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Analysis and forecast

Analyse und Prognose

What is fundamental analysis?

Fundamental analysis is the application of micro- and macro-economic theory to markets to predict future trends. Major fundamental forces are frequently one of the key drivers of FX rates.

The following are a list of key US economic indicators:

Balance of Trade

The trade balance reflects the difference between a nation's exports and imports of goods. A positive trade balance, or a surplus, occurs when a country's exports exceed imports. A negative trade balance, or a deficit, occurs when more goods are imported than exported.

Trade balances are closely followed by players in FX, because of the influence they can have. It is often used as an assessment of the overall economic activity in a country’s or region’s economy. Export activities not only reflect the competitive position of the country in question, but also the strength of economic activity abroad. Trends in the import activity reflect the strength of domestic economic activity.

A country that runs a significant trade balance deficit tends to generally have a weak currency. However, this can be offset by substantial financial investment inflows.

Current Account

The current account is an important part of international trade data as it is the broadest measure of sales and purchased goods, services, interest payments and unilateral transfers. The trade balance is contained in the current account. In general, a Current Account deficit can weaken the currency.

Consumer Price Index

The Consumer Price Index (CPI) is a measure of inflation. It takes the average level of prices of a fixed basket of goods and services purchased by the consumers.

CPI is a primary inflation indicator because consumer spending accounts for nearly two-thirds of economic activity. A rising CPI is often followed by higher short-term interest rates, which can be supportive for a currency in the short term. However, if inflation becomes a long-term problem, confidence in the currency will eventually be undermined and it will weaken.

Durable Goods Index

Durable goods orders are a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Monthly percent changes reflect the rate of change of these orders.

The durable goods orders index is a major indicator of manufacturing sector trends. Rising durable goods orders are normally associated with stronger economic activity and can lead to higher short-term interest rates, which is usually supportive for a currency.

Gross Domestic Product

Gross domestic product (GDP) is the broadest measure of aggregate economic activity available. It is an indicator of the market value of all goods and services produced within a country. GDP is reported quarterly and it is followed very closely as it is the primary indicator of the strength of economic activity.

The GDP report has three releases: 1) advance release (first); 2) preliminary release (1st revision); and 3) final release (2nd and last revision). These revisions usually have a substantial impact on the markets.

A high GDP figure is usually followed by expectations of higher interest rates, which is mostly positive for the currency concerned at least in the short term, unless there are also inflationary pressures.

In addition to the GDP figures, there are the GDP deflators, which measure the change in prices in total GDP as well as for each component. The GDP deflators are another key inflation measure beside the CPI. In contrast to the CPI, the GDP deflators have the advantage of not being a fixed basket of goods and services, which means that changes in consumption patterns or the introduction of new goods and services will be reflected in the deflators.

What is technical analysis?

Technical analysis is another method of forecasting prices. It studies past price action in an attempt to predict the future. The technical analyst focuses exclusively on market information and works on the assumption that all fundamental information is already reflected in the price. Unlike the fundamentalist, the technician attempts to predict future price directions by searching for established patterns of price behavior that have signaled major movements in the past.

Charts are the major tool in technical analysis. The following is an introduction to the most common technical analytical tools used to identify trends and recurring patterns in a volatile market.

Charts

There are three main types of charts used in technical analysis:

Line Chart: The line chart is a graphical depiction of the exchange rate history of a currency pair over time. The line is constructed by connecting daily closing prices.

Bar Chart: The bar chart is a depiction of the price performance of a currency pair, made up of vertical bars at set intraday time intervals (e.g. every 30 minutes). Each bar has 4 'hooks', representing the opening, closing, high and low (OCHL) exchange rates for the time interval.

Candlestick Chart: The candlestick chart is a variant of the bar chart, except that the candlestick chart depicts OCHL prices as 'candlesticks' with a wick at each end. When the opening rate is higher than the closing rate the candlestick is 'solid'. When the closing rate exceeds the opening rate, the candlestick is 'hollow'.

Support & Resistance Levels

One use of technical analysis is to derive "support" and "resistance" levels. The underlying idea is that the market will tend to trade above its support levels and below its resistance levels. A support level indicates a specific price level that the currency will have difficulties crossing below. If the price repeatedly fails to move below this particular point, a straight line pattern will appear.

Resistance levels on the other hand, indicates a specific price level that the currency will have difficulties crossing above. Recurring failure for the price to move above this point will produce a straight line pattern.

If a support or resistance level is broken, the market is expected to follow through in that direction. These levels are determined through analysis of the chart and by assessment of where the market has encountered unbroken support or resistance in the past.

Moving Averages

Moving averages provide another tool for tracking price trends. A moving average is in its simplest form an average of prices that rolls over time. A 10-day moving average is calculated by adding the last 10 days’ closing prices and then dividing them by 10. On the following day, the oldest price is dropped, and the new day’s closing price is added instead; now these 10 prices are divided by 10. In this way, the average "moves" each day.

Moving averages provide a more mechanical approach to entering or exiting the market. To help identify entry and exit points, moving averages are frequently superimposed onto bar charts. When the market closes above the moving average, it is generally interpreted as a buy signal. It is in the same way considered a sell signal when the market closes below the moving average. Some traders prefer to see the moving average line actually change direction before accepting it as a buy or sell signal.

The sensitivity of a moving average line and the number of buy and sell signals it produces is directly correlated with the chosen time period for the moving average. A 5-day moving average will be more sensitive and will prompt more buy and sell signals than a 20-day moving average. If the average is too sensitive, traders may find themselves jumping in and out of the market too often. On the other hand, if the moving average is not sensitive enough, traders risk missing opportunities by identifying buy and sell signals too late.

Moving averages can be extremely useful tools for the technical trader.

Trend Line

A trend line helps identify the trend as well as potential areas of support and resistance. A trend line is a straight line that connects at least two important peaks or troughs in the price action of an underlying tradable. No other price action must break the trend line between the two points. In this way a trend line marks a support or a resistance area where the price has turned (peaks and valleys) and has not been violated. The longer a trend line the more valid it is, especially if price has touched the line several times without penetration.

The penetration of a long term trend line may be an indication that a reversal of the trend is about to occur. However, there is no guarantee that this will happen. As with all indicators of a price trend reversal, there is no proof method that predetermines where future prices will go.

Double (Triple) Bottoms and Double (Triple) Tops

A double or a triple bottom formation also provides a good level for a technical sell-stop order. Such a sell-stop order would normally be placed just below the prior lows. Likewise does a double or a triple top formation provide a good level for a technical buy-stop order just above the prior highs.

Retracements

When a market is moving swiftly in a given direction, it may sometimes pull back as market participants take their profits. This phenomenon is known as a retracement often it presents a good opportunity to re-enter the market at more attractive levels before the underlying trend resumes.

Forex Trading and Chaos Theory

Bill Williams developed his unique theory by combining trading psychology with the Chaos Theory and their effects on the markets. He suggested that rewards from trading and investing are determined by human psychology and that anyone can become a profitable trader/investor if they uncover hidden determinism in seemingly random market events.

Williams says that fundamental or technical analysis cannot guarantee steady profitable results because they do not see the real market. Moreover, he says that traders lose because they rely on different types of analysis, which are useless in nonlinear dynamic models, i.e. the real markets.

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