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How Fundamentals are important in Forex?

How Fundamentals are important in Forex- Equidious Research.png

Fundamental Analysis is a process of analyzing a security in order to determine its fair value (also known as intrinsic value), by evaluating relevant economic, financial, non-financial and other quantitative and qualitative factors.

Fundamental trading is a method by which a trader focuses on company-specific events to determine which stock to buy and when to buy it. Trading on fundamentals is more closely associated with the buy-and-hold strategy of investing than with short-term trading. There are, however, specific instances in which trading on fundamentals can generate some nice profits in a short period.
As the largest financial marketplace, forex is affected by an incredibly diverse amount of factors. These market fundamentals are the key pieces to determining when a currency is going to rise in value and when it’s going to fall. Trading on the fundamentals – also referred to as trading the news, is the study of news events and economic statistics to determine trading opportunities. These traders pay close attention to changes in economic indicatorssuch as interest rates, employment rates, and inflation. By assessing the relative trend of these data points, a trader is analyzing the relative health of the country’s economy and whether to trade the future movement of their currency.

There are times in the market cycle when the true value of a currency pair is at variance with the market value of the currency pair. The job of the fundamental analyst is to look at a currency using certain factors of evaluation, compare its valuation with another currency, and determine if the present value is the true value of the pairing, or if the value of one currency against another is undervalued or overvalued. If a currency is undervalued, then the trader’s response to the fundamental analysis is to assume a long position on the undervalued. Similarly, if the fundamental analyst sees a currency as overvalued, a short position will be assumed so as to benefit from a future downward move towards true valuation.

The relative importance of these releases may change: Business Sentiment Surveys, Consumer Confidence Surveys, Gross Domestic Product (GDP), Industrial Production, Inflation (consumer price or producer price), Interest Rate Decision, Manufacturing Sector Surveys, Retail Sales, Trade Balance, Employment / Unemployment (Non-Farm Payrolls).

Interest rate policy is the biggest key driver of currency prices and typically a forex fundamental analysis strategy for currency traders. If an economy is strong or weak this will be reflected in that country’s interest rate policy, and ultimately, the strength or weakness of the currency. Fundamentally, if a country or currency region raises its interest rates and has a strong monetary policy, the currency of that country will strengthen. Also if a country or currency region is lowering interest rates that individual currency could be weak.

Since economic indicators gauge a country’s economic state, changes in the conditions reported will therefore directly affect the price and volume of a country’s currency. There are many economic indicators, and even more private reports, that can be used to evaluate forex fundamentals. It’s important to take the time to not only look at the numbers but also understand what they mean and how they affect a nation’s economy. When properly used, these indicators can be an invaluable resource for any currency trader.

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How Volatility Affects Forex Market?

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What does volatility mean in forex?

Volatility (in Forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction. On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

The market’s estimate of how much a currency pair will fluctuate over a certain period in the future is known as implied volatility. For online investors, a volatile market means both potential risks and an abundance of opportunities. Many traders follow market news and economic calendars in an attempt to recognize potential volatility, benefit from it and stay ahead of the market. Volatility is a useful concept for forex traders that can give them a sense of the risk involved in trading a particular currency pair.

The term “Volatility” most frequently refers to the standard deviation of the change in value of a financial instrument over a specific time period. It is often used to quantify (describe in numbers) the risk of the currency pair over that time period.

Volatility (in forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction. On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time. Commonly, the higher the volatility, the riskier the trading of the currency pair is.

Forex traders traditionally chose currency pairs for their investments on the ground of classical risk/return analysis. Moreover, both return and risk are assessed in each separate moment or, in the best case, for certain discrete time series. In reality, actual price quotations change constantly at a different pace: sometimes quickly, sometimes slowly. That is why among all other market characteristics a lot of attention should be paid to volatility as a quantitative measure of past, current and future price range of a currency pair.

The most volatile currency pairs are GBP/JPY, EUR/NZD and GBP/AUD.
The least volatile currency pairs are EUR/GBP, NZD/USD and EUR/CHF.

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Forex Trading Plan

“Fail to Plan and You Plan to Fail”

Trading Plan- EQUIDIOUS RESEARCH

Having a Forex trading plan is one of the key elements to becoming a successful Forex trader. Many traders never even make a trading plan, let alone use one regularly. It’s very important that you do both; make a trading plan and use the one you make…don’t just make one and then never look at it like many traders do.

Assessing your skill

Have you tested your strategy? Are you confident that it would work? Can you follow your strategy without hesitation? If you haven’t mastered your trading strategy yet, it might be best to practice and tweak it until you’re confident in implementing it.

Set your risk level

When trading, you should set a risk level that you’re comfortable with. Professional traders tend to risk no more than anywhere between 1-5% of their capital – what you choose should be dependent on your trading style and risk tolerance.

Set yourself goals

Before you start trading, you should set yourself goals in terms of realistic profit targets and risk/reward ratios. As a trader you should set weekly, monthly and yearly profit goals and assess them regularly to see if you’re on track.

