader including free market news, and real time charts. The most valuable tool, however, is the FXCM Demo account, which allows you to test out strategies and learn from your mistakes without risking real money.
Step 2 - Risk Management
Every successful trader should know how much risk he is willing to take, and what profits should result from the trade. This is the basis of every realistic trading strategy.
Step 3 - Two Ways to Trade
There are two types of traders, technical and fundamental. Both have a radically different approach to making trading decisions. Click here to find out which camp you belong to.
Step 4 - The Basics of Technical Analysis
All technical analysis starts with a few basic building blocks. With these as a foundation, you can start to make sound trading decisions.
Step 5 - Applying Technical Analysis
FXCM provides tools for basic technical analysis. Test your knowledge of technical analysis.
Step 6 - Fundamentals Everyone Should Know
All Traders should understand why economic releases, interest rates, and international trade are important to movements in the currency market.
Step 7 - Psychology of Trading
The biggest enemy to most traders is not the market, but themselves. Learn four basic trading principals that will help you to avoid the four biggest mistakes that traders make.
Getting Started: Step 1 of 7
FXCM provides you with access to a live trading platform with a virtual balance of $50,000. The account looks, feels, and behaves identically to the real FXCM trading system including price action, and trade execution.
How to Trade Your Demo
Use this time to make a plan.
1. Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some to slow so decide which currency pair is most appropriate for your strategy and time frame.
2. Decide on how long you plan to stay in a trade. If you are an inter day trader, what is the average time of your trade, few minutes, couple of hours a full day, swing trade (couple of days to a week).
3. Before you enter a trade you should also have clear exit plan. Place your stops and limits accordingly.
4. Know how much you are willing to risk and how much you are looking to gain.
5. Keep track of important news and technical levels, which may be tested within your time frame.
Keep a Trade Log
A diary is a trader's best friend; it will show you what works and what doesn't. It will also keep you from making the same mistakes, which is the reason most traders fail. The diary should have but not limited to the following information:
1. Time and date you placed the trade.
2. A note describing your strategy and why you chose to enter the trade.
3. Why you exited the trade, and if it was at your stated stop or limit level or did you get out for other reasons etc.
Keeping trade logs or a diary of all the past trades can help a trader recognize why some trades worked and others didn't. Once you start recognizing successful patterns, you can rest assured they will develop again, and when they do just be there to take advantage of it. This is made much easier to practice in the currency market because of reliable technical patterns that consistently develop in this market.
Trading Tools
The right trading tools can mean the difference between profit and loss.
Real-Time Charts
For currency trading, a crucial trading tool for capturing key entry and exit points is technical analysis. FXCM offers a variety of free basic and advanced charts as well as professional chart at a discount to meet the needs of all traders.
Charts Available: www.fxcm.com/charting_options_top.jsp
For guidance on using these trading tools, FXCM's team of charting specialists is available around-the-clock to help you determine which charts are right for you.
DailyFX is Dedicated to FX News and Analysis
A diary is a trader's best friend; it will show you what works and what doesn't. It will also keep you from making the same mistakes, which is the reason most traders fail. The diary should have but not limited to the following information:
1. Current Market Reports - Read these weekly reports to gain a macro view of general trends in currency market. This will help you to understand the underlying factors and current issues that affect the movement in currencies. Fundamental based traders will particularly find this useful.
2. Daily Fundamentals - The Daily Fundamental forex report provides commentary on the most important events that occurred in the past 24 hours and provides an outlook for the day ahead. It also recaps the key economic releases and global market movements.
3. DailyFX Technical Triggers - Study and spend time learning the multitude of chart patterns that develop on a daily basis. Use DailyFX daily technical triggers to see which patterns developed in the last 24-hours to identify bullish or bearish trends across the major currencies.
4. Bank Research - Make sure you read market analysis from major banks and find out where the markets recognize support and resistance levels, which are readily available. You don't have to necessarily always agree with them but its good to have them on your side! DailyFX provides link to over 10 highest rates banks for FX research.
