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					Dollar, Yen Find Support On 'Swine Flu'
Pandemic Fears, Adding To Concerns Over Bank
Stress Tests
Monday, 27 April 2009 09:57:22 GMT

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Written by John Rivera, Currency Analyst

The Yen has been the main story overnight as the currency has re-established its safe-haven
status with the potential “swine flu” pandemic sending cautious investors to the sidelines. The
fact that the health concerns are based in the Western hemisphere has heightened concerns as
it could negatively impact the U.S. economy where the most stimulus has been enacted and is
the expected source of growth to help stem the current global downturn.

Talking Points
• Japanese Yen: Finds Support On “Swine Flu” Fears
• Pound: Housing Markets Continues to Show Weakness
• Euro: Deflation Concerns Remain
• US Dollar: Durable Goods Orders On Tap

Dollar, Yen Find Support On “Swine Flu” Pandemic Fears, Adding To Concerns Over
Bank Stress Tests

The Yen has been the main story overnight as the currency has re-established its safe-haven
status with the potential “swine flu” pandemic sending cautious investors to the sidelines. The
fact that the health concerns are based in the Western hemisphere has heightened concerns as
it could negatively impact the U.S. economy where the most stimulus has been enacted and is
the expected source of growth to help stem the current global downturn. USD/JPY reached as
low as 96.46 leaving the March 30th low of 95.94 as the next support level. There is a risk that
market sentiment could return their focus back toward fundamentals, but that may not change
sentiment as the pending results of the bank stress test and the gloomy outlook painted by the
IMF for the global economy may still lead traders to avoid risky assets.

The Euro continues to remain under pressure as traders continue to unwind risk positions
sending it back below the 100-Day SMA at 1.3219 to an intraday low of 1.3119. The economic
docket demonstrated the two themes that are currently prevalent in the economic region
growing confidence and declining prices. The German Gfk consumer confidence reading held
steady at 25 for a third month as it beat estimates for a decline to 23. The sentiment reading
follows improvement in the PMI and IFO business gauges as confidence is starting to improve
on the back of the ECB’s increasingly accommodative monetary policy and the individual
stimulus packages by the various countries. Meanwhile, the German import price index to -7.1%
from -6.4% in February as declining oil costs continues to drive down inflationary pressures.
Deflation concerns will remain as longs as price continue to fall and the economy lacks clear
signs of growth returning. Therefore, expectations are t hath e central bank will lower their
benchmark rate by another 25 bos and initiate non-standard measures over their next two policy
meeting, which could become a weighing factor for the single currency. The 50-Day SMA is the
next possible support level at 1.3059, but the April 20th below of 1.2889 will be the key level to
watch.
The pound has also continued to remain under pressure as it fell to an intraday low of 1.4514,
but we are starting to see support from the 100-Day SMA which stands at 1.4521. The hopes of
a recovery in the U.K. housing market were put on hold when Hometrack reported that home
prices fell for a 19th month by 0.3% bringing the annualized reading to -10.1%. Additionally, the
BBA loans for home purchases measurement declined to 26,097 from 28,024 in March. The
BoE continues to purchase debt in hopes of loosening credit markets, but if those results don’t
begin to start to show results we may see fears grow that more downside risks remain for the
country’s economy which could start to weigh on sterling. The 50-Day SMA at 1.4421 remains a
key level of support since mid-March, and a failure there could lead to a significant move lower
for the pound.

The dollar traded higher throughout the majority of the overnight session, except against the
yen as the unknown attached to the “swine flu” has fueled risk aversion. We have started to see
the greenback give back some of its gains as the extra-ordinary factor may have limited impact
on broader sentiment. However, concerns over growth and the bank stress test may keep
traders cautious going forward. A light fundamental calendar will leave the dollar at the mercy of
the broader themes today but the FOMC meeting and the first quarter GDP report will provide
event risk latter in the week. The Dallas Fed manufacturing report is the only release scheduled
to hit the wires and it is expected to show a mild improvement to -46.0% from -49.0%. Dow
futures continue to trade down over 100 points, and a weak day on Wall St could continue to
lend support for the dollar.

Will The EUR/USD Break 1.3000? Join us in Forum



Investment Myths page 26
                     Contents
Forex
    Forex Overview
    Currency Pairs & Rates
        Rates Calculation
        Spread
        Long/Short
    Trading
        Strategies Day/Position
        Decision making
              1. Technical Analysis – mainly statistical function designed by
                 some clever folks
              2. Fundamental ---
                  1. macro-economic news
                  2. Geo-Political events
                  3. Comments by some prominent folks
        Brokers/Dealing Firms
              1. Trading Platforms - PC based with broadband access
              2. Selecting firms and trading station software
              3. Signup for account/Deposit etc

         



                           Trading Like A Machine

Hi Friend,

One of the biggest mistakes people make when trading, from stocks, options to
FOREX is getting emotionally attached to a position.

You need to trade like a machine! How can you start removing emotions from the
game?

First, enter a stop-loss immediately after you enter a position. Depending on your
platform will depend on how you enter a stop-loss. Some systems allow you to
enter it right when you enter a trade, others make you enter it after the trade.
The only hard-fast rule to setting a stop loss is 10-20%. This means if the market
turns against you and goes 10-20% in the wrong direction your trade will execute
and close out automatically.

The most important part with a stop-loss is to set it and do NOT change it. Once
you change it, you've emotionally attached yourself to the trade and are no longer
trading like a machine. this is how accounts get wiped out. Losses are to be
expected, keeping loses as low as possible while riding winners is the key to
successful trading.

It's very important to use stop-losses to limit risk especially in a highly volatile
market like FOREX.

Check with the platforms help section you're using, they should have a section hat
explains how to set up stop losses and execute them correctly.
                                   Forex Overview

ou don't have to be a trader to participate in the foreign exchange market: every time you travel and need
to exchange your currency into a foreign currency, you are participating in it.




                           A Foreign Exchange office in Las Ramblas - Barcelona

It also happens when companies from different countries buy and sell goods and services across national
borders which require payments in non-domestic currencies. Either way, importing or exporting, there is
going to be a transaction which takes one currency being swapped for another.

Nevertheless, in order to trade actively in this market, you should know how it came to be. The current
market's shape and conditions are relatively new in the large history of money and that is what you are
going to learn in this first chapter.

Despite your curiosity to jump directly into the more practical knowledge, you should know that an
understanding of the historical circumstances from which this market emerged will gear you up with more
insight when it comes to plan your future business in FX trading.

What about a little historical background about the largest financial market in the world?



