General Discussion

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As the official currency sponsor of the CNBC Portfolio Challenge, FXCM is happy to welcome you to this forum which is designed to open up lines of communication between traders and to answer any questions you may have on trading in the exciting world of currencies. The moderators of this forum are all instructors in the FXCM Education Division which provides a number of online-based courses designed to help new traders and experienced traders who are coming over from the equities or futures markets for the first time, learn more about trading currencies. These instructors are all experienced traders who have made the change from other financial markets into the Foreign Exchange markets, also known as the Forex or FX markets, and would be happy to answer any questions you have about trading currencies. Initially, I would like to offer you a short “Introduction to Forex” to answer any questions you might have on how the FX markets work. If you have any further questions or comments, please post them in this forum and we will be happy to respond accordingly. Good luck with your trading!

What is a “pip”?

"Pip" is short-hand for "Point in Percentage". It represents 1% of the smallest denomination of the counter currency in a pair. For example, the smallest unit of a US Dollar is 1 cent. A pip is 1/100th of 1 cent. The same holds of most currency pairs. There is no smaller unit than the Yen in Japanese currency, so for JPY pairs, a pip is 1/100th of 1 Yen.

A pip is typically found in the 4th decimal place for an exchange rate. For example, with a EUR/USD price of 1.54281, you would look at the “8”. If the Euro rose to 1.54291, it would have risen by 1 pip.

Rollover Interest

When you hold open positions at 4:00PM, you have technically held them overnight. When holding positions overnight, rollover interest is either added or subtracted from your Currency Account.

Every currency you buy or sell has a certain overnight interest rate associated with it. The interest amount varies based on the interest rate differential between the two currencies you are buying and selling, and fluctuates day to day with the movement of prices. These rollover rates or “swap rates” are based on money market rates. To see each trading day’s rollover rates, look at the Roll columns in the Dealing Rates Tab.

For example, on any given day, the rollover could be $11.00 per lot for GBP/USD and $3.30 per lot for EUR/USD. Rollover fees are shown in dollars per lot and are posted in the "Roll S” and “Roll B” columns of the Dealing Rates. For Participants that do not hold a currency position through 4:00 PM, rollover will not affect their account.

At 4:00 PM, funds are automatically subtracted from, or added to, Currency Accounts with open positions.

Top Menu Bar



The top menu bar of the Currency Trading section of the Site has the following five buttons:
• Sell: Allows you to create an order to sell a Pair at the current market price.
• Buy: Allows you to create an order to buy a Pair at the current market price.
• Entry: Allows you to create an “Entry Order”, which is an order to buy or sell a Pair at a future price.
• Report: Allows you to specify the dates for which you would like to view all account information.
• Refresh: Click here to refresh the information displayed. You will get all the most recent rates and information.

The Overview tab displays the following account information:



• Cash Balance: This is the “floating” value of funds in your Currency Account, including any profits and losses on open positions.
• Day P/L: Day P/L includes the profit and loss for the day’s trading session. This is all profit and loss from open and closed positions incurred since the beginning of the trading day at 4:00 PM.
• Usd Mr (Used Margin): This is the amount of Currency Account equity currently committed to maintain open positions. It is similar to a deposit required to maintain your open position(s). The Currency Account must maintain AT LEAST this amount for open trades to remain open. For every 100k lot (the smallest trade size), you will need to set aside $10,000 of your available funds. For example, with 10% margin (10:1 leverage), if you have $500,000 (5 lots) in open positions, you would have a $50,000 margin requirement. You will see this in the Used Margin Column.
• Usbl Mr (Usable Margin): This is the amount of money that is not currently being committed to Used Margin. Usable Margin should be thought of as 2 things: (1) The amount available to open NEW positions and (2) The amount that you can lose before receiving a margin call. The number fluctuates with profits or losses in your account. Usable Margin plus Used Margin equals Cash Balance.
• Usble Mr, %: The column titled Usable Margin, % shows the usable margin as a percentage of your Currency Account Cash Balance. This enables you to see how much of your current cash is committed to maintaining your open trades.
• MC (Margin Call): In the margin call box, there will be a Y (yes) or N (no). If Y appears, your usable margin has reached zero, you received a margin call, and all your trades were closed.

