forex - analyst.ue.wroc.pl · firstly, you usually play with high leverage, so it increases risk...

FOREX

WhatisForex?(ForeignExchange)•Forexisacurrencymarketinwhichyoucantradecurrenciesalmostfromallovertheworld.Itisdecentralised,sotransactionsalenotmadeinoneplacelikewecanobserveitonstockexchangemarket;

•Banks,individualinvestors,hedgefunds,investmentfundsmeetinthatplace;

• Itisthebiggestmarkettakingintoconsiderationmediumturnover(5,3trillionUSDollarsaday);

•Themostliquidmarket- itmeansthatyoucanbuyorsellanimmenseamountofcurrenciesinad-hoc;

• Tradingispossible24haday.Tradingsessionstartsat10pm.onSunday(10am.onMondayinWellington– startinghourofregulartradingonNewZealandStockExchangeor8am.onMondayinSydney- hourofopeningmarketinSydneyinAustralia)andendson10pm.onFriday(endinghouroftradingsessiononNYSE- NewYorkStockexchange);

•Thehighestturnoccurseverydaybetween9Am.And11Am.,14Pm.And15Pm..

StructureofForexmarket

Source:Jakubczyc,Forex,2012

StructureSmallindividualinvestorsusebroker’splatformtotrade.Itisconnectedwithrisks,butwewillmentionaboutthatlittlefurther.ItsisusuallyMetaTrader 4/5.

Forexfinancialinstrumentsandtransactions.•Spottransaction:

•Simplespottransactions(betweenbiginstitutionsusually)

•CFD(contractfordifference- it’skindofspottransaction);

•Contractswithdeliveryterm:

•SWAP;

•CIRS(CrossCurrencyInterestRateSwap);

•Options.

CFD- ContractForDifferencevol.1• ItisthemostpopularfinancialinstrumentonForexmarketforindividuals;•Onmarketforsmallindividualsyoucantakealongorshortpositionasitisoneverymarket;•Long(BUY)– youspeculatethatpricewillbehigherinthefuture;•Short(SELL)- youspeculatethatpricewillbelowerinthefuture;

•Aseveryfinancialinstrumentsthatderivativehasspread;

•SpreaddeterminesdifferencebetweenBID andASK prices;

•Whenyoutakealongposition,youstarttransactionwithASKandclosewithBID,andoppositetothatwhenyousellyouopenwithBIDandclosewithASK.

CFD-ContractForDifferencevol.2Howdoesbuyorsellpositionsettling(technicalissues)?

• BUYyouopenyourpositionsbybuyingaccordingtofirstquoteandclosebysellingaccordingtoanotherquote

•SELL youopenyourpositionbysellingaccordingtofirstquoteandclosebybuyingaccordingtoanotherquote.

CFD- ContractForDifferencevol.3Whenyoutradeyoushouldknowalsopossibilitiesofmakingandendingtransactions.

StopLoss- pricewithwhichtransactionswillbeclosedwhenpricewillgooppositetoyourexpectations(Short/Long)

Takeprofit- pricewithwhichtransactionswillbeclosed(buypricebreaklevelfromshorterlevel,

sellfromhigher);

Buystop- buyexecutionwhenpricewillbreakthelevelfromshorterlevel;

Sellstop- sellexecutionwhenpricewillbreakthelevelfromhigherlevel;

Buylimit- buyexecution whenpricewillbreakthelevelfromhigherlevel;

Selllimit- sellexecutionwhenpricewillbreakthelevelfromshorterlevel.

CFD- ContractForDifferencevol.4CFDusuallyisconnectedwithleverage.• Leveragesimplymeansthatyouborrowmoneytomaketransaction.Yourlossesandprofitsareconnectedwithamountofborrowedmoney (Maximalknownleverageknownformeis888:1butinPolanditislimitedto100:1byPolishFinancialSupervisionAuthority- Komisja Nadzoru Finansowego)andbignessoftransactionmeasuredinlots.(1lotequals100000unitsofbasecurrency).•Forexampleyouarebuying1lotofEUR/USDwithquote1,02000itmeansthatyouarebuying100000€for102000$.•Requireddeposit- minimumamountofmoneythatgivesyouapossibilityofmakingtransaction.•Yourleverageis100:1.YourdepositisbeingREGISTREDinPLN.•USD/PLNquote3.0000(fixedquotesetbybroker)•Thus,youneed(102000$*3USD/PLN)/100=3060PLNtoopentransaction.It’srequiredminimuminthiscase.•Yourprofitwillbecalculatedfromthatformula: {[ (futurequotingEUR/USDminuscurrentquotingEUR/USD)dividedbyminimalstep(0,00001)]multipliedby(valueoftransaction(100000unitsinthiscase)*minimalstep(0,00001)}multipliedbyquotingofUSD/PLNin(fixed).