At this point let's summarize the main features of the Bretton Woods system:

      It's a dollar-based world payments arrangement: officially, the Bretton Woods system was a gold-
       based system which worked symmetrically for all countries. But in reality, it was a US-dominated
       system, which means the US provided domestic price stability (or instability) that other countries
       could (or should) "import". As the US did not itself engage in exchange rates intervention, which
       would have been desirable, all other countries had the obligation to intervene themselves in the
       currency market to fix their exchange rates against the US dollar.
      It was a semi-pegged exchange rate system: this means that exchange rates were normally fixed
       but permitted to be infrequently adjusted under certain conditions. Members were obligated to
       declare a par value (a 'peg') for their national currency and to intervene in currency markets to
       limit exchange rate fluctuations within maximum 'band' of one per cent above or below parity. At
       the same time, members also retained the right, whenever necessary and in accordance with
       agreed procedures, to alter their peg to correct a 'fundamental disequilibrium' in their balance of
       payments. This arrangement was thought to combine exchange rate stability and flexibility, while
       avoiding mutually destructive devaluation.
      Tight capital mobility: by contrast to the classical gold standard of 1879-1914, when there was
       free capital mobility, member countries could impose capital-account regulations and severe
       exchange controls.
      acroeconomic growth reached historically unprecedented highs: this was achieved through global
       price stability and trade liberalization from the mid 1950s to the late 1960s.

The expansion of international trade and the massive capital movements led to a dollar shortage.

Later, during the 50's, the Bretton Woods system was under enormous pressure and needed help to
function properly when the major economies started to evolve in different directions. While the classical
gold standard collapsed because of external forces (the outbreak of WWI), the Bretton Woods regime
failed due to internal inconsistency. US monetary policy was the system's anchor and the growing
inflation in the US destabilized the system until it started to disintegrate.

After WWII, Europe and Japan needed to import from US all kinds of manufactured goods and
machinery for its own reconstruction while US wanted to favor Western European countries in front of
the menace of Eastern European countries and the USSR. But there were not enough dollars in
circulation. So in 1948 the US decided to give west Europe an economical aid, under the name of the
Marshal Plan, officially called the European Recovery Program.

In the 60's the situation started to revert and an oversupply of dollars in circulation gradually appears. The
Vietnam war, welfare expenditure and the space race with the USSR were the major reasons for the
increased US government spending. When US inflation began to accelerate, other countries refused to
import it into their economies. This whole situation destabilized the exchange rates agreed upon in Breton
Woods.

Shortage in international currencies and abundance of US dollars rise some doubts about its convertibility
to gold. The already high trade deficit of the US led to speculative pressures awaiting a strong devaluation
of the US dollar versus gold. A series of readjustments held the system for a while but finally, on August
15, 1971, everything changed. U.S. President Nixon suspended the gold convertibility standard and in
1973 the U.S. formally announced the permanent floating of the U.S. dollar, thereby officially ending the
fixed exchange rate regime and the Breton Woods system.

The system became an open US-dollar-based world payments arrangement.

Let's define some of the concepts that we have learned so far:




What is FOREX/FX
FX/Forex is the exchange of one currency for another. The purpose of FX market is to facilitate trade and
investment. The need for a foreign exchange market arises because of the presence of multifarious
international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such
currencies.

The foreign exchange market is unique because of

              its trading volumes,
              the extreme liquidity of the market,
              its geographical dispersion,
              its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday
               until 22:00 UTC Friday),
              the variety of factors that affect exchange rates.
              the low margins of profit compared with other markets of fixed income (but profits can be
               high due to very large trading volumes)
              the use of leverage

According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange
markets is estimated at $3.98 trillion. Of the $3.98 trillion daily global turnover, trading in London
accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global centre for
foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and
Tokyo accounted for 6.0%.

The foreign exchange market (currency, forex, or FX) market is where currency trading takes place. It
is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX
transactions typically involve one party purchasing a quantity of one currency in exchange for paying a
quantity of another. The foreign exchange market that we see today started evolving during the 1970s
when world over countries gradually switched to floating exchange rate from their erstwhile exchange
rate regime, which remained fixed as per the Bretton Woods system till 1971.

Now, the FX market is one of the largest and most liquid financial markets in the world, and includes
trading between large banks, central banks, currency speculators, corporations, governments, and other
institutions. The average daily volume in the global foreign exchange and related markets is continuously
growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for
International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's
annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]



  Forex market participants
  In the last years, the foreign exchange market has expanded from one where banks would execute
  transactions between themselves to one in which many other kinds of financial institutions like
  brokers and market-makers participate including non-financial corporations, investment firms,
  pension funds and hedge funds.

  Its' focus has broadened from servicing importers and exporters to handling the vast amounts of
  overseas investment and other capital flows that currently take place. Lately foreign exchange day
  trading has become increasingly popular and various firms offer trading facilities to the small
  investor.

  Foreign exchange is an 'over the counter' (OTC) market, that means that there is no central exchange
  and clearing house where orders are matched. Geographic trading 'centres' exist around the world
  however and are: (in order of importance) London, New York, Tokyo, Singapore, Frankfurt, Geneva
  & Zurich, Paris and Hong Kong. Essentially foreign exchange deals are made between participants
  on the basis of trust and reputation to deliver on an agreement. In the case of banks trading with one
  another, they do so solely on that basis. In the retail market, customers demand a written legally
  accepted contract between themselves and their broker in exchange of a deposit of funds on which
  basis the customer may trade.

  Some market participants may be involved in the 'goods' market, conducting international
  transactions for the purchase or sale of merchandise. Some may be engaged in 'direct investment' in
  plant and equipment, or may be in the 'money market,' trading short-term debt instruments
  internationally. The various investors, hedgers, and speculators may be focused on any time period,
  from a few minutes to several years. But, whether official or private, and whether their motive be
  investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they
  are all part of the aggregate demand for and supply of the currencies involved, and they all play a role
  in determining the exchange rate at that moment.




Market participants

      2.1 Banks
      2.2 Commercial companies
      2.3 Central banks
      2.4 Hedge funds as speculators
      2.5 Investment management firms
      2.6 Retail foreign exchange brokers
      2.7 Non-bank Foreign Exchange Companies
      2.8 Money Transfer/Remittance Companies

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market
is divided into levels of access. At the top is the inter-bank market, which is made up of the largest
investment banking firms. Within the inter-bank market, spreads, which are the difference between the
bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner
circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies
such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large
amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a
better spread. The levels of access that make up the foreign exchange market are determined by the size
of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts
for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-
national corporations (which need to hedge risk and pay employees in different countries), large hedge
funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension
funds, insurance companies, mutual funds, and other institutional investors have played an increasingly
important role in financial markets in general, and in FX markets in particular, since the early 2000s.”
(2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of
both number and overall size” Central banks also participate in the foreign exchange market to align
currencies to their economic needs.

[edit] Banks

The interbank market caters for both the majority of commercial turnover and large amounts of
speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is
undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's
own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and
matching anonymous counterparts for small fees. Today, however, much of this business has moved on to
more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank
trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

[edit] Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign
exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared
to those of banks or speculators, and their trades often have little short-term impact on market rates.
Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate.
Some multinational companies can have an unpredictable impact when very large positions are covered
due to exposures that are not widely known by other market participants.

