Trading Setup


Fundamental Analysis Considerations

Currency exchange rates can be floating, in which case they change continually based on a multitude of factors, or they can be pegged (or fixed) to another currency, in which case they still float, but they move in tandem with the currency to which they are pegged. Fundamental Analysis involves analyzing the economic, social, and political forces that may affect the supply and demand of the asset we are trading. Our Trading Plan involves currency pairs, thus we are interested in the factors affecting currencies.
We are interested in the factors causing:
1. Volatile market conditions    2. Appreciation/Depreciation of the currency to high degrees causing trends.    3. The degree of severity and impact of a factor.
High demand for a currency or a shortage in its supply will cause an increase in price and vise versa.

> Monetary Policy and Interest Rates:
An expansionary policy aimed at increasing economic growth and expanding economic activity. The monetary authority often lowers the interest rates through various measures, businesses and individuals can secure loans on convenient terms, financial and capital assets in the country tend to become less appealing > demand for currency lower> exchange rate to fall.
By implementing a restrictive policy, the central bank increases real interest rates > higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates > demand for currency higher >  attract foreign capital and cause the exchange rate to rise.
In addition to direct influence over the money supply and bank lending environment, central banks have a powerful tool in their ability to shape market expectations by their public announcements about the central bank’s own future policies. Central bank statements and policy announcements move markets, and investors who guess right about what the central banks will do can profit handsomely.

> Central Bank Monetary Policy Report (or Outlook Report), Rate Statement, Overnight Rate
The Monetary Policy Report provides valuable insight into the bank’s view of economic conditions and inflation, factors based on which the monetary policy will take shape, and influencers of interest rate decisions.
The Central Bank’s Governing Council members come to a consensus on where to set the rate. The Overnight Rate is the interest rate at which major financial institutions borrow and lend overnight funds between themselves. The Rate Statement contains the outcome of their decision on interest rates and commentary about the economic conditions that influenced their decision.
ECB: The 6 members of the ECB Executive Board and 15 of the 19 governors of the Euro area central banks vote on where to set the rate, via rotation. Also called Main Refinancing Rate, , Refi Rate, Repo Rate, Minimum Bid Rate
Released quarterly.
Source: Central Banks
> Raw Interest rate decisions from Central Banks example. These data are publicly available from various sources. 

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> FOMC Meeting Minutes
It’s a detailed record of the FOMC’s most recent meeting, providing in-depth insights into the economic and financial conditions that influenced their vote on where to set interest rates.
The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System. The committee within the Federal Reserve System is charged under United States law with overseeing the nation’s open market operations, makes key decisions about interest rates and the growth of the United States money supply.
FOMC minutes can be viewed on the Board’s website at http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
Usual Source: Federal Reserve

> Crude Oil Inventories 
Change in the number of barrels of crude oil held in inventory by US commercial firms. There is a weekly release of these data. When oil inventories go up, traders respond by selling their positions since it seems demand has fallen, causing a price retreat. When oil inventories decline, traders see this as a signal that demand is increasing, and they may buy oil, bidding up prices.
Crude oil is quoted in U.S. dollars (USD) so pricing changes have an immediate impact on related crosses. The USD benefits from crude oil’s price decline since the energy sector is a significant contributor to U.S. GDP. In addition, fundamentals suggest that a fall in oil prices should be accompanied by a real depreciation of oil exporters.
Source: U.S. Energy Information Administration (EIA);

> Trade Balance
The difference in value between imported and exported goods and services during the reported month. Export demand and currency demand are directly linked since foreigners must buy the domestic currency to pay for the nation’s exports. Export demand also impacts production and prices at domestic manufacturers.
A country that exports more goods and services than it imports has a trade surplus or a positive trade balance and it will have more demand for its currency.
Usual Source: Bureau of Economic Analysis

> PMIs (Purchasing Managers Index)
Purchasing managers’ index is an economic indicator derived from monthly surveys of private sector companies. It is an index of the prevailing direction of economic trends in the manufacturing and service sectors. Used for decision making such as production decisions, estimation of future demand, and so on. Investors can use the PMI to their advantage because it is a leading indicator of economic conditions. The survey involves hundreds of purchasing managers. It asks respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. 
Above 50.0 indicates industry expansion, below indicates contraction. 
Usual source: IHS Markit

> Core Retail Sales and Retail Sales
This is the change in the total value of sales at the retail level. Core Retail Sales excludes automobiles. These data are thought to be vital consumer spending data accounting of the overall economic activity.
They are released monthly.
Usual source: U.S. Census Bureau