Prepare for trading

Before you start each trading day you could follow a series of steps before placing your first trade. For example, research the major news announcements for the day, set up support and resistance zones on your charts, or even read through your trading plan.

Trade Preparation

Whatever trading system and program you use, label major and minor support and resistance levels, set alerts for entry and exit signals and make sure all signals can be easily seen or detected with a clear visual or auditory signal.

Set Exit Rules

Most traders make the mistake of concentrating 90% or more of their efforts in looking for buy signals, but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don’t want to take a loss. Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don’t take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.

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Know more about Exchange rates

An exchange rate is the price of a nation’s currency in terms of another currency. Thus, an exchange rate has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly.

forex Swap Trading (1)
For example, an interbank exchange rate of 112 Japanese yen to the United States dollar means that ¥112 will be exchanged for each US$1 or that US$1 will be exchanged for each ¥112.

Why do exchange rates change?

Exchange rates fluctuate due to one major factor: global demand and supply. The more in-demand a particular currency is, the more its value will increase.

  • Factors that affect demand and supply of currency include governments and businesses trading internationally, countries’ political and economic stability, travel and tourism, trading of currencies on the stock market and even natural disasters.
  • Exchange rates are also influenced by countries’ rules and actions that govern their currency, known as their fiscal policy.
  • Interest rates play a large role in exchange rate fluctuation. Favourable interest rate movements will drive demand for a particular currency – driving up its value.

Breaking down the ‘Exchange Rate’

Forex currency concept-EQUIDIOUS RESEARCH

  • An exchange rate has a base currency and a counter currency.
  • In a direct quotation, the foreign currency is the base currency and the domestic currency is the counter currency.
  • In an indirect quotation, the domestic currency is the base currency and the foreign currency is the counter currency.
  • Most exchange rates use the US dollar as the base currency and other currencies as the counter currency.
  • However, there are a few exceptions to this rule, such as the euro and Commonwealth currencies like the British pound, Australian dollar and New Zealand dollar.

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Forex Insights-20-Sept-2018

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EUR/USD:

Headlines: Euro dwells in the tight range in lack of fundamental impulses

  • Euro is trading on the upside while remaining trapped within the tight range at around key level as lack of fundamental data see German Bundesbank President Weidmann speaking as a major headline of Thursday.
  • EUR/USD appears consolidated in the near term, while further upside is poised to face formidable resistance above 1.1700 the figure for the time being.

GBP/USD:

Headlines:Sterling moves higher after UK retail sales rise above expectations

  • Sterling is trading on the upside ahead of the UK retail sales report and the unofficial European summit on Brexit in Salzburg.
  • The Uk retail sales rose above expectations on both total and core retail sales basis in August pushing Sterling above key level.
  • Sterling rose to a fresh multi-week high after UK inflation rose above expectations in August, but the news of the UK Prime Minister set to reject EU Irish border proposal saw Sterling retreating lower on Wednesday.
  • The correction out from the 2018 low has accelerated, with the market pushing through critical shorter term resistance at 1.3000, while trying to set up a higher platform around 1.2800 along the way.

USD/JPY:

Headlines: USD/JPY on the defensive, but holds above 112.00 handle

  • The USD/JPY pair traded with a mild negative bias for the second consecutive session, albeit has still managed to hold above the 112.00 handle.
  • Rallies continue to be very well capped, with the medium-term outlook still favouring lower tops and lower lows. Look for a daily close back below 109.75 to strengthen the bearish outlook, opening the door for the start to a move back down towards 108.00 which guards against the 104.60 area 2018 low.

CRUDE OIL:

Headlines: WTI consolidates around $ 71, focus shifts to OPEC + meeting

  • WTI (oil futures on NYMEX) has entered into a phase of consolidation near two-week tops of $ 71.34, as the bulls await fresh impetus for the next push higher.
  • Iran’s Oil Minister Zanganeh was on the wires last minutes, speaking about the output policy ahead of the OPEC+ meeting in Algiers this weekend.
  • Oil at $80 per barrel is a suitable price.

GOLD:

Headlines: Gold edges lower, but holds above $1200 mark on softer USD

  • After an initial uptick to fresh weekly tops, gold prices turned lower and eroded a part of previous session’s goodish up-move.
  • Spot prices inched higher on Wednesday and jumped back above the key $1200 psychological mark, shrugging off a strong rally in the US Treasury bond yields.
  • Fails to capitalize on overnight up-move, despite retracing US bond yields.
    •  Risk-on mood/Fed hike prospects seemed to collaborated towards capping.
    •  The prevalent USD selling bias helped limit any immediate sharp downside.

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Need of Moving Average in Forex

The Moving Average, MA for short, is probably the most popular trend following indicator used by Forex traders. In this blog we will discuss more about Moving Average (MA)

What is Moving Average?

A moving average is a type of lagging indicator that accumulates past price points and then averages them to provide a technical analyst with a better sense of where a security went over a period of time. There are a handful of different moving averages, including the simple moving average (SMA) and the exponential moving average (EMA).