[edit] Central banks

National central banks play an important role in the foreign exchange markets. They try to control the
money supply, inflation, and/or interest rates and often have official or unofficial target rates for their
currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton
Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange
rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more
precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful
because central banks do not go bankrupt if they make large losses, like other traders would, and there is
no convincing evidence that they do make a profit trading.

The mere expectation or rumour of central bank intervention might be enough to stabilize a currency, but
aggressive intervention might be used several times each year in countries with a dirty float currency
regime. Central banks do not always achieve their objectives. The combined resources of the market can
easily overwhelm any central bank.[6] Several scenarios of this nature were seen in the 1992–93 ERM
collapse, and in more recent times in Southeast Asia.

[edit] Hedge funds as speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or
institution that bought or sold the currency has no plan to actually take delivery of the currency in the end;
rather, they were solely speculating on the movement of that particular currency. Hedge funds have
gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of
equity and may borrow billions more, and thus may overwhelm intervention by central banks to support
almost any currency, if the economic fundamentals are in the hedge funds' favour.

[edit] Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as
pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign
securities. For example, an investment manager bearing an international equity portfolio needs to
purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations,
which manage clients' currency exposures with the aim of generating profits as well as limiting risk.
Whilst the number of this type of specialist firms is quite small, many have a large value of assets under
management (AUM), and hence can generate large trades.

[edit] Retail foreign exchange brokers
There are two types of retail brokers offering the opportunity for speculative trading: retail foreign
exchange brokers and market makers. Retail traders (individuals) are a small fraction of this market and
may only participate indirectly through brokers or banks. Retail brokers, while largely controlled and
regulated by the CFTC and NFA might be subject to foreign exchange scams.[7][8] At present, the NFA
and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization
required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone.
It is not widely understood that retail brokers and market makers typically trade against their clients and
frequently take the other side of their trades. This can often create a potential conflict of interest and give
rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing
Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore
trader confidence, but caution is still advised in ensuring that all is as it is presented.

[edit] Non-bank Foreign Exchange Companies

Non-bank foreign exchange companies offer currency exchange and international payments to private
individuals and companies. These are also known as foreign exchange brokers but are distinct in that they
do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical
delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments[9] are made via Foreign Exchange
Companies.[10] These companies' selling point is usually that they will offer better exchange rates or
cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance
Companies in that they generally offer higher-value services.

[edit] Money Transfer/Remittance Companies

Money transfer/remittance companies perform high-volume low-value transfers generally by economic
migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of
remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and
the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000
agents globally.




Financial instruments
[edit] Spot

A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar and the
Mexican Nuevo Peso, which settle the next day), as opposed to the futures contracts, which are usually
three months. This trade represents a “direct exchange” between two currencies, has the shortest time
frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.
The data for this study come from the spot market. Spot transactions has the second largest turnover by
volume after Swap transactions among all FX transactions in the Global FX market.

[edit] Forward

See also: forward contract

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction,
money does not actually change hands until some agreed upon future date. A buyer and seller agree on an
exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the
market rates are then. The duration of the trade can be a one day, a few days, months or years. Usually
date is decided by both parties

[edit] Future

Main article: currency future

Foreign currency futures are exchange traded forward transactions with standard contract sizes and
maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures are
standardized and are usually traded on an exchange created for this purpose. The average contract length
is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Swap

Main article: foreign exchange swap

The most common type of forward transaction is the currency swap. In a swap, two parties exchange
currencies for a certain length of time and agree to reverse the transaction at a later date. These are not
standardized contracts and are not traded through an exchange.

Option

Main article: foreign exchange option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has
the right but not the obligation to exchange money denominated in one currency into another currency at
a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most
liquid market for options of any kind in the world.




Exchange rates and units used
In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the
drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000. The
change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1% or one basis
point Among the major currencies, the only exception to that rule is the Japanese yen. Because the
Japanese yen has never been revalued since the Second World War, 1 yen is now worth approximately
US$0.08; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e. to 1/100th of
yen, as opposed to 1/1000th with other major currencies).

A one decimal place change is a pip. Which is the smallest measure of change in a currency pair in the
forex market. This is unit change in the last decimal place of the quote. A change from 102.23 to 102.24
for example is a pip.

Pip stands for "percentage in point" . It can be measured in terms of the quote or in terms of the
underlying currency. A pip is a standardized unit and is the smallest amount by which a currency quote
can change, which is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly
referred to as 1/100th of 1%, or one basis point. This standardized size helps to protect investors from
huge losses. For example, if a pip was 10 basis points, a one-pip change would cause more
extreme volatility in currency values.



Understanding forex quotes: 1 unit of the base currency = the exchange rate in the quote currency. Eg if
EUR/USD is trading at 1.2762, 1 Euro will buy you 1.2762 Dollars.

Understanding contract size in forex trading: The contract size is normally a lot of 100,000. This means
per standard contract you are controlling 100,000 units of the base currency. For this contract size, each
pip (the smallest price increment) is worth $10. Many firms offer mini accounts now where you can trade
units of 10,000, where the pip value is $1.



Understand Trading

Foreign Exchange is the simultaneous buying of one currency and selling of another. Currencies are
traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

What are you really selling or buying in the currency market?
The short answer is "nothing". The retail FX market is purely a speculative market. No physical exchange
of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on
market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded
as such on the trader's account.


Currency Pairs & Rates
      what are they ? Example EUR/USD EUR/GBP
      Rates are quoted as a range of two figures with the difference being the spread. The lower the
       spread the better the deal




Because currencies always trade in pairs, when a trader makes a trade he or she is always long one
currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units)
of EUR/USD, she would, in essence, have exchanged euros for dollars and would now be "short" euro
and "long" dollars. To better understand this dynamic, let's use a concrete example. If you went into an
electronics store and purchased a computer for $1,000, what would you be doing? You would be
exchanging your dollars for a computer. You would basically be "short" $1,000 and "long" 1 computer.
The store would be "long" $1,000 but now "short" 1 computer in its inventory. The exact same principle
applies to the FX market, except that no physical exchange takes place. While all transactions are simply
computer entries, the consequences are no less real.
Long – it is going up
Short – it is going down


Which currencies are traded?
Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the
majority trade the seven most liquid currency pairs in the world, which are the four majors:

      EUR/USD (euro/dollar)
      USD/JPY (dollar/Japanese yen)
      GBP/USD (British pound/dollar)
      USD/CHF (dollar/Swiss franc)

and the three commodity pairs:

      AUD/USD (Australian
       dollar/dollar)
      USD/CAD (dollar/Canadian
       dollar)
      NZD/USD (New Zealand
       dollar/dollar)

These currency pairs, along with their various combinations (such as EUR/JPY, GBP/JPY and
EUR/GBP) account for more than 95% of all speculative trading in FX. Given the small number of
trading instruments - only 18 pairs and crosses are actively traded - the FX market is far more
concentrated than the stock market.