Margin Calls

The idea of margin trading is that your margin acts as a good faith deposit to secure the larger notional value of your position. Margin trading allows Participants to hold a position much larger than the actual Currency Account value. The Currency Trading portion of the Contest has margin management capabilities, which allow for this high leverage. If your Currency Account falls below margin requirements, it will trigger an order to close all open positions. When positions have been over-leveraged or trading losses are incurred to the point that insufficient Usable Margin exists to maintain current open positions, a margin call will result and open positions must be liquidated.

Please keep in mind that when a Currency Account’s Usable Margin reaches zero, all open positions are immediately closed. The margin call process is entirely electronic and there is no discretion on FXCM’s part as to order in which trades are closed. Since the margin call closes all open positions, your Currency Account can never have a negative balance.

Example: A trader has $100,000 in a standard account and his margin requirement is 10% (i.e. leverage of 10:1). For each position he opens (each position = 1 lot = 1000,000 notional value), he is required to set aside $10,000 in used margin. If he opens two positions, his required margin is $20,000. The trader can lose up to $80,000 before he starts dipping into his margin requirement. When his account equity reaches $20,000, a margin call is triggered and all positions will be closed.



Summary Window

The summary window gives you an overview of your Currency Account’s overall exposure. It shows each currency pair in which your Currency Account currently has open trades, as well as the average entry price and current profit or loss in that pair.

Included in the Summary window from left to right is:

• Currency: The Summary window sorts all open positions by currency pair rather than ticket number. When you have multiple positions open for the same currency pair, the Summary window will add them together.
• S Amt (K) and B Amt (K): This is the cumulative size of all open positions in the currency pair, shown in thousands. Sell (short) positions are shown in S Amt (K) while Buy (long) positions are shown in B Amt (K).
• Av Sell and Av Buy: Shows the average price at which you entered Sell (short) or Buy (long) positions in each currency pair.
• Gross P/L: This is your current floating profit or loss in open positions of each particular pair in US Dollars. A positive number denotes a floating profit; a negative number denotes a floating loss.
• Amt S (K) and Amt B (K): This is the cumulative size of all open positions in the currency pair.
• Sell and Buy: These columns show the current Buy or Sell price, at which you can close your current position(s).

Dealing Rates




Buy and Sell

You can buy or sell any currency pair listed at any time, so long as you have sufficient margin. Each currency quote box contains both a buy (i.e., offer or ask) and a sell price (i.e., the bid). The spread is the difference between the buy and sell price, and this represents your total transaction cost.

When the rate for a currency pair rises, this means that the base currency (the first currency listed) is getting stronger and therefore the counter currency (the second currency listed) is getting weaker. When the rate for a currency pair falls, this means that the base currency is getting weaker and the counter currency is getting stronger.

If you are expecting the rate for a currency pair to rise, you would buy that pair, which gives you a long position. If you expect the rate to fall, you would sell that pair, establishing a short position.

High and Low

Also displayed in the currency quote box is the high and low prices since 4:00PM at the end of the day’s market session. The high shown is the highest Buy price reached since 4:00PM and the low is the lowest sell price reached since 4:00PM.

Roll S and Roll B

This shows your Roll rate for Buy and Sell positions.
• This is the amount in dollars per lot that you will pay or receive, respectively, for positions that are open AT 4:00PM on a trading day.
• If there is a minus sign next to the number, the amount will be subtracted from your Cash Balance. If the number is positive, the amount will be added to your Cash Balance.
• If you have no open positions at 4:00PM, even if you made trades during the previous 24 hours, there will be no rollover of positions, and no Roll S or Roll B will apply.
• For a more detailed description of how rollovers work, please refer to the section entitled “Rollover Interest” above.

Pip Cost

A “pip” is one of the most common ways that price movement, profits, and losses are counted in the currency trading market; much like “points” are used in the stock market. (See “What is a pip” above for more details). The Pip Cost gives you the pip value in US Dollars for each currency in real time. The approximate pip value is $10 per pip.

Time

Every time an exchange rate changes, a time stamp is placed next to the currency pair. The time is recorded in Eastern US Time. The official time for all exchange rates will be determined in accordance with FXCM’s internal clock, maintained at FXCM’s offices.

