The delusion conceptually propounds that intraweek and intraday FOREX currency quotes movement is governed by either improvement or by the deterioration of the state’s economic situation. But in reality, even in the case, the actual Forex news is superior to the estimated one, the FOREX quotes up/down movement are of 50/50 probability.
This statement is thoroughly important. Once the job of Forex trader is gambling on FOREX exchange rates differential (FOREX pairs up/down movement), the following is to be realized to obtain faultless profit:
FOREX pairs pricing mechanism (say at point X where you are completing the market analysis)
Factors impacting growth/decline to FOREX rates (up/down from point X).
Thus, having understood the FOREX rates factors effective at the extra-exchange (book-maker) FOREX market and the given currency motive factors, a trader must possess distinct knowledge of whether to buy or to sell the given currency pair.
So, what are these factors?
FOREX student suggests an unambiguous interpretation of factors responsible for the price formation and the fluctuations thereof:
Forex rate constitutes a demand-supply balance for a given good (currency).
Any violation of this balance, (for instance, in the case where the estimated news is in disagreement with the issued official one), results in the FOREX rates reciprocation in chase of a new demand-supply balance.
Poor demand brings about a decline in a certain currency rate, with a high demand leading to the growth of the latter. The situation continues as long as the currency buy/sell demand comes to balance at another level or another point.
Referring to B. Williams (“Trading Chaos 2” Chapter 1 “The market is what you are thinking of it”):
Each world market is dedicated to distribute or share a limited amount of something… among those desirous to obtain it most of all. Does the market affect it by way of finding out and identifying the exact price? Underlying the buyer’/sellers’ power absolute equilibrium point.
The above point is readily established by stock, futures, bonds, FOREX and options markets, be it either via an open auction or under a computerized facility. Markets spot this point before any misbalance being detectable by you or by me or even by traders at the exchange floor.
With this scenario holding – and it does – we are in a position to jump at certain simple yet important conclusions as regards the information being circulated through the market and enjoying doubtless acceptance”.
Thomas Demark was more laconic in “Technical analysis – an emerging science”:
“Price movement is governed by demand and supply. Should demand exceed supply, there’s a price rally and if visa versa, there’s a price decline. All economists do share these underlying principles”.
Hence, the role of fundamental analysis for the FOREX market is readily apparent.
In scholar fiction one will discover roughly the following explanation, persistently wandering from book to book, from site to site and suggesting attaining successful trading at FOREX market by way of scrutinizing the country’s economic fundamental data, viz. by tracking the factors reflective of the country’s economic condition as below:
State economy condition dynamics indicators (GDP, trade & payments balance, current account, industrial production, etc. It is knowledge, that the higher the above indicators – the faster the economic and the currency price growth);
Stock indices, via an average arithmetic index of the country’s securities market condition and dynamics. E.g.: 0.3% daily DJI growth in the USA means that this certain day the shares of 30 leading US companies, being pictured by DJU, went 0.3% more expensive. By similarity, DAX30 is the major German index, incorporating the price of shares of the country’s 30 leading companies.
The country’s interest rate, since the higher the rate, the greater number of investors is eager to invest in the country’s economy and hence into national currency strength.
Rate of inflation (the higher the rate, the quicker the National Bank will hike the interest rate). With this assumption, the CPI constitutes a key factor.
Money supply growth in the domestic market, which fact brings about inflation, leading to the interest rate hike.
The country’s gold and currency reserve assets.
Variation dynamics correlation of balances of payment, trade balance, state budget, gross domestic product (GDP), etc.
Trade and industry dynamics (industrial production, industrial orders, DGO, capacity utilization, retail sales, etc.)
Construction statistics (construction spending, new home sales, housing under construction, building permits, etc.)
Labour statistics (unemployment rate, new jobs, etc.)
Society investigations (consumer confidence, consumer sentiment, purchase managers and service managers sentiment, etc.)
To be considered additionally are the country’s political stability and tranquillity (clearly, any political, natural and other cataclysms are sure to turn investors nervous making them withdraw the investments from the country, thus weakening its national currency). And with the currency being the national economy derivative, changes in economic data will inevitably result in the above currency rate movement.
Progress in the economy results in the currency exchange rate rally.
The decrease in economic indicators leads to the national currency rate decline.
To sum it up, critical economic and political news (whose calendar is issued in advance and is familiar to any trader) constitute a standing factor giving rise to misbalance and causing the currency rate fluctuations.
In anticipation of important economic and political news FOREX pair crawl to the rates as inspired by the estimates (“rumoured trade”), whereas upon actual news there occurs a pulse motion of FOREX pairs following the scheme below;
Forex rate grows if actual news is better than the estimated one;
Forex rate declines if actual news is worse than the estimated one.
ARE YOU FAMILIAR WITH THESE ABC BASICS OF STUDYING FOREX?
Do you accept that one can earn money by way of using these basics, known to every trader?
Then why, having absorbed these economic axioms, 90% of Forex traders in the world are losers rather than winners.
Where is the delusion of the above ABC truth, nudging traders towards losses? Let us perform a sort of point-by-point analysis.
Below are some examples:
Fig. 1. GBPUSD chart as of April 1, 2005, after the news, positive for the GBP and negative for the US economy.
See Note below
In March the CIPS manufacturing index amounted to 52.0 (with the previous data revised from 51.8 to 51.6). Oil price in NYC has grown by USD 2.40 up to USD57.70 per bbl (a new record of the latest 21 years). Non-farm payrolls in the USA was minimum since last July (previous data revised towards lower values). There has been a decline in the Michigan sentiment index to 92.6 (median estimate was 92.9, with 92.9 previously).
All the US indices faced a fall down. DJI at NYSE has fallen by 99.46 pips (-0.95%) towards closing at 10404.30. NASDAQ declined by 14.42 pips (-0.72%) to 1984.81. S&P500 slipped by 7.67 pips (-0.65%) to 1172.92. 30-yr US Bonds yielded 4.729 (0.037 lower as compared to the previous close). By contrary, FTSE100 has grown by 19.60 pips (+0.40%) to 4914.00.
Now, the question is to certified economists: what will happen to the GBP to USD within one day or even several hours upon publication of these data? You are right, USD should not simply fall, it should collapse. Powerfully, swiftly. Well, well…
And this time, the same question to experienced traders. By FOREX news headlines You might have guessed that the events are taking place at the Friday American session. Correct. Initially, anyway, the GBPUSD chart will go up by 100 pips (news wok-off), followed by a pullback. Then the Forex chart starts a new rally.
It is now to be tracked whether the GBP will breach the latest rally high or not. If affirmative, it will rush up by approximately 160 pips (Elliott wave 1 was 100 pips, while EW 3 is 60% longer). But if the high is not breached? The GBP currency quote will in no way come to a standstill, moreover on Friday afternoon. Hence, – down, to the starting point! And, if breached, the similar situation takes shape but the counting is performed in a “down” direction (EW1, being the same 100 pips plus 187 pips from 1.8826 to 1.8759 being EW 3).