Hedging And How To Do It

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Hedging And How To Do It

Investments in overseas instruments, such as stocks and bonds, can generate substantial returns and provide a greater degree of portfolio diversification, but they introduce an added risk, that of exchange rates. Since foreign exchange rates can have a significant impact on portfolio returns, investors should consider hedging this risk where appropriate. While hedging instruments such as currency futures, forwards and options have always been available, their relative complexity has hindered widespread adoption by the average investor.

On the other hand, currency ETFs, by virtue of their simplicity, flexibility and liquidity, are ideal hedging instruments for retail investors who wish to mitigate exchange rate risk.


Impact of Exchange Rates on Currency Returns


The first decade of the new millennium proved to be a very challenging one for investors. U.S. investors who chose to restrict their portfolios to large-cap U.S. stocks saw the value of their holdings decline by an average of more than one-third. Over the approximately nine-and-a-half-year period from January 2000 to May 2009, the S&P 500 index fell by about 40%. Including dividends, the total return from the S&P 500 over this period was approximately -26% or an average of -3.2% annually.


Equity markets in Canada, the largest trading partner of the U.S., fared much better during this period. Fueled by surging commodity prices and a buoyant economy, Canada's S&P/TSX Composite index rose about 23%; including dividends, the total return was 49.7%, or 4.4% annually. This means that the Canadian S&P/TSX Composite index outperformed the S&P 500 by 75.7% cumulatively or about 7.5% annually.

U.S. investors who were invested in the Canadian market over this period did much better than their stay-at-home compatriots, as the Canadian dollar's 33% appreciation versus the greenback turbocharged returns for U.S. investors. In U.S. dollar terms, the S&P/TSX Composite gained 63.2%, and provided total returns, including dividends of 98.3% or 7.5% annually. That represents an outperformance versus the S&P 500 of 124.3%cumulatively or 10.7% annually.


This means that $10,000 invested by a U.S. investor in the S&P 500 in January 2000 would have shrunk to $7,400 by May 2009, but $10,000 invested by a U.S. investor in the S&P/TSX Composite over the same period would have almost doubled, to $19,830.


When to Consider Hedging

U.S. investors who were invested in overseas markets and assets during the first decade of the 21st century reaped the benefits of a weaker U.S. dollar, which was in long-term or secular decline for much of this period. Hedging exchange risk was not advantageous in these circumstances, since these U.S. investors were holding assets in an appreciating (foreign) currency.


However, a weakening currency can drag down positive returns or exacerbate negative returns in an investment portfolio. For example, Canadian investors who were invested in the S&P 500 from January 2000 to May 2009 had returns of -44.1% in Canadian dollar terms (compared with returns for -26% for the S&P 500 in U.S. dollar terms), because they were holding assets in a depreciating currency (the U.S. dollar, in this case).


As another example, consider the performance of the S&P/TSX Composite during the second half of 2008. The index fell 38% during this period - one of the worst performances of equity markets worldwide - amid plunging commodity prices and a global sell off in all asset classes. The Canadian dollar fell almost 20% versus the U.S. dollar over this period. A U.S. investor who was invested in the Canadian market during this period would therefore have had total returns - excluding dividends for the sake of simplicity - of -58% over this six-month period.


In this case, an investor who wanted to be invested in Canadian equities while minimizing exchange risk could have done so using currency ETFs. The following section demonstrates this concept.


Hedging Using Currency ETFs


Consider a U.S. investor who invested $10,000 in the Canadian equity market through the iShares MSCI Canada Index Fund (EWC). This ETF seeks to provide investment results that correspond to the price and yield performance of the Canadian equity market, as measured by the MSCI Canada index. The ETF shares were priced at $33.16 at the end of June 2008, so an investor with $10,000 to invest would have acquired 301.5 shares (excluding brokerage fees and commissions).


If this investor wanted to hedge exchange risk, he or she would also have sold short shares of the CurrencyShares Canadian Dollar Trust (FXC). This ETF reflects the price in U.S. dollars of the Canadian dollar. In other words, if the Canadian dollar strengthens versus the U.S. dollar, the FXC shares rise, and if the Canadian dollar weakens, the FXC shares fall.



Recall that if this investor had the view that the Canadian dollar would appreciate, he or she would either refrain from hedging the exchange risk, or "double up" on the Canadian dollar exposure by buying (or "going long") FXC shares. However, since our scenario assumed that the investor wished to hedge exchange risk, the appropriate course of action would have been to "short sell" the FXC units.

In this example, with the Canadian dollar trading close to parity with the U.S. dollar at the time, assume that the FXC units were sold short at $100. Therefore, to hedge the $10,000 position in the EWC units, the investor would short sell 100 FXC shares, with a view to buying them back at a cheaper price later if the FXC shares fell.


At the end of 2008, the EWC shares had fallen to $17.43, a decline of 47.4% from the purchase price. Part of this decline in the share price could be attributed to the drop in the Canadian dollar versus the U.S. dollar over this period. The investor who had a hedge in place would have offset part of this loss through a gain in the short FXC position. The FXC shares had fallen to about $82 by the end of 2008, so the gain on the short position would have amounted to $1,800.


The unhedged investor would have had a loss of $4,743 on the initial $10,000 investment in the EWC shares. The hedged investor, on the other hand, would have had an overall loss of $2,943 on the portfolio.


Currency ETFs Are Margin-Eligible


Some investors may believe that it is not worthwhile to invest a dollar in a currency ETF to hedge each dollar of an overseas investment. However, since currency ETFs are margin-eligible, this hurdle can be overcome by using margin accounts (which are brokerage accounts in which the brokerage lends the client part of the funds for an investment) for both the overseas investment and currency ETF.

An investor with a fixed amount to invest who also wishes to hedge exchange risk can make the investment with 50% margin and use the balance of 50% for a position in the currency ETF. Note that making investments on margin amounts to using leverage, and investors should ensure that they are familiar with the risks involved in using leveraged investment strategies.

The Bottom Line

Currency moves are unpredictable and currency gyrations can have an adverse effect on portfolio returns. As an example, the U.S. dollar unexpectedly strengthened against most major currencies during the first quarter of 2009, amid the worst credit crisis in decades. These currency moves amplified negative returns on overseas assets for U.S. investors during this period. Hedging exchange risk is a strategy that should be considered during periods of unusual currency volatility. Because of their investor-friendly features, currency ETFs are ideal hedging instruments for retail investors to hedge exchange risk.

Fx Spreads And The News

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Fx Spreads And The News

Talking Points


Spreads are based off the Buy and Sell price of a currency pair.

Spreads are variable and can change during news.

Watch for normalization of spreads, shortly after economic events.


Financial markets have the ability to be drastically effected by economic news releases. News events occur throughout the trading week, as denoted by the economic calendar, and may increase market volatility as well as increase the spreads you see on your favorite currency pairs.


It is imperative that new traders become familiar with what can happen during these events. So to better prepare you for upcoming news, we are going to review what happens to Forex spreads during volatile markets.


Spreads and the News


News is a notorious time of market uncertainty. These releases on the economic calendar happen sporadically and depending if expectations are met or not, can cause prices to fluctuate rapidly. Just like retail traders, large liquidity providers do not know the outcome of news events prior to their release! Because of this, they look to offset some of their risk by widening spreads.