The Basics of Currency Trading

With over $3 trillion in daily turnover, the foreign exchange market is five times the size of the US futures market, making it the largest market in the world. Surprisingly, this sleeping giant is unfamiliar terrain for most individual traders and investors. Until the popularization of Internet trading a few years ago, forex was primarily the domain of large financial institutions, multinational corporations, and secretive hedge funds. But times have changed: the US Dollar has fallen to record lows, and everyone from your local car dealer to bartender is waking up to the impact of currencies.

How does this market differ from other markets?

Unlike the trading of stocks, futures, or options, currency trading does not take place on a centralized exchange, but instead through different forex brokers. At first glance, this ad hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. However, this arrangement works exceedingly well in practice: participants in forex must both compete and cooperate with each other, and self-regulation provides an effective amount of control over the market. Furthermore, reputable retail forex dealers in the United States become members of the National Futures Association (NFA), and by doing so, they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA-member firm.

Here are some other factors that make the currency market different from other markets that are sure to raise eyebrows:

Simple Bet—Pro-Dollar and Anti-Dollar. When it comes to trading any of the dollar- based currency pairs, the general idea is simple: you are either pro-dollar or anti-dollar. Because 90 percent of all currency transactions involve the US dollar, the outlook for the greenback and US economic data tend to dominate the price action of the currency pairs.

Forex Trades on Public Data—No Fraud Like Enron. Since the currencies that we offer for trading are the ones of the most developed countries in the world, such as the US, UK, euro zone, and Australia, accounting fraud is not an issue in currency trading. Also, economic data is released at the same time to everyone, which means that there is no such thing as insider trading. CNBC, for example, will announce the non-farm payrolls number the instant that it is released, leveling the playing field for all investors.

The Ability to Earn Rollover. Rollover is the interest paid or earned for holding a position overnight. Each currency has an interest rate associated with it, and because forex is traded in pairs, every trade involves not only 2 different currencies, but their two different interest rates as well. If the interest rate of the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade.

24-Hour Trading. The currency market is the most liquid and fluid market in the world. It trades 24 hours a day, from 5 PM (EST) Sunday to 4 PM (EST) Friday, and it rarely has any gaps in price. Its sheer size (it trades over US$3 trillion each day) and scope (from Asia to Europe to North America) also makes the currency market the most accessible market in the world. You can trade before work, during work, or even after work, and there will always be a market that is open.

A pip stands for "percentage in point," and it is the smallest increment of trading in forex. In the forex market, prices are quoted to the fourth decimal point. For example, if a bottle of water in the drugstore were priced at $1.20, in the forex market, the same bottle of water would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip, and it is typically equal to 1/100th of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One yen is now worth approximately US$0.08; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e., to 1/100th of yen, as opposed to 1/1000th with other major currencies).

Which currencies are traded?

Although some retail dealers trade exotic currencies such as the Hungarian Forint or the Malaysian ringgit, the majority trade the eight most liquid currencies:

1. US Dollar (USD)
2. Euro (EUR)
3. British Pound (GBP)
4. Japanese Yen (YEN)
5. Canadian Dollar (CAD)
6. Australian Dollar (AUD)
7. New Zealand Dollar (NZD)
8. Swiss Franc (CHF)

Collectively, they form the seven most actively traded currency pairs in the world:

* EUR/USD (Euro/Dollar)
* USD/JPY (Dollar/Japanese Yen)
* GBP/USD (British Pound/Dollar)
* USD/CHF (Dollar/Swiss Franc)
* AUD/USD (Australian Dollar/Dollar)
* USD/CAD (Dollar/Canadian Dollar)
* NZD/USD (New Zealand Dollar/Dollar)


All about the Majors

Let’s take a deeper look at the key characteristics of each of the major currencies:

US Dollar
* Nicknames: Greenback, Buck
* Reserve currency of the world
* Represents 90% of all trading activities
* Critical to settlement of trade in major commodities, including foodstuffs and industrial metals, but most importantly—OIL
* Responds to growth and interest-rate data

Euro
* Nickname: Anti-dollar
* Represents the second largest economy in the world
* The only currency that can challenge the hegemony of the dollar
* The currency without a country
* Central bank fears strong currency because of export-dependent economy