5. Daily Technicals - A technically trained trader can easily identify new trends and breakouts, which provide multiple opportunities to enter and exit positions. As a result, t he currency markets are the most technically traded markets in the world. The daily technical report includes updated support and resistance levels, intraday probability bands, and pivot points on the major currency pairs, which you can use to determine entry and exit positions.
Getting Started: Step 2 of 7
FXCM provides you with access to a live trading platform with a virtual balance of $50,000. The account looks, feels, and behaves identically to the real FXCM trading system including price action, and trade execution.
How much do I believe the market will move and where do I want to take my profit?
Limit Orders allow traders to exit the market at 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. Limit orders help create a disciplined trading methodology and enable traders to walk away from the computer without constantly monitoring the market.
How much am I willing to lose before I exit the position?
Stop/Loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair the stop/loss order should be placed above the current market price. If you are long the currency pair the stop loss order should be placed below the current market price. Stop/Loss orders help traders control risk by capping losses. Stop/Loss orders are counter-intuitive because you do not want them to be hit, however, you will be happy that you placed them! When logic dictates, you can control greed.
Where should I place my stop and limit orders?
As a general rule of thumb traders should set stop/loss orders closer to the opening price than limit orders. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable. For example, a trader that uses a 30 pip Stop/Loss and 100 pip limit orders, needs only to be right 1/3 of the time to make a profit. Where the trader places the stop and limit will depend on how risk-adverse s/he is. Stop/Loss orders should not be so tight that normal market volatility knocks the position out. Similarly, limit orders should reflect realistic expectation of gains given the markets trading activity and the length of time one wants to hold the position.
Getting Started: Step 3 of 7
There are two basic approaches to analyzing the currency market, fundamental analysis and technical analysis. The fundamental analyst concentrates on the underlying causes of price movements, while the technical analyst studies the price movements themselves.
Technical Analysis
Technical analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions. The primary tools of the technical analyst are charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.
Fundamental Analysis
Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued.
Technical Analysis or Fundamental Analysis?
Most traders with FXCM abide by technical analysis because it does not require hours of study. Technical analysts can follow many currencies at one time. Fundamental analysts, however, tend to specialize due to the overwhelming amount of data in the market. Technical analysis works well because the currency market tends to develop strong trends. Once technical analysis is mastered, it can be applied with equal ease to any time frame or currency traded.
Getting Started: Step 4 of 7
The Basis of Technical Analysis explains trend analysis and how to use basic trend following techniques.
Chart 1. What is Market Trend? Trend is simply the overall direction prices aremoving -- UP, DOWN, OR FLAT.
Chart 2. Types of Trends The direction of the trend is absolutely essential to trading and analyzing the market. In the Foreign Exchange (FX) Market, it is possible to profit from UP and Down movements, because of the buying and selling of one currency and against the other currency e.g. Buy US Dollar Sell Japanese Yen ex. Up Trend chart.
Up TrendAs the trend moves upwards the US Dollar is appreciating in value.
Down TrendAs the trend moves downwards the US Dollar is depreciating in value.
Sideways TrendPrices are moving within a narrow range (The currencies are neither appreciating nor depreciating).
Chart 3. Trend Classifications
Chart 4. Information About Trendlines The basic trendline is one of the simplest technical tools employed by the trader, and is also one of the most valuable in any type of technical trading. For an up trendline to be drawn, there must be at least two low points in the graph where the 2nd low point is higher than the first. A price low is the lowest price reached during a counter trend move. Drawing Bullish Trendlines
Chart 5. Trend Analysis and Timing Markets don't move straight up and down. The direction of any market at any time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). Within those trends, markets have countertrend (backing & filling) movements. In a general sense "Markets move in waves", and in order to make money, a trader must catch the wave at the right time.
Chart 6. Drawing Trendlines
Chart 7. Trendlines I Drawing Trendlines will help to determine when a trend is changing.
Chart 8. Trendlines II Trendlines show support boundaries under prices. These boundaries may be used as buying areas.
