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- About Forex
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ABOUT FOREXForex Market
The foreign exchange market or Forex market as it is also called is the market in which currencies are traded. According to the Bank for International Settlements, it is the world's largest market which has almost $4 trillion daily volume. This is more than all of the world's stock and bond markets combined. Not only the Forex market is the largest market in the world, but also the most liquid one which separates it from the other markets.
In addition, there is no central marketplace for currency exchange, but instead the trading is conducted over-the-counter. Unlike the stock market, decentralization of the market facilitates traders to make trades with much more number of different dealers and conduct better prices assessments. Normally, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass the prices on to their clients. The spot currency market is open 24 hours a day, five days a week, with currencies being traded among the participants all around the world, such as banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The Tokyo session opens and Forex trading starts; while it closes, the London session opens and continue non-stop going into New York session; the close of New York completes a whole trading day. Since only Forex market opens 24 hours a day, no other markets have the capability to offer the profit potential as Forex market has.Forex & Stocks
|Foreign Exchange Market||Stock Market|
|24-Hour Trading Market||Limited Trading Time Of Less Than 7 Hours|
|No Commissions||Commission And Transaction Fees|
|Unlimited Short Selling||Uptick Rule Is Applied|
|Easy Access to Market Information||Unbalanced Market Information|
Forex is a 24-hour market, which offers a major advantage over stock market. It is open from Sunday at 5:00 p.m. EST when the Sydney market opens, until Friday 5:00 p.m. EST when the New York market closes. Unlike stock market, it provides great opportunity for traders to trade any time during a day. This flexibility in trading hours means traders are always able to respond to breaking news immediately for exchange rates and market conditions which can change at any time in response to developments that can take place in the market. In addition, traders and other market participants must be alert to the possibility of a shock in exchange rates during off hours or elsewhere in the world. With the ability to trade round the clock, currency traders have the advantage of adjusting individual trading schedules; they can usually get in or out of the market at any time without waiting for an opening bell or encountering a market gap. After-hour stock trading is also possible, however, the lack of trading volume and wider bid-ask spread makes it disadvantageous compared with currency trading.Commission Free Trading
Unlike the Stock market where there must be a middleman who charges a commission, the Forex market is a commission-free market that requires no middlemen. It is a transparent market where brokers make their profit from the bid-ask price differences, also known as spreads. There are no hidden fees or charges to trade in the Forex market; all the trader needs to do is fund his account and he is ready to go.Instantaneous Execution of Market Orders
Your trades are instantly executed under normal market conditions. You also have price certainty on every market order under normal market conditions. What you click is the price you get. You're able to execute directly off real-time streaming prices. There's no discrepancy between the displayed price shown on the platform and the execution price to enter your trade. Keep in mind that most brokers only guarantee stop, limit, and entry orders are only guaranteed under normal market conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order execution may experience delays.Short-Selling Without an Uptick Rule
Unlike the equity market, there is no restriction on short selling in the Forex currency market, no matter which way the market is moving. Since currency trading involves buying one currency and selling another, a trader has the same ability to trade in a rising market as in a falling one. Traders in the Forex market can benefit from both the rising market (Bull Market) and falling market (Bear Market). Although some stocks have the same option, this is somehow limited to certain conditions. This means that a crisis or falling market is not necessarily bad for the Forex trader, in fact it can be very profitable.Forex Market Information Easily Accessible
Information on the Stock Market is abundant, but so are the stocks themselves. Thorough research and analysis in locating key trade opportunities in the Stock Market means shifting through the data on several thousands of stocks (NYSE: 4,500 stocks and NASDAQ: 3,500 stocks). While in the Foreign Exchange Market, traders have only five major currencies such as USD, EUR, GBP, CHF, and JPY to research.Major Currencies Traded
|U.S. Dollar (USD)||88.7%|
|Japanese Yen (JPY)||20.3%|
|Great Britain Pound (GBP)||16.9%|
|Swiss Franc (CHF)||6.1%|
|Australian Dollar (AUD)||5.5%|
