Wednesday, June 3, 2009

Forex Trading And Analysis


I've become a little frustrated with most of news sources out there. If you've been an active forex trader for any length of time you'll notice that talking heads are always trying to tell you why something happened.

That's really nice, and might possibly help you learn about various financial interactions, but it's absolutely useless from a trading point of view. If you are trading you need to figure out what's going to happen -- not what just happened. Check out this video (complete with atrociously low audio levels).

This type of analysis is unlikely to help you with your fx trading tomorrow. Generally, how the markets will move tomorrow, based on tomorrow's news, is not something you'll get from any of the gurus and talking heads.

On the other hand useful analysis will be too slow to be meaningful. For example, I'm very confident the world economy will eventually recover. When that happens we'll have a period of high interest rates as rising commodity prices drive inflation. Guess what? This will mean that carry trades pairs will end up at much higher prices. Unfortunately, I can't tell you when the world is going to focus on this. Generally, not before the money moves from wherever it is to wherever it is finally going to end up.

The closest thing to predictive analysis, or something you can really use to drive your forex trades, is technical analysis. Charting. Something which gets very little respect in some circles. Many people don't understand it and many others discount it because it isn't able to make perfectly accurate predictions. Technical analysis does not have to be a perfect tool for prediction. It merely has to increase the odds that your fx positions end up earning you a profit.

Euro US Dollar Exchange Rate Forecast


Written by Jamie Saettele, Senior Currency Strategist; John Rivera, Currency Analyst; Ilya Spivak, Currency Analyst

Euro / US Dollar Monthly Technical Forecast

Sentiment and technical considerations favor a top forming now. On the sentiment side, the risk reversal rate (call option volatility - put option volatility) on 25 delta 3 month EURUSD options is the highest in at least 6 years (I have data that extends only to 2003) and speculators (as reported from the CFTC through COT numbers) are net short US dollars for the first time since May 2008 (near a former USD bottom). Technically, the decline from 1.4723 counts as an impulse (5 waves) and the rally from 1.2454 is in 3 waves (to this point). RSI is divergent and in overbought territory. The risk to going short now against 1.4723 is that the rally from 1.2454 extends into 5 waves and above 1.4723 in order to complete a larger correction from 1.2327. In this case, there is measured resistance from 1.4791 to 1.4850.

Euro / US Dollar Interest Rate Forecast

Although the main driver of EUR/USD price action has been risk sentiment, it is curious how the pair has rebounded to more closely track the differential in interest rate expectations. The ECB lowering their benchmark rate to a record low 1.00% from 1.25% helped closed the gap as it widened the spread to -11 from -5. The central bank announcing that it will begin on quantitative easing by buying “covered bonds “has eased expectations that they may ultimately lower rates to near zero following the Fed’s lead.

There has been much debate in the public forum from committee members as to whether 1.00% represents the bottom for interest rates and whether the €60 billion in bond purchases is the limit. Unemployment reaching to an almost decade high of 9.2% and inflation falling to 0.6% have caused enough concern that it will keep open the possibility of future action which could be a weighing factor on the pair. Additionally, expectations that the U.S. will emerge first from the downturn could see flows return to the dollar and lift against currencies with lagging economies like the Euro.

Euro / US Dollar Valuation Forecast

EURUSD Valuation Forecast: Bearish

The Euro remains the most substantially overvalued currency against the US Dollar, trading over three thousand pips above its “fair” exchange rate. Although EURUSD has seen decisive gains on the back of a rebound in risk appetite beginning in early March, the long-term fundamental picture is supportive of a broadly bearish scenario: a smaller-scale fiscal effort and a deliberately slow approach to monetary easing suggest the Euro Zone's economic recovery will lag behind that of the US, fueling expectations that the Fed will be first to raise interest rates and boost demand for greenback. Still, the pair’s current momentum cannot be ignored and it is possible that prices could head deeper into overvalued territory before a correction materializes. The deepening disparity is ultimately advantageous, offering sellers a better entry point once a correction does materialize.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.

Choosing A Day Trading System


CocupEveryone that aspires to trade in the markets should select a consistent trading system. Below are the principles for examining a trading system. How many of these principles do you adopt with your current approach?

  • To corroborate a trading system you need a minimum of 50 trades in the test. You should also have at least 75 ticks (overall market trades) in a bar to have a sound charting approach.
  • Calculate your average profit per trade, the average loss, and the percentage of your all wins and losses.
  • The biggest winning trade should not surpass 50 of the net profit. Otherwise the random lucky trade factor will throw off your system results.
  • What is the Expectancy Ratio of your method? If it does not surpass 2 to 1 with a 50 but makes money, can you psychologically trade it and except all the losses necessary to stick with the system?
  • As Van K. Tharp, Mark Douglas, Bill Williams, and Bent Steenbarger the Market Wizards all say, you trade your beliefs about the market. What does your trading system expose about your trading mentality? Does your system lead to doubt or confidence?
  • Compare your trading system to other types of investments. Which system has the best Internal Rate of Return with the least risk? At minimum you need at least four times the return of a low risk investment (T-Bills) to make your system worth trading.

What is the best approach to build a solid trading system? Just like you build anything else. You first start with a goal, and apply the principles to reach the end result. Then you create a plan to achieve that goal, which includes all the risks, rewards, terms and conditions necessary to reach your goal.

The missing element is often the next step: execute the plan, closely observe your results, and make necessary modifications or changes to the system. The last step is to observe your emotions to see if you can accurately trade these signals, and play the probabilities for gains versus losses as you have laid out your system.

Mental control is the biggest challenge of any trading system. Have a plan, and trade your plan. This is the best path to achieve your goals.


About FOREX 2009. Foreign Exchange (FOREX) Unlike other financial markets, the Forex is market has no physical location and no central exchange (off-exchange)!!