Chart 9. Trendlines III Temporary trendline penetrations are not as significant as a close beyond the trendline.
Chart 10. Channel Lines When prices trend between two parallel trendlines they form a Channel. When prices hit the bottom trendline this may be used as a buying area and when prices hit the upper trendline this may be used as a selling.
Chart 11. Find Price Support Levels Price supports are price areas where traders find that it is difficult for market prices to penetrate lower. Buying interest in the dollar is strong enough to overcome Selling interest in the dollar keeping prices at a sustained level.
Chart 12. Finding Price Resistance Levels Resistance is the opposite of support and represents a price level where Selling Interest overcomes Buying interest and advancing prices are turning back.
Chart 13. 50% Retracements
Chart 14. 33% and 66% Retracements There are also 33% and 66% Retracements.
Getting Started: Step 5 of 7
Currency charts can be used on an intraday basis (5-minute, 15 minute), hourly, weekly, or monthly basis. The chart you study depends on how long you plan on holding a position. If you are trading with a few hours in mind you may want to look at 5-minute or 15-minute charts. If you plan on holding a position for a couple of days, you may want to look at an hourly, 4-hour or daily chart. Weekly charts and monthly charts compress price movements to allow for much longer-range trend analysis. Therefore, these currency charts give the technical trader a longer-term context in which to conduct trades.
Test Your Skills
Look at the 5-minute, 15-minute, and one-hour currency charts and find support and resistance lines for the EUR/USD. You will notice that once a major support or resistance line is broken, markets tend to trend strongly in that direction.
Getting Started: Step 6 of 7
Currency prices reflect the balance of supply and demand for currencies. Two primary factors affecting supply and demand are interest rates and the overall strength of the economy. Economic indicators such as GDP, foreign investment, and the trade balance reflect the general health of an economy and are, therefore, responsible for the underlying shifts in supply and demand for that currency. There is a tremendous amount of data released at regular intervals, some of which is more important than others. Data related to interest rates and international trade is looked at the closest.
Interest Rates
If the market has uncertainty regarding interest rates, then any bit of news regarding interest rates can directly affect the currency markets. Traditionally, if a country raises its interest rates, the currency of that country will strengthen in relation to other countries, as investors shift assets to that country to gain a higher return. Hikes in interest rates, however, are generally bad news for stock markets. Some investors will transfer money out of a country's stock market when interest rates are hiked, believing that higher borrowing costs will affect ballance sheet negatively and result in devalued stock, causing the country's currency to weaken. Which effect dominates can be tricky, but generally there is a consensus beforehand as to what the interest rate move will do. Indicators that have the biggest impact on interest rates are PPI, CPI, and GDP. Generally the timing of interest rate moves are known in advance. They take place after regularly scheduled meetings by the BOE, FED, ECB, BOJ, and other central banks.
International Trade
The trade balance shows the net difference over a period of time between a nation's exports and imports. When a country imports more than it exports, the trade balance will show a deficit, which is generally considered unfavorable. For example, if US consumers wanted Japanese products, major automobile dealers might sell US dollars to pay for the import of Japanese vehicles with yen. The flow of dollars outside the US would then lead to a depreciation in the value of the US dollar. Similarly if trade figures show an increase in exports, dollars will flow into the United States due to inreased confidence in the economy and then the value of the US dollar would increase. From the standpoint of a national economy, a deficit in and of itself is not necessarily a bad thing. However, if the deficit is greater than market expectations then it will trigger a negative price movement.
Getting Started: Step 7 of 7
Four Principles for Becoming a Better Trader
Trade With A DISCIPLINED Plan
The problem with many traders is that they take shopping more seriously than trading. The average shopper would not spend $400 without serious research and examination of the product he is about to purchase, yet the average trader would make a trade that could easily cost him $400 based on little more than a “feeling” or “hunch.” Be sure that you have a plan in place BEFORE you start to trade. The plan must include stop and limit levels for the trade, as your analysis should encompass the expected downside as well as the expected upside.