Above is an example of spreads during the January NFP employment number release. Notice how spreads on the Major Forex pairs widened. Even though this was a temporary event, until the market normalizes traders will have to endure wider costs of trading.

spreads news 2.png

Dealing with the Spread


It is important to remember that spreads are variable, meaning they will not always remain the same and will change as liquidity providers change their pricing. Above we can see how quickly spreads normalize after the news. In 5 minutes, the spreads on the EUR/USD moved from 6.4 pips back to 1.4 pips. So where does that leave traders wanting to execute orders around the news?


Traders should always consider the risk of trading volatile markets. One of the options for trading news events is to immediately execute orders at market in hopes that the market volatility covers the increased spread cost. Or, traders can wait for markets to normalize and then take advantage of added liquidity once market activity subsides.

The Open-Minded Trader

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The Open-Minded Trader

One of the lessons I learned the hard way in trading is that to become and to stay successful as a trader, you have to be very open-minded. Unfortunately, this is easier said than done and many traders fail to stay open-minded in the long run.


This is a very common trap for traders you're having success early in their trading career. Maybe you started trading back in the early 90s when the stock markets moved from one high to the next. You learned a very simple long-only strategy to trade stocks and of course, you were very successful doing that. But in the year 2000 everything changed and that super bull markets turned into an ugly bear market. A completely new environment to trade in and guess what your long-only trading strategy stops working. But as you've been making nice money with it for almost 10 years it's very hard to stop trading it. On every little profit you make, you start hoping it might work again. But as the stock markets continue to collapse, so does your equity.

That trader can hardly be blamed for not being open-minded enough to see that and stop trading the strategy before it's too late. It's a very difficult thing to do. And that's why most traders who've had a very good start usually give it all back to the markets later on.


But there are also traders who've been around for a while that should know better by now. Still, they believe that only one way of trading is right and try to stick to it forever, happily ignoring all the facts telling them the opposite. Often, they're the ones who love hanging out in trading forums to tell everyone the truth about trading. Whenever someone wants to tell you "the truth about the markets", run as fast as you can!


If there is a truth in trading and the markets, it can be summarized in "it changes all the time". Whenever you think you've seen it all, something new happens. Truths like "bonds and stock market are highly correlated" simply become untrue. Whole markets become illiquid or disappear. Trading costs is another factor that can make markets untradeable (or tradable) for a specific strategy. And of course, market participants change all the time.

Because of that, trading strategies that worked for years can simply stop working. It will be very interesting to see what happens to many traders/strategies/hedge funds that are currently relying on some kind of long-only stock market strategies when things become ugly again.


So that's one of the reasons you have to stay flexible and open-minded in this business. Markets change. If you don't adapt, you won't survive.

But you also need an open mind to be successful in developing trading strategies and looking for market edges. Very often you'll find that the very opposite of what you believe or read in a trading book is actually true. But you won't find that out if you're not ready to challenge what you believe to the true right now. Is a certain chart pattern that is categorized as "bullish" all over the internet actually "bullish"? Or might the truth be that chances of success are much higher fading that signal? Go ahead and find out!


Also if a strategy looks like the worst strategy ever, maybe it's going to be a good one if you do the opposite? The same is true for indicators, think of new ways to use them. Maybe it's actually meaningless if an indicator hits a specific value where it's supposed to be "overbought" but it's an excellent indicator to show a change in momentum by looking at its change from one period to the next?


Other things traders tend to get attached to are specific markets or trading styles. "I trade only the EUR/USD and I never hold a trade overnight". Good luck with that! This means you'll hit some very serious drawdowns (or have to completely stop trading if you have a filter for that) whenever the volatility of EUR/USD gets too low to profitably day trade in that market. And these periods can last for years! As this can be true for whole asset groups like currencies, it's always good to be able to switch to wherever the action is (energy markets, bonds, stock indices for example).


Of course, when it comes to the actual execution part of trading, there's no room for you to be open-minded. Here you have to be 100% disciplined and stick to your rules and risk management. If you're open-minded about how much you'll risk on the next trade, you've clearly overdone it.

Trading Psychology

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Trading Psychology

There are many characteristics and skills required by traders in order for them to be successful in the financial markets. The ability to understand the inner workings of a company, its fundamentals and the ability to determine the direction of the trend are a few of the key traits needed, but not one of these is as important as the ability to contain emotions and maintain discipline.


The psychological aspect of trading is extremely important, and the reason for that is fairly simple: A trader is often darting in and out of stocks on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with previously established trading plans and know when to book profits and losses. Emotions simply can't get in the way. 

Understanding Fear

When a trader's screen is pulsating red (a sign that stocks are down) and bad news comes about a certain stock or the general market, it's not uncommon for the trader to get scared. When this happens, they may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. Now, if they do that they may avoid certain losses - but they also will miss out on the gains.


Traders need to understand what fear is - simply a natural reaction to what they perceive as a threat (in this case perhaps to their profit or money-making potential). Quantifying the fear might help. Or that they may be able to better deal with fear by pondering what they are afraid of, and why they are afraid of it.


Also, by pondering this issue ahead of time and knowing how they may instinctively react to or perceive certain things, a trader can hope to isolate and identify those feelings during a trading session, and then try to focus on moving past the emotion. Of course this may not be easy, and may take practice, but it's necessary to the health of an investor's portfolio. 

Creating a Trading Plan

Traders should try to learn about their area of interest as much as possible. For example, if the trader deals heavily and is interested in telecommunications stocks, it makes sense for him or her to become knowledgeable about that business. Similarly, if he or she trades heavily in energy stocks, it's fairly logical to want to become well versed in that arena.


To do this, start by formulating a plan to educate yourself. If possible, go to trading seminars and attend sell-side conferences. Also, it makes sense to plan out and devote as much time as possible to the research process. That means studying charts, speaking with management (if applicable), reading trade journals or doing other background work (such as macroeconomic analysis or industry analysis) so that when the trading session starts the trader is up to speed. A wealth of knowledge could help the trader overcome fear issues in itself, so it's a handy tool.


In addition, it's important that the trader consider experimenting with new things from time to time. For example, consider using options to mitigate risk, or set stop losses at a different place. One of the best ways a trader can learn is by experimenting - within reason. This experience may also help reduce emotional influences.

Finally, traders should periodically review and assess their performance. This means not only should they review their returns and their individual positions, but also how they prepared for a trading session, how up-to-date they are on the markets and how they're progressing in terms of ongoing education, among other things. This periodic assessment can help the trader correct mistakes, which may help enhance their overall returns. It may also help them to maintain the right mindset and help them to be psychologically prepared to do business. 

Greed Is Your Worst Enemy

There's an old saying on Wall Street that "pigs get slaughtered." This greed in investors causes them to hang on to winning positions too long, trying to get every last tick. This trait can be devastating to returns because the trader is always running the risk of getting whipsawed or blown out of a position.


Greed is not easy to overcome. That's because within many of us there seems to be an instinct to always try to do better, to try to get just a little more. A trader should recognize this instinct if it is present, and develop trade plans based upon rational business decisions, not on what amounts to an emotional whim or potentially harmful instinct.


To get their heads in the right place before they feel the emotional or psychological crunch, investors can look at creating trading rules ahead of time. Traders can establish limits where they lay out guidelines based on their risk-reward relationship for when they will exit a trade - regardless of emotions. For example, if a stock is trading at $10/share, the trader might choose to get out at $10.25, or at $9.75 to put a stop loss or stop limit in and bail.


Of course, establishing price targets might not be the only rule. For example, the trader might say if certain news, such as specific positive or negative earnings or macroeconomic news, comes out, then he or she will buy (or sell) a security. Also, if it becomes apparent that a large buyer or seller enters the market, the trader might want to get out.


