The foreign exchange market in general, the broader trends that the stock market as a whole. Why? Equity market, which is really an individual fellowship, governed by the dynamics of certain micro-enterprises. The foreign exchange market, by contrast, is driven by macroeconomic trends can sometimes take years to develop. The best trends are manifested by the lead partner and the currencies of commodity block. Here we see this trend, analyze where and why they occur. Then I also see this type of tide offers the best opportunity for the range for commercial purposes.
Major Currencies
There are only four major currencies currency pairs, which makes it very easy to follow on the market. They are:
- EUR / USD - Euro / U.S. Dollar
- USD / JPY - Dollar Yen U.S. / Japanese
- GBP / USD - British Pound / U.S. Dollar
- USD / CHF - U.S. Dollar / Swiss Franc
It is easy to understand why the United States, European Union and Japan have the money the most active and liquid market in the world, but why the UK? After all, in 2005, India has a larger GDP ($ 3.3 trillion compared to $ 1.7 trillion for the United Kingdom), while Russia's GDP (1.4 million) and the GDP of Brazil (1.5 million) is roughly the total economy of the United Kingdom. Explanation, which applies to many foreign exchange market, it's tradition. English is the first time in the world economy for the development of capital markets and sophisticated at the same time was the British pound and U.S. dollar, which serves as a global reserve currency. Because of this heritage and the supremacy of London as a center of world trade currencies, the pound is still considered one of the major world currencies.
Swiss franc, meanwhile, took its place among the big four known that Swiss neutrality and fiscal prudence. At a time when the Swiss franc is 40% backed by gold, but for many traders in the forex market is still known as "liquid gold". In times of crisis or economic stagflation, traders turn to the Swiss franc as a safe haven.
The main partner of the largest - in fact, most liquid financial instruments in the world, is the EUR / USD. This pair is trading nearly 1 billion per day of notional value from Tokyo to London to New York 24 hours a day, five days a week. The two pieces are the two largest economic entities in the world: United States, with a GDP of U.S. $ 11 billion and the euro area, with a GDP of about $ 10.5 billion.
Although U.S. economic growth was much better than the euro area (3.1% vs.1.6%), the Eurozone economy generates net trade surplus, while the U.S. has a chronic trade deficit. Superior balance sheet of the euro area and the size of the euro area economy has made the euro an attractive alternative reserve currency to the dollar. Thus, central banks, including Russia, Brazil and South Korea have diversified some of their reserves in euros. Obviously, this is a time the diversification process has so many events or changes that affect the currency market. This is why one of the main attributes of a positive trend in the forex market is a long-term.
Long-term observation of the importance
To see the importance of long-term perspective, we look at Figure 1 and Figure 2, using three simple moving average (three SMA) filter.
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| Figure 1 - EUR / USD exchange rate of March 1 to May 15, 2005. Consider the price action suggests choppiness and the possibility of a downward trend since the beginning of each line of three in each other SMA. |
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| Figure 2 - EUR / USD exchange rate from August 2002 to June 2005. Each bar represents one week and one day (as in Figure 1). And in the long-term chart, a completely different view has emerged - the uptrend remains intact every time down to nothing more than provide a starting point to new heights. |
Some merchants may ask why we use the moving average of 65. An honest answer? Do we take this idea to John Carter, a futures trader and educator, as these are the values used. But the importance of the three secondary filters are not in the values of a particular school, but in the interaction of short-term trends, medium and long term provided by the school. While using a reasonable approximation for each of these trends, three SMA filter provide valuable insight.
See the EUR / USD from both points of view of time, we can see how various trends may be a sign. Figure 1 shows the daily changes for the month of March, April and May 2005, showing the jerky movement with a clear downward trend. Figure 2, however, charts the weekly data for 2003, 2004 and 2005 and shows a very different picture. According to Figure 2, the EUR / USD is still in a clear uptrend despite some very strong corrections along the way.
Warren Buffett, the investor famously known for trading long-term trend, has been widely criticized for holding a long position on EUR / USD has suffered losses along the way. Looking to the creation of Figure 2, however, it becomes much clearer why Buffet may have the last word.
Currency Block Commodity
The three commodity currencies higher liquidity in the forex market is the USD / CAD, AUD / USD and NZD / USD. Canadian dollar, known as the "loonie", the Australian dollar as the "Aussie" and the New Zealand dollar as a "kiwi". The three countries are commodity exporters and extraordinarily strong tendency often in conjunction with the application of each of its major exports.
For example, see Figure 3 showing the relationship between the Canadian dollar and oil prices. Canada is the largest exporter of oil to the United States and nearly 10% of Canada's GDP includes the areas of energy exploration. USD / CAD trades inversely, the strong Canadian dollar so that creates a downtrend in the pair.