Cut Your Losses Early and Let Your Profits Run
This simple concept is one of the most difficult to implement and is the cause of most traders demise. Most traders violate their predetermined plan and take their profits before reaching their profit target because they feel uncomfortable sitting on a profitable position. These same people will easily sit on losing positions, allowing the market to move against them for hundreds of points in hopes that the market will come back. In addition, traders who have had their stops hit a few times only to see the market go back in their favor once they are out, are quick to remove stops from their trading on the belief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out of 6 trades to be profitable then you are doing well. How then do you make money with only half of your trades being winners? You simply allow your profits on the winners to run and make sure that your losses are minimal.
Do Not Marry Your Trades
The reason trading with a plan is the #1 tip is because most objective analysis is done before the trade is executed. Once a trader is in a position he/she tends to analyze the market differently in the “hopes” that the market will move in a favorable direction rather than objectively looking at the changing factors that may have turned against your original analysis. This is especially true of losses. Traders with a losing position tend to marry their position, which causes them to disregard the fact that all signs point towards continued losses.
Do Not Bet the Farm
Do not over trade. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade. Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at any given time. Trading currencies is not easy (if it were, everyone would be a millionaire!). |
| posted by Harun Azis, A.Md. @ 2:57 PM |
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| What is Forex Trading? |
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What is Forex Trading?
Overview
FXCM provides an online trading platform for individuals that want to speculate on the exchange rate between two currencies. In doing so, traders buy and sell currencies with the hope of making a profit when the value of the currencies changes in their favor, whether from market news or events that take place in the world. The forex market is the largest market in the world with daily reported volume of over 1.8 trillion making it one of the most exciting markets for trading.
Market Hours
The spot FX market is unique to any other market in the world, as trading is available 24-hours a day. Somewhere around the world, a financial center is open for business, and banks and other institutions exchange currencies, every hour of the day and night with generally only minor gaps on the weekend. Essentially foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day.
How Market Hours Work
Time Zone New York GMT
Tokyo Open 7:00 PM 0:00
Tokyo Close 4:00 AM 9:00
London Open 3:00 AM 8:00
London Close 12:00 PM 17:00
NY Open 8:00 AM 13:00
NY Close 5:00 PM 22:00
How an FX Trade Works
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Example of How FX Trade Works
Trader's Action Euros US Dollars
A trader purchases 10,000 euros in the beginning of 2001 at the EUR/USD rate was .9600. +10,000 -9,600
In May of 2003 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. -10,000 +11,800
In this example, the trader earned a gross profit of $2,200. 0 +2,200
Quoting Conventions
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
Currency Abbreviations
Symbol Definition Symbol Definition
EUR Euro NZD New Zealand dollar
GBP Great British pound AUD Australian dollar
USD US dollar CAD Canadian dollar
CHF Swiss franc JPY Japanese Yen
EUR/USD
In this example euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell.
If you think the British economy will continue to be the leading economy among the G7 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the CHF is the base currency and thus the “basis” for the buy/sell.
If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
Buying/Selling
First, the trader should determine whether they want to buy or sell. If they want to enter a short order – whereby they will profit if the exchange rate falls – they simply need to click on the SELL rate. The opposite holds true for traders who enter buy orders: they can simply click on the BUY rate, and thus will profit if the exchange rate goes up.
Example of How Buying/Selling Works
Just like in all markets, there are two prices for every currency pair. The difference between these two prices is the spread, or the cost of the trade. In this example, the spread is three pips. On a mini account, a pip on the EUR/USD currency pair is worth $1.
Margin
The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. FXCM’ s online trading platform has margin management capabilities, which allow for this high leverage. FXCM’s most lenient margin requirement is 1%.
In the event that funds in the account fall below margin requirements, the FXCM Dealing Desk will close some or all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market.
Example of How Margin Works
Since the trader opened 1 lot of the EUR/USD, his margin requirement or Used Margin is $1000. Usable Margin is the funds available to open new positions or sustain trading losses. If the equity (the value of his account) falls below his Used Margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits.