> Employment Change – Non-Farm Employment Change (for the U.S. Bureau of Labor Statistics).
Change in the number of employed people during the previous month. (BLS excludes the farming industry).
The higher the number the better as more people find work. It is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity. Naturally, people would be more willing to spend if they were employed, and vice versa.
Also called Non-Farm Payrolls or NFP. Released monthly, usually on the first Friday after the month ends;
Usual source: National statistical office

> Unemployment Claims
The number of individuals who filed for unemployment insurance for the first time during the past week. The number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor-market conditions and, of course, is a major consideration for policy decisions. 
Released weekly
Usual source: Department of Labor

> Unemployment Rate
Percentage of the total workforce that is unemployed and actively seeking employment during the previous month. The number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor-market conditions. Also monetary policymakers take it heavily into consideration.
Released monthly, usually on the first Friday after the month ends;
Usual source: National statistical office

> Cross Domestic Product (GDP) inflation-adjusted – Real GDP
The change in the inflation-adjusted value of all goods and services produced by the economy. The GDP q/q data release, it’s reported in an annualized format (quarterly change x4). There are 3 versions of GDP released a month apart – Advance, Preliminary, and Final. The Advance release is the earliest and thus tends to have the most impact.
It is an important measure of an economy’s output and actual growth of production. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.
Usual source: National statistical office

> Consumer Price Index (CPI) – Core CPI/CPI Ex Food and Energy, Underlying CPI
The change in the price of goods and services purchased by consumers. It is a measure of inflation. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in the purchasing power of the money they are paid in the future. Central Banks counter inflation by raising interest rates. This makes borrowing more expensive and slows down economic growth. Raising interest rates increases the demand for domestic currency,  leading to appreciation and a stronger exchange rate.
Usual source: National statistical office

Technical Analysis Considerations

Technical Analysis is the study of the price movement in order to find some indication of future price direction. Technicians look for patterns in the historical time series of prices. While we are performing analysis timing and volume traded must be taken into consideration.
1. What weekday is it?   2. What time is it?   3. Is the volume traded high enough to move the market price?

> Patterns
-Support and resistance areas: can be identified on charts using trendlines and moving averages and other indicators such as the Fibonacci tools.
-Trends and trendlines: Price direction and speed, the current move of the market.
-Breakouts: If the breakout is legitimate, the price should move in the breakout direction. If it doesn’t, it’s a failed breakout.
-Reversals and Retracements: look for a trend change in the price. A retracement refers to the temporary reversal of an overarching trend.
-Continuation Patterns: Triangles, Wedge, Pennants, Rectangles.
-Channels, Double-Top, Double-Bottom. Head and Shoulder.

> Indicators:
Technical analysis traders rely on mathematical representations of market data, also known as indicators. Indicator signals help in identifying the ideal entry and exit points of positions. However, note that they also tend to become self-fulfilling.
Leading versus Lagging Indicators:
>Leading indicators attempt to predict where the price is headed. It gives a signal before the new trend or reversal occurs.
-Oscillators: interested if momentum begins to slow. A change in momentum is often a signal that the current trend is weakening.
-Relative Strength Index (RSI), Stochastic oscillator, Commodity Channel Index (CCI), Accelerator Oscillator.
Purpose: measure the speed and change of price movements (RSI), identify overbought or oversold conditions, identify large shifts in momentum since the price is thought to follow it (SO), identify cyclical trends, assess price trend direction and strength (CCI). Measures acceleration and deceleration of the current driving force> change its direction before the price (AO).
>Lagging indicators offer delayed feedback. Signal once the price movement has already passed or is in progress.
-Simple Moving Average (SMA) or (EMA), Moving Average Convergence Divergence – MACD, Average Directional Index – ADX, Bollinger Bands, Parabolic SAR, Alligator Indicator etc.
Purpose: identify trend direction, smooth out price data (MA), sell/buying signals on crossovers, a measure of price momentum (MACD), determine the strength of a trend (ADX), identifying when an asset is oversold or overbought (BB), identify potential reversals (PSAR), confirm ongoing trends and their primary direction (AI).

> Charts and Analysis: Leading indicators 
-Relative Strength Index (RSI), Stochastic oscillator, Commodity Channel Index (CCI), Accelerator Oscillator.

> Charts and Analysis: Lagging indicators 
-Simple Moving Average (SMA) or (EMA), Moving Average Convergence Divergence – MACD, Average Directional Index – ADX, Bollinger Bands, Parabolic SAR, Alligator Indicator etc.

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Risk Warning: CFDs are highly leveraged over-the-counter derivatives and due to their degree of complexity, trading CFDs carries a high level of risk and may not be suitable for all investors. Please be aware that this educational material does not constitute investment advice and does not take into account your investment objectives, financial situation or specific needs. This content is for educational purposes only and we accept no liability whatsoever for losses or damages resulting either directly or indirectly from the use of the information contained in this website. You take responsibility for your own trading decisions.

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