Oil and Currency Trading
Wall Street watches oil prices like a hawk. Remember the early part of 2008 when oil prices skyrocketed from near $70 to almost $150 within a few months. This was more than a 100% increase in oil prices. Many hedge funds heavily betted on the increase in oil prices and made a windfall.
It is being studied whether the increase in the oil prices was due to speculation by the hedge funds. When the stock markets crashed in the middle of 2008, most of the hedge funds had to liquidate their investments in crude oil futures to cover the redemption pressure on them. Oil prices collapsed. Oil prices are down now due to low consumer demand because of the global recession. But it is being predicted by the experts that with a recovery in the global economy, the oil demand will rise and the prices will go up again. Oil demand in China and India plays a major role now.
As oil prices go up, consumers are forced to spend more on oil. The more they spend on oil, the less they can spend on other products. The less they spend on other products, the less profit companies make. Declining profits made by these companies mean declining stock prices.
The opposite is also true. The less the oil prices become, the more Wall Street becomes optimistic about the profit potential of companies. This increased optimism leads to increase in stock prices. Two large futures exchanges are used to determine the prices of oil. They are the New York Mercantile Exchange (NYME) and the International Petroleum Exchange (IPE).
Historically, rising oil prices have been associated with falling stock markets. NYME is where most of the crude oil futures are traded. By monitoring the movement of the crude oil futures in NYME, you can develop a feel of the future economic situation of the United States. Since oil is heavily traded in US Dollar, this affects the US Dollar. The net effect is however a bit complicated.
Lets take a look at it more closely to understand the two effects that pull USD with oil. When oil prices increase, the demand for US Dollar also increases. Most of the countries need US Dollar to pay for their oil imports. High demand for US Dollar means that it should appreciate.
But this is not the whole story. Increased oil prices also take its toll on the US economy. The question is which effect is more important for the forex markets.
The effect varies for different currency pairs. Suppose you are watching a currency pair that involves the USD and a currency representing a country that does well during the times of high oil prices. Take Canada that has huge oil reserves after Saudi Arabia. The effect would be depreciation in the value of USD/CAD pair. US imports more oil from Canada than any other country. And if you are watching a currency pair that involves USD and a currency whose economy is harmed by the rising oil prices, the demand for USD will rise.
So some currencies have positive correlation with oil prices and other currencies have negative correlation with rising oil prices. The currency pair CAD/JPY shows the strongest reaction to rising oil prices. Japan imports almost 100% oil.
Watch for CAD/JPY currency pair, when oil prices are going to rise again. CAD is positively correlated with oil prices. JPY is negatively correlated. So CAD/JPY has the strongest reaction to the increase in oil prices. It can be a very good currency pair to trade during times of oil price boom.
Learning Fibonacci Retracements
Many traders and investors use Fibonacci ratios to project future levels of support and resistance calculated on previous price moves in forex markets. In simple words, past price movements in the forex market determine where the Fibonacci levels will be calculated.
Fibonacci analysis is used in determining and identifying the support and resistance levels during both the trend retracement and the trend continuations. It is based on a number of ratios derived from the Fibonacci sequence. This interesting and remarkable sequence was discovered by an Italian mathematician Leonardo Pisano in the 13th century.
The sequence starts with 0, 1 and 1. The next number in the sequence is determined by adding the previous two numbers. For example, if you take the first two numbers 0 &1, the next number will be 0+1=1. If you take the next two recent numbers, 1 & 1, the next number will be 1+1=2. So the Fibonacci sequence takes shape like this: 0,1,1,2,3,5,8,13,21,34,55.
The remarkable thing about this sequence is that the ratio of number at specific intervals would consistently be the same, no matter how high you count the numbers. Fibonacci sequence gives us two very important ratios. These two ratios appear over and over again in nature such as sunflowers, shells, pine cones etc. These two ratios also appear in forex markets.
The first ratio is 38.2%. It is calculated by dividing any number in the Fibonacci sequence by the number two places higher in the sequence. For example, in the above Fibonacci sequence, divide 21 by 55 (55 is two places higher than 21) you get 21/55=38.2%.
The second important ratio is 61.8%. It is obtained by dividing any number in the Fibonacci sequence by the next number in the sequence. For example, divide 34 by 55 (55 is the next number after 34), you get 34/54=61.8%.