CluesRememberthatthistypeoftransactionsareveryrisky:

Firstly,youusuallyplaywithhighleverage,soitincreasesriskbecauseyoumaketransactionsfornotyoursownmoney.

Secondly,duringtradingwithMarketMakers,theycanchangealittlebitquotestomakeasituationthatyouwilllossmoneybecauseofchangerealquote.BeforechoosingForexbrokerreadopinionaboutthattypeofinstitution.

Third,Don’ttradeduringappearingveryimportantpoliticalandalsoeconomydata.Inspiteof,bigliquiditysuddenlyitcandisappearbecauseofdecreasingpriceoforders(betweentwopricestherearenotanytransactions).

Technical&Fundamental Analysis

Technicalanalysisisatradingtoolemployedtoevaluatesecuritiesandattempttoforecasttheirfuturemovementbyanalyzingstatisticsgatheredfromtradingactivity,suchaspricemovementandvolume.

Technicalanalystsfocusonchartsofpricemovementandvariousanalyticaltoolstoevaluateasecurity'sstrengthorweaknessandforecastfuturepricechanges.

Fundamentalanalysisisamethodofevaluatingasecurityinanattempttomeasureitsintrinsicvalue,byexaminingrelatedeconomic,financialandotherqualitativeandquantitativefactors.

Fundamentalanalystsstudyanythingthatcanaffectthesecurity'svalue,includingmacroeconomicfactorssuchastheoveralleconomyandindustryconditions,andmicroeconomicfactorssuchasfinancialconditionsandcompanymanagement.

TheUnderlyingAssumptionsofTechnicalAnalysisTheassumptionthatpricediscountseverythingessentiallymeansthemarketpriceofasecurityatanygivenpointintimeaccuratelyreflectsallavailableinformation,andthereforerepresentsthetruefairvalueofthesecurity.Thisassumptionisbasedontheideathemarketpricealwaysreflectsthesumtotalknowledgeofallmarketparticipants.

Thesecondbasicassumptionunderlyingtechnicalanalysis,thenotionthatpricechangesarenotrandom,leadstothebeliefoftechnicalanalyststhatmarkettrends,bothshorttermandlongterm,canbeidentified,enablingmarkettraderstoprofitfrominvestingaccordingtotheexistingtrend.

HowTechnicalAnalysisIsUsedTechnicalanalysisisusedtoattempttoforecastthepricemovementofvirtuallyanytradableinstrumentthatisgenerallysubjecttoforcesofsupplyanddemand,includingstocks,bonds,futuresandcurrencypairs.

Itismostcommonlyappliedtopricechanges,butsomeanalystsmayadditionallytracknumbersotherthanjustprice,suchastradingvolumeoropeninterestfigures.

TechnicalindicatorsTechnicalindicatorshavebeendevelopedbyanalystsinattemptstoaccuratelyforecastfuturepricemovements.Someindicatorsarefocusedprimarilyonidentifyingthecurrentmarkettrend,includingsupportandresistanceareas,whileothersarefocusedondeterminingthestrengthofatrendandthelikelihoodofitscontinuation.Commonlyusedtechnicalindicatorsincludetrendlines,movingaverages andmomentumindicatorssuchasthemovingaverageconvergencedivergence (MACD)indicator.

Stochastic oscillatorThestochasticoscillatorisamomentumindicatorcomparingtheclosingpriceofasecuritytotherangeofitspricesoveracertainperiodoftime.

Where:C =themostrecentclosingpriceL14 =thelowofthe14previoustradingsessionsH14 =thehighestpricetradedduringthesame14-dayperiod%K =thecurrentmarketrateforthecurrencypair%D=3-periodmovingaverageof%K

%K= $%%('()$*)(,$*()$*) %𝐷 =

%𝐾$ +%𝐾1 +%𝐾23

Overbought vsOversoldLaneexpressedtheimportantrolethestochasticoscillatorcanplayinidentifyingoverboughtandoversoldlevels,becauseitisrangebound.Thisrange– from0to100– willremainconstant,nomatterhowquicklyorslowlyasecurityadvancesordeclines.