Traders might also consider setting limits on the amount they win or lose in a day. In other words, if they reap an $X profit, they're done for the day, or if they lose $Y they fold up their tent and go home. This works for investors because sometimes it is better to just "go on take the money and run," like the old Steve Miller song suggests even when those two birds in the tree look better than the one in your hand.

Bottom Line

It's often important for a trader to be able to read a chart and have the right technology so that their trades get executed, but there is often a psychological component to trading that shouldn't be overlooked. Setting trading rules, building a trading plan, doing research and getting experience are all simple steps that can help a trader overcome these little mind matters.

Understanding Technicals

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The ability to make commodity price forecasts is only the first step in the price decision making process. The second, and often more difficult step, is market timing. Since commodity futures markets are so highly leveraged ( initial margin requirements are generally less than 10% of a contract's value), minor price moves can have a dramatic impact on trading performance.


Therefore, the precise timing of entry and exit points is an indispensable aspect of any market commitment. Timing is everything when dealing in the commodities markets, and timing is almost purely technical in nature. This is where a practical application of charting principles becomes absolutely essential in the price forecasting and risk management process.


There are three basic assumptions on which technical analysis is based:


1. The futures market discounts everything.


The technician believes that the price posted on the board of a commodity exchange at any given time is the intrinsic value of the commodity based upon the fundamental factors affecting the supply and demand of the product. Therefore, if the fundamentals are already reflected in the price, market action (charts- price, volume, open interest) is all that is needed to be studied to forecast future price direction. Although not knowing the specifics of the fundamental news, the technician indirectly studies the fundamentals by studying the charts which reflect the fundamentals of the marketplace.


2. Prices move in trends


Prices can move in one of three directions, up, down or sideways. Once a trend in any of these directions is in effect it usually will persist. The market trend is simply the direction of market prices, a concept which is absolutely essential to the success of technical analysis. Identifying trends is quite simple; a price chart will usually indicate the prevailing trend as characterized by a series of waves with obvious peaks and troughs. It is the direction of these peaks and troughs that constitutes the market trend.


3. History repeats itself


Technical analysis includes the psychology of the market place. Patterns of human behavior have been identified and categorized for several hundred years and are repetitive in nature. The repetitive nature of the marketplace is illustrated by specific chart patterns which will indicate a continuation of or change in trend.



Does Technical Trading Really Work?


Some people think you can make money by drawing a couple of squiggles on a chart? You've got to be kidding me.

Is technical analysis the Holy Grail for investors? Or is it just tea leaf reading?


It shouldn't come as a surprise that talking about investing strategies brings up strong emotions among their practitioners. After all, people's money is on the line. But few topics draw the same polar degrees of ire and praise that technical analysis does. The thing is, many of the biggest TA critics don't really understand how technicians actually use their toolbox to make money in the markets.


Today, we'll seek to bust technical analysis myths by shining a pragmatic light on this investing discipline.

Clearly, an exhaustive debate about the usefulness of technical analysis (or fundamental analysis, for that matter) could never be achieved in a single article. That said, I’ll attempt to scratch the surface, debunking some of the more prevalent myths in the technical analysis world.


First, though, let's define exactly what technical analysis is. At its core, technical analysis is the study of the market itself, rather than the goods that trade in the market, in determining the investment-worthiness of a security. While fundamental analysts focus on a company's business to try and get at the share price of its stock, technicians are primarily concerned with price and volume and with the supply and demand factors that actually move shares.


With that definition in mind, let's take a look at some of the biggest myths.


Myth 1: Past Prices Aren't Useful for Predicting Future Prices


One of the most biting criticisms of technical analysis is the idea that there's no way past prices can be a crystal ball for future prices. But that argument is seriously flawed.


Anyone who's ever bought a stock can attest to the psychological impact of watching a position's gains climb or losses mount. It's human nature. That's a good indicator that entry prices do have at least some impact on future behavior. Remember, we judge our performance by comparing a stock's current price against our entry -- and those entry prices are past prices. Because investors' entry prices have a lot to do with their eventual decisions to close their positions (or buy more), it's naive to think that past prices don’t have some impact on how a stock trades in the future.


No, it's not that past prices magically work their way into future prices that's important. Rather, past prices are significant because they are the best way we have to identify pockets of supply and demand in the market.

So we've established that past prices do impact future prices to some extent. But can you predict future prices with a chart alone?

I certainly can't.

I'll concede that technical analysis doesn't make predictions -- but bear with me. The problem with this claim is that the word "prediction" conjures up crystal-ball-style connotations. Technicals aren't a crystal ball, and I don't know a single professional trader or analyst who believes they are.


In practice, technical analysis is a way to find high-probability setups in reaction to the market -- trading setups that factor in potential price barriers such as supply, demand and market mechanics and that give the trader cues about the market move with the highest likelihood. Charts can't help a trader predict a stoc'’s exact day-to-day price movement for the next five years, but they can help generate consistently profitable trades with preset price targets and stop loss levels.


Technicals can help you identify important levels on a stock's price chart and then react when something actionable happens.

As an investor, there's a difference between being right and making money. Predictions are great for people who like being right, but technical tools are more valuable for investors who like making money in reaction to important market moves.


Myth 2: Academics Say Technicals Don’t Work


In the past, academia hasn’t been kind to technical analysis. According to prevailing financial and economic models such as Efficient Market Hypothesis and Random Walk Theory, technicals can't work.


But what most critics leave out is the fact that under those models fundamental analysis tools can't work either.


While those traditional academic models have been powerful arguments against technicals in the past, new research suggests that EMH and RWT are seriously flawed. Academic research as early as 1996 noted the fact that real-world market behavior (namely the existence of trends and occurrences of market crashes) makes Random Walk Theory statistically impossible. Similar results have been found to be the case with Efficient Market Hypothesis, which essentially claims that all available information is immediately priced into shares.



In reality, as events like 2008's market meltdown show us anecdotally that it's really how investors feel about that information that's reflected in share prices.


In the past, one of the biggest issues with academic studies of technical analysis has been the fact that the academics conducting the studies weren't particularly good at developing realistic technical trading systems to their studies. Now, as technical trading becomes more widely understood, academic studies are showing statistically significant out-performance from technical strategies.

Maybe even more importantly for retail investors, new work is showing that applying very simple technical strategies to buy-and-hold index investing can dramatically reduce risk and improve returns net of transaction fees. You don't need to be an active investor to benefit from TA.


Myth 3: The Biggest Investors Don't Use Technical Analysis


The idea that technical analysis isn't used at major funds and institutional settings is a common one, but it's another that's factually untrue. While fundamentally driven funds do certainly dominate the institutional landscape, nearly ever major institutional investment firm has a technical research group -- and all institutions employ trading floors filled with technical traders.


Even though purely technical funds and ETFs have only come onto the scene more recently, some of the most successful investors and traders have risen to prominence using an exclusively technical strategy. Big names include the likes of Richard Dennis and Paul Tudor Jones. Even fundamental analysis icons such as Graham and Dodd made mention of technically driven factors in their explanation of the markets.


Ultimately, the merit of any investment strategy should be based on the successes of its best practitioners -- not the failure of those who don’t fully understand it. Plenty of institutional fund managers use technicals as one of their inputs in making investment decisions. And interestingly enough, the TA proponents actually significantly outperform their peers.


According to research done by David Smith, Christophe Faugère and Ying Wang, at the University of Albany and Kedge Business School Bordeaux, "With respect to mean and median values, the performance advantage of technical analysis is slight, but statistically significant. The contrast appears more salient during down markets, and when performance is measured relative to a primary benchmark."