Rollover
For positions open at 5pm EST, there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure it is closed at 5pm EST, the established end of the market day. Since every currency trade involves borrowing one currency to buy another, interest rollover charges are an inherent part of FX trading. Interest is paid on the currency that is borrowed, and earned on the one that is purchased. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net differential will be positive – and the client will earn funds as a result. Please note that clients must be on 2% margin in order to earn funds.
Getting Started
With no commitment or cost, you can open a Virtual Trading Account. The account has the full capabilities of a "real" account including live market rates, access to real-time market analysis, and the ability to execute trades off streaming prices. The virtual account (or Demo Account) gives you the ability to learn about the forex markets and test your trading skills without any risk.
How to Trade Your Demo: Use this time to make a plan.
1. Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some to slow so decide which currency pair is most appropriate for your strategy and time frame.
2. Decide on how long you plan to stay in a trade. If you are an inter day trader, what is the average time of your trade, few minutes, couple of hours a full day, swing trade (couple of days to a week).
3. Before you enter a trade you should also have clear exit plan. Place your stops and limits accordingly.
4. Know how much you are willing to risk and how much you are looking to gain.
5. Keep track of important news and technical levels, which may be tested within your time frame. |
| posted by Harun Azis, A.Md. @ 2:54 PM |
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| Learn Trading: Basics of Fundamental Analysis (4) |
| Saturday, December 30, 2006 |
Dear Harun Azis,
My name is Nadia Fleischer and I work for Marketiva Corporation
(http://www.marketiva.com/). Marketiva is a foreign exchange (forex)
dealer
where people can start trading with as little as $1 and learn how to
successfully participate in the largest financial market in the world.
Currency traders trade on the basis of fundamental analysis and
technical
analysis. Fundamental analysis involves the study of economic
fundamentals, e.g. economic indicators and reports. Technical analysis
involves the study of charts or diagrams. In the following newsletter,
we
will explain at length the GDP and the CPI measures.
GROSS DOMESTIC PRODUCT (GDP)
Gross Domestic product (GDP) is the total market value of all goods and
services produced by factors of production (land, labor and capital) in
the
United States by domestic and foreign economic agents within a
specified
time frame. GDP replaced GNP (Gross National Product) in 1991 as a
standard measure of domestic output in accordance with the United
Nations
System of National Accounts (SNA) and in order to promote a better
comparability of U.S. output growth rates with other growth rates of
other
countries. GDP is the single most widely used measure of national
output
and growth by countries worldwide. Investors need to monitor closely
economic activity since it dictates oftentimes whether an investment
will
perform up to expectations. GDP data are available in real and nominal
terms and real GDP growths discount the rate of inflation. A higher GDP
means more inflationary pressures while a lower GDP is tantamount to a
depressed economic state and less inflation. The measure of Gross
Domestic
Product can reveal significant major and minor trends in the economy.
For
example, GDP components such as consumer spending, business and
residential investment can disclose at an early stage underlying
currents
which may present favorable investment opportunities. Information
contained in the GDP can also provide better insights towards an
efficient
management of an investment portfolio. GDP is a quarterly report: data
for
the preceding quarter is released on the third or fourth week of the
month at
8:30 am Eastern Time with subsequent releases of revised GDP data in
the
second and third month of the quarter. Seasonal adjustments are made in
July with the release of the second quarter data. The Bureau of
Economic
Analysis (BEA), which is an agency of the U.S. Department of Commerce,
produces GDP estimates from the National Income and Product Account. In
theory, there are three approaches to measuring national output -
namely, the
expenditure, the income, and the added value, or production, approach.