What is carry?
Carry is the most popular trade in the currency market, practiced by both the largest hedge funds and the
smallest retail speculators. The carry trade rests on the fact that every currency in the world has an interest
rate attached to it. These short-term interest rates are set by the central banks of these countries: the
Federal Reserve in the U.S., the Bank of Japan in Japan and the Bank of England in the U.K. (To learn
more, see What Are Central Banks?)
The idea behind the carry is quite straightforward. The trader goes long the currency with a high interest
rate and finances that purchase with a currency with a low interest rate. In 2005, one of the best pairings
was the NZD/JPY cross. The New Zealand economy, spurred by huge commodity demand from China
and a hot housing market, has seen its rates rise to 7.25% and stay there (at the time of writing), while
Japanese rates have remained at 0%. A trader going long the NZD/JPY could have harvested 725 basis
points in yield alone. On a 10:1 leverage basis, the carry trade in NZD/JPY could have produced a 72.5%
annual return from interest rate differentials alone without any contribution from capital appreciation.
Now you can understand why the carry trade is so popular! But before you rush out and buy the next
high-yield pair, be aware that when the carry trade is unwound, the declines can be rapid and severe. This
process is known as carry trade liquidation and occurs when the majority of speculators decide that the
carry trade may not have future potential. With every trader seeking to exit his or her position at once,
bids disappear and the profits from interest rate differentials are not nearly enough to offset the capital
losses. Anticipation is the key to success: the best time to position in the carry is at the beginning of the
rate-tightening cycle, allowing the trader to ride the move as interest rate differentials increase.

What is leverage?
FX Jargon
Every discipline has its own jargon, and the currency market is no different. Here are some terms to know
that will make you sound like a seasoned currency trader:

       Cable, sterling, pound - alternative names for the
        GBP
       Greenback, buck - nicknames for the U.S. dollar
       Swissie - nickname for the Swiss franc
       Aussie - nickname for the Australian dollar
       Kiwi - nickname for the New Zealand dollar
       Loonie, the little dollar - nicknames for the Canadian
        dollar
       Figure - FX term connoting a round number like
        1.2000
       Yard - a billion units, as in "I sold a couple of yards
        of sterling."

T




Trading

            Brokers/Dealing Firms
                1. Trading Platforms - PC based with fast broadband access
                2. Selecting firms and trading station software

                          Goggle for forex trading and look through the listing.
                           Example below:
                          1. http://www.dbfx.com/?engine=adwords&keyword=fore
                             xtrading&CMP=SFS-70130000000HwJuAAK
                          2. http://www.fxcm.com
                          3. http://www.ac-markets.com
Understanding the major Currencies/Currency pairs
The US Dollar: US dollar / Yen pair, which constitute 18%-20% of the currency trading market. With
this pair the base currency is the US dollar so let's look at that and it's importance to us as forex traders.

Currency Trading Online : The US Dollar
With the largest economy in the world, the US dollar dominates the world stage and you underestimate its
significance in trading at your peril. Whilst in Europe it has been replaced by the Euro as currency of first
reserve, throughout the rest of the world the dollar is still the most common currency for international
transactions, and constitutes more than half of other countries foreign exchange reserves. Before you open
a trade in another pair, make sure you have checked on the direction of the US dollar.

Currency Trading Online : US Economy

The US is the world's largest importer of goods, the worlds third largest exporter, and a GDP of 14 trillion
dollars in 2006. The country is rich in minerals, natural resources, and fertile soil, but it is the labour force
that converts these raw materials into goods and services. Throughout it's history the US has experienced
a steady growth in it's labour force and that in turn has helped to fuel almost continuous economic
expansion. The quality of labour is extremely high and also mobile, moving to those areas in the country
of high production and output. The American economy is often referred to as 'mixed', a term used to
describe the importance of both private enterprise and government controls working together to achieve a
successful economy. Americans believe supply and demand determines the prices in the market, and this
is underpinned by their belief in free enterprise and the entrepreneurial spirit.

Currency Trading Online : Factors Affecting The Dollar

The US equivalent of a central bank is the Federal Reserve, founded in 1913 as an independent body
within government, as none of the decisions it makes have to be ratified by the President. The Reserve
sets monetary policy, with the FOMC ( Federal Open Market Committee) overseeing the market
operations. The FOMC sit eight times a year and it is at these meetings that economic forecasts are made
by the Chairman, along with decisions on interest rates. The release of this data, has a huge impact on the
currency markets immediately following the announcements, and the data is 'sliced and diced' for hours
afterwards. Price swings can be large, and it is often the case that the initial market movement will
promptly be reversed shortly afterwards. The reason often given is that traders have had time to analyse
the figures in more detail. The truth is that it is an opportunity for brokers to take out your stops! In these
volatile periods most forex brokers will widen their spreads to reflect the increased volatility. For those
who trade on or through these announcements this can be a major source of annoyance, and the forums
are full of the moans and groans from traders - my view is that this is part of trading - just accept it! The
FOMC also forecasts GDP, inflation, and unemployment rates, all major factors affecting the currency.
The US Treasury Department is also involved in influencing economic policy and will often issue
instructions to intervene in the forex market if conditions suggest that the currency is over or under
valued. The USD index chart will give you a guide to dollar strength or weakness. Be aware that gold,
which is priced in dollars, tends to have an inverse relationship (negative correlation) to the dollar, whilst
US stocks and bonds are positively correlated. ( I discuss correlation later in regard to the pairs
themselves)

Currency Trading Online : Major Economic Indicators


Interest rates - Naturally these can cause major moves in currency. Often considered a blunt instrument,
their effect in the market may last only a few hours or days. For long term traders they are an annoyance -
for short term traders they represent volatility in the markets and a trading opportunity. One change in
interest rates rarely happens in isolation without hints of others to follow. Words such as vigilance or
strong vigilance will often be reported.
NFP - Non Farm Payroll is announced at 8.30 a.m. EST on the first Friday of each month. No single
indicator can move the markets, including stocks, bonds and forex as this one - it is a major economic
indicator. The employment figures it provides are dissected and analysed for hours and days afterwards.
Ironically, and approximately 2 weeks later, these figures are then revised as the data is consolidated.
Needless to say, by then the markets have moved on! If jobs are on the increase this could be the first
signal of an overheating economy, which in turn could drive interest rates higher. This could make the
currency more attractive to overseas investors. A poor set of results could suggest problems for US
companies and hence downward pressure on interest rates. This would make the currency less appealing
to overseas investors.
GDP - GDP is a classic lagging indicator and foremost in reporting on the health of the economy as it
measures how fast or slow the economy is growing. The figures are released in the final week of January,
April, July and October with various revisions a month or so later. The currency market sensitivity to
these figures is medium to high ( as are stock and bond markets ). If we look back over the last 50 years at
GDP performance it is clear that the US economy has shown almost continuous upwards growth.
CPI - Consumer Price Index, Another of the red hot indicators that is dissected by the currency and
broader markets. This is generally released in the second or third week following the month being
considered, and is released monthly at 8.30 am EST.
Durable Goods Orders - A key indicator of future manufacturing activity. This is released at 8.30 am
EST 3-4 weeks after the end of the reporting period, and on a monthly basis. The reason this news is
important is simply that it provides a snapshot of future manufacturing output and therefore a clue to the
health of the economy, and therefore the strength or weakness of the currency.