Here's what that out-performance looks like in dollar terms:


A Pragmatic Approach to Technical Trading


While technical analysis has become very popular in recent years, there are still a number of pervasive myths about technical trading that throw people off. Technical analysis doesn't use price as a way to magically peer into the future, it doesn't contradict the latest academic market models, and technicals are being used to successfully manage substantial institutional assets.


It's worth noting that technical and fundamental analysis aren't mutually exclusive investing strategies. In fact, they're quite complementary. No single investment strategy is going to outperform in every single market condition, but if you're a fundamental investor, adding some simple technical tools to your arsenal can help you beat the market during times when out-performance is hard to find. And technicals can also help you limit your risk when the floor falls out of the market.

How Governments Influence Markets

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In the 1920s, very few people would have identified the government as the major player in the markets. Today, very few people would doubt that statement. In this article, we will look at how the government affects the markets and influences business in ways that often have unexpected consequences.


Monetary Policy: The Printing Press
Of all the weapons in the government's arsenal, monetary policy is by far the most powerful. Unfortunately, it is also the most imprecise. True, the government can do some fine control with tax policy to move capital between investments by granting favorable tax status (municipal government bonds have benefited from this). On the whole, however, governments tend to go for large, sweeping changes by altering the monetary landscape.

Currency Inflation
Governments are the only entities that can legally create their respective currencies. When they can get away with it, governments always want to inflate the currency. Why? Because it provides a short-term economic boost as companies charge more for their products and it also reduces the value of the government bonds issued in the inflated currency and owned by investors.

Inflated money feels good for awhile, especially for investors who see corporate profits and share prices shooting up, but the long-term impact is an erosion of value across the board. Savings are worth less, punishing savers and bond buyers. For debtors, this is good news because they now have to pay less value to retire their debts - again, hurting the people who bought bank bonds based off those debts. This makes borrowing more attractive, but interest rates soon shoot up to take away that attraction. (Learn about the tools the Fed uses to influence interest rates and general economic conditions

Fiscal Policy: Interest Rates
Interest rates are another popular weapon, even though they are often used to counteract inflation. This is because they can spur the economy separately from inflation. Dropping interest rates via the Federal Reserve - as opposed the raising them - encourages companies and individuals to borrow more and buy more. Unfortunately, this leads to asset bubbles where, unlike the gradual erosion of inflation, huge amounts of capital are destroyed, which brings us neatly to the next way the government can influence the market. (For more on how interest rates affect economics.

After the financial crisis from 2008-2010, it is no secret that the U.S. government is willing to bailout industries that have gotten themselves into problems. Truth be told, this fact was known even before the crisis. The savings and loan crisis of 1989 was eerily similar to the bank bailout of 2008, but the government even has a history of saving non-financial companies like Chrysler (1980), Penn Central Railroad (1970) and Lockheed (1971). Unlike the direct investment under Troubled Asset Relief Program (TARP), these bailouts came in the form of loan guarantees.

Bailouts can skew the market by changing the rules to allow poorly run companies to survive. Often, these bailouts can hurt shareholders of the rescued company and/or the company's lenders. In normal market conditions, these firms would go out of business and see their assets sold to more efficient firms in order to pay creditors and - if possible - shareholders. Fortunately, the government only uses its ability to protect the most systemically important industries like banks, insurers, airlines and car manufacturers.

Subsidies and Tariffs
Subsidies and tariffs are essentially the same thing from the perspective of the taxpayer. In the case of a subsidy, the government taxes the general public and gives the money to a chosen industry to make it more profitable. In the case of a tariff, the government applies taxes to foreign products to make them more expensive, allowing the domestic suppliers to charge more for their product. Both of these actions have a direct impact on the market.

Government support of an industry is a powerful incentive for banks and other financial institution to give those industries favorable terms. This preferential treatment from government and financing means that more capital and resources will be spent in that industry, even if the only comparative advantage it has is government support. This resource drain affects other, more globally competitive industries that now have to work harder to gain access to capital. This effect can be more pronounced when the government acts as the main client for certain industries, leading to the well-known examples of over-charging contractors and chronically delayed projects. (Everything you need to know - from the different types of tariffs to their effects on the local economy.

Regulations and Corporate Tax
The business world rarely complains about bailouts and preferential treatment to certain industries, perhaps because they all harbor a secret hope of getting some. When it comes to regulations and tax, however, they howl - and not unjustly. What subsidies and tariffs can give to an industry in the form of a comparative advantage, regulation and tax can take away from many more.

Lee Iacocca was the CEO of Chrysler during its original bailout. In his book, "Iacocca: An Autobiography," Iacocca points at the higher costs of ever-increasing safety regulations as one of the main reasons Chrysler needed the bailout. This trend can be seen in many industries. As the regulations increaser, smaller providers get squeezed out by the economies of scale the larger companies enjoy. The end result is highly-regulated industry with a few large companies that are necessarily intertwined with the government.

High taxes on corporate profits have a different effect in that they discourage companies from coming into the country. Just as states with low taxes can lure away companies from their neighbors, countries that tax less will tend to attract any corporations that are mobile. Worse yet, the companies that can't move end up paying the higher tax and are at a competitive disadvantage in business as well as for attracting investor capital. 

The Bottom Line
Governments may be the most terrifying figures in the financial world. With a single regulation, subsidy or switch of the printing press, they can send shockwaves around the world and destroy companies and whole industries. For this reason, Fisher, Price and many other famous investors considered legislative risk as a huge factor when evaluating stocks. A great investment can turn out to be not that great when the government it operates under is taken into consideration. (Though the U.S. government can help its citizens by subsidizing risky loans, the costs always come back to the taxpayers 

Learn About Commodities

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Learn About Commodities


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XAG/USD - Silver

The price of silver is driven by speculation and supply and demand; mainly by large traders or investors, short selling, industrial, consumer and…


NGAS is the pricing point for natural gas futures contracts on the New York Mercantile Exchange (NYMEX) and the OTC swaps traded on Intercontinental…

Just what is commodity trading? Well lets look at first what a commodity futures contract is:


Commodity Futures Contract:


  • A standardized contract set by a particular futures exchange that includes the size (1000 barrels, 5000 bushels, 5000 ounces, etc.), the place where delivery can be made, the type and quality of the commodity to be delivered, and the price of the transaction.

  • The futures contract is negotiated on a regulated futures exchange, which is a central market place where all buy and sell orders are routed to a single location on the exchange.


A transaction in the commodity futures market is made on the trading floor (or in the trading computers) of the exchange between brokers who are members of the exchange that particular commodity is trading on. The seller will have a broker, and buyer will have a broker. They will then transact an order for a purchase and sale.


The buyers and sellers of commodity futures contracts have obligations. The buyer is obligated to take delivery and pay for the cash commodity during a specific time frame. The seller is obligated to deliver the commodity, for which he will be paid the price that was decided in the exchange pit by the brokers. (Sometimes the price can be more or less depending on the grade (quality) of the specific material.) The buyer and seller can eliminate their obligation by offsetting their trade at the exchange before the contract comes due. This is what most speculators do in the commodity markets.




There are speculators and hedgers that trade in the commodity markets. (A hedger is not interested in making a profit off the movements in price of a commodity futures contract, but rather in shifting his risk of loss on the commodity itself due to adverse price change.) Speculators will buy and sell futures, or options on futures, for the purpose of making a profit. They will buy futures (a long position) when they think prices will rise, or they will sell futures (a short position) when they think prices will fall. Both the speculators and hedgers add volume to a market making it a more liquid market to trade.