|Canadian Dollar (CAD)||4.2%|
Created in 1913 by the Federal Reserve Act, the Federal Reserve System (also called the Fed), the U.S. dollar also referred to as the greenback is the home denomination of the world's largest economy, the United States. As with any currency, the dollar is supported by economic fundamentals, including gross domestic product, and manufacturing and employment reports. However, the U.S. dollar is also widely influenced by the central bank and any announcements about interest rate policy. The U.S. dollar is a benchmark that trades against other major currencies, especially the euro, Japanese yen and British pound. It is also the most traded currency in the world with 88.7% of all global transactions.Euro (EUR)
The Euro is the single currency of the 16 member countries of the European Union (EU), including Germany, France, and Italy. It is also the official currency in several areas outside the EU. The euro was adopted as a unit of exchange in January 1999. Those who advocated the currency believed it would strengthen Europe as an economic power, increase international trade, simplify monetary transactions, and lead to pricing equality throughout Europe. Euro currency notes and coins were introduced in January 2002 and became the sole national currency in all participating countries by March 1. Britain and Sweden decided not to adopt the euro immediately, and voters in Denmark rejected it. Moreover, the Euro is the second most traded currency in the world with 37.2% of all global transactions.Japanese (JPY)
The Japanese yen was established as far back as 1882, with the Bank of Japan serving as the central bank to the world's third largest economy. Offering a low interest rate, the currency is pitted against higher-yielding currencies, especially the New Zealand and Australian dollars and the British pound. As a result, the underlying trends to be very erratic, pushing traders to take technical perspectives on a longer-term basis. The yen's average daily ranges are in the region of 30-40 pips, with extremes as high as 150 pips. Consequently, the Japanese yen is the third most traded currency, making up 20.3% of all global transactions.British Pound (GBP)
The British Pound is a little bit more volatile than the euro, and is also sometimes referred to as "pound sterling" or "cable". It tends to trade a wider range through the day. With swings that can encompass 100-150 pips, it isn't unusual to see the pound trade as narrowly as 20 pips. Swings in notable cross currencies tend to give this major a volatile nature, with traders focusing on pairs like the British pound/Japanese yen and the British pound/Swiss franc. As a result, the currency can be seen as most volatile through both London and U.S. sessions, with minimal movements during Asian hours (5pm - 1am EST). Subsequently, the British pound is the fourth most traded currency, making up 16.9% of all global transactions.Swiss Franc (CHF)
Similar to the euro, the Swiss franc hardly makes significant moves in the any of the individual sessions. It is also known as a "banker's currency". As it's central bank, the Swiss National Bank, is different from all other major central banks for it is viewed as a governing body with private and public ownership. This idea stems from the fact that the Swiss National Bank is technically a corporation under special regulation. As a result, a little over half of the governing body is owned by the sovereign states of Switzerland. It is this arrangement that emphasizes the economic and financial stability policies dictated by the governing board of the SNB. Smaller than most governing bodies, monetary policy decisions are created by three major bank heads who meet on a quarterly basis. Therefore, the Swiss franc is the fifth most traded currency, totaling 6.1% of all global transactions.Australian Dollar (AUD)
The Australian dollar offers one of the higher interest-rates in major global markets, as the Reserve Bank of Australia has always upheld price stability and economic strength as cornerstones of its long-term plan. Headed by the governor, the bank's board is made up of six members-at-large, in addition to a deputy governor and a secretary of the Treasury. Together, they work to target inflation between 2-3%, while meeting nine times throughout the year. As a result, volatility can be experienced in the Australian dollar if a deleveraging effect takes place. Otherwise, the currency tends to trade in similar averages of 30-40 pips, like other majors. The currency also maintains a close relationship with commodities, most notably silver and gold. Subsequently, the Australian or the "Aussie" is the sixth most traded currency with 5.5% of all global transactions.Canadian Dollar (CAD)