There are many other news announcements that move both forex and stock markets, including consumer
confidence, PPI ( producer price index) and the Beige Book - you will need to follow all these
announcements if you are to be successful in your online currency trading.




EUR -- Traded heavily during all session.


Currency Trading Online
The Euro: The number one currency pair traded online is the Euro dollar.                      Let's take the
Euro first, and then we will consider the other five currency pairs in turn, and consider either the base or
secondary currency in each case. In this pair the Euro is the base currency.

Currency Trading Online : The Euro
Prior to the introduction of the Euro in 2002 as a physical currency ( having been a purely accounting one
prior to this date) it was difficult for countries to keep large reserves of each others national currency. In
effect this meant that the currency of first reserve was generally the US dollar. With the introduction of
the Euro, most EU member states, and many others have since adopted the Euro as their currency of first
reserve. This trend is expected to continue with the decline of the US dollar's importance. This is why the
EUR/USD pair is the most widely traded pair in Forex. It is the most liquid of all currency pairs, and
provides an indicator for strength and weakness in both Europe and the US

Currency Trading Online : European Economy

The European economy is second in size only to the US, and represents 22% of the worlds total gross
product with a working population third largest in the world. The European Central Bank was established
as the central bank for the currency and tasked with the responsibility for maintaining liquidity,
purchasing power, overall stability, and for setting Eurozone interest rates. The ECB board meets on a
twice monthly basis, to discuss monetary policy and to set rates accordingly. The recent strength in the
Euro has not been as a result of economic strength in Europe, but more to do with economic weakness in
the USA.

Currency Trading Online : Factors Affecting The Euro

Being the currency used most widely throughout Europe, it is particularly sensitive to economic or
political uncertainty within Europe. This is particularly true in the larger member states such as France,
Germany, Italy, and to a lesser extent Spain.

Currency Trading Online : Major EU Economic Indicators
Interest rates - Naturally these can cause major moves in currency. Often considered a blunt instrument,
their effect in the market may last only a few hours or days. For long term traders they are an annoyance -
for short term traders they represent volatility in the markets and a trading opportunity. One change in
interest rates rarely happens in isolation without hints of others to follow.
GDP - GDP is a classic lagging indicator and foremost in reporting on the health of the economy as it
measures how fast or slow the economy is growing. As a forex trader you need to monitor this figure
closely for signs of slow down or growth. In simple terms GDP is the total sum of goods and services
made in the period. The market is very sensitive to these figures, but it is the longer term trend that is
important. Compare trends in GDP over the last years for a comparative and meaningful analysis. May
cause short term volatility, but it is the long term trend that is important. The EU economy is very
dependant on the service industry with almost 75% derived from this sector alone. The figures are
released quarterly.
CPI - Consumer Price Index, another of the red hot indicators that is dissected by the currency and
broader markets. It's obvious why it gets so much attention as inflation touches everyone. In a nutshell it
dictates how much we all have to pay for goods and services. Inflation in Europe means the purchasing
power of the Euro is reduced. If the CPI is high then inflation may be rising which in turn puts pressure
on the ECB to raise interest rates. At present the ECB looks to keep the CPI headline rate between 0 and
2%.
Money Supply - A set of broad measures M0 to M4 which measure the amount of cash in the system
available for the purchase of goods and services. Again this gives an indication of the broader economy
and is a long term indicator.

If you would like a more detailed look at the Euro and it's relationship to the US dollar, ( and the UK
pound) I have recently published several new sites which examines the euro in more detail. Please just
follow the link to euro vs dollar, euros to pounds, or euro to dollar. The sites examine the currencies from
a variety of aspects including technical, fundamental, trading and investing.

And you thought forex trading online was simple !!!! - if you want to make money you have to combine
the technical skills of chart reading with the fundamental analysis of both macro and micro economics.
OK, let's have a look at the dollar yen currency pair.




USD/CHF
Stability and safety would sum up the economy of Switzerland. Extremely prosperous, its residents enjoy
an extremely high standard of living, often envied by other less fortunate states. Overseas investors view
the country as a safe haven due to its discreet and confidential banking system, with the result that money
flow into the country tends to increase when world events bring volatility and uncertainty to the markets.
Switzerland's main trade partners are Germany, the USA, France and Italy. The country has one of the
highest trade surpluses in the world, with major exports including plant and machinery, consumer
products and chemicals.

Swiss Economy

For much of the last century, Switzerland was the wealthiest country in Europe, but during the late 1990's
and into the 21st century, the economy started to slow, to an extent where Switzerland now ranks number
four in Europe on a per capita basis. More than half the workforce is employed in the banking and
financial services sector with the service industry comprising more than 70% of GDP. Switzerland has the
lowest unemployment rate per capita in Europe. The Swiss National Bank ( SNB ) conducts the country's
monetary policy and its primary goal is to ensure price stability and steady economic growth, and acts
wholly independently. Monetary policy decisions are made quarterly on the basis of a regularly
published inflation forecast and implemented by steering the rate of interest for three-month Swiss-franc
investments using the three-month Libor. The SNB generally favours a weak Franc in order to encourage
money flow into the country.

Factors Affecting Swiss Franc

There are several factors which affect the price movements in the Swiss France. As with the Aussie
Dollar, the Swiss Franc correlates strongly with the price movements in gold, since the country is the
fourth largest holder of gold in the world. Gold is viewed by many investors as the ultimate safe haven.
Secondly, having a generally low interest rate the currency is another favourite for currency speculators in
the carry trade. The USD/CHF pair is actually a synthetic currency derived from two pairs, namely the
EUR/USD and the EUR/CHF. If you are trading the USD/CHF then you must pay attention to price
moves in the other two pairs as they will strongly influence the USD/CHF pair.

