Forex Secrets - Delusion No1 - Forex Currency Rate And Economic Factors Impact

[Naomi Hill]

The delusion conceptually propounds that intraweek and intraday FOREX
currency quotes movement is governed by either improvement or by
deterioration of the state's economic situation. But in reality, even
in case the actual Forex news is superior to the estimated one, the
FOREX quotes up/down movement is 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 imparting 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 suggest unambiguous interpretation of factors
responsible for the price formation and the fluctuations there of:
Forex rate constitutes a demand-supply balance for a given goods
(currency). Any violation of this balance, (for instance, in 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 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 at another point. Referring to the 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 limited amount
of something... among those desirous to obtain it most of all. The
market affects 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 by virtue of
a computerized facility. Markets spot this point prior to any
misbalance being detectable by you or by me or even by traders at the
exchange floor.
With this scenario holding true - and it really does - we are in
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 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 economy 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 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 into 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 domestic market, which fact brings about the
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.)
Labor 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 tranquility (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. Conclusions:
Progress in economy results in the currency exchange rate rally.
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 ("rumored trade"),
whereas upon actual news there occurs a pulse motion of FOREX pairs in
accordance with the scheme below;
Forex rate grows if actual news are better than the estimated one;
Forex rate declines if actual news are 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 sort of point-by-point analysis.
The currency exchange FOREX market is a book-makers one. It is
gambling on rates difference without direct money delivery to the
exchange market, except for hedging of traders' funds by Forex
brokers, via buy-sell difference especially during strong trends).
Then, www.forexite.com reads: "Trading is performed without actual
currencies supply, which fact cuts overheads and enables Forexite to
go long and short on the currency" http://www.forexite.com/forexite_advantages/forex_advantages.html.
Comment: Have you ever met any book-makers;
- whose logics was coincident with that of THEIR clients (traders),
- whose stakes were being made in accordance with THEIR technical
analysts forecasts, economic laws and common sense?
And what extent of doubt and skepticism should be attached to THEIR
free "recommendations", "advice", "surveys" and "forecasts", laid out
at THEIR sites through THEIR analysts?
As a regular result, over 90% of the world traders are still loosing
their deposits at FOREX each time they follow Thomas Demark stereotype
that "All the economists share these underlying principles".
Comment No.1. In as much as the above underlying principles are 90%
contradictory to practice, it gives rise to the following question.
Might these "underlying principles, shared by all economists including
Thomas Demark" have possibly turned into dogma, alien to life and
practice?
Comment No.2. What should a trader lean on: practice or dogma even if
supported by great names, provided that the trader is purported at
earning money?
FOREX analysts issuing their daily bulky market reviews are not FOREX
traders in the overwhelming majority (see detailed discussion below).
And on bringing together pairs 1, 2 and 3 there appears certain
regularity.
Please, think over A. Elder words, that: "FOREX rates and the
fundamental analysis are tied together with a mile-long rope. The
fundamental analysis is ultimately decisive. But anything is likely to
happen prior to this eventuality". Another, yet no less renowned
trader and analyst, Bill Williams underlines the same mental
regularity of an experienced professional trader (level 3 of his
trader's skill rating as per "Trading Chaos 2"): "On attaining level 3
you emerge as a self-provided pro trader. You are always familiar with
the market's basic, usually invisible structure. You no longer need to
refer to others' opinions. You needn't read "Wall Street Journal",
watch market-oriented TV programs, and subscribe to information
bulletins, waste money on information channels".
Comment: Logically, there is a counter-implication, that if You are
eager to become a successful trader, You are to restrict the influence
of various surveys and recommendations on yourself even in case they
originate from the world famous "Wall Street Journal", to say nothing
of crude gurus in analyst skins who use to know ahead of time where
currencies will go.
Forex news is a scheduled issue of fundamental data, which as a rule
impairs FOREX rates a sharp pulse of motion. But then, why the
currency rates movement vector is only 50% coincident with the ABC
truism logics as to where the rate should rush in case of actual news
being much better or worse than the estimate. And, please, make an
attempt to answer the following question, stirring for every trader:
why with the new being worse than expected (say, on US economy), the
USD currency would initially fall by 40 pips (news work-off) but in 5
to 10 minutes it would swivel back and would display a 200-point
rally, with no account to either the issued news or to common sense.