British Pound
* Nicknames: Cable, Sterling
* Former reserve currency of the world
* Fourth largest economy, a magnet for free market principles in Europe
* Business-friendly regulations promote—acquisitions
* UK: Member of the EU but NOT the EC

Japanese Yen
* Nickname: None
* Represents the dominant economy in Asia
* Serves as a free-market proxy for the Chinese yuan
* Laden with speculators, short carry, interest rate the focus
* Major oil importer

Canadian Dollar
* Nickname: Loonie
* Highly correlated to oil—second only to Saudi Arabia
* The only G-7 nation with BOTH a trade and budget surplus
* Benefits from Chinese demand

Swiss Franc
* Nickname: Swissie
* The safe-haven currency of choice but losing that luster
* Stronger growth and better balance sheet than its next-door neighbor

Australian Dollar
* Nickname: Aussie
* World’s second largest producer of gold
* Huge beneficiary of China's growth

New Zealand Dollar
* Nickname: Kiwi
* Liquid because of its proximity to Australia
* Highest interest rates in OECD


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Great stuff thanks!

It looks like this got cut off in mid-sentence???

It's been down all night on the CNBC game?

Thank you.

Unlike the trading of stocks, futures, or options, currency trading does not take place on a centralized exchange, but instead through different forex brokers. At first glance, this ad hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. However, this arrangement works exceedingly well in practice: participants in forex must both compete and cooperate with each other, and self-regulation provides an effective amount of control over the market. Furthermore, reputable retail forex dealers in the United States become members of the National Futures Association (NFA), and by doing so, they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA-member firm.

This announcement is on the CNBC website:

Due to technical difficulties related to currency trading, we have cancelled all currency transactions submitted throughout Monday, May 12th and currency trading is currently unavailable. All traders' currency allocations will be reset to $100,000 CNBC Bucks until currency trading resumes.

Unfortunately, I have no new information for you at this time. Please check back at http://milliondollar.cnbc.com for updates.

Experienced stock and futures traders moving over to the Spot FX market for the first time typically will look for any similarities between the markets they are familiar with and currency market. They soon find that there is a very important common point and that is interest rates. Typically rising interest rates will lead to a stronger currency while falling interest rates will lead to a weaker currency. One of the main reasons for this is that international money managers look for the highest yielding paper in the most secure financial markets. So if the German Bund is yielding more than the US Treasury counterpart, these money managers will sell their US Treasuries, sell their US Dollars to buy Euros and invest in the German Bund market. The chart below is a daily chart of the EUR/USD with one year of trading activity. We have also plotted the highs and lows of the 10-year US Treasury Note yield to see if there is indeed any relationship between the US interest rate environment and the value of the USD when compared to the EUR. Since this is the EUR/USD, a rising market would indicate USD weakness, while a falling market would indicate USD strength. We can see where the highs and lows of the 10-year yield do indeed suggest that there is a relationship with the strength/weakness of the US Dollar. The currency pair typically falls as the yield moves higher and rises as the yield moves lower. There is not a perfect relationship as we are only looking at the US side of the interest rate environment, but it is quite obvious that the reason for the US Dollar weakness has been falling interest rates in the US while interest rates remained steady in Europe. So if you trade bond futures or the stock market and have been following interest rates, the move over to the FX market is not as much of a change as one might think.

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Three Ways to Trade Currencies

No two people are alike. We all have different tastes, styles, and temperaments. Fortunately, when it comes to trading, we don’t have to limit ourselves to a single strategy. There are many ways to trade the currency market, and in this report, we have focused on three specific styles that take advantage of the key drivers of currency trading—fundamentals, technicals, and market sentiment.

News Moves Markets

What moves currency markets? News. Economic news, political news, and commentary from monetary officials that is at odds with market expectations can all have a massive impact on price. Speculation is all about sentiment, and news can either reinforce that sentiment or completely turn it around.