Most individuals who open commodity trading accounts are speculators looking to benefit off of the price movement of the commodity being traded. Farmers, oil operators, cattle companies, etc could open a commodity futures trading account looking to be a hedger and reduce their risk of price movement.




Here is a simple example of a speculator (we will call him a futures trader) executing a trade and how it would work. Once the futures trader has established a futures trading account, he would then call his broker to initiate a trade. He would let the broker know if he was looking to buy or sell (long or short), the specific commodity he wants the trade in, the month and year of the contract he is looking to trade, the quantity, and the price which he is willing to buy or sell for (or he can say Market Order to have the trade executed at the current market price in the trading pit).


Example: The futures trader calls his broker and says "I would like to buy One March 2007 Corn futures at the Market Price." The broker would then take this futures order and relay this to the trading pit at the exchange, where the order would then be executed by brokers on the floor. (Sometimes conditions are present when the trade can not be executed for some reason which is rare but can happen.)


After the trade is executed, the floor broker would relay price paid or sold and relevant information back to the trader's broker. The futures trader's broker would then let the futures trader know the price that the Buy or Sell (the trade) was executed.


In recent times, more trading has been done through the use of online futures trading, eliminating the use of telephones and calling of brokers on the telephones. The futures trader can trade directly from their computer and have the trade routed directly to the trading floor of the exchange. At the exchange some orders (electronic markets) are executed immediately in the exchanges computers. This is becoming the more preferred method of trading because it tends to be quicker.


Lets say the futures trader got his price back (the fill price) and he bought one March Corn at $3.10. He then watches the futures quotes and sees the price trading higher at $3.15. He then calls his broker (or enters an order into his computer trading platform) to sell the futures contract he has bought earlier in the day. He tells his broker "I would like to sell 1 March 2007 Corn at the Market Price." The broker then relays this to the trading pit where the trade is executed and reported back to the futures trader. Lets say the price he received for the sale was $3.14.


  • The futures trader bought a March Corn for $3.10 and sold a March corn for $3.14

  • One corn contact is 5000 bushels. Therefore, every one cent move in the price of a full size corn futures contract is $50.

  • The difference between the buy and sell was a 4 cent profit.

  • The futures trader experienced a gain of 4 cents multiplied by $50, or a $200 move in his favor.


Commissions and fees would be deducted from his buy and sell.

Also bear in mind, had the price fallen, and the futures trader sold the corn at $3.06, he would have lost 4 cents,a loss of ($200) plus commissions and fees. And remember the risk of loss exists in futures trading.

Sometimes traders execute trades numerous times a day and for numerous quantities.


In Conclusion:


This is just a brief example of how commodity trading works. This in no way explains all the intricacies involved with trading. Trading commodities is risky and one should only use risk capital to invest. Please contact one of our licensed brokers who can explain more in-depth on how the commodity markets work, and determine if you are suitable to trade these fast paced markets. 

Understanding The Economic Calendar

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How to use an Economic Calendar?


In the unpredictable world of Forex, to know why the market is moving in a certain way and be able to anticipate these moves is one of the major keys for successful Forex trading. Although the reaction of the market to the world events fluctuates daily, experienced traders try to analyze future economic events in order to foresee currency movements. Trader needs to stay way ahead of event announcements and act accordingly so that by the time an announcement is made, he/she has already priced the value of their currency pair. On the whole, the biggest market-moving events tend to be the release of key economic data such as the US non-farm payroll number.


The easiest way to manage the information from announcements is to follow an Economic Calendar. Through using this efficient economic tool, you can track key indicators which will present you where the market is headed and what may impact your currency movements. The knowledge of future economic and political indicators and coming events is not only beneficial, but crucial factor for a good trader.

To make the picture clearer, let’s assume that the Bank of England and the European Central Bank plan to meet later next month to discuss the policy of interest rates. You can forecast whether the rate will be raised or lowered through the knowledge of this meeting. An experienced trader will take long or short positions in both GBP/USD and EUR/USD respectively. If however interest rates are expected to remain the same, traders will check other factors out that might affect the direction of a currency pair.

There are alternative ways to keep an economic calendar. You can search for main indicators online and create your own calendar by inputting the information manually. Otherwise, there are many online calendar platforms provided by different brokers or financial organizations that update indicators automatically and will endow you with all necessary information. It is also possible to copy the indicators from the calendar and paste the whole list of them into a document, highlight important events and delete the ones you consider to be less important.

After you have obtained the information, inputting it in your calendar and you are keeping track, you need to act. You notice from your calendar that an announcement date is approaching. What is to follow is that a consensus will be forecast as to what to expect from said announcement. As a forex trader you will begin to price the new data and adjust your trades accordingly.



What Indicators are used in Economic Calendar?


The US dollar accounts for a large proportion of global currency trades and has the biggest influence on currency prices.

The most important indicator is GDP (Gross Domestic Product) as this measures the sum of all goods and services in a country. Industrial production measures how much is produced in a nation’s factories, mines, or utilities. PMI (Purchasing Manager’s Index) monitors manufacturing conditions.

Other two important indicators to measure the inflation are the Producer Price Index (PPI) and Consumer Price Index (CPI), which measure the average prices for sellers and buyers.


Here is the list of the most important economic indicators that can be found from the Economic Calendar:


Consumer Confidence Index (CCI)

Released: 10am EST Last Tuesday of each month

This survey of over 5,000 US households intends to show the financial health, spending power, and confidence of the average American consumer. It consist of three headline figures – the Index of Consumer Sentiment, which reflects how people currently feel, Current Economic Conditions, which reflects how people feel the economy is going, and the Index of Consumer Expectations, which reflects how they think the economy will be in six months time. Despite the subjectivity of this survey, it can be a big market mover on the forex markets, because the confidence of consumers is key to the economic performance of a country as a whole, and therefore directly affects the value of its currency.


Consumer Credit Report

Released:  3pm EST, About five weeks after month’s end

This monthly Fed report estimates changes in the dollar amounts of outstanding unsecured loans to individuals, which tend to be used to purchase consumer goods. It’s not a big market mover, but it can be a good indicator of the future spending levels of consumers, and can therefore be used to inform traders of the positions they should take when trading the Personal Consumption and Retail Sales reports.


Consumer Price Index (CPI)

Released: 8.30, Monthly, approximately mid-month

This is the main benchmark for inflation in the US economy, covering the prices across a basket of commonly bought consumer goods and services such as groceries and haircuts. It is perhaps the most important economic indicator there is, because it is always taken into account in Fed decisions, and because it is used to make adjustments to cash flow mechanisms such as pensions, Medicare, and cost of living adjustments to insurance policies.


Durable Goods Report

Released: 8.30am EST On or around the 20th of each month (advance release; revised release about six weeks after period end with Factory Orders)

The Durable Goods Report, which is released by the US census bureau, consists of data on new orders from thousands of manufacturers of durable goods, which are higher-priced goods with a useful life of over three years such as cars, consumer electronics, and turbines. Rises in this number usually occur ahead of general economic expansion, although sample error can affect the figure considerably so it is best to consider a moving average that takes into account previous releases when evaluating these results.


Employee Cost Index (ECI)

Released: 8.30am, last Thursday of April, July, November and January

The Employment Cost Index (ECI) is a quarterly report that reflects changes in wages, bonuses, and benefits from the previous quarter on a per-hour basis. Because employee costs are such a large part of corporate expenditure, they will often be reflected in the price of goods and services. Therefore, it can be used to gain an insight into future inflation trends, and can be a major market mover if it deviates from analysts’ estimates.