Forex market trends dont go exactly in a straight line, up trends never go straight up and down trends never go straight down. The price will always trace along the way as buyers and sellers enter and exit the markets, the important question in every investors mind is how far these retracements will penetrate into the previous price movements. This is where the Fibonacci ratios are extensively applied and used.
Most forex traders use the three additional ratios of 0%, 50% and 100% in conjunction with the two primary Fibonacci ratios to round out the retracement analysis tools. Two secondary Fibonacci ratios, 161.8% and 261.8% are also used in the trend continuation projections. The ratio 161.8% is obtained by dividing any number in the sequence by the number preceding it. For example, in the above sequence dividing 55 by 34 gives 55/34=161.8%. Similarly the ratio 261.8% is obtained by dividing any number in the sequence by the two preceding it. For example, divide 55 by 21, you will get 55/21=261.8%.
Fibonacci ratios are used by currency traders and investors in making entry and exit decisions for each trade. The first ratio 38.2% is used as an entry point in a trending market. The ratio 0% is used as the exit point. The question that you may ask is what the reason markets react to these levels is. You should not forget currency markets are just investors and speculators buying and selling currencies. So if many investors and speculators start believing in a thing, it starts becoming a self fulfilling prophecy. As most of the investors use Fibonacci analysis in determining the support and resistance and placing there entry and exit orders based on these ratios, the markets starts reacting to these levels.
Forex Basics
One of the fastest growing investment arenas in the world is the foreign exchange market. Over a trillion dollars goes through the forex market every single day. It’s bigger than any stock market and it is going on 24 hours per day, 5 days a week. Why is it becoming so popular and what exactly is forex?
Forex trading simply means exchanging the currency of one country for the currency of another. If it appears that your own currency looks like it might be dropping, this must mean the value of another currency somewhere in the world is going up by comparison. By trading one currency for another in the hopes that the original one you began with goes up, you can generate profits when you close out that trade.
For example, if you’re beginning with the US Dollar (USD) and trading it for the British Pound (GBP), then you hope that the value of the USD goes up or appreciates in value. When the price does go up, you trade your GBP back for your original USD and you receive the higher amount back again.
The difference between what you paid and what you received at the end of the trade is your profit. The pricing of currencies is quoted in pips and these are the basic units of all currencies. Your ultimate goal as a forex trader is to try and find the right currencies to trade to gain as many pips as possible.
There are a lot of different strategies available to trade forex including scalping, swing trading, and trending. Scalping is one of the most popular methods of trading and it utilizes a lot of quick, small transactions. You decide to buy a certain currency and then you sell it a few moments later. In this manner, you can gain a lot of small profits and hopefully minimize any risk to your account.[youtube:RCMoj8fcBmQ;[link:automated forex analysis];http://www.youtube.com/watch?v=RCMoj8fcBmQ&feature=related]
When the foreign currency exchange market became more available to smaller investors, the massive surge of interest also brought with it a flood of forex-related products. These range from educational courses to forex robots and coaching programs. While understanding and learning about any form of investment is always a good idea for anyone, it’s important that you don’t simply buy products because they promise the world. Research any product thoroughly before buying.
Digital products, or informational books that you download to your computer, are a great idea. The only problem is that you can’t verify what’s inside until after you’ve paid your money. Always see if you can find reviews for the product you’re considering. Join forex-related forums and ask questions of actual traders who are using the programs and systems you want.
The same rules apply when you’re trying to find the right forex broker. Because the forex market is global and the internet is a global medium, you might find the broker is in a country where the regulations are not as strict as they could be. If you can, try to be sure to find a broker who operates from the same country in which you live.
The forex market can be very profitable, but at the same time it can also be very volatile. Spend some time learning about how the market works and understand some of the jargon before you jump in.
Thinking of Forex Investing? Read this!
One of the biggest markets for investors to open up in recent years is forex trading. A lot of people use it as an alternative to the stock market, and after the bloodletting on Wall Street last fall, who can blame them? Doing forex trading requires a lot of soul searching, and a lot of time to do well. Asking if it’s right for you means knowing the following things.
In a nutshell, forex trading is about taking a pair of currencies and their exchange rate; and playing off how that exchange rate varies on a day by day (or month to month) basis. You’re not betting on the performance of a company, you’re betting on the fiscal reputations of countries. There’s less research involved, and you have the advantage that it’s very difficult for currency values to plummet as rapidly as stocks can and do (and have, recently).
