Browse >
Home / Archive: August 2009
Aug 12 2009
Fibonacci Retracement: Fibonacci Price Retracements: How do you identify a possible support level once the market pulls back from a high? Fibonacci price retracements are run from a prior low to high swing using the ratios 0.382, 0.50, 0.618 and 0.786 to identify possible support levels as the market pulls back from a high. First practice on your
forex demo account. Learn about
forex managed accounts.
Similarly you need to identify possible resistance levels when the price action bounces back from a low. Retracements are run from a prior high to low swing using these same ratios looking for resistance as the market bounces from a low. Most basic technical analysis software will run the Fibonacci retracement levels for you when you choose the swing you want to run them from.
Multiply the length of the swing (from low to high or high to low) by the retracement ratios and then subtract the result from the high if you are running low to high swings or add the results to the low if you are running high to low swings in case you want to understand how to calculate the Fibonacci price retracements yourself.
Fibonacci Price Extensions: Fibonacci price extensions are almost similar to the Fibonacci Price retracements in that they are run from the prior lows to highs or from prior highs to lows using only two data points to run the price relationship.
What is the difference between the Fibonacci Price Extensions and Fibonacci Price retracements? The difference between the Fibonacci price extensions and the Fibonacci price retracements is that we are running the relationship of a prior swing that are less than 100% or retracing the price move whereas with the extensions we are running the relationships of a prior swing that are extending beyond 100% of it.
Fibonacci Price extensions are run from prior low to high swings using the ratios 1.272 and 1.618 for potential support. They are run from prior high to low swings using the ratios 1.272 and 1.618 for potential resistance. These two techniques are named differently to indicate whether the price relationship is occurring within the prior swing or extending beyond it.
Fibonacci Price Projections: We use 1.00 and 1.618 ratios to run the projections. Fibonacci price projections are run from three data points and are comparing swings in the same direction. They are run from a prior low to high swing and then projected from another low for possible resistance or they are run from prior high to low swing and projected from another high for possible support.
Price clusters identify key support and resistance zones that can be considered to be trade setups. A price cluster is the coincidence of at least three Fibonacci relationships that come together within a relatively tight range.
Three is just the minimum number required to meet the definition. A price cluster can also develop with a coincidence of more than three price relationships. You may see five to ten price relationships come together in a relatively tight range. There are times when you see these large clusters develop not too far from the current market activity and they tend to act like a magnet for price.
Aug 12 2009
Economically, the United Kingdom is more free-market oriented than Europe, and it tends to share a more common set of views with the United States. At the same time, the United Kingdom can’t totally disassociate itself from Europe, given its history and its geography. The upshot is a currency that is affected by politics at home and on the two continents to which its destiny is so closely related.First practice on your
forex demo account. Learn about
forex managed accounts. Know
forex charts.
The British Pound GBP) is active against the dollar and the euro, offering good opportunities to trade both pairs (GBP/USD and USD/GBP). The GBP/USD is one of the most liquid currency pairs in the world. 6% of the all the global currency trading involves GBP as either the base or counter currency.
One of the reasons for GBP liquidity is the country’s highly developed capital markets. GBP is also in the four most traded major currency pairs EUR/USD, GBP/USD, USD/JPY and USD/CHF in the world.
Many foreign investors seeking to diversify their investment other than the United States send their funds to the UK. In order to create these investments, foreigners need to convert their local currency into GBP.
GBP was full of speculators one to two years back. GBP had one of the highest interest rates in the developed countries. Although Australia and New Zealand had still higher interest rates but their financial markets are not as well developed as UK.
Carry trading was popular with many hedge fund managers. It is a long term fundamental trading strategy. Carry traders would use GBP as the lending currency taking advantage of the high interest rates and would go long against USD, JPY and CHF.
However, the present global financial crisis has taken a heavy toll on the British Banks as well. There have been a number of high profile bankruptcies. UK Treasury had to intervene heavily in the market by pumping money into a number of failing banks in order to stabilize the financial markets.
Interest rates have been lowered. With the lowering of the interest rates, an exodus of carry traders took place that increased volatility in GBP. Interest rate differentials between UK gilts/US Treasuries is a barometer for GBP/USD flows and UK gilts/German Bunds is a barometer for EUR/GBP flow. These interest rate differentials are widely watched by the professional forex traders.