One of the common mistakes that many novice traders make is assuming that all news is discounted in the price the moment it hits the computer screen. Not so at all. The currency market is enormous. In fact, it is the largest, deepest, most liquid financial market in the world, trading more than $3 trillion of volume a day. In this market, it is impossible for prices to adjust instantly to major news surprises. When large players such as multi-national corporations or multi-billion dollar hedge funds react to the latest changes in the economic or political landscape, price can sometimes take days to fully adjust to the new reality.

Following the flow is what reactive trading is all about. There's no need to guess the result beforehand, which is often difficult for traders without a strong economic background. Instead, we sit and observe. If the piece of economic data is considerably worse or better than the forecast, then a good reactive opportunity may present itself. There is, however, one key rule that we follow in all reactive trades: We are either right or we are out. If the price has not reacted as expected to a given piece of news and has in fact retraced all the way to pre-news levels—why be in the trade? The market has clearly decided that the news does not matter enough, so we take a small loss and move on. In those cases when we are right, however, we try to milk our profits for as much as we can.

Each week, our Trading the News report teaches you exactly how to trade reactively. We pick the most market moving data of the week and give you clear entry and exit levels (Sample Report).

Stay With a Trend

Trade with the trend is an old maxim that has helped many traders earn millions of dollars in the currency market (conversely, they can also lose millions of dollars). Generally, currencies tend to develop very strong and persistent trends. Unlike stocks, which can be impacted by a myriad of unforeseen variables—from the overall state of the economy to the sudden surprising resignation of a key executive—currencies are primarily driven by larger macro-economic issues such as the country’s growth and interest rate policy. Therefore, like a large ship at sea, once they have established a direction, currencies tend to follow it.

However, it's not always clear what that direction may be. On a day-to-day basis, economic and political news or speculative positioning can temporarily knock currencies off course, making trend trading more difficult than you may think. Fortunately, we have the benefit of technical analysis at our disposal to help us distinguish true trend from random noise. One of our favorite ways to gauge trend is through Bollinger Bands. Bollinger Bands are one of the most popular technical indicators for traders in any financial market—stocks, bonds, or foreign exchange. Many traders use them primarily to determine overbought and oversold levels, selling when price touches the upper Bollinger Band and buying when it hits the lower Bollinger Band. We, however, have a unique way of using Bollinger Bands to create dynamic price channels that help us to stay on the right side of the trend. At the core, Bollinger Bands measure deviation. This is the reason why they can be very helpful in diagnosing trend. By generating two sets of Bollinger Bands—one set using the parameter of "1 standard deviation" and the other using the typical setting of "2 standard deviation"—we can look at price from a fresh perspective. In the chart below, we see that whenever price channels between the upper Bollinger Bands +1 SD and +2 SD away from mean, the trend is up; therefore, we can define that channel as the "buy zone." Conversely, if price channels within Bollinger Bands -1 SD and -2 SD, it is in the "sell zone." Anywhere in between is what we call "no man's land."

One of the other great advantages of Bollinger Bands is that they adapt dynamically to price expanding and contracting as volatility increases and decreases. Therefore, the Bands naturally widen and narrow in sync with price action, creating a very accurate trending envelope.



Fading Sentiment

One of the most common trading strategies in the currency market is to try to pick tops and bottoms, but using traditional technical analysis can be frustratingly difficult. However, fading sentiment has proven to be a useful way to time tops and bottoms. Once a week, we publish our FXCM Speculative Sentiment Index, which measures the positioning of a subset of exceedingly speculative traders. This Index relies on traders who are always caught on the wrong side of the market and always trying to pick tops and bottoms at the wrong time. When they give up is the exact time when a turn usually occurs.

Here is a link to a sample of the Speculative Sentiment Index. The black line is the price of the EUR/USD while the bars represent the ratios of long to short positions. As a rule of thumb, when positioning is short, the contrarian signal is to buy EUR/USD in this case. When it is long, the signal is to sell the EUR/USD. When the ratio flips from short to long, expect a top relatively soon; and when it flips from long to short, expect a bottom.