Currency Trading Online : Major Economic Indicators


Interest rates - Naturally these can cause major moves in currency. Often considered a blunt instrument,
their effect in the market may last only a few hours or days, before the trend continues unbroken. For long
term traders they are an annoyance - for short term traders they represent volatility in the markets and a
trading opportunity. One change is rarely announced without others to follow. Currently interest rates are
low, providing opportunities for the carry trade. Rates are set by the SNB at it's monthly meeting.
GDP - GDP is a classic lagging indicator and foremost in reporting on the health of the economy as it
measures how fast or slow the economy is growing. As the principal indicator, a strong GDP can be an
indication that inflation may be entering the economy, with a resulting increase in interest rates. Figures
are released quarterly.
CPI - Consumer Price Index, Another of the red hot indicators that is dissected by the currency and
broader markets and measures the change in retail goods and services. The headline figure is presented as
a % change on the previous month's figures or on the annual numbers. This is the prime indicator for
inflation and is therefore monitored closely by the markets.
Trade Balance - The trade balance indicates whether the country is exporting more than it is importing, a
positive trade balance, or importing more than it is exporting which is a negative trade balance. A positive
balance will translate to upward pressure on the currency as money flows out of the country, causing
greater demand, whilst a negative balance will have the opposite effect. The figures are announced
monthly, one month after the reporting period.




GBP/USD
GBP -- Influenced to a great deal by housing market and service industry perfomance

The UK Pound: Next on our list of currencies is the UK Pound and US Dollar pair. This pair is often
referred to as cable, as the original communication between the UK and the US was via a cable link laid
on the sea bed. OK, let's look at the factors which move the currency in our forex trading online.

UK Pound Sterling
The UK currently ranks seventh in the worlds largest economies, and is the fifth largest importer, with the
US ranking as the most important exporter to the UK, closely followed by Germany and France. Whilst
part of the EU, the UK is unlikely to adopt the Euro in the foreseeable future, with the vast majority of the
general public against both the EU and the Euro. In order for the Euro to be adopted, interest rates would
have to drop significantly, and with reducing interest rates, traders would be encouraged to sell the UK
pound, thus weakening the currency. The UK economy is one of the strongest in Europe, with low
inflation and unemployment and this strength would suggest that adoption of the Euro is unlikely in the
short to medium term.

Currency Trading Online : UK Economy

The UK economy has changed significantly in the last 25 years, with a decline in manufacturing and
traditional heavy industry, and a move to a service orientated market, which now constitutes almost 80%
of the labour force in sectors such as banking, finance and business services. The agriculture industry is
the most efficient in Europe and supplies around 60% of its own food. Monetary policy is set by the BOE
( Bank of England ) having gained independence from central government in 1997, under the then
chancellor Gordon Brown. The inflation target is set annually by the Government with the BOE
managing interest rates to meet these targets. In the event that inflation exceeds the target, then the
Governor of the Bank is forced to write to the Chancellor to explain the reasons. The bank meets once a
month to discuss the economy and to set interest rates accordingly, and in addition they publish two
quarterly reports on the broader economic outlook.

Currency Trading Online : Factors Affecting The UK Pound

The ongoing debate regarding the Euro is closely watched and any comments from Government or the
Treasury can affect the currency, with favourable comments putting pressure on the UK Pound, and
negative comments having the reverse effect. The currency pair trade in the market as the EUR/GBP.

Currency Trading Online : Major Economic Indicators


Interest rates - Naturally these can cause major moves in currency. Often considered a blunt instrument,
their effect in the market may last only a few hours or days. For long term traders they are an annoyance -
for short term traders they represent volatility in the markets and a trading opportunity. One change in
interest rates rarely happens in isolation without hints of others to follow. Currently the UK has one of the
highest interest rates in major markets. Rates are set by the BOE at it's monthly meeting.
GDP - GDP is a classic lagging indicator and foremost in reporting on the health of the economy as it
measures how fast or slow the economy is growing. For the UK , these figures are released on a quarterly
basis at 8.30 am GMT. In the UK three different theoretical approaches are used to arrive at the GDP
figures, with one focusing on output, the second on input and the third on expenditure. This provides a
broad summery of the economic well being of the country. In general a positive GDP prompts bullish
moves, whilst negative comments prompt a bearish move, but these are generally well known in advance
so the impact on the currency is generally muted.
CPI - Consumer Price Index. Another of the red hot indicators that is dissected by the currency and
broader markets and measures the change in the cost of retail goods and services including food and
energy. The report tracks the change in a basket of products. This is the key indicator used by the BOE in
making interest rate decisions with an increase in CPI implying that it is costing more to purchase the
standard basket of products and services. A more accurate measure of inflation is termed the core CPI as
it's basket excludes volatile goods making the index more meaningful. The figures are released monthly
by the Office for National Statistics.
Trade Balance - The trade balance indicates whether the country is exporting more than it is importing
which is a positive trade balance, or importing more than it is exporting which is a negative trade balance.
With a negative balance this implies that currency is leaving the country which could lead to a weakening
of the UK Pound.

As with all the currencies there are many other news announcements that move both forex and stock
markets, but these are the major ones - do you have to be an economist to be a forex trader - NO - but you
do have to understand the broad economics of each country in order to take a view and help you make
decisions for trading currency online.

If you would like a more detailed look at the UK pound and it's relationship to the US dollar, I have
recently published a new site which examines this pair in detail. Please just follow the link pounds to
dollars. Now let's look at the next pair which is the AUD/USD - the Aussie Dollar.
GBP/EUR
    Use the trend of this pair to trade the USD pair. If GBP is appreciating against the
Euro then Trade GBP/USD instead of EUR/USD

A commodity currency is a name given to currencies of countries which depend heavily
on the export of certain raw materials for income. These countries are typically developing
countries, eg. countries like Burundi, Tanzania, Papua New Guinea; but also include
developed countries like Australia and Iceland. In the foreign exchange market,
commodity currencies generally refer to the Australian Dollar, Canadian Dollar, New
Zealand Dollar, and the South African Rand

Canadian Dollar
The Canadian Dollar: The last on our list of forex currencies is the USD/CAD pair. Here we are going
to look at the secondary currency, the Canadian dollar as we have already considered the US dollar.

Currency Trading Online : Canadian Dollar
The Canadian dollar is often referred to as the 'loonie' for the simple reason that the one dollar coin has a
picture of the loon, a common Canadian bird on the back! Like most economies around the world, the
service sector dominates, and yet it is one of the richest countries in terms of natural minerals and
resources. The US and Canada are close trading partners and intertwined due to their geographic
proximity. Its major exports include cars, plant and machinery, and oil. Canada's reserves of oil are
second only to Saudi Arabia!

Currency Trading Online : Canadian Economy

A vast country with a wealth of natural resources, the economy is very strong but extremely dependant on
the US economy since approximately 83% of its exports go to its next door neighbour. Any changes in
the US economy will have an immediate and knock on effect in Canada. The central bank is the Bank of
Canada, established in 1934, and is responsible for monetary policy. Like the UK the BOC is set inflation
targets by the Department of Finance, which it must achieve. The board meet eight times a year to discuss
the economic outlook and to raise or lower interest rates accordingly.