Employment Situation Report

Released: 8.30am EST, First Friday of the month

This broad-based indicator, released by the Bureau of Labor Statistics (BLS), consists of two surveys. The “establishment survey”, which samples over 400,000 businesses, presents important statistics such as non-farm payrolls, hours worked, and hourly earnings. The “household survey” samples over 60,000 households to produce a figure representing the total number of individuals out of work, from which the national unemployment rate is derived. As we stated in yesterday’s article, the non-farm payrolls figure is one of the most hotly anticipated and widely traded indicators among forex traders. The other most eagerly-awaited number here is the unemployment figures from the household report, which are considered a lagging indicator of the health of the economy. The report as a whole is perhaps the most influential in determining Fed policy, and if the figures surprise analysts, it can move markets in a very dramatic way.


Existing Home Sales

Release Date: 8.30am EST Fourth week of the month

This report from the National Association of Realtors shows the number of existing (as opposed to new-build) homes that were closed during the month, the average selling price, and the length of time it is currently taking to sell off the entire housing inventory. These figures represent the aggregate demand among consumers for housing. This report, when used in conjunction with the Housing Starts report, can be a good leading indicator for the general health of the economy.


Factory Orders Report

Released: 8.30am EST, First week of the month

This report combines the Durable Goods Report with information about non-durable goods sales such as food and clothing. It is less vague than the Durable Goods report, but because much of the information is already known, it doesn’t tend to move the market much upon its release, although the inclusion of forward-looking data such as inventory and new orders makes it an important leading indicator for forecasting GDP.


Gross Domestic Product (GDP)

Released: 8.30am EST – advance release: four weeks after quarter ends; Final release: three months after quarter ends

This is the most widely quoted and most influential economic indicator there is, representing the market value of all goods and services produced by the economy of the country being measured on a quarterly basis. While the results are conclusive, and form a vital part of any analysis of economic trends, it is not very timely, with much of the information contained within the report already being known ahead of its release. Nonetheless, it is a figure that every trader should have a deep understanding of if they are to be successful in analyzing the markets.


Housing Starts

Released: 8.30am EST, On or around the 17th of the month

This report is the result of a survey of homebuilders across the US that measures the amount of housing starts, which are considered the laying of foundations for new homes, and approved building permits. These are leading indicators for the health of the construction industry and the economy as a whole, and while the report rarely sends shockwaves around the markets, the figures are useful for estimating other consumer-based indicators, as people buying new homes also tend to spend money on other consumer goods such as furniture and appliances.


Industrial Production

Released: 9.15 EST On or around the 16th of the month

This Fed report provides the monthly raw volume of goods produced by industrial firms such as factories, mines and electric utilities in the US, as well as newspaper, periodical and book publishing. It is useful as a leading indicator for inflation as industry is the first to feel supply shortages for basic materials, which drive up prices all the way down the supply chain. While the shift away from industrial production towards a service economy in the West means that the relevance of this figure is declining, it is often one of the first indicators of an inflection point in the trajectory of the economy as a whole.


Jobless Claims Report


A rate of 42 or above indicates that the GDP is likely to expand, whereas a rating below this indicates that a recession may be on the way. It is a very timely leading indicator for GDP and BLS reports, particularly when used in conjunction with more data-driven indicators such as the PPI and GDP or the ISM Non-Manufacturing Report.


Retail Sales Report

Released: 8.30am EST on or around the 13th of the month

This is one of the most keenly anticipated numbers among economists and investors, tracking the dollar value of merchandise sold within the retail trade, sampling both fixed point-of-sale and non-store retailers of all sizes. There are two headline figures here, the total sales figure (and percentage change from the previous month), and the “ex-autos” figure, which discounts auto sales, which can skew the overall figure due to the high prices and historical seasonality. It is a good predictor of inflationary pressure, and has a large bearing on Fed policy, and it can therefore be a big market mover, particularly if it differs greatly from analysts’ estimates.


Trade Balance Report

Released: 8.30am EST around the 19th of the month

This is an important one for forex traders, as it is widely used by investors and policy makers to determine the health of the US economy and its relationship with the rest of the world. The headline figure here is the nominal trade deficit, which represents the current dollar value of U.S. exports minus imports. The US has run a trade deficit for over 20 years now, and this is not necessarily a bad thing as long as the deficit is balanced by an equal dollar amount of foreign investment in U.S. assets – mainly treasuries. This means that, when interest rates are low, US debt becomes less attractive, causing the value of the dollar to drop in comparison with other currencies. If the data in the Trade Balances report is markedly different to previous reports, it can move the markets in a profound way. While the report is notoriously difficult to estimate, partly due to the high volatility of oil prices, it can give valuable clues as to future changes to GDP that are not explained by internal consumption and production.


3. Why Economic Calendar is needed for traders?


Using an economic calendar allows you to know about future global events, news, announcements and follow trends. You can make money when you have advanced information and you can predict the direction a currency pair is going. The more you know and understand about the factors affecting the Forex market, the better chance you have of gaining the profit.


To be highly effective in Forex trading, you have to consider all economic and political factors across your currency pairs and go even further by keeping the bigger picture in mind. Indicators may arise from economies whose currency you’re not trading in but may affect those that you are trading. The economic calendar provides the trader with all important aspects.

While the effect of economic indicators on prices can be unpredictable, it is still a significant value having an idea of how you might generally expect the market to react, so that if it contradicts this, you can examine the reasons why it might have done so and make right trading decisions.

What is Geopolitics?

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What is Geopolitics?

Geopolitics is a type of human geography, this helps us to understand and look at politics from a different perspective.  Geopolitics is the study of politics that uses the three main geographical concepts that are seen in the National Curriculum:

+ Space
+ Place
+ Scale

Studying the interactions between people and places and the spatial organisation of human activity, with the three previous concepts and politics allows us to study politics geographically. 

Definition: It is difficult to define geopolitics in one sentence, although it can be split into four different definitions which combine to give the complete picture of geopolitics:

1. Throughout time, states and countries have always competed for territory and/or resources. The 'War on Terror' being an example of this, producing alliances between states and the deployment of troops in Afghanistan and Irag. 

2. Geopoltics is a way of 'seeing' the world', some geopolitical theoreticians believe that the study of geopolitics makes the world a transparent space, that is 'seeable' and 'knowledgeable'. 

3. The identification of 'situated knowledge' that is, geopolitics is not simply about country versus country. Apart from war, geopolitics can also include: racial conflicts in cities, restrictions on the movement of women and the diplomacy over greenhouse gas emissions. 

4. Critical geopolitics, identifying the power relationships within geopolitical statements. Critical geopolitics aims to encourage anti-geopolitics. 
(Flint, 2012) 


These are some key-words that may help you when reading through geopolitical literature (most taken from Flint, 2012). 

Geopolitical Codes: The manner in which a country orientates itself towards the world. Based around 5 'calculations:
- Allies and Enemies
-Current and potential enemies
- maintaining and nurturing allies.
- Countering current enemies and emerging threats.
- How to justify to the global community and public, the 4 calculations above.
Boundary: The dividing line between political entities
Frontier: the process of territorial in what are deemed, used falsely, as 'empty areas'
Globilisation: The global, social, economic connections that shape our world
Meta-geography: Spatial  structures through which people order their knowledge of the world (Flint, 2012, Beaverstock et al 2006).
State: 50 seperate entities that comprise a country, although in geopolitics, countries are called states. 