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| Figure 3 - This table shows the relationship between the Canadian dollar and oil prices. The economy of Canada is a rich source of oil reserves. The graph shows that oil price increases, it becomes more affordable for people who have dollars to buy Canadian dollars. |
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| Figure 4 - The graphic aspect of the relationship between Australia and the gold price (U.S. dollars). Notice how the rise of gold from December 2002 to November 2004, coinciding with a strong upward trend in Australian dollars. |
Unlike Major League Baseball and the currencies of commodity block, offering traders the opportunity of the strongest trend and more, which shows a cross currency swap is the best jump. In Forex, the cross is defined as the currency pair that does not have the dollar as part of the couple. EUR / CHF is a cross, and perhaps best known for the range of commercial partners. One reason, of course, there is little difference between the growth rate of the European Union and Switzerland. The two areas of current account surpluses and stick to a prudent fiscal policy.
A strategy for operators is to determine the parameter range of coverage for the spouse, divide the parameter with the center line and just below the middle of buying and selling there. Classification is determined by the parameters of high and low prices fluctuate during the given period. For example, the EUR / CHF, traders can go, for the period May 2004 to April 2005, set at the 1, 5550 1.5050 top and bottom of the range of 1.5300 to the axis of the delineation of areas of buying and selling. (See Figure 5).
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| Figure 5 - This chart EUR / CHF (May 2004-April 2005), with 1.5550 as the upper and lower range of 1.5050 and 1.5300 as the midline. A comprehensive strategy trading involves the sale in the mean and median purchase below. |
Cross currency is so attractive to the time range of strategies as they represent the two cultures and economies of these countries, the imbalances between currencies, as it often returns to equilibrium. It's hard to imagine, for example, that the Swiss will go into depression, while the rest of Europe is growing briskly. The same tendency toward equilibrium, however, can not say that the share of a similar nature. It is easy to imagine how, for example, General Motors could go bankrupt, even though Ford and Chrysler continue to do business. Because currencies represent macroeconomic forces that are not vulnerable to risks that occur at the micro level, as stocks of individual companies. The currency is because it is safer from trade.
However, the risk is present in all the speculation, and the merchant has no pair trading range without a stop loss. A reasonable strategy is to use a stop in half the total amplitude range. In the case of the range of CAD / CHF is defined in Figure 5, stops above the seeds 250 below top and bottom 250. In other words, if the pair reached 1.5800 1.4800 or, the merchant must be stopped outside the store because of the high probability of damage.
Interest Rates - Final Part
While the USD / CHF has a relatively narrow range of 500 pips in recent years is shown in Figure 5, a pair like GBP / JPY has a much wider range in 1800 nuggets, shown in Figure 6. Interest rates are the reason why there is a difference.
The interest rate differential between the two countries affecting trade in the range of its currency pairs. For the period shown in Figure 5, the Swiss interest rate by 75 basis points (bp) and the rate of the euro area is 200 basis points, creating a spread of only 125 points basis. However, for the period represented in Figure 6, however, interest rates in the UK is 475 basis points, while in Japan - which is held by deflation - 0 bps rate, 475 basis points overcome the difference between the two countries. The golden rule in the Forex is a differential interest rates higher, the more stable partner.
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| Figure 6 - This chart of GBP / JPY (December 2003-November 2004). Consider the pair reach almost 1800 pips! |
| Currency Pair | Central Bank Rates (in basis points) | Interest Rate Spread (in basis points) | 12-Month TradingRange (in pips) |
|---|---|---|---|
| AUD/JPY | AUD - 550 / JPY - 0 | 550 | 1000 |
| GBP/JPY | GBP - 475 / JPY - 0 | 475 | 1600 |
| GBP/CHF | GBP - 475 / CHF - 75 | 400 | 1950 |
| EUR/GBP | EUR - 200 / GBP - 475 | 275 | 550 |
| EUR/JPY | EUR - 200 / JPY - 0 | 200 | 1150 |
| EUR/CHF | EUR - 200 / CHF - 75 | 125 | 603 |
| CHF/JPY | CHF - 75 / JPY - 0 | 75 | 650 |
Although the relationship is not perfect, is certainly big enough. Notice how the couple with a wider interest rate spreads typically trade in a wider range. Therefore, when reviewing the strategy in the range of forex trading, traders should be aware of differences in volatility and interest adjustments. Without taking into account the interest rate differential can change the range of ideas to lose potentially valuable proposals.
The forex market is very flexible, adaptable to both trend and range traders, but as with any successful business, the right knowledge is the key.
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