The Canadian dollar or otherwise known as the "loonie" was established by the Bank of Canada Act of 1934. The Bank of Canada serves as the central bank called upon to focus on the goals of a low and stable inflation, a safe and secure currency, financial stability and efficient management of government funds and public debt. Acting independently, Canada's central bank draws similarities with the Swiss National Bank because it is sometimes treated as a corporation, with the Ministry of Finance directly holding shares. Despite the proximity of the government's interests, it is the responsibility of the governor to promote price stability at an arm's length from the current administration, while simultaneously considering the government's concerns. With an inflationary benchmark of 2-3%, the BOC is likely to remain a shade more hawkish rather than accommodative when it comes to any deviations in prices. Moreover, the currency has a close relationship with crude oil, as the country remains a major exporter of the commodity. As a result, plenty of traders and investors use this currency as either a hedge against current commodity positions or pure speculation, tracing signals from the oil market. Consequently, the Canadian dollar is the seventh most traded currency, making up 4.2% of all global transactions.Market Participants Banks
Banks in the Foreign Exchange Market are basically the biggest participants accounting to almost 2/3 of all Foreign Exchange transactions. Theses commercial banks earn profits by buying and selling currencies through and from each other, making up both the majority of commercial turnover and large amounts of speculative trading every day.Commercial and Multi-National Companies
Commercial Companies with global coverage and offices, under the Foreign Exchange Market require foreign currencies in their course of doing business or making investments elsewhereCentral Banks
Central Banks play an important role in the Foreign Exchange Markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often-substantial foreign exchange reserves to stabilize the market. The mere expectation or rumor of central bank intervention might be enough to destabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime.Hedge Funds
Hedge Funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.Investment Management Firms
Investment Management Firms who typically manage large accounts on behalf of customers such as pension funds and endowments use the foreign exchange market to facilitate transactions in foreign securities.Retail Forex Brokers
In the Foreign Exchange Market, brokers act as intermediaries between banks by providing information to where dealers can get the best prices for the currencies.Forex Mechanics Currency Pair
The currency pair is the two currencies used in a foreign exchange transaction. The currency pair consists of a base currency and a counter currency. The value of the currency pair is determined by the rate at which one unit of the base currency is converted into units of the counter currency. For example, a currency pair could be U.S. dollar/Japanese yen (USD/JPY) or British pound / Swiss franc (GBP/CHF).Bid Price
The bid price is the price a buyer is willing to pay for a currency pair. This is one part of the bid, with the other being the bid size, which details the amount of currency pair the investor is willing to purchase at the bid price.
The Ask price is the lowest price for which any investor or dealer will sell a given currency pair. Example: 1.0120/1.0126Bid/ Ask Spread
The amount by which the ask price exceeds the bid. This is usually the difference in price between the highest price that a buyer is willing to pay for a currency pair and the lowest price for which a seller is willing to sell it.Common Forex Terms Lot Size
The Lot Size is the standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit.Leverage and Margin
Leverage is referred to as the ratio of the amount of capital used in a transaction to the required security deposit needed for the ability to control large dollar amounts of a security with a relatively small amount of capital.
Margin is referred to as the amount of capital needed to maintain a position. A margin is not a fee or a transaction fee taken against the client, but instead it is a percentage of the full amount of the position allocated as a margin deposit.
Let's say that the client has a $10,000 account with a brokerage. The client trades ticket sizes of 1,000,000 EURUSD. This equates to a margin ratio of 1% ($10,000 is 1% of $1,000,000) 100:1 leverage. How can the client trade 100 times the amount of money in his disposal? The answer is that the brokerage temporarily gives every client necessary credit to make margin trading transactions possible. Without the margin, the client would only be buying and selling currency pairs of $10,000 at a time.
The Pip, also known as Percentage In Point, is the smallest price increment a currency can make.
1pip = 0.0001 for Non-JPY Pairs (EURUSD, GBPUSD, etc.)
1pip = 0.01 for JPY Pairs (USDJPY, GBPJPY, etc.)
The Swap, also known as rollover, pertains to the process of extending the settlement data of open trading positions. The Swap is a fee calculated by the difference in the interest rates that apply to the two currencies in the traded pair. If the interest on the base currency is higher than that of the quote currency, the client will earn a positive swap. On the contrary, when the interest rate of the quote currency is higher than that of the base currency, the clients incur a negative swap which can add significant extra cost to the profit or loss of the trade.