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Are you looking for a way to increase your leverage to take advantage of your opinion of the stock market? Many traders find that trading the EUR/JPY is a way to do just that. If you look at the daily chart of the EUR/JPY below and compare it to a daily chart of the S&P 500, you will find that the lows and the highs are very similar. The swings between those points may be a little different, but the reversals are close enough to grab the attention of stock index traders. Why would they trade this market instead of the stock market? The answer is most likely leverage. The trading contest allows for leverage of 10:1 in your currency trades, which means that your margin for a $100,000 position is $10,000. That gives you the potential for bigger gains using this currency pair that you might get trading the same trending move in the S&P 500, NASDAQ 100 or Dow 30 indices. The reason for the relationship is that this pair is considered somewhat of a proxy for the carry trade. Carry traders buy those currency pairs with a positive rollover, so they can earn interest daily at the 4PM contest close in addition to the potential of earning on the market move itself. They are more confident in their carry trades if the stock market is rising and other markets are calm, so they take on the risk of opening a carry trade in the EUR/JPY or other JPY based pairs. When the stock market is falling, these carry traders will not take on that risk and will exit their trades. So the next time you find yourself bullish on the stock market and are looking for a trade to take advantage of that opinion, follow that same trade in the EUR/JPY to see if that would offer better results. You may find yourself using the FX markets more often like those other stock and futures traders who have found that you can get more bang for your buck by trading in the Spot FX market.

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The Five Things that Move the Currency Markets

The Foreign Exchange Market

The currency market is one of the most sophisticated markets in the world, attracting trillions of dollars per day in volume from central banks, corporations, hedge funds, and individual speculators. It operates on a 24-hour basis, beginning with trading in Wellington, New Zealand and continuing on to Sydney, Australia; Tokyo, Japan; London, England; and finally, ending with New York before the whole cycle begins all over again. Although the currency market exists mainly for importing and exporting activities and for corporations to hedge their foreign exchange risk, like all markets, there are speculators. In the Forex market, it happens that 80% of all trading activity is speculative in nature. However, of all the influences on the foreign exchange markets, there are five key factors that are the main drivers of movements, and we will rank and explain them in terms of importance:

I. Interest Rates

Interest rates are the biggest influencing factor of exchange rates between currencies. Every currency’s country has a central bank that sets the interest rate on the currency. What this means is that when the central bank of a country moves the interest rate either up or down, it affects the movement of the currency substantially. This is because, in general, speculators will buy currencies with high yields and finance those same purchases with low yielding currencies. One example is the USD/JPY pair, which is often used for carry trades. In the fall of 2006, the short-term rates in the U.S. were at 5.25%, while in Japan they were only 0.25 %. In this case, traders would buy long on dollars in order to receive 525 basis points of interest and sell yen to only pay 25 basis points on that end of the trade, making a total spread of 500 basis points, allowing you to not only gain profit from interest income flows( rollover), but also from capital appreciation (Please note: You will pay interest when you sell a currency with a high interest yield and in exchange buy a currency with a low interest yield). Similarly, when the Bank of England surprisingly raised interest rates in August of 2006 from 4.5% to 4.75%, the spread on the popular GBP/JPY pair widened from 425 basis points to 450 basis points, driving the pair to have huge speculative flows in the currency as traders tried to take advantage of the new spreads, which brought the currency pair up a stunning 700 points within just three short weeks.

II. Economic Growth

The country’s economic growth, or as otherwise expressed by gross domestic product (GDP), is the second most influential factor on currency movements. This is because the stronger a country’s economy becomes, the more likely it is for the country’s central bank to raise rates in order to tame inflation that comes about when there is growth; there's also a much larger chance that there will be large flows of foreign capital into the country's fixed income and equities markets. Activity in the EUR/USD during 2005 and 2006 was an excellent example of this. In 2005, the euro zone lagged behind significantly in terms of GDP growth, averaging a meager 1.5% rate throughout the year, while the U.S. expanded at a healthy 3%. This led to a large drop in the EUR/USD in 2005, but in 2006, the euro zone began to grow and eventually overtook the U.S.’s growth, and the EUR/USD rallied.

III. Geopolitics

The influence of geopolitics on currencies is large and can best be understood through realizing that speculators run first, and ask questions later. They will quickly run to the sidelines until they are certain that the political risk has dissipated. Therefore, the rule of thumb when dealing with currency is that politics almost always trumps standard economics. One example of this influencer in action was the USD/CAD in May of 2005. Despite Canada enjoying the position of no.1 crude exporter to the U.S, then Canadian Prime Minister Paul Martin was facing a no-confidence vote from accusations of past Liberal Party corruption. Despite the country’s economics signaling a rally, the CAD stayed relatively weak to the USD until finally weeks later, currency traders began to focus on Canada’s stellar economic fundamentals instead and the USD/CAD plunged 200 points.

