Fundamental Analysis - page 2
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Short Selling Method
Short Selling:
Traders in the Forex market can benefit from both the rising market (Bull Market) and falling market (Bear Market). Forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction although some stocks have the same option, this is somehow limited to certain conditions. . For example, it is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. This means that a crisis or falling market is not necessarily bad for the Forex trader, in fact it can be very profitable. But in a declining stock market, it is only with extreme ingenuity that an investor can make a profit.
On the other hand, since the Forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market.
Governments and Central Banks
Governments and Central Banks
Arguably, some of the most influential participants involved with currency exchange are the central banks and federal governments. In most countries, the central bank is an extension of the government and conducts its policy in tandem with the government. However, some governments feel that a more independent central bank would be more effective in balancing the goals of curbing inflation and keeping interest rates low, which tends to increase economic growth. Regardless of the degree of independence that a central bank possesses, government representatives typically have regular consultations with central bank representatives to discuss monetary policy. Thus, central banks and governments are usually on the same page when it comes to monetary policy.
Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. For example, ever since pegging its currency (the Yuan) to the U.S. dollar, China has been buying up millions of dollars worth of U.S. treasury bills in order to keep the Yuan at its target exchange rate. Central banks use the foreign exchange market to adjust their reserve volumes. With extremely deep pockets, they yield significant influence on the currency markets.
Hedgers
Hedgers
Some of the biggest clients of these banks are businesses that deal with international transactions. Whether a business is selling to an international client or buying from an international supplier, it will need to deal with the volatility of fluctuating currencies.
If there is one thing that management (and shareholders) detests, it is uncertainty. Having to deal with foreign-exchange risk is a big problem for many multinationals. For example, suppose that a German company orders some equipment from a Japanese manufacturer to be paid in yen one year from now. Since the exchange rate can fluctuate wildly over an entire year, the German company has no way of knowing whether it will end up paying more Euros at the time of delivery.
One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go into the spot market and make an immediate transaction for the foreign currency that they need.
Unfortunately, businesses may not have enough cash on hand to make spot transactions or may not want to hold massive amounts of foreign currency for long periods of time. Therefore, businesses quite frequently employ hedging strategies in order to lock in a specific exchange rate for the future or to remove all sources of exchange-rate risk for that transaction.
For example, if a European company wants to import steel from the U.S., it would have to pay in U.S. dollars. If the price of the euro falls against the dollar before payment is made, the European company will realize a financial loss. As such, it could enter into a contract that locked in the current exchange rate to eliminate the risk of dealing in U.S. dollars. These contracts could be either forwards or futures contracts.
Technical Analysis
Technical Analysis
One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the Forex is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast. This makes it the perfect market for traders that use technical tools, such as trends, charts and indicators.
It is important to note that, in general, the interpretation of technical analysis remains the same regardless of the asset being monitored. There are literally hundreds of books dedicated to this field of study, but in this tutorial we will only touch on the basics of why technical analysis is such a popular tool in the Forex market.
Currency Pairs in the Futures Markets
Currency Pairs in the Futures Markets
One of the key characteristics of the Forex markets is the way currencies are quoted. In the futures markets, foreign exchange always is quoted against the U.S. dollar. This means that pricing is done in terms of how many U.S. dollars are needed to buy one unit of the other currency. Remember that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the futures market and the spot market quotes will not always be parallel one another.
For example, in the spot market, the British pound is quoted against the U.S. dollar as GBP/USD. This is the same way it would be quoted in the futures markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it will also rise in the futures markets.
On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese Yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that one U.S. dollar would buy 115 Japanese Yen. In the futures market, it would be quoted as (1/115) or .0087, which means that 1 Japanese Yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen would buy less U.S. dollars.
Consumer Confidence:
Consumer Confidence:
measures the levels the citizens in the sixteen economies trust their economy, which results from the difference between the negative and positive answers, zero is considered to be the barrier, a reading below zero means that the negative answer surpass the positive answers, but if the reading is positive then the positive readings are more than the negative readings.
The fiscal policy:
The fiscal policy: is a policy stimulated by the policy makers, it is divided into taxation law and government spending; the government can adjust these laws in order to modify the amount of non-refundable income available to its tax payers, for example a government could ask more taxes from individual which makes them have less amount of money used in spending on goods and services, then the government could use those money to inject it back again into certain companies and markets by something called Government Spending. The higher the government spending means that they are going to demand more taxes from individuals in the economy; but the major disadvantage of this policy is that it might take time in order to achieve all that.
Trend or Range
Trend or Range
One of the greatest goals of technical traders in the Forex market is to determine whether a given pair will trend in a certain direction, or if it will travel sideways and remain range-bound. The most common method to determine these characteristics is to draw trend lines that connect historical levels that have prevented a rate from heading higher or lower. These levels of support and resistance are used by technical traders to determine whether or not the given trend, or lack of trend, will continue.