Currency Trading Online : Factors Affecting Canadian Dollar

The main influencing factor is the US economy, so a downturn in the US will have a similar knock on
effect in Canada. As a general rule, since the country is highly dependent on natural resources, as
commodities increase in value the Canadian dollar will also tend to increase, giving a positive correlation
to the currency. The reverse occurs when commodity prices fall. The Canadian dollar is also another of
the carry trade opportunities, although the Japanese Yen is always top of the list with traders given the
countries' very low interest rates.

Currency Trading Online : Major Economic Indicators


Interest rates - Naturally these can cause major moves in currency. Often considered a blunt instrument,
their effect in the market may last only a few hours or days, before the trend continues unbroken. In
Canada, the effect can be dramatic as the BOC issues a statement with every announcement, and like
America, the wording is considered as important as the news itself, since this gives hints to future
monetary policy and the current thinking of the board. The announcements are made eight times a year
and are released at 9.00 am EST.
GDP - GDP is a classic lagging indicator and foremost in reporting on the health of the economy as it
measures how fast or slow the economy is growing. Figures are released quarterly in Canada, but as the
information is generally pre-released in production figures then the news generally has little impact on the
currency.
CPI - Consumer Price Index, Another of the red hot indicators that is dissected by the currency and
broader markets and measures the change in retail goods and services. The headline figure is presented as
a % change on the previous month's figures and also on the annual numbers. This is the prime indicator
for inflation and is therefore monitored closely by the markets. As with many economies the data is
presented as a core figure and a headline figure. In Canada, the core figure excludes the 8 items that are
considered to be the most volatile over the previous month, in order to try to provide a more accurate
assessment of core inflation. The figures are announced monthly around the 20th of each month at 8.30
am EST.
Trade Balance - The trade balance indicates whether the country is exporting more than it is importing, a
positive trade balance, or importing more than it is exporting which is a negative trade balance. A positive
balance will translate to upward pressure on the currency as money flows out of the country, causing
greater demand, whilst a negative balance will have the opposite effect. The figures are announced
quarterly and approximately three months after the end of the reporting period, so they are almost 6
months out of date by release. They therefore tend to have a limited impact on market volatility.

If you would like a more detailed look at the Canadian Dollar and it's relationship to the US dollar, I have
recently published a new site which examines this pair in detail. Please just follow the link USD to CAD.
Finally let's look at the Japanese Yen which will complete our economic analysis of the world's major
currencies.




     Commodity currency (Oil, mining)
     Major trading partner US
     Data releases at about same time as US data.
     USD/CAD movement usually controlled by the US factor

NZD Commodity currency
AUD Commodity currency
       Choosing the best Forex trading software
Choosing the best Forex trading software is not that difficult. You only have to base the program you
selected on 3 criteria namely: reliability, the type of application, and the user's detailed personal needs.

Reliability. Very important. It refers to the ability of the program to deliver real time information from the
market. Does it provide you with instant access to market data? Does the system often get downtime? Is
the data accurate? These are the questions you need to ask yourself first before purchasing software. You
can always check the forums or message boards about the product. By doing so, you will be able to check
out if previous users have any complaints about the product.

The next one on our list is determining which type of program works for you. There are two types of
these applications. They can be either web based or server based. Server based applications have data
machines that store information from the web and transactions between the traders and the users. The
primary concern of server based programs is the delay of the transfer of information. The delay will be
based on the physical distance of the main server to the trader's machine. Internet connection will also
play a factor in the delay. You will also need a very good machine to act as the server. This will cost a lot
of money because you will need to take care of your server, too. Web based programs, on the other hand,
are more popular because of the fact that they do not need servers. The content is just in the website of the
trader. All the trader needs to do is access it.

The last criterion is the detailed personal needs of the user. This last part in knowing if you have indeed
selected the best trading software is based on perception of the user. Try to see if the application you want
to purchase has the necessary interface and tools that will aid you in your day-to-day trading. It really
depends on what you want.
Currency Correlations
To be an effective trader, understanding your overall portfolio's sensitivity to market volatility is
important. But this is particularly so when trading forex. Because currencies are priced in pairs, no single
pair trades completely independently of the others. Once you know about these correlations and how they
change, you can take advantage of them to control over your portfolio's exposure.


Definition


The reason for the interdependence of currency pairs is easy to see: if you were trading the British pound
against the Japanese yen (GBP/JPY pair), for example, you are actually trading a kind of derivative of the
GBP/USD and USD/JPY pairs; therefore, GBP/JPY must be somewhat correlated to one if not both of
these other currency pairs. However, the interdependence among currencies stems from more than the
simple fact that they are in pairs. While some currency pairs will move in tandem, other currency pairs
may move in opposite directions, which is in essence the result of more complex forces.

Correlation, in the financial world, is the statistical measure of the relationship between two securities.
The correlation coefficient ranges between -1 and +1. A correlation of +1 implies that the two currency
pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs
will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship
between the currency pairs is completely random.

Reading The Correlation Table
With this knowledge of correlations in mind, let's look at the following tables, each showing correlations
between the major currency pairs for the month of March 2005.




The upper table above shows that over the month of March (one month) EUR/USD and AUD/USD had
very strong positive correlation of 0.94. This implies that when the EUR/USD rallies, the AUD/USD will
also rally 94% of the time. Over the longer term (three months), though, the correlation is slightly weaker
(0.47).

By contrast, the EUR/USD and USD/CHF had a near-perfect negative correlation of -0.99. This implies
that 99% of the time, when the EUR/USD rallies, USD/CHF will undergo a selloff. This relationship even
holds true over longer periods as the correlation figures remain relatively stable.
Yet correlations do not always remain stable. Take USD/CAD and NZD/USD, for example. With a
coefficient of -0.94, they had a strong negative correlation over the past year, but the relationship
deteriorated over March 2005 for a number of factors, including the Reserve Bank of New Zealand's
intentions to resume rate hikes, and political instability in Canada.

Correlations Do Change
It is clear then that correlations do change, which makes following the shift in correlations even more
important.Sentiment and global economic factors are very dynamic and can even change on a daily
basis.Strong correlations today might not be in line with the longer-term correlation between two
currency pairs.That is why taking a look at the six-month trailing correlation is also very important.This
provides a clearer perspective on the average six-month relationship between the two currency pairs,
which tends to be more accurate.Correlations change for a variety of reasons, the most common of which
include diverging monetary policies, a certain currency pair’s sensitivity to commodity prices, as well as
unique economic and political factors.