IV. Trade Flows vs. Capital Flows

Trade flows (how much income the country brings in through trade) and capital flows (how much foreign investment the country attracts) are critical components of currency movement. Still, the reason why it’s only the fourth influencer is that some countries are more sensitive to trade flows, while others are more dependent on capital flows. In this way, it’s not possible to apply the weight of trade flows and capital flows to the same country. In general, trade flow matters much more for commodity-dollar currencies such as the Canadian, Australian, and New Zealand dollars. In Canada, oil is the primary source of revenue; in Australia, industrial and precious metals dominate trade; and in New Zealand, agricultural goods are a crucial source of income. Trade flows are also very important for other export heavy countries such as Japan and Germany. Though for countries such as the U.S. and the U.K., due to very large liquid capital markets, investment flows are much more important than trade flows. These countries have financial services that are extremely important. In fact, US financial services represented 40% of the total profits of the S&P 500. On the surface, the U.S.’s record multi-billion dollar deficit should make the currency depreciate significantly, but historically, it has not been the case. The U.S. offsets this deficit by attracting more than enough surplus capital from the rest of the world. Currently, the massive deficit in trade flows does not affect the U.S. but should the U.S. be unable to attract enough capital flows to offset this deficit, the currency may weaken. Understanding this, one can easily see why studying the trade flows and capital flows of a country can be so important when gauging which direction a currency may move.

V. Mergers and Acquisition Activity

Although this may be the fifth factor in importance for what can affect long-term currency movements, it can be the most powerful near-term-movement influencer of the five. The basic definition of mergers and acquisitions as it pertains to currency is when a company from one economic region wants to make a transnational transaction and buy a corporation from another country. For example, if a European company wishes to buy a Canadian asset for C$20 billion, it would have to buy that currency through the foreign exchange market because of the difference in currencies. Typically, these types of deals are not price sensitive but rather time sensitive because the acquirer may have a date by which the transaction must be completed. Due to this time constraint, M&A flows can have very strong temporary effects on Forex trading, sometimes skewing the natural course of the order flow. One recent example was with the USD/CAD pair, which should have responded to weakness in Canadian economic data by rallying; however, due to an extremely large demand for Canadian corporate assets from investors in Asia, the Middle East, and Europe, there were huge influences on the CAD, which kept it up against the US Dollar, and the pair remained near its all-time lows even as oil sustained a major correction.

Conclusion

These are the five basic building blocks of Forex analysis. These five factors are fairly straightforward, but actual currency trading is not as easy as just looking at these five building blocks, that is, currency trading involves an endless interplay and combination of all these five components, and by becoming familiar with these ideas, you will be well on your way to being able to understand and trade in the biggest financial market in the world, the Spot FX market.

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Fantastic information! We need to get some more people on this board.
But, I guess with the Currency Trading still broken in the CNBC game
there isn't much interest. I hope they fix it soon.

As do I.....thank you.

Traders who move over to the FX markets from stocks or futures usually find that the trending moves last longer in currencies than they do in most other financial markets. Trends in the FX market can last for years, giving traders who like to use technical analysis in their trading decisions plenty of opportunities to find quality trade setups. Here is an example of a classic buying opportunity in the EUR/GBP pair. The direction of the daily trend is up and we can see a pullback off of the highs down to about the 50% Fibonacci retracement level as the Slow Stochastics (default setting of 5,5,5) moves from below 20, which is considered oversold, to above 20 with a crossover. These textbook trade setups are found on daily charts with great frequency. However, most traders like to trade shorter term with more opportunities available to trade. So we recommend that traders use the hourly chart to find their trades, but to only trade in the direction of the trend on the daily chart. This gives active traders plenty of quality trading opportunities and at the same time keeps them on the momentum side of the market. Trading with the trend is what increases our chance of success in these markets, as it puts us a position to be in on some of the big moves that we typically see in the Spot FX market.

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