An Example of a geopolitical model: Modelskis 'Model of World leadership'

This model is historically based, founded upon his interest for naval history.  In this model, power is based around the ability of 'global reach', to influence countries across the world. Modelski represents the worlds most powerful country as a 'leader', implying that it has willing followers instead of being dominant or forceful. A world leader is one that offers the world an innovation, such as institutions  and ideas that provide geopolitical order and security. 

The model itself is dynamic, it shows the rise and fall of the world leader over centuries, with the title passing over from one country to another over time.  Each cycle lasts approximately 100 years and is divided into 4 stages:

1. Phases of global war: the ability or right to be world leader is decided through a period of global war.

2. Phase of world power: Once victory has been achieved the geopolitical project of the world leader is renacted.

 3. Phase of deligitimation: The imposed 'order' is welcomed, although over time dissent grows.

 4. Phase of deconcentration: The challenges beginning in the previous phase become stronger, the leader uses its own materials and capacity to overall make it vulnerable to attack. 


This model has been used to look at several situations. Looking at World War II and the Cold War, several comparisons can be made to Modelski's model. Another model similar to Modelskis is Wallersteins world system theory (1979/1984).

Economic Indicators

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While economic indicators are often seen as a fundamental currency trading tool, they're often just as important for trading commodities or stock index CFDs.


In general, Economic Indicators are major data releases from world governments that gauge the current status of the economy of a country, monetary union, or a particular sector They're published regularly at a certain time of month by governmental agencies.

These statistics help Forex and Commodity traders monitor the economy's pulse.

Immediately after the release of the highest impact economic data reports, the interbank market will quickly digest the information and, as a result, prices will often jump and increase in unusual volatility for up to 15 minutes.

This is a natural part of the market reaction to new information.


It's important for beginner traders to understand that the market is not a mechanical tool that does what it's "supposed" to do. The market is an aggregate of human decisions (primarily those of traders at large financial institutions) taking positions based on their opinions, driven by the information they have at hand.

No human - not even a trader at a "too big to fail" desk - is perfect, let alone the opinions of the masses.

The key to profitable trading is not to follow the masses' expectations but to find the opportunities to capitalise on opinions that oppose the masses.


Some of the most important economic indicators include:



Interest Rates Announcement

Interest rates play the most important role in a nation or monetary union's economy, resulting in strong moves on the prices of their currencies.

Interest rates are a central part of modern capitalism, primarily because every economy relies heavily on startups as well as established corporations who borrow money in order to pay back into the country's economy (either through salaries to employees or payments to suppliers who will then pay their employees.)

If interest rates are low, then "money is cheap." (In other words, it costs less to borrow.) Conversely, when interest rates are high, "money is expensive."


This is the nature of the economic cycle


Central Banks (such as the ECB in the European Union or the Federal Reserve in the United States) control when money is cheap or expensive by raising and dropping interest rates. While this may appear to be a sense of power, it's actually a reaction:


When money is cheap, companies borrow to spend. People are happy. New jobs are created. People who get those jobs spend on other companies. Those other companies spend and/or borrow to spend. Repeat.

As this continues, Central Banks gradually raise interest rates so that the region's finite resources can support all the borrowed capital. Eventually, the interest rates are high enough to curb further companies from borrowing and spending (money is too expensive.)


As corporate profits fall, the market drops. The world reacts as if it's never happened before (forgetting that this happens at least once every couple of decades, but that's too long of an attention span to expect of humans, it appears.)


As lost jobs and fallen corporate profits drop the world markets to a new short-term low, Central Banks gradually drop interest rates to encourage new borrowing.


Eventually, the Central Bank's interest rate drops fall in love with the right level of economic depression and the country's fall into oblivion halts.


Then... money is cheap again, so companies borrow to spend. People are happy again.

We then repeat the whole cycle... complete with sensationalist media coverage and masses of uneducated traders acting like it's all happening for the first time... yet again.


Despite exponential advancements in technology, our societies have yet to find a more stable way to manage a capitalist economy.


The most important factor is that Central Banks set interest rates based on their expectations: If they believe that money is too cheap, they will raise rates. If they believe money is too expensive, they will lower rates.

The effect of interest rates on the markets is best understood with one simple question: "If I hold this (any financial asset), how much will it pay me?"


For the purposes of understanding this concept, forget the fact that this asset has a price movement. Think only in terms of regular payments (interest, dividends, etc.)


If the current benchmark rate set by the Central Bank is 0.5% per year, that means a large institution can buy government treasury bills (basically government issued "IOU's") that pay roughly 0.5% per year.


With that in consideration, it sure looks like a great deal to hold onto a stock (or stock index) that pays a 5% per year dividend or a currency pair that pays a positive swap rate (which is the difference between the two currencies' interest rates, aka. that fee you see on your trading platform when you hold it through "rollover" time that can be a positive or negative number).


Why? That 5% per year is a lot higher than the "risk free" government treasury's 0.5%. A whole 4.5% more.

(To put this into perspective, 4.5% of a "small" hedge fund that has $50 Million US Dollars under management is a lot of money to most people.)


If a currency pair or stock index has that kind of differential from the treasury rate, it'll likely go up in price in the long term due to this very demand.


Likewise, if the current Central Bank rate is set at 15%, suddenly that 5% yield on the index or currency pair isn't such a great deal.


Under this environment, it's a lot less risky to hold a "risk free" government treasury to make 15% than to hold onto a volatile asset that pays 5%. It doesn't take a genius to see why it's no longer bullish for the hypothetical instrument.

Understanding the rationale behind the influence of interest rates on all global markets is a basic concept that all traders should learn. It's also vital to understand prior to learning the logic behind the other economic indicators.

Gross Domestic Product (GDP)

The GDP is the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country.

A strong economy, as shown in the Interest Rate Announcement tutorial above, leads to rising interest rates. So if the UK's economy is strong and the American economy is weak, the GBP/USD can be considered bullish (within this context, don't trade based on one factor in reality.)


Why? In theory, the interest rates on the GBP will likely rise while the rates on the USD will likely fall. This nets out to a positive net interest rate differential on the GBP/USD (the swap rate which is charged on rollover approximates the interest rate of the base currency on the left minus the interest rate on the quote currency on the right.)


However, the GDP figure itself is often considered a lagging indicator as institutional traders will have already priced in the information long before its announcement. Instead, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report.


Of course, sometimes there are significant revisions after these reports (advance report shows a high number, actual GDP comes out lower, and the currency will drop drastically.) This is similar in effect to an expected earnings announcement coming out lower than expected on a stock.

Consumer Price Index

The Consumer Price Index (CPI) is an indicator of inflation. It represents changes in the level of retail prices for the basic consumer basket.

Since inflation is effectively the fall of buying power of a currency within its country's borders, the CPI tends to impact the currency markets heavily.

If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, as illustrated in the interest rates tutorial above, leads to an increase in the attractiveness of a currency.

Employment Indicators

Employment indicators reflect the overall health of an economy or business cycle.

In order to understand how an economy is functioning, it is important to know how many jobs are being created or taken away, what percentage of the work force is actively working, and how many new people are claiming unemployment.

For inflation measurement, it is also important to monitor the speed at which wages are growing.

Employment Indicators, especially the Non-Farm Payrolls report from the United States, are released on a monthly basis and are among the strongest market-moving announcements in the FX markets.

