Forex Recipe

Fundamental analysis is one of the key components in Forex trading to accomplish the business efficiently. It deals with the study of the socio-economic and political situations of the countries because movement of the currencies will depend totally on the respective countries to which they belong.

Fundamental analysis gives all the relevant information regarding how the currency market is influenced by the various levels. Figures and statements made by various financial spokespersons of the countries matter a lot and have an impact on the market movements. The US economy is to be properly monitored in Forex trading.

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Pivot points are used by professional traders and market makers to spot important support and resistance levels in the forex market. A pivot point and its support or resistance levels are areas where the direction of price movement can perhaps change. They are particularly of importance to short-term traders who wish to take advantage of small price movements.

Both range-bound traders and breakout traders can utilize pivot points. For range-bound traders, pivot points are to be used for identifying reversal points. On the other hand, breakout traders would use pivot points to make out key levels that are needed to be broken for a move to be considered as a real deal breakout.

You can calculate the pivot point and associated support and resistance levels with the last trading session’s open, high, low, and close values. As the Forex market is open for 24 hours, most of the traders use market timing s of New York as closing time, which is 4:00 pm EST as the previous day’s close.

Pivot point can be calculated as

Pivot point or PP= (High + Low + Close) / 3, which means it is an average of the three values.

For calculating the support and resistance levels the formula are:

For the first level support and resistance:

First support or S1 = (2 ´ PP) – High

First resistance or R1 = (2 ´ PP) – Low

For the second level of support and resistance levels the formula are:

Second support or S2 = PP – (High – Low)

Second resistance or R2 = PP + (High - Low)

Almost all the automated charting software will calculate these support and resistance level within a fraction of seconds and plot a chart accordingly. Some of the charting software can also provide additional pivot point like a third support and resistance level and other intermediate levels or mid-point levels.

These “extra levels” aren’t as significant as the main five but it doesn’t hurt to pay attention to them. Here’s an example:

Pivot points are extremely elementary yet powerful tool for any traders involved in forex trading. It is therefore wise to understand the implications of pivot points in forex trading.

Ralph Nelson Elliot, in late 1920s, established a correlation between financial market moves and a pattern, which is a totally disciplined pattern as opposed to any chaotic behavior. He pointed out that this repetitive pattern occurred because of emotions of investors influenced by outside sources/news at any particular time.

He divided the market movements into three distinct groups, trends, corrections, and sideways. He also assigned a wave terminology to these specific periodic movements like trend movement as “Impulsive Wave” and a correction movement as “Corrective Wave”. He also showed that a treading market moves in a “5-3 wave pattern”. The first five-wave pattern is the impulse waves and the last three-wave pattern is the corrective waves. Although the Elliott Waves were first conceived for explaining the market behavior of stock, it can be applied to Foreign exchange as well.

The waves formed can be explained on the basis of market psychology. When you watch an upward move, it reflects many investors feeling that the price of the particular currency will go up and as the current price is low, it is better to buy more. If you find a downward trend followed by this upward move, it says, many investors considered the currency to be overvalued and took profits. This causes the price to go down.

Likewise, there are subwaves inside the wave patterns, where each wave section can again be divided into 5 smaller waves. An analyst can judge the performance of the currency with the Elliott wave patterns. Because of the repetitive nature of Elliot waves, you will be able to make a pretty accurate forecast of how the market is going to behave next.

The major difference between the Elliott wave principle and any other cyclic theories is that Elliott wave do not suggest any absolute time requirement for a cycle to complete. This poses some interpretive challenge for the theory.

Technical and fundamental – these are the two methods of forex analysis. A good forex broker or investor always develops a strategy mixing both the methods to formulate a perfect one.

In forex technical analysis the price movements and market trends are predicted by studying and analyzing charts of past market action that take into account price of instruments, volume of trading, and, if applicable, the open interest of instruments.

On the other hand, in forex fundamental analysis the prediction of future price movements of any financial instrument is made on the basis of economic, political, environmental, or other relevant factors and statistics that may affect the basic supply and demand of the financial instrument.

One major advantage of technical analysis is that an experienced analyst can follow many markets and market instruments simultaneously. But in fundamental analyst one has to know a particular market intimately to predict its future actions.

Fundamental analysis focuses on what ought to happen in a market and technical analysis focuses on what actually happens in the market. In fundamental analysis the factors that affect price analysis are supply and demand, seasonal cycles and weather, and specific government policies. In technical analysis charts are prepared on the basis of market action involving price, volume, and open interest (for futures only). Fundamental analysis is for studying the cause of market movement, while the technical analysis is for studying the effect.

Technical indicators are for predicting future market or price movement. They are highly technical and mathematical tool that analyze past data to obtain future prices. The moving average is one of the most basic technical indicators for forex. It can help you in identifying trends, when it smoothes price action into a single line. It generates the basic trading signals when price crosses the single line.

The moving average is one of the most widely used and popular technical indicators because of its versatile nature. The indicators can be constructed easily. With moving average, you can follow trends in the movement of a currency quite meticulously. It can identify a new trend, a sustained movement, either up or down, in the currency and can generate signal for a trader. The signals generated by a moving average has a lag to market conditions, therefore it is a trend that follows the indicator.

The moving average, as implicated by the name, is an average. You can choose the time periods in minutes, hours, days, or weeks. The most common of all is the 21-day moving average. Moving averages with shorter and longer durations are used and they have their own advantages and disadvantages.

Some analysts prefer to add more weight to the most recent data. In a 10-day moving average, the data from the 10th day, which is the most recent, would be multiplied by 10, the 9th day’s data by 9, and so on. Analysts also consider exponentially smoothed moving average to be better than the simple or linear averaging methods.

The main function of moving average is to identify the trend. You can simply examine the direction of the moving average for significant up or downward movements. You can also observe the price location. If the price is located above the moving average than the currency is in upward trend, but if the price is below the moving average, the currency is in a downward trend.

Technical and fundamental analyses are two extremely powerful tools used extensively by the forex investors and traders for forecasting the behavior of the market. The goal or motive is to predict a price or movement. Technical analysis studies the effect as opposed to fundamentalist analysis, which studies the cause of market movement. A combination of both can produce even superior results.

Technical Analysis focuses on analyzing market prices rather than the factors that can influence the market directly. By analyzing actual daily, weekly, and monthly price fluctuations, a trader can chalk out the future course of price movements. Technical analyses generally utilize different mathematical calculations developed to monitor market activity. Trading decisions are taken on the basis of signals generated by charts, graphs, calculations, or their combinations.

Fundamental analysis includes the analysis and interpretation of global events, economic, political, financial events, and other factors that can cause a currency to fluctuate. In fundamental analysis, a trader studies the cause of market movement instead of studying the effect. It is essentially analyzing factors external to the trading markets, which can influence the supply and demand of a particular market. According to the theories, by monitoring relevant supply and demand factors for a particular market, potential factors affecting market conditions may be identified before they start influencing the price level of that market.

Many forex traders classify themselves as either technicians or fundamentalists. However, the best approach would be to have a working knowledge of the basic tenets of both to take full advantage of these methods.