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 (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
GBPUSD within one day or even several hours upon publication of these
data? You are right, USD should not simply fall down, 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 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, 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).
The FOREX day trading tactics will be given scrutiny in a separate
chapter. A still separate chapter will be dedicated to Friday trade at
American session due to its inherent specifics and to strong seemingly
inappropriate movement. The movement is, of course, appropriate. To
say nothing of Friday. But it will be touched upon later.
Now, getting back to the currency chart. As apparent, the GBPUSD pair
movement on Friday, April, 01, 2005 is in no way in conjunction with
the US economy fundamental data. Each forex trader can provide from
tens to hundreds of similar instances, where the news are of a certain
vector, whereas, after a fraudulent rush along the news vector, a
currency applies reverse thrust.
Thereafter, the next day, in daily currency surveys, certified
economists are sure to explain all to us by way of inventing another
undisguised nonsense, like: "in spite of certain data, traders decided
that the currency has already worked-off this side". But! How could
this occur on Apr, 01, 2005, provided that the currency has been
staying flat in a narrow range in the course of the whole of the
European session?
Otherwise, another explanation may emerge, that forex traders were
expecting still more inferior news on the US economy... But! By how
much more inferior, if according to DJ, the US non-farm payrolls MA
was equivalent to 180K, with actual being +110K, estimate being +225K
and prior being +243K? And in what manner do these economists count up
world traders: by capita, by countries or by the funds, lost by those,
who continued staying long in a holy belief in renowned academic
scholars postulate of FOREX rates being tied up to countries' economy
statistics.
I wonder if I'll ever chance to witness legal procedures to be
instituted against any of those famous scholars, so that no one would
dare claim that fundamental data trigger rate spikes.
The same pertains to economists, writing about the way, hundreds of
thousands traders throughout the globe have conspired to conclude that
it is time to reverse the trends with absolutely no grounds. Is it
really feasible?
Such reading-matter is, but hammering a single question into one's
head: is it lie or is it stupidity of those cooking daily reports for
taking traders for a ride, fooling them up and keeping them from the
truth, which might be of great avail to them in daily trading. Traders
are not a decisive factor, thus rates movement is in no way dependent
on their will. Practically in no way.
Wanna check? Negotiate with tens of traders of the trading floor and
arrange for a simultaneous entry long on some exotic FOREX pair. In so
doing, try to push up either the NZDHKD, or the NZDCAD, or the HKDCAD.
No need? I think so. You'll certainly suffer failure with the above,
to say nothing of the EUR, GBP, CHF.
Another example:
Fig.2. GBPUSD movement as of May 13, 2005. See Note below
This is an M15 chart of the American session, where the USD pair has
grown by over 100 pips from 1.8583 to 1.8481 against the news,
negative for the US economy:
Most indices have dropped down: DJI at NYSE - by 49.36 pips (-0.48%)
to close at 10140.12; S&P500 - by 5.31 pips (-0.46%) to 1154.05.
NASDAQ has grown by 12.92 pips (+0.66%) to1976.80. 30yr US Bonds
yielded 4.484 (0.047 drop from previous close)
There is a fall in Michigan sentiment index. In May UMich was 85.3
with med est 90.0 and prior 87.7. So it was worse than the estimate,
reaching the low since March, 2003. The index decline was being
observed for the fifth month.
The April US export price index was +0.6% with prior of +0.7%. Below
are other similar examples of that same day.
Fig. 3. EURUSD chart as of May 13, 2005. See Note below
Hundreds of examples may be offered, where the Forex news vector is
opposite to that of the currency movement. Practically, actual news
may happen to be superior or inferior to the estimate. FOREX quotes up/
down movement is also of 50/50 probability irrespective of the above.
Why does it happen and what is the way for a trader to pinpoint
entries and exits? This is going to be discussed in ensuing chapters
of this book.
Note:Full text of this article and pictures of examples http://www.masterforex-v.su/
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