That said, the opportunities in forex don’t allow quite as much growth potential as a stock program can, and forex trading is more vulnerable to inflation and currency devaluation moves by governments. Unlike a stockholder, you don’t get a vote (or proxy vote) in the operations of the nation whose currency you buy. Forex trading is a 24 hour a day opportunity to make trades, with a span running from the London open to the Hong Kong close, meaning it spans more than five working days if you let it.
The ability to use leverage means there’s a lot of opportunity to make money off of even tiny swings in currency prices. This can pay off handsomely on well executed manual trades, and a lot of the more common types can even be automated.
If manual trading isn’t your thing, you can even set up several expert advisors to make your trades for you. In this way, you can make steady gains with your account over a long period of time. This strategy doesn’t even require you to know much about the forex market. You can just set them up and forget them.
Forex is a good way to pull in a decent income working from home. It’s not the road to automatic easy riches, it’s an investment. Like other investments you have to pay attention to it to avoid disasters, and the risk of disasters in forex is as large as the potential gains, especially with leveraged brokerage accounts. Still, it’s a good way to make a lot of money working from home with nobody breathing on your neck.[youtube:RCMoj8fcBmQ;[link:automated forex analysis];http://www.youtube.com/watch?v=RCMoj8fcBmQ&feature=related]
You can make more than some doctors and lawyers without having to go to college for eight years. You can really make as much or as little as you want. If you just need enough to get by, there are a number of safe, conservative strategies that are available. If you want to ride the trends and rake in huge profits, there are also a lot of methods for that.
If you’re the sort of person who lives for being wired on coffee, staying inside for a 14 hour trading day, and staring at a computer screen, forex trading may be for you – even if only temporarily. The real secret of forex day traders is that the successful ones get out of it and retire, and retire early.
How to Identify Breaking Support and Resistance?
Support and resistance levels are used by investors and speculators to determine how far they believe a currency pair will move between the two levels. This also tells them at what points the price action may turn around due to the buying or selling pressure and start moving in the opposite direction.
Sometimes, the markets change direction due to a shift in some underlying fundamental factor. The market change of direction due to the shift in underlying economic factors is strong enough to cause a currency pair to break through a previously established support and resistance level. When a previous support and resistance level is broken by the markets, new support and resistance levels are established. However, the broken levels may still have some influence on the market in the future.
Sometimes there are attempted breakouts, this is also known as False Breakouts. With experience, it will become clear to you that prices do not always stop at exactly the same points each time. So if you are going to use strict requirements for your support and resistance, those levels may not hold up every time. This way, you are going to fake yourself out of a lot of valid price movements.
Even when you take all the precautions with your support and resistance levels, you may fall victim to a false breakout. Now, you will ask how I can tell when the price has truly broken through support and resistance in a new direction.
There are primarily two methods that you can use to filter out a false breakout with a true breakout. These two methods are setting price-amplitude benchmarks and identifying role reversals.
Setting price amplitude benchmarks involves analyzing a chart to see if you can identify any moments when the price momentarily poked through the prevailing support and resistance level before pulling back and once again adhering to the previous level.
The dips through the predetermined levels are usually short lived. You can draw a secondary support and resistance lines which you can then utilize as your price-amplitude benchmarks.
A price amplitude benchmark tells you that if the price breaks through the predetermined level but does not break through the benchmark, you dont need to worry about a change in the direction of the trend. However, if the price has enough momentum to breach the benchmark, it has a good chance of continuing in the new direction.
Identifying role reversals method involves watching the price action to see if support levels turn into resistance levels and resistance levels turn into support levels. Often, you will see the price action bounce off a level of resistance, then turn around and start heading lower and bounce off the previous resistance level.
When a resistance level is broken, that same level will turn into a support level. Conversely when a support level is broken, that same level will turn into a resistance level. What this tells is that you can use both the benchmark and the role reversal confirmations in your trading analysis.
Learning Forex Basics
The foreign currency exchange market is quickly becoming one of the fastest growing investment choices in the world. More than a trillion dollars each day is exchanged on the forex market. This is a truly global market that operates 24 hours a day. So why is this massive marketplace becoming so popular and what is forex?
Forex trading simply means exchanging the currency of one country for the currency of another. If it appears that your own currency looks like it might be dropping, this must mean the value of another currency somewhere in the world is going up by comparison. By trading one currency for another in the hopes that the original one you began with goes up, you can generate profits when you close out that trade.