The
GDP report that is released by the BEA is based on the expenditure
approach, e.g. the final expenditures on goods and services in a
specified
time frame. Due to the scarcity of data on imports and outsourcing
activities,
the measure of GDP by the expenditure approach may fail to aptly
capture
the actual magnitude of foreign outsourcing and imports of services;
GDP
by the expenditure approach is measured as follows: Total Expenditures
=
Consumption + Investments + Government Expenditure + (Exports -
Imports), or net exports. An underestimated figure of imports would
systematically lead to an inflated figure of Gross Domestic Product,
net
exports and growth rates. Although the BEA recommends putting more
faith
in the expenditure approach, a number of economists still advocate
alternative measures to better gauge GDP actual growth rates - namely,
GDI
and IPI. Gross Domestic Income (GDI) is the measure of national output
based on the income approach, i.e. income earned by factors of
production
(land, labor, and capital). Had all relevant data been available for
their
respective components, both the income and the expenditure approaches
would amount to similar values. GDI exhibits slower growth rates than
the
GDP, so its growth rates relate to actual growth rates of GDP. The
Industrial
Production Index (IPI) is an economic indicator that is released every
month
by the Federal Reserve Board. The IPI can provide timely information.
Early reports of the GDP estimates are based on partial and incomplete
data
and only subsequent GDP reports include improved data. The Bureau of
Economic Analysis (BEA) conducts regular studies on the reliability of
GDP estimated figures. In these studies, reliability measures whether
successive GDP estimates describe consistently the general picture of
economic activity. The latest research threads suggest that early
estimates of
GDP present indeed a robust image of economic activity. The GDP measure
has consistently indicated whether growth is positive or negative,
accelerating or decelerating, high or low in relation to the overall
trend of
the economy or the business cycle, according to these studies. In
addition,
the latest study also found that, on average, revisions to GDP are
small and
positive, indicating the tendency to revise GDP estimates upward.
Equally,
these studies concluded that GDI estimates did not contain any
additional
information that would actually improve the predictability of future
GDP
growth rates.
Evidence from other studies conducted by the Government Accountability
Office and the International Monetary Fund, suggests that both imports
and
exports of goods and services may be misrepresented due to the
unavailability of reliable data on the volume of imports of services.
There is
also no evidence of a systemic bias in the estimates of net exports in
GDP.
In the National Income and Product Accounts (NIPAs), growth in real
imports has been consistently sluggish since 2001. Yet, there is enough
evidence that outsourcing is increasing at staggering rates. The NIPA
component, most applicable to outsourcing, is imports of "other private
services" which includes business, professional and technical services.
Individual estimates for real spending on business, professional and
technical services are not available, but overall and on the aggregate,
they
exhibit an increasing pattern. For more information, please visit the
http://www.bea.gov page.
The IPI is a monthly index of production output in the energy sector
mainly
in the manufacturing, mining, electric and gas utilities industries.
Each
industrial production index is construed based on two types of source
data:
1) output measured in physical units, and 2) inputs used in the
production
process (e.g. production-worker hours). GDP is a quarterly series that
measures the market value of goods and services produced by factors of
production in the United States. The aggregate GDP measure that closely
matches the IPI index is a GDP measure of goods that comprises durable
and non-durable goods within the consumption category, fixed
investment,
change in private inventories and net exports. GDP measures production
based on producers' prices paid to manufacturers by wholesalers,
retailers,
and consumers. These disparities may elucidate some of the existing
discrepancies between growth in the IPI and the GDP of goods since a
major
portion of growth in the GDP of goods is attributed to the retail and
wholesale trade sectors rather than the goods-producing sector,
although the
goods-producing sector has being showing strong growth patterns lately
(GDP by industry). Despite the fact that the IPI estimates reflect a
combination of energy use, tons of materials shipped and employment
indicators, both the IPI and GDP of goods reflect the same Census
source
data (e.g. the annual survey of manufacturers). Deviations between the
movements of these two indicators tend to disappear as longer time
periods
are being examined. You can find more information about the IPI at the
http://www.federalreserve.gov page.
WHAT IS THE CPI?
The Consumer Price Index (CPI) is a measure of the average change over
time in the prices paid by urban consumers for a market basket of
consumer
goods and services. The Consumer Price Index is produced by the Bureau
of
Labor Statistics, U.S. Department of Labor. The CPI data for the prior
month is released at 8:30 am Eastern Time around the 13th of the every
month. Adjustments for seasonal factors are introduced in February with
the
release of January data and this revision affects the last five years
of data.