The Non-Farm Payroll report causes some of the strongest short-term volatility every month within the 5 to 15 minutes before and after its announcement as the market digests its data vs the expected data.

Retail Sales

The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores.

The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy.

Balance of Payments

The Balance of Payments represents the ratio between the amount of payments received from abroad and the amount of payments going abroad.

In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for growth of the national currency.

Government Fiscal and Monetary policy

Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets and the supply of credit, money, and other financial assets.


Understanding economic indicators is a vital part of every Forex trader's tool box.

It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy.

Factors or Events that Affect the Stock Market

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Stock markets can be volatile, and the reasons particular stocks rise and fall can be complex. More often than not, stock prices are affected by a number of factors and events, some of which influence stock prices directly and others that do so indirectly. 

Internal Developments

Developments that can occur within companies will affect the price of its stock, including mergers and acquisitions, earnings reports, the suspension of dividends, the development or approval of a new innovative product, the hiring or firing of company executives and allegations of fraud or negligence. Stock price movements will be most drastic when these internal developments are unexpected.

World Events

Company stock prices and the stock market in general can be affected by world events such as war and civil unrest, natural disasters and terrorism. These influences can be direct and indirect, and they often occur in chain reactions. The social uncertainty and fear generated by the terrorist attacks on Sept. 11, 2001, affected markets directly as they caused many investors in the United States to trade less and to focus on stocks and bonds with less risk. An example of an indirect influence on markets is the announcement of a new military venture by a country in response to the outbreak of civil unrest or conflict abroad. This announcement likely would cause the price of the stocks of military equipment and weapons manufacturers to rise due to an expected increase in defense contracts, which in turn can raise the value of stocks for companies that supply military equipment parts and technology. It likely would raise the demand for, and price of, natural resources used to make these parts, which would raise the price of stocks representing particular mining and natural resource processing companies.

Inflation and Interest Rates

One of the more predictable influences of the stock market are periodic adjustments of interest rates by the U.S. Federal Reserve to combat inflation. When interest rates are raised, many investors sell or trade their higher risk stocks for government-backed securities such as bonds to take advantage of the higher interest rates they yield and to ensure that their investments are protected.

Exchange Rates

Foreign currency rates have a direct impact on the price and value of stocks in foreign countries, and changes in exchange rates will increase or decrease the cost of doing business in a country, which will affect the price of stocks of companies doing business abroad. While long-term movements in exchange rates are affected by fundamental market forces of supply and demand and purchase price parity, short-term movements are driven by news, events and futures trading and are difficult to predict.


Stocks and the stock market also can be affected by hype about a company or the release of new products or services. Many people and organizations have an interest in promoting particular stocks and industries to increase the value of their own shares and profits, and positive financial reports and stock market newsletters, Internet blogs, press releases and news reports can build high expectations for the performance of companies, which will raise the price of their stocks. This can occur even when the hype has no foundation in truth; investors are wise to consider peopleâ??s reaction to hype rather than analyze the merits of the positive promotion.rnrnHype (and its opposite) can be advanced by respected stock market authorities such as Warren Buffet, Peter Lynch and hedge fund investor and financial speculator George Soros; such is the respect given to these individualsâ?? skill and past success that they sometimes can affect the movement of markets by simply suggesting that developments might occur.


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Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. In general, it's based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'.

In the Forex markets, fundamentals are driven mainly by economic data from the country or monetary union related to the currencies involved.


For example, a company's shares may arguably have an intrinsic value based on its current or expected earnings as a corporation. The US Dollar, however, has had no intrinsic value since the end of the Gold standard in the 1970's. (The same can be said for all fiat currencies in the world today.)


Rather, since every currency pair involves two individual currencies, the main influences of a currency pair's price is simply the relation between the interbank market's expectations toward each of its individual currencies' economic output as well as the country or monetary union's expected central bank policies (especially interest rate decisions).



Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. In general, it's based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'.

In the Forex markets, fundamentals are driven mainly by economic data from the country or monetary union related to the currencies involved.


For example, a company's shares may arguably have an intrinsic value based on its current or expected earnings as a corporation. The US Dollar, however, has had no intrinsic value since the end of the Gold standard in the 1970's. (The same can be said for all fiat currencies in the world today.)


Rather, since every currency pair involves two individual currencies, the main influences of a currency pair's price is simply the relation between the interbank market's expectations toward each of its individual currencies' economic output as well as the country or monetary union's expected central bank policies (especially interest rate decisions).

It's important for currency traders to become familiar with the most important economic data announcements and central bank decisions related to the currency pair:


  • Interest Rates Announcement

  • Gross Domestic Product (GDP)

  • Consumer Price Index (Inflation) and Spending Indicators

  • Employment Indicators

  • Retail Trade and Consumer Confidence

  • Balance of Trade Surplus or Deficit

  • Government Fiscal and Monetary Policy


The next generation xStation platform includes an integrated Economic Calendar in the trading software. There's no longer a need to check for these announcements on web sites when it's only a click away while you're trading.

It's also important to keep in mind that the market is not the answer. The market is the expectation.

Like the old adage by stock traders, "Buy on Rumour, Sell on News," market prices are not about a present day reality. They're about the market's expectation of the future.


Example: The EUR/USD has been falling precipitously as the European Union suffers from a horrible state of affairs, affirmed by news reports worldwide... but you firmly believe that the European Union, for some reason due to your own in-depth analysis, will miraculously turn things around in the near future.


Do you:

a. Buy EUR/USD


b. Short Sell EUR/USD


A typical losing trader would choose "b" and Short Sell the EUR/USD to follow the current trend because he or she is influenced by the media's sensationalist reports of the present day's doomed EU situation which has already been priced into the market. (When something is widely reported in the news, the professionals in the market already know about it, let alone your taxi driver and your grandmother.)


However, in this hypothetical scenario, you are a professional trader who has discovered convincing evidence that the EU has a trick up its sleeve to turn things around.


In such a scenario, your correct trade would be "a" - buy (go long on) EUR/USD because you expect it to go up in the future due to improved economics.


If, in this hypothetical reality, you were correct in your view, then the EUR/USD will begin to rise as other market participants become aware of the expectation of improvements in the EU.


This example is not intended to imply that the European Union will, in fact, fix all of its problems. The purpose of this example is to illustrate the importance of trading your own expectation (especially if you have reason to believe your expectation goes against "commonly accepted" beliefs) rather than following the emotional way.



Fundamental Analysis Benefits


While beginners tend to look at "Fundamental Analysis vs Technical Analysis" as opposing forces, professional traders understand that the two are intertwined in a single reality.


Ignoring one or the other is akin to a doctor who only believes in viruses but refuses to believe in the existence of infections. Would you want to be his patient?


Your trading account would prefer that you understand the importance of using fundamental analysis as part of the picture... because the interbank market trades on it.

Identifying Short-Term Trading Opportunities


Whether you're a day trader or a scalper, it makes sense to look at the short-term picture as well as the bigger picture.


If, for instance, you hold a long-term view that the US Dollar is doomed to death-by-inflation, don't let this opinion cloud your judgement. Continue to keep an open mind and look for short-term trading opportunities, even if they might contradict your long-term opinions.


After all, every trader who followed the herd and believed in the US Dollar's doom suffered horrendous losses in 2014-2015. Being right (in the long term, especially) means nothing in the short-term.


Making money in the meantime will support your lifestyle. Losing money from stubborn opinions will only add losers to the market.


Always analyse the market with as much objectivity as you can manage. At the very least, you may discover some opportunities missed by the crowd. That's when the market pays you.