For example, if you’re beginning with the US Dollar (USD) and trading it for the British Pound (GBP), then you hope that the value of the USD goes up or appreciates in value. When the price does go up, you trade your GBP back for your original USD and you receive the higher amount back again.
Pips are the pricing units using when you’re trading currencies. Your trading prices will always be quoted in pips and you’ll notice you’re quoted two sets of prices. This is called your spread. You will need to spend a bit of time understanding how the pricing works if you want to succeed in forex trading.
There are a lot of different strategies available to trade forex including scalping, swing trading, and trending. Scalping is one of the most popular methods of trading and it utilizes a lot of quick, small transactions. You decide to buy a certain currency and then you sell it a few moments later. In this manner, you can gain a lot of small profits and hopefully minimize any risk to your account.[youtube:RCMoj8fcBmQ;[link:automated forex analysis];http://www.youtube.com/watch?v=RCMoj8fcBmQ&feature=related]
With so much growth in the forex market, there are obviously a lot of different people involved. You will find that there are a lot of products and services that you can purchase to help your forex trading. Everything from coaching programs to robots that trade for you will be pitched and promoted. If you’re new to the market, it is probably a good idea to get some kind of guidance. Without it, you will probably lose a lot of money fairly quickly. However, you want to make sure that you investigate any product thouroughly before you buy it.
Digital products, or informational books that you download to your computer, are a great idea. The only problem is that you can’t verify what’s inside until after you’ve paid your money. Always see if you can find reviews for the product you’re considering. Join forex-related forums and ask questions of actual traders who are using the programs and systems you want.
In addition to that, you should also do your homework on whichever broker you decide to go with. There have been a few brokers that turned out to be scams, so you’ll want to make sure that they are regulated and that you feel comfortable with them. If you live in the United States, you’ll probably want to find a broker that is in the United States and regulated by the NFA.
Regardless what you decide to do in the forex market, just be sure and learn a little bit about the market before you jump in. With great reward also comes great risk.
Support and Resistance Levels in Forex Trading
Learning technical analysis will give you the edge as a forex trader. It will develop your confidence in your ability to predict what will happen in the markets in the future.
But the most important drawback with most of the technical indicators is that they lag behind the markets. Lagging means part of the price action has already taken place before the movement is reflected by these technical indicators.
However, support and resistance levels especially those based on Fibonacci levels are considered to be leading indicators because they lead the markets in predictable paths. Now, when we say predictable, it does not mean guaranteed. But it can be pretty close.
Support is the price level that a currency pair has trouble breaking through to the downside. Support is also referred to as the floor of the currency pair price movement.
Resistance is the price level that a currency pair has trouble breaking through to the upside. Resistance level is also known as the ceiling of the currency pair price movement.
Many new forex traders find it surprising that there is a strangely predictable and reliable price action that takes place at the support and resistance levels. Most of the time, they will find the price action oscillating between the support and resistance levels.
Why it is that majority of the people begin buying and selling at the given support and resistance levels. There is nothing on the charts that forces the people to do so.
A simple explanation is this that majority of the forex traders think the support level as the best price available to them and considers it an excellent opportunity to buy once it reaches the support level.
Similarly, at resistance, majority of the currency traders think that currency pair is not favorably priced and has become overpriced. So they consider it as an excellent opportunity to short the pair.
You will have an edge and an advantage in your currency trading if you are capable of accurately identifying and predicting the support and resistance levels in the markets. As more and more traders use technical analysis in trading and calculate the support and resistance levels, the more these levels become self fulfilling prophesies.
One important indication of support and resistance levels is that price level is reached a number of times but it is never breached. Support and resistance levels can be horizontal for a ranging markets or they can be sloping up or down for a trending market.
What happens at the support level is that as traders begin to sell the currency pair and take profit, the price of the currency pair starts to drop down. As the price starts to fall, other forex traders who were interested in buying the currency pair watch how far it will go down.
Most of them have done their calculations as to how far the price level will drop down before they can go long. Past price action tells them that the price offered at the support level is the best price under the present market conditions. So when it reaches that level, most of them start buying and go long.
When there are more buyers than sellers, the price of the currency pair starts to rebound and rise. It rises till the resistance level determined by most of them when majority decide that the currency pair is now over priced and start selling.
This oscillating price action keep on repeating itself until and unless there is a fundamental shift in the markets that forces new levels and a new direction.