Indications on adopting the Euro usually put negative pressure on GBP while further opposition to Euro boosts GBP. The three month eurosterling futures reflect market expectations on UK interest rates three months into the future and can help predict fluctuations of GBP/USD.
GBP/USD tends to be more sensitive to the developments in the US economy. GBP/USD is more liquid than EUR/USD. However, EUR/GBP is the leading gauge for GBP strength. EUR/GBP is more pure fundamental pound trade as EU is the UK primary trading and investment partner. GBP has positive correlation with the energy prices.
Aug 12 2009
Despite the independence of the Bank of England (BOE), its monetary policy is dictated by the inflation target set by the Treasury Chancellor. BOE has the power to change interest rates to levels that it believes will allow it to meet this target.First practice on your
forex demo account. Learn about
forex managed accounts. Try Netpicks
forex signal service free.
The Monetary Policy Committee (MPC) meetings are closely followed by the professional forex traders all over the world as GBP is a highly popular currency among the traders. MPC meetings are held on a monthly basis and are closely followed by changes in the monetary policy including changes in the interest rates.
MPC issues statements after each meeting. A Quarterly Inflation Report detailing the MPC’s forecasts for the next two years of growth and inflation and its justification for its policy movements is also published.
Another publication, the Quarterly Bulletin also provides information for the past monetary policy movements and analysis of international economic scene and its impact on the British economy. All of these reports are highly informative for professional forex traders.
The main policy tools used by MPC and BOE are the Bank Repo Rate and the Open Market Operations. Bank repo rate is the key rate used in the monetary policy to achieve the Treasury’s target inflation rate.
Changes to the bank repo rate affect the commercial banks interest rates for its savers and borrowers. Bank repo rate is set by the BOE for its own operations in the market such as the short term lending activities.
An increase in the Bank Repo Rate means BOE wants to curb the inflation. A decrease would be to stimulate growth and expansion. Changes in the bank repo rate changes the commercial interest rates. In turn these commercial interest rates will affect spending and output in the economy and eventually the costs and prices.
The goal of the open market operations is to implement the changes in the bank repo rate while assuring adequate liquidity in the market and continued stability in the banking system.
Both the bank repo rate and the open market operations are used by the BOE to achieve its broad monetary policy objective. The three main objective of the BOE are to maintain the stability of the financial system, maintain the integrity and value of GBP and seeking to ensure the effectiveness of the UK financial services.
These monetary policy objectives are met primarily through the open market operations. In order to ensure liquidity in the economy, BOE daily conducts open market operations to buy or sell short term fixed income government instruments. BOE can conduct additional overnight operations as well if this is not sufficient to meet the liquidity needs. The United Kingdom is a pivotal nation because it bridges the economical, geographical, and ideological divide between the United States and Europe.
Because the United Kingdom is an oil producer, the GBP can be affected more directly by oil prices than other currencies. The relationship between oil and the pound is fading, however, because production in the United Kingdom’s North Sea oil fields is steadily decreasing.
Aug 12 2009
What is
Fibonacci Retracement?Did you see the movie, “The DaVinci Code”? You will find a scene in the movie where the characters talk about the Fibonacci number as part of a clue or code of some sort. First practice on your
forex demo account. Learn about
forex managed accounts.
The Fibonacci series starts with 0 and 1 and goes out to infinity with the next number in the series being derived by adding the prior two. What are Fibonacci numbers? The Fibonacci number series were made famous by an Italian Leonardo de Pisa. For example, 0+1=1, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13, 8+13=21, 13+21=34, 21+34=55, 34+55=89, 55+89=144, 89+144=233, 144+233=377.
So the Fibonacci series is like this; 0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610, 987…..to infinity. What is so fascinating about this series is that there is a constant found within the series as it progresses to infinity. This constant is known as the Golden Ratio, Golden Mean or Divine Proportion.
Take any two consecutive numbers in the series after the first few and you will find the Golden Mean by dividing the higher number with the lower number. For example, 89/55=1.618, 144/89=1.618, 233/144=1.618, 377/233=1.618, 610/377=1.618, 987/610=1.618 and so on. The inverse of 1.618 is 0.618.