Here is a table showing the six-month trailing correlations that EUR/USD shares with other pairs:




Calculating Correlations Yourself
The best way to keep current on the direction and strength of your correlation pairings is to calculate them
yourself. This may sound difficult, but it's actually quite simple.
To calculate a simple correlation, just use a spreadsheet, like Microsoft Excel. Many charting packages
(even some free ones) allow you to download historical daily currency prices, which you can then
transport into Excel. In Excel, just use the correlation function, which is =CORREL(range 1, range 2).
The one-year, six-, three- and one-month trailing readings give the most comprehensive view of the
similarities and differences in correlation over time; however, you can decide for yourself which or how
many of these readings you want to analyze.

Here is the correlation-calculation process reviewed step by step:

   1. Get the pricing data for your two currency pairs; say they are GBP/USD and USD/JPY
   2. Make two individual columns, each labeled with one of these pairs. Then fill in the columns with
      the past daily prices that occurred for each pair over the time period you are analyzing
   3. At the bottom of the one of the columns, in an empty slot, type in =CORREL(
   4. Highlight all of the data in one of the pricing columns; you should get a range of cells in the
      formula box.
   5. Type in comma
   6. Repeat steps 3-5 for the other currency
   7. Close the formula so that it looks like =CORREL(A1:A50,B1:B50)
   8. The number that is produced represents the correlation between the two currency pairs

Even though correlations do change, it is not necessary to update your numbers every day, updating once
every few weeks or at the very least once a month is generally a good idea.

How To Use It To Manage Exposure
Now that you know how to calculate correlations, it is time to go over how to use them to your advantage.

First, they can help you avoid entering two positions that cancel each other out, For instance, by knowing
that EUR/USD and USD/CHF move in opposite directions nearly 100% of time, you would see that
having a portfolio of long EUR/USD and long USD/CHF is the same as having virtually no position - this
is true because, as the correlation indicates, when the EUR/USD rallies, USD/CHF will undergo a selloff.
On the other hand, holding long EUR/USD and long AUD/USD is similar to doubling up on the same
position since the correlation is so strong.

Diversification is another factor to consider. Since the EUR/USD and AUD/USD correlation is
traditionally not 100% positive, traders can use these two pairs to diversify their risk somewhat while still
maintaining a core directional view. For example, to express a bearish outlook on the USD, the trader,
instead of buying two lots of the EUR/USD, may buy one lot of the EUR/USD and one lot of the
AUD/USD. The imperfect correlation between the two different currency pairs allows for more
diversification and marginally lower risk. Furthermore, the central banks of Australia and Europe have
different monetary policy biases, so in the event of a dollar rally, the Australian dollar may be less
affected than the Euro, or vice versa.

A trader can use also different pip or point values for his or her advantage. Lets consider the EURUSD
and USDCHF once again. They have a near-perfect negative correlation, but the value of a pip move in
the EURUSD is $10 for a lot of 100,000 units while the value of a pip move in USDCHF is $8.34 for the
same number of units. This implies traders can use USDCHF to hedge EURUSD exposure.

Here's how the hedge would work: say a trader had a portfolio of one short EUR/USD lot of 100,000
units and one short USD/CHF lot of 100,000 units. When the EUR/USD increases by ten pips or points,
the trader would be down $100 on the position. However, since USDCHF moves opposite to the
EURUSD, the short USDCHF position would be profitable, likely moving close to ten pips higher, up
$83.40. This would turn the net loss of the portfolio into minus $16.60 instead of minus $100. Of course,
this hedge also means smaller profits in the event of a strong EUR/USD sell-off, but in the worst-case
scenario, losses become relatively lower.
Regardless of whether you are looking to diversify your positions or find alternate pairs to leverage your
view, it is very important to be aware of the correlation between various currency pairs and their shifting
trends. This is powerful knowledge for all professional traders holding more than one currency pair in
their trading accounts. Such knowledge helps traders, diversify, hedge or double up on profits.

Summary
To be an effective trader, it is important to understand how different currency pairs move in relation to
each other so traders can better understand their exposure. Some currency pairs move in tandem with each
other, while others may be polar opposites. Learning about currency correlation helps traders manage
their portfolios more appropriately. Regardless of your trading strategy and whether you are looking to
diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind
the correlation between various currency pairs and their shifting trends.




Candlesticks


"three white soldiers" and is considered by some candle theorists as one of the most bullish candle
patterns. The three white soldiers pattern is most potent when it occurs after an extended decline and a
period of subsequent consolidation. When a particular stock posts a decline followed by a sideways
movement, the appearance at that point of three white soldiers signals that higher prices are likely ahead.

The first of the three advancing white soldiers is a reversal candle. It either ends a downtrend or signifies
that the stock is moving out of a period of consolidation after a decline. The candle on day two may open
within the real body of day one. The pattern is valid as long as the candle of day two opens in the upper
half of day one's range. By the end of day two, the stock should close near its high, leaving a very small
or non-existent upper shadow. The same pattern is then repeated on day three. Below you will find an
illustration of the three white soldiers candlestick pattern:




Although this candle pattern is very potent when a currency pair is at or near its lows, it
should be regarded sceptically if it appears following a long advance in price. If you spot
three white soldiers after a sustained rally, then it may mean a top is near. Be on the alert
then for a reversal candle such as a doji or negative engulfing.
Investment Myths
Investment Protection
The foreign exchange market is one of the most popular markets for speculation, due to its enormous size,
liquidity and tendency for currencies to move in strong trends. Presumably, these characteristics would
enable traders to have tremendous success. However, success has been limited mainly for the reasons
described below.

Many traders come with false expectations of the profit potential and lack the discipline required for
trading. Short-term trading is not an amateur's game and is usually not the path for quick riches. Though
currencies may seem exotic or less familiar than traditional markets (i.e. equities, futures, etc.), the rules of
finance and simple logic are not suspended. One cannot hope to make extraordinary gains without taking
extraordinary risks. A trading strategy that involves taking a high degree of risk means suffering
inconsistent trading performance and often suffering large losses. Trading currencies is not easy (if it was,
everyone would already be a millionaire), and many traders with years of experience still incur periodic
losses. One must realize that trading takes time to master and there are absolutely no short cuts to this
process.

The most enticing aspect of trading currencies is the high degree of leverage used. Leverage seems very
attractive to those who are expecting to turn small amounts of money into large amounts in a short period
of time. However, leverage is a double-edged sword. Just because one lot ($100,000) of currency only
requires $1,000 as a minimum margin deposit, it does not mean that a trader with $10,000 in his account
should easily be able to trade 10 lots or even 5 lots. One lot is $100,000 and should be treated as a
$100,000 investment and not the $1,000 put up as margin. Most traders analyze the charts correctly and
place sensible trades, yet they tend to over leverage themselves (take a position that is too big for their
portfolio), and as a consequence, often end up forced to exit a position at the wrong time.

If an account value is $10,000 and the trader places a trade for 1 lot, he is in effect, leveraging himself 10
to 1, which is a very significant level of leverage. Most professional money managers are not allowed to
leverage even this high. Trading in small increments on the account will allow the trader to endure many
losing trades without experiencing large monetary losses.

				
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