The CPI affects almost every household it the U.S. due to its
application to
various economic instances. The CPI is used as an economic indicator,
as a
deflator of other economic indicators, and as an inflation-discounting
rate.
The CPI is the benchmark of inflation par excellence. It is also a
barometer
of the efficiency of government economic policies. CPI provides timely
information about price changes in the U.S. economy to policy setters,
business leaders, labor workers, and private citizens and is used by
these
categories of individuals as an economic decision making tool. In
addition,
the President, Congress, and the Federal Reserve Board monitor closely
trends in the CPI in order to set efficient fiscal and monetary
policies. The
CPI and its components are also used to adjust other economic
indicators for
price changes so that these indicators translate into inflation-free
dollars.
Examples of indicators adjusted using the CPI include retail sales,
hourly
and weekly earnings, and components of the National Income and Product
Accounts. The CPI is also used as a deflator, or discounter, to compute
the
purchasing power of every dollar. The purchasing power of every dollar
spent by the consumer of goods and services measures the change in the
value that a dollar can buy at different times. In other words, as
prices
increase, the purchasing power of every consumer dollar declines. The
CPI
is used to income (for example, social security), to set eligibility
levels for
government assistance, and to adjust the cost-of-living wage of wage
earners
in the United States. The CPI affects the income of nearly 80 million
individuals: 51.6 million Social Security beneficiaries, 21.3 million
food
stamp recipients, and about 4.6 million military and Federal Civil
Service
retirees and survivors. Changes in the CPI also affect the cost of
lunches for
28.4 million children who eat lunch at school. The CPI is also used to
adjust
the Federal income tax structure. These adjustments remove inflation-
induced increases in tax rates; this is referred to as the bracket
creep. The
CPI is considered to be an upper bound of the cost-of-living index, as
the
CPI does not reflect changes in buying patterns that consumers normally
make to adjust to relative price changes. Since January 1999, most of
the
basic indexes within the CPI are computed based on the geometric mean
formula; in other words, the prices within most item categories (for
example, apples) are geometrically averaged; the application of the
geometric mean moves the CPI closer to a cost-of-living index since it
allows for a modest amount of substitution as prices within each item
category change. The geometric mean formula is used to average prices
within each item category so it does not account for consumer
substitution
between item categories. For example, if the price of pork rises
relative to
the prices of other meats, consumers might shift their buying away from
pork to beef, poultry, or fish. The traditional CPI formula does not
reflect
this type of consumer sensitivity to changing prices. In 2002, as a
complement to the CPI-U and CPI-W, the Bureau of Labor Statistics
produced a new index called the chained CPI all urban consumers (C-CPI-
U). The C-CPI-U reflects more or less a cost-of-living index, as it
accounts
for substitution among item categories. The CPI is based on data from
the
Consumer Expenditure Survey of more than 30,000 households, which
provides detailed information on the spending habits of respondents.
This
enables BLS to construct the CPI market basket of goods and services
and to
assign a weight to each item within the market basket based on total
family
expenditure. The last step in the sampling process involves the
selection of
the specific item to be priced in each consumer outlet. This is done in
the
field, using the method of disaggregation. For example, BLS economic
assistants may be directed to price "fresh whole milk." Through the
disaggregation method, the economic assistant selects the specific kind
of
fresh whole milk that will be priced in the outlet over time. By this
practice,
each kind of whole milk is assigned a probability of selection, or
weight,
based on the outlet sales. For example, if vitamin D homogenized milk
in
half-gallon containers accounts for 70 percent of the sales of all milk
sales,
and the same milk in quart containers accounts for 10 percent of all
milk
sales, then the half-gallon container will be seven times more likely
to be
bought by consumers than the quart container. After probabilities are
assigned to one type, brand and size container of milk that was
selected by
the disaggregation process, it will continue to be priced each month in
the
same outlet. The CPI reflects spending patterns of two population
groups:
all urban consumers (CPI-U) and urban wage earners and clerical workers
(CPI-W). The CPI-U group accounts for nearly 87 percent of the whole
U.S.
population. CPI-U is based on the expenditures of more or less all
residents
of urban or metropolitan areas, including professionals, the
self-employed,
the poor, the unemployed and retired individuals, as well as urban wage
earners and clerical workers. Not included in the CPI is the buying
behavior
of individuals residing in rural areas, farm families, individuals in
the
Armed Forces and those in institutions, such as prisons and hospitals.
