Forex Strategies – Technical Analysis | Download Current Analysis
The foreign exchange markets are extremely popular among practitioners of technical analysis. The large number and variety of foreign exchange market participants make it ideal for technical analysis.
In particular, major price moves almost always involve significant trading volume and broad participation. Thus, false price breakouts and misleading trend reversals should not occur as often as in other markets. Additionally, the 24-hour nature of the market enables charts to be read without taking into account distorting price gaps that occur between trading sessions.
In addition to using economic data, foreign exchange traders utilize an array of technical analysis techniques to predict a currency’s future movements on the basis of its past behavior. One major advantage technical analysis holds over other trading techniques is that it can be used with any financial instrument and over any time period-from a second to a day to a month.
FXCM offers a comprehensive variety of advanced charting packages for the currency trader. Provided free with a FXCM account, these charts provide an analysis tool to support your currency trading strategy
Forex Strategies – Macroeconomic Analysis
Changes in a country’s macroeconomic situation can have a major influence on the value of its currency. Foreign Exchange traders pay close attention to countries’ economic and political situations when making their decisions.
In the long run, the relative strength of a nation’s economy is often reflected in the strength of its currency. An economy that is growing quickly will likely attract investors from abroad seeking higher returns.
On a daily basis, economic data releases, policy decisions, and political events cause economists and traders alike to reappraise their outlook on a country’s economy. These dynamics, along with technical factors are what may drive price movement in the shorter-term.
Each country’s currency has an overnight lending rate determined by that country’s central bank. For example, the US Federal Reserve Bank meets periodically to set the Federal Funds rate. Higher interest rates attract foreign investment and induce domestic investors to repatriate overseas funds, increasing the demand for the currency and making it stronger. Therefore, any move to increase interest rates or any development that could cause a central bank to increase interest rates will tend to make traders bullish on that currency. The reverse also applies.
In the United States and other countries with developed equity markets, both the overall direction in equity prices and dramatic short-term moves tend to have an impact on the value of a country’s currency. Money flows into a country as its equity markets rise and reverses direction in falling markets. Additionally, the equity markets serve as a sentiment barometer for a country’s economic prospects. The more positive sentiment for country’s economy, the greater the demand for its assets.
A nation’s trade balance is vital in any assessment of its economic health and more specifically in measuring the strength of its currency. A trade deficit causes a weakening currency, since more of the country’s financial resources flow out of the country than other nations’ flow in. For foreign exchange markets, any unexpected move away from a nation’s trade balance baseline will usually trigger increased trading and a price movement.
Another major international influence on the value of currency is the price of commodities particularly petroleum. A rise, but more especially a sharp, unexpected spike in the price of oil will negatively affect the currency of oil-importing nations, such as the United States, and positively strengthen the currency of an oil-exporter, such as Canad
Forex Strategies – Asset Diversification
Diversify Your Portfolio with Foreign Exchange Investments
The foreign exchange markets offer investors the opportunity to diversify their portfolios from stock and bonds. Investors who diversify their portfolios, by including foreign exchange as an asset class, can lower the overall volatility of their portfolio. Stocks or stock indices even when varied by country or industry in your portfolio tend to move in synch.
The FX markets have a large variety of market participants compared to other capital markets, offering a unique opportunity for profit for motivated participants.
Forex Markets Participants
One aspect of the foreign exchange markets is the large number of market participants that transact on a non-profit seeking basis. Professional investment risk-takers, dedicated to profiting from foreign exchange markets, only make up around 25% of market participants, as opposed to around 80% or 90% in other capital markets. The other market participants, such as central banks (which might intervene to enact government policy) and corporations (which typically transact to finance a specific deal), do not seek to generate profits as their primary motive for foreign exchange market transactions. Thus, the central tenet of the efficient market hypothesis is not as applicable in the FX market, and significant profits could accrue to profit-motivated participants. This was outlined in a study, performed by the Russell Investment Group (“Is there still Alpha to be gained in active currency management?” September 2003), which stated that currency market return opportunities not only exist but should be persistent due to the number of these non-profit seeking institutions.