Moving Average- Equidious Research

Moving averages help forex traders make effective transactions by aiding them in evaluating the price history of a currency pair or related investment. More specifically, these averages make it easier for investors to interpret the price fluctuations of an asset by smoothing out their random movements.

One sweet way to use moving averages is to help you determine the trend.

The simplest way is to just plot a single moving average on the chart. When price action tends to stay above the moving average, it signals that price is in a general UPTREND.

If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.

In an uptrend, the “faster” moving average should be above the “slower” moving average and for a downtrend, vice versa.

CALCULATING THE SMA

To calculate the SMA, one must start by gathering a security’s closing prices over a fixed number of trading sessions.

If a trader wants to determine the 20-day SMA of the EUR/USD, he can add up all the currency pair’s closing prices over the time and then divide by 20. Alternatively, figuring out the 200-day SMA of the same currency pair would require totalling its closing values during that time and then dividing that sum by 200.

CALCULATING THE EMA

Calculating the EMA is a bit more complicated, as this indicator gives greater weight to more recent values in order to reduce the effect of lag. To determine this moving average, a forex trader should begin by selecting a time period, for example 10 days, and then calculating its SMA.

Next, the investor should figure out the multiplier he will use to give the most recent data points greater emphasis. The size of this multiplier will depend on how long the EMA is.

To calculate the multiplier, one can use the following formula:

  • Multiplier = (2/(number of time periods) + 1)
  • For a 10-day EMA: (2/(10 + 1)) = 0.1818 or 18.18%
  • For a 20-day EMA: (2/(20 + 1)) = 0.0952 or 9.52%

Once this multiplier has been acquired, the following equation can be used to determine the EMA:

  • Multiplier x (closing price – EMA(previous day)) + EMA(previous day)

If investors take the time to master the moving average and the many benefits it provides, they will have access to a wide range of tools they would not be able to harness otherwise.

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What is a Forex Swap Trading?

What is a Forex Swap?

Forex Swap is when you buy a high interest currency against a low interest currency. For each day that you hold that trade your broker will pay you the interest difference between the two currencies as long as you are trading in the interest positive direction.

forex Swap Trading (1)

Forex Swap Offers Two Ways To Profit

The forex carry trade is a type of strategy in which traders sell currencies of countries with relatively low interest rates, and use the proceeds to buy currencies of countries that yield higher interest rates.

Forex swaping leverages the differences in interest rates between countries. For example, one country’s central bank may lower interest rates in order to create economic stimulation, while the central bank in another country maintains higher interest rates.

In effect, the forex trader borrows money in one country with a lower interest rate, and invests it in another country with a higher interest rate, and keeps the difference in yield as profit.

A positive-carry forex trade (or simply “carry trade”) means that the position has a positive spread between the interest rates of the currencies. The carry trade strategy can capture this spread, and the profits depend on the leverage applied through the mechanical trading system.

How does Forex Swap work?

Forex Swap offers forex traders an extra dimension of profitability. When the carry is positive, the forex position can accrue positive income even while market fluctuations cause a short-term loss in currency value.

For example, in buying one lot of EUR/USD, the trader is buying one lot of Euros, and selling one lot of Dollars. By maintaining the position overnight, the trader pays interest on that currency which was sold, and he or she receives interest for the currency which was purchased.

So, in this example, if the interest received from the purchased Euros is greater than the interest paid for the sold Dollars, the trading account gains simply by holding the position.

The longer the winning position is held, the greater the possible interest income and the thicker the cushion against fluctuations in the market.

A Forex Swap creates an extra opportunity for profit as well as a layer of additional protection. And, the carry trade can also increase the potential longevity of a holding.

Part of the appeal of Forex Swap is the possibility of earning interest. Typically, income accrues daily for long carries with triple rollovers. Here’s the calculation to approximate daily yield:

[(Interest Rate of the Long Currency) – (Interest Rate of the Short Currency) / 365] x Notional value of the position

So, for example, for one lot of NZD/JPY with a notional value of 100,000 the interest can be calculated like this:

[(0.0333 – 0.0033)/365] x 100,000 = about $8 per day

This amount will be approximate, since banks use overnight rates which fluctuate daily. As well as yield for forex traders who are long NZD/JPY, traders whose strategies involve “fading” the carry, or else going short NZD/JPY can also earn interest.

Hedged Carry Trades

Yet another type of carry trade involves hedging one long carry trade with another short carry trade using different currency pairs that are closely correlated and which results in a net interest rate benefit to the overall position.

For example, a hedged carry trader might exploit interest rate differentials between well correlated currency pairs like the following:

  • EUR/USD and USD /CHF
  • AUD/USD and NZD/USD
  • GBP/USD and USD/CHF
  • EUR/JPY and CHF/JPY
  • GBP/JPY and CHF/JPY

Such hedged carry trades are often highly leveraged to make them worthwhile, thus much more risky. Nevertheless, the main risk to this hedged carry trade strategy arises if the correlation between the pairs breaks down for some reason and subsequently results in losses. Remember that the correlation risk is of course not the only risk factor to consider, just one of them.

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