The
CPI-W is based on the expenditures of households included in the CPI-U
population that also meet two requirements: more than 50 percent of the
household's income is earned from clerical or wage occupations and at
least
one of the household earners must have been employed for at least 37
weeks
during the last 12 months. The CPI-W population represents about 32
percent of the aggregate U.S. population, and is a subset of the
population of
the CPI-U. The BLS selects the market baskets and pricing methodologies
for the U and W populations based on the experience of the average
household, not on any given family or individual. The CPI market basket
is
determined based on consumption information provided in the Consumer
Expenditure Survey by families and individuals. The CPI represents all
goods and services purchased for consumption by the two populations (U
and W). BLS classifies expenditure items into more than 200 categories,
organized into eight major classes. For each of the more than 200 item
categories, and based on scientific statistical sampling rules, the
Bureau of
Labor Statistics has chosen samples of several hundred specific items
in
selected outlets to represent the multitude of goods and services
available in
the marketplace. For example, in a given supermarket, the Bureau may
select a plastic bag of golden delicious apples, U.S. extra fancy
grade,
weighing 4.4 pounds to represent the Apples category. Every month, BLS
economic assistants gather data by visiting or calling thousands of
retail
stores, service establishments, rental units, and doctors' offices,
across the
U.S. to obtain information on the prices of the thousands of items used
in
order to track and measure price changes in the CPI. The major classes
are
the following: FOOD AND BEVERAGES (milk, coffee, chicken, breakfast
cereal, service meals and snacks), HOUSING (rent of primary residence,
fuel oil, bedroom furniture, owners' equivalent rent), APPAREL (men's
shirts and sweaters, women's dresses, jewelry), TRANSPORTATION (new
vehicles, airline fares, gasoline, motor vehicle insurance), MEDICAL
CARE (prescription drugs and medical supplies, physician's services,
eyeglasses and eye care, hospital services), RECREATION (television,
pets
and pet products, sports equipment, admissions), EDUCATION AND
COMMUNICATION (college tuition, postage, telephone services, computer
software and accessories), OTHER GOODS AND SERVICES (tobacco and
smoking products, haircuts and other personal services, funeral
expenses).
Also included in these major classes are various government charges,
such
as water and sewage charges, auto registration fees, and vehicle tolls,
taxes
such as sales and excise taxes. However, the CPI excludes taxes such as
income and Social Security taxes because they are not incurred with the
purchase of consumer goods and services. The CPI does not also include
investment vehicles, such as stocks, bonds, real estates, and life
insurance,
since these investments relate to savings rather than to daily
consumption.
The CPI measures inflation as experienced by consumers and most of its
indices employ as a base, or reference, a year within the following
time
interval 1982-1984. Each month BLS releases detailed CPI numbers to the
media. However, the media focuses on the Consumer Price Index for All
Urban Consumers (CPI-U). The Core CPI excludes food and energy prices
from the traditional CPI, and can be used as a tool to discern
underlying
patterns in the price level. When the core CPI posts a
larger-than-expected
increase that means there is more inflationary pressure. You can find
more
information about the CPI at http://www.bls.gov page.
Again, we suggest you to trade with virtual money for as long as
possible,
before trading your own real funds. In the learning process,
fundamental and
technical analyses have a very important place. We will continue this
practice
of sending educational e-mails in order to help you to get further into
analysis secrets.
However, if you need more information, please reply to this e-mail and
we
will provide more third-party, independent material.
Best Regards,
Nadia Fleischer
Relations / Manager
Marketiva Corporation
nadia.fleischer@marketiva.com
http://www.marketiva.com/
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