When a client buys a currency pair, say for example the EURUSD, the client is buying EUR, and selling the USD. If the EUR's interest rate is bid at 1.0%, and the USD's interest rate is at 0.1%, the client is buying the currency with the higher interest rate resulting to a positive swap of about 0.9% on an annual basis.
Market Order refers to entering the market as soon as the trader's order can be filled, regardless of the price. The most advantageous aspect of the Market Order is the ability for the trader to capture better fills.Limit Order
A Limit Order indicates that the trader wants to buy or sell a given currency at a specific price or better while taking into account the length of time an order can be outstanding before being canceled.Stop Order
A Stop Order specifies a price at which the trader wants to buy above the market or sell below the market at a pre-specified level, believing that the price will continue in the same direction.Making A Trade
- The current Bid and Ask Price for EURUSD is 1.0120/1.0126.
- This means, the trader can buy 1 EUR for 1.0126 USD.
- Suppose the value of the EUR is expected to appreciate against the USD, let's say by applying Fundamental and Technical Analysis.
- To execute the strategy, the trader would buy EUR against the USD and then wait until the exchange rate rises.
- Example: Buy 100,000 EUR (1 Lot) at price 1.0126 (101,260) with a margin of 1%, and thus the trader's initial deposit would be 1,102.60 USD.
- Let's say the trader was right on buying the EUR against the USD, and that the exchange rates rise to 1.0236.
- Now, the trader must sell EUR for USD to realize any profit and to close the buy order at 1.0236.
- When the trader sold 100,000 EUR at the current exchange rate of 1.0236, the trader will receive $102,360 USD in return. Since the trader originally bought the USD for 101,260, the trader's profit is 1,100 USD on 101,260 USD worth of currency, by depositing only 1,102.60 USD.
1. When you expect to gain quickly in your trade without much effort.
2. When despite using all fundamental and technical analysis in your trade, the pattern reverses.
3. When you become fickle minded with your trades.
1. It will lead you to a lack of clear vision.
2. It may blow up your account.
3. You may feel discouraged to trade.
1. Step back and re-evaluate your expectations.
- Ask yourself if your expectations are realistic
- Also ask yourself your long-term financial goals
- Eg. Divide your expected return by 72 and you get the time it takes to achieve this
- Before going into your live account, give yourself at least a month in a demo account
- Test your trading plan in your demo account
- Do not panic in trading
1. Connected with Common Error #1.
2. If your trading strategy does not work, you tend to be impulsive.
3. When you think that your trading plan is the only plan without considering other factors.
1. You will not be focused in your trades.
2. Lose confidence in your trade.
3. You will not effectively implement your trading plan.
1. Give your trading strategy/plan some time.
2. Constantly test your trading plan.
3. Trade with a demo account first and if your trades are constantly yielding profits, then start trading it in a live account.
1. For traders who have a career other than FX trading, sometimes, they opt to trade after hours of their work, compromising their sleeping pattern since the FX market is open 24 hours a day.
2. Since FX trading is highly volatile during the opening and closing of the different stock market, some traders who live in a different country would have to match their trading hours, even if it means sleeping late at dawn.
3. When you compromise your daily activities including sleep just to trade.
1. High level of fatigue.
2. Lack of concentration in your trades.
3. Anxiety that will lead to impulsive trading.
1. Analyze your schedule.
2. If you trade based on your free time, then it is best to trade in the long term by setting your pending orders.
3. Develop a strategy that best suits your lifestyle and not the other way around.
1. When you are not minding the spread, not knowing that each trade you do generates spread revenue for the brokers that erodes your net profit.
2. When you are used to long term trading, not knowing that the tax/commission will be a big deduction to your profit at the end of the day.
3. If you convince yourself that the spread is an irrelevant cost of trading, but in fact it is a significant part of your transactions.