The Golden Ratio can be found in many places in nature like flowers, shells, fossils etc. What is most important to forex traders is that applying these ratios can help identify key support and resistance zone in the market and therefore determine key trading opportunities or setups.
Thus the application of Fibonacci ratios can give you the edge as a forex trader if you use the Fibonacci trading technique properly. We have already discussed the Golden Ratios 1.618 and its inverse 0.618. The main ratios used in everyday analysis are 0.382, 0.50, 0.618, 0.786, 1.000, 1.272 and 1.618.
Since you are trying to look into a type of technical analysis, it is assumed that you have a computer, a market data source such as quote.com and a technical analysis program to manipulate that data. You should be proficient with the technical analysis program.
There are three types of Fibonacci price relationship namely, retracements, extensions and price projections (sometimes also called price objectives). We will look into each type of these relationships individually. The Fibonacci price analysis calculations can be done by hand as well but they are time consuming and tedious.
The definition of a support is the price area below the current market where you will look for a possible termination of the decline and where you would consider to becoming a buyer of whatever currency pair you are trading. Each of these Fibonacci price relationships will be setting up potential support or potential resistance in the chart that you are analyzing.
Similarly resistance is price area above the current market where you would look for the possible termination of a rally and consider being a buyer.
Aug 11 2009
How effective is automated trading?
Do you remember the TV series Lost in Space and in particular do you remember the name of the robot?
If you answered “Robby” you are totally incorrect. I will tell you why a little later.
During the 1950s many scientists and engineers were working on the development of robotics and there were a good many science programs and documentaries that lead us to believe that we would by the start of the 21st Century have most of our menial work carried out by robots.
In November, 1971, a company called Intel publicly introduced the world's first single chip microprocessor, the Intel 4004 (U.S. Patent #3,821,715), invented by Intel engineers Federico Faggin, Ted Hoff, and Stan Mazor.
This invention would be crucial to the development of robotics, and indeed today there are “robot controls” in more areas of our life than we may imagine. A good deal of our menial factory work is indeed carried out by robots – and they do an exceedingly good job.
Yet despite the gargantuan progress in the development of robotics, I still do not have a robot that can stand behind me as I consider placing a trade who will shrill out “WARNING, WARNING, WARNING” whilst waving it’s arms in the air. Nor is any of the housework undertaken by robot in my house - and there is a reason for this.
Even the most mundane task around the house requires an extraordinary amount of decision making. Just because we do not consider plugging in a vacuum cleaner to be difficult, it belies the amount of brain function required to achieve that “simple” exercise.
I have, over the years, experimented with many automated
forex trading systems and my personal experience has been very disappointing.
Since no one has yet managed to develop a robot that can carry out some very routine household tasks – should I be surprised to find that there doesn’t appear to be a robot that can make the very exacting and varied judgement calls required when
forex trading?
There are of course automated trading aids that can enter a trade when a set of pre-defined criteria is met, but that is a long haul from fully automated trading.
Traders often ask me about "set it and forget it" fully automated
forex systems as if such systems were a reality. Be assured that they do not yet exist. If they did, I for one would be using one to make money while I went out and played golf instead of sitting in front of my PC for hours each day.
If such systems actually existed there would be no "Trading Houses" employing analysts and traders, just rooms full of PCs automated to make money. How many banking institutions would have closed their investment departments and dismissed their staff in favour of such automation?
No, I am afraid that like the Robison family, automated trading is –at least for the foreseeable future - Lost in Space, and so for those of you who want to make money from trading on the foreign exchange I guess that like yours truly, you will need to keep on studying those charts.
Oh, and for those of you that are still wondering about the name of the robot........
The original television series NEVER gave the robot a name, so it is simply referred to as "Robot."
Dick Tufeld provided the voice and actor Bob May actually "worked" the Robot from inside.
Many people mistakenly call the robot "Robby" -- which is actually the name of the robot from the 1956 movie "Forbidden Planet."
Both robots, strangely enough, were designed by the same man -- Robert Kinoshita.
RSS FEED