Consideringthemosttraditionalsettingsfortheoscillator,20istypicallyconsideredtheoversoldthresholdand80isconsideredtheoverboughtthreshold.However,thelevelsareadjustabletofitsecuritycharacteristicsandanalyticalneeds.

Resistance andsupport levels•Support levelandresistance level-areas ofprice at which the same numberofbuyers (demand)meet thesamenumberofsellers (supply).They cause thecorrection or may reverse atrend.

•Consolidation- Amomentwhen growing price meets resistance or falling price meets support.

Support• Support levelstendtostoppricefromfallingbelowaspecificpoint.

•Because ofalow price Demand

•Because ofalow price Supply

•Support is thepointthat loss stops

Resistance•Resistance levelsactlikeapriceceilingthatpricecannotbreakabove.

•Because theprice is highDemand

•Because theprice is highsupply

•Resistance is apointthat growths stops

Howtodraw resistance/support•Todraw aresistance or support wehave totake interval untill to8months andit’s better tocompare day-to-day charts than forexample hour-to-hour.

•Long-term resistance/support

are more important than short-term ones

Howtouse supportlevels andresistancelevels inpractice?

Supportlevels Resistance levels-Agood placetosetastoploss -Goodplacetosell for„buy pit,sell peak”investors-Crossing support is usually asignal tosell -Crossing resistance is usually asignal tobuy

-Agood placetosetstopbuy- it’s akind ofstoploss that isactivated when theprice exceed existing resistance

WHATISTREND,IMPULS,CORRECTION?WHATISTREND,IMPULS,CORRECTION?

TREND:thedirectionwhichisfollowedbytheprice

IMPULS:growthoftheprice(inuptrend)*

CORRECTION:falloftheprice(inuptrend)*

*indowntrenditisconversely

WHATISATRENDLINE?

- animportanttoolintechnicalanalysis- astraightlinethatconnectstwoormorepricepoints (historicallylinked)- actasalineofsupportorresistance

Uptrend andDowntrend

uptrend downtrend- hasapositive slope andisbyconnectingtwoormore low points- Thesecondlowmustbehigherthanthefirst- act assupport

- hasanegativeslope andisformedbyconnectingtwoormore high points- Thesecondhighmustbelowerthanthefirst

Channels

welinkednotonlylowsbutalsohighs

1) - wedrawparallelline tothetradeLine

- wereceivedachannel,whichisgoingtobepriceoutlookinthistrade =weexpectthatthispricewillmoveinthistrade

2)-weconnectedtwosuccessivelows/high (thesamelikedrawingtradeLine)

-wereceivedthetruecorrelation betweenhighs

-inthisexamplewegotdownwardchannelandthepriceisrecedingfromtheUpperBand=ACCELERATIONOFTHETREND

- ifweareabletogetthelasttwohighsinthemomentwhichispresentedonthechartwereceiveacceleratedtradeline

SLOWDOWN

- whensuccessivelowsandhigharestandingcloserandcloser (biggerdemandandsupply),tradelines,whicharelinkingthelasttwolowsandhighsaregoingtocross eachother

- wedrawaGreenLine(tradeline) andweseethathighsaregoinglowerandlower=DESCENDINGTRIANGLE

- thankstothegreenline,weseethatitcausessuccessivefalls.Inotherwords,wefoundawaytodesignatecorrection!

CONCLUSION

- tradelinesshowscorrelationbetweensupplyanddemand- remembertochoosehighsandlowsfromoneperiodoftime- trendlinescanoffergreatinsight,butifusedimproperly,theycanalsoproducefalsesignals- donotpaytoomuchattentiontodrawingthelines,becausethemarketisnotsoprecise

Marketdepth

Buystop

Buylimit

Selllimit

Sellstop

Market

MarketDepthIfyouuseMarketdepthtools(accessibleandpayableonfuturesmarketratherthanonCFD)

Youcancheckhowhighisliquidityonpricelevels.Itgivesyouapossibilityofcheckinghow”hard”supportorresistancewillbeprotected.Unfortunately,wecan’seebuystopsorsellstopsbecausewewouldseehowmanypeoplewanttobuyorsellinthatprices.Underthesecircumstancestradingdoesn’tmakesense(wewouldknowwhichpricewilloccurwhenbuystops,sellstopswillbeexecuted)

Demandandsupply

Demandandsupplyzones

Demandandsupplyzones

Demandandsupplyzones

Demandandsupplyzones

Demandandsupplyzones

Demandandsupplyzones