1. You become complacent in your trade.
2. Brokers will take advantage of you.
3. Your desired profit will not be accurate.
1. Be careful in systems that promote excessive trading.
2. Be mindful of the spread payment, tax, commission and slippage because it will erode your profit.
3. If you continue to get re-quotes or slippage from your broker, consider changing your broker
1. As a result of a situation when your trading plan fails, you seek for outside sources to help you.
2. When you are the type that would easily be persuaded by other people in trading.
3. When you compromise your trading plan just to listen to other people's advice.
1. Lose Confidence.
2. Become more confused.
3. Make a trade that you will regret.
1. Success comes in diligent research, patience and practice.
2. When you ask for advice, don't ask for tips, but ask for advice on skills.
3. Ask them how they have come to that conclusion and draw out your own interpretation.
1. There are many various factors that influence the currency such as economic data, trend lines, technical indicators, price movement, gold indices, interest rates, etc.
2. Sifting through all these can lead you to different conclusions and may confuse you.
3. If certain indicators contradict each other.
1. Confusion in your trade.
2. Lead you to information overload.
3. Losing patience in the indicators.
1. Sift through the most important indicators first and then compare it with the trend lines. Use technical indicators as a means to confirm and not a decisive point.
2. Technical indicators are usually delayed. So it is best to wait for a confirmation before drawing your own conclusion.
3. Do not over analyze the indicators.
1. There is a misconception on "real leverage" and "account leverage".
2. Real leverage refers to the actual leverage set upon at any one time relative to your account size.
3. Account leverage is what the broker gives you to trade with.
|Real Leverage||% Price Change in Market||% Price Change in Account|
A Take Profit is a price at which the trader would like to close a position for a profit, above or below the current price of the currency. Setting the Take Profit level will make sure that the trade exits in profit once the market makes the downward move that is expected.Stop Loss
A Stop Loss is an order to buy or sell a given currency once the exchange rate of the security climbs above or drops below a specified stop price. When the specified stop price is breached, the Stop Order is entered as a market order or a limit order that could be activated by a short-term fluctuation in an exchange rate. Setting the Stop Loss will limit the trader's losses if the market does not move in the preferred direction.Trailing Stop
- A trader places a buy order on EURUSD at the price of 1.3510 with a Trailing Stop of 10 pips.
- Let's say that the exchange rate of EURUSD went up to 1.3550 then stops and retraces a bit.
- When the exchange rate is at 1.3550, the Trailing Stop of 10 pips would have been at 1.3540.
- If the price retraces back to 1.3539, the trade would be stopped out, but the trader would have made 30 pips, thus simply locking the profit in case the exchange rate turns against the trader.
Fundamental Analysis is a method used to analyze economic indicators, social factors and government policy of a business cycle that can forecast price movement and trends of the market. The essentials of any country, multinational industry or trading union lie in the combination of factors like social, political and economic influences. Fundamental analysis contains some estimation where the different conditions, except for the price movement, are taken into consideration during trading. Such conditions include a number of macroeconomic factors like economic growth rates, interest rates, inflation, unemployment level and others.Key Economic Indicators Definition
Economic indicators are statistics of financial and economic data published regularly by governmental agencies and the private sector. These figures help market observers monitor the economy's pulse, and with so many people poised to react to the same information, economic indicators have tremendous potential to generate volume, volatility and move prices.Business Life Cycle
The business life cycle consists of fluctuating levels of economic activity that an economy experiences over an extensive period of time. The business cycle has five stages, namely the growth (expansion), peak, recession (contraction), trough and recovery.
Economic growth is in essence a period of sustained expansion. Hallmarks of this part of the business cycle include increased consumer confidence, which translates into higher levels of business activity. Because the economy tends to operate at or near full capacity during periods of prosperity, inflationary pressures also generally accompany growth periods.
The peak is the highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall. It is at this point that real GDP spending in an economy is at its highest level.
A recession is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish. This is the most unwelcomed stage of the business cycle for business owners and consumers alike. A particularly severe recession is known as a depression.
The trough is the transition of a business-cycle contraction to a business-cycle expansion. The end of a recession carries this descriptive term of trough, or the lowest level of economic activity reached in recent times. A trough is one of two turning points. The other, the transition from expansion to contraction, is a peak. Turning points are important because they represent the transition from bad to good or from good to bad.
Also known as an upturn, the recovery stage of the business cycle is the point where the economy "troughs" out and starts working its way up to better financial footing. It is also referred to as the early portion of an expansion.
There are three types of indicators that describe the movement of the economy when it enters a certain phase of the business cycle: the leading, coincident, and lagging indicators.
A leading indicator attempts to tell what the market will do in the future. They are use to predict changes in the economy, but are not always accurate. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, money supply, inventory changes, and stock prices. The Fed watches many of these indicators as it decides what to do about interest rates. There are also coincident indicators, which change about the same time as the overall economy, and lagging indicators, which change after the overall economy, but these are of minimal use as predictive tools.
A coincidental indicator is an economic indicator that provides information on the current state of the economy. That is, a coincident indicator does not show which way the economy is heading, but where it is at present. For example, coincident indicators move up when GDP is growing and down when GDP is shrinking. A common example is personal income. It is also called a concurrent indicator.
The Business Life Cycle's Effect in Forex
Business cycle is the name given to the growth and contraction phases of economic life. It is one of the most important determinants of economic trends; no trader can be called a trader without understanding the inevitable nature of cycles. Since it is one of the major drivers of all trends and economic events on a global scale, it plays a very important role in determining currency prices and their trends.
On the most basic level, the cycle is the most important driver of money supply growth. Since money supply is closely related to currency values (the more there is of a currency, the less its value will be) Forex trends also respond to cyclical developments. But this is just a tiny portion of the power of the business cycle. The nature of the cycle also defines such variables as unemployment, consumer demand, industrial production, and the availability of credit; these variables in turn lead international capital to shun or favor a currency.
When a nation is going through the boom phase of the cycle, international capital will flow there in search of better returns on investment, through channels like foreign direct investment, or international loans. These channels will create inflows of capital, and cause the nation's currency to appreciate. Conversely, when a nation is going through the bust phase of the cycle, international capital will shun it, dry up Forex flows, and cause the currency to depreciate. These developments will continue until they are exhausted by market developments or are contradicted by government action.
You can short the currencies of nations that are going through the bust period, and long the currencies of those that are just entering the boom period, with the caveat that those nations that are net-creditors (external assets are more than liabilities) will see their currencies appreciate regardless of the their domestic economies.
Gross National Product
The Gross National Product (GNP) is the total value of all final goods and services produced for consumption by a country during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country. The figures used to assemble data include the manufacture of tangible goods such as cars, furniture, and bread, and the provision of services used in daily living such as education, health care, and auto repair. Intermediate services used in the production of the final product are not separated since they are reflected in the final price of the goods or service. The GNP does include allowances for depreciation and indirect business taxes such as those on sales and property.
Gross Domestic Product
The Gross Domestic Product (GDP) measures output generated through production by labor and property that is physically located within the confines of a country. It excludes such factors as income earned by U.S. citizens working overseas, but does include factors such as the rental value of owner-occupied housing. In December 1991, the Bureau of Economic Analysis began using the GDP rather than the GNP as the primary measure of United States production. This figure facilitates comparisons between the United States and other countries, since it is the standard used in international guidelines for economic accounting.
The trade balance is the difference in value over a period of time between a nation's imports and exports of goods and services. The balance of trade is part of a larger economic unit, the balance of payments, which includes all economic transactions between residents of one country and those of other countries. If a nation's exports exceed its imports, the nation has a favorable balance of trade, or a trade surplus. If imports exceed exports, an unfavorable balance of trade, or a trade deficit, exists.
The current account balance is defined by the sum of the value of imports of goods and services plus net returns on investments abroad, minus the value of exports of goods and services, all measured in the domestic currency. In layman's terms, when a country's current account balance is positive, the country is a net lender to the rest of the world. When a country's current account balance is negative, the country is a net borrower from the rest of the world.
Consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall health of the economy. In essence, if consumer confidence is higher, consumers are making more purchases, boosting the economic expansion. On the other hand, if confidence is lower, consumers tend to save more than they spend, prompting the contraction of the economy. A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs.
The consumer confidence index was arbitrarily set at 100 in 1985 and is adjusted monthly on the basis of a survey of about 5,000 households. The index considers consumer opinion on both current conditions (40% of the index) and future expectations (the other 60%). The Consumer Confidence Index is closely watched because many economists consider consumer optimism an important indicator of the future health of the economy.Employment
Employment Cost Index
The employment cost index is an index used to monitor inflation. The Employment Cost Index measures the relative changes in wages, benefits, and bonuses for a specific group of occupations. The reason the ECI is thought to be an indicator of inflation is that as wages increase, the added cost is often passed to consumers shortly thereafter in the form of higher prices (which is inflation). In combination with the productivity report, the ECI can reveal whether the increased cost of labor is justified or not. The ECI is released on the last business day of January, April, July and October at 8:30 a.m. Eastern.
Employment Situation Report
The Employment Situation Report, also known as the Labor Report, is made up of two separate surveys. The 'Establishment Survey' collects data from a sampling of more than 400,000 businesses across the country, covering more than 500 industries and hundreds of metropolitan areas. The survey encompasses one-third of all non-farm workers nationwide. The final statistics include non-farm payrolls, hours worked and hourly earnings.
The unemployment rate is the percentage of total workforce that is unemployed and is looking for a paid job. Unemployment rate is one of the most closely watched statistics because a rising rate is seen as a sign of weakening economy that may call for a cut in the interest rate.
Average Weekly Hours Work
This data series measures the average number of hours worked per week by production workers in a certain country. Average weekly hours worked in manufacturing is an element of the Index of Leading Economic Indicators, produced by the Conference Board to provide an indication of the future direction of the U.S. economy.
Inflation is the rate at which the general level of prices for goods and services is rising, and consequently, the purchasing power is falling. Deflation on the other hand, is the decline in prices at a general level, which is often caused by a reduction in the supply of money or credit, decrease in government spending, personal spending or investment spending.
Consumer Price Index
The consumer price index measures the changes in the purchasing power of a currency and the rate of inflation. CPI expresses the current prices of a 'basket' of goods and services in terms of the prices during the same period in a previous year, to show effect of inflation on purchasing power. Also called cost of living index (COLI), it is one of the best known lagging indicators. See also producer price index.
Product Price Index
The producer price index is the relative measure of average change in price of a basket of representative goods and services sold by manufacturers and producers in the wholesale market. A family of three indices (finished goods, intermediate goods, and raw materials or crude commodities), it is used as an indicator of the rate of inflation or deflation. In contrast to the consumer price index (CPI) which measures price changes from the consumer's perspective, PPI measures them from the seller's perspective.
Industrial Production Index
The Industrial Production Index (IPI) is an economic indicator which measures real production output. It is expressed as a percentage of real output with the base year currently at 2002. This index, along with other industrial indices and construction, accounts for the bulk of the variation in national output over the duration of the business cycle.
Capacity utilization measures the extent to which the nation's capital is being used in the production of goods. The utilization rate rises and falls with business cycles. As production increases, capacity utilization rises.
Technical analysis is a method of predicting price movements and future market trends by examining past market charts/data. It is more concerned with what has happened than what should happen in the market. Moreover, it takes into account the price of devices as well as the volume of trading, and creates charts from that data to serve as the principal tool. One major advantage of technical analysis is that an experienced analyst is enabled to follow many markets and market devices at the same time.Tenets of Technical Analysis
- All market fundamentals are reflected in price data which means moods, differing opinions, and other market fundamentals don't need to be studied.
- Prices move in trends so that fluctuations are not random and unpredictable. Once an up, down or sideways trend has been established, it usually will continue for a period.
- History repeats itself in regular and moderately predictable patterns.
A style of chart that is created by connecting a series of data points together with a line. This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line.
Horizontal rectangles (bars) chart in which the length of a bar is proportional to the value (as measured along the horizontal axis) of the item (entity or quantity) it represents. Also called bar graph, it is used commonly to compare the values of several items in a group at a given point in time.
A candlestick chart is a style of bar-chart used primarily to describe price movements of a security (finance), derivative, or currency over time. It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movements over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.
Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. This logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.Resistance
Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. This logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.