We have finally decided to put all of our experience and knowledge into this Forex Pdf. This Forex Trading PDF is written in such a way that even complete beginners can understand it and learn from it. In other words, we have read tons of Forex books, opened and closed thousands of trades; have filtered out?

all the needed basics for beginner traders, and simplified them. So all you have to do is to take this FREE knowledge and start your online currency trading journey! TOP 3 Forex strategies that actually work? TOP 6 market movers, that create the most significant opportunities for profits? The best times for trading Currencies online? Learn how to read charts? Tips and warnings when using leverage? Learn whats the difference between Fundamental and Technical Analysis? Interest rates do the same thing - they change - but they definitely don't change as often.

Most traders don't spend their time focused on current interest rates because the market has already "priced" them into the currency price. What is more important is where interest rates are EXPECTED to go.

It's also important to know that interest rates tend to shift in line with monetary policy, or more specifically, with the end of monetary cycles. If rates have been going lower and lower over a period a time, it's almost inevitable that the opposite will happen. Rates will have to increase at some point.

And you can count on the speculators to try to figure out when that will happen and by how much. The market will tell them; it's the nature of the beast. A shift in expectations is a signal that a shift in speculation will start, gaining more momentum as the interest rate change nears. While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single report. This causes interest rates to change in a more drastic fashion or even in the opposite direction as originally anticipated.

So you better watch out! Rate Differentials Pick a pair, any pair. Many forex traders use a technique of comparing one currency's interest rate to another currency's interest rate as the starting point for deciding whether a currency may weaken or strengthen. The difference between the two interest rates, known as the "interest rate differential," is the key value to keep an eye on. This spread can help you identify shifts in currencies that might not be obvious. An interest rate differential that increases helps to reinforce the higher-yielding currency, while a narrowing differential is positive for the lower-yielding currency.

Instances where the interest rates of the two countries move in opposite directions often produce some of the market's largest swing. An interest rate increase in one currency combined with the interest rate decrease of the other currency is a perfect equation for sharp swings!

Nominal vs. Real When people talk about interest rates, they are either referring to the nominal interest rate or the real interest rate. What's the difference? The nominal interest rate doesn't always tell the entire story. The nominal interest rate is the rate of interest before adjustments for inflation. Markets, on the other hand, don't focus on this rate, but rather on the real interest rate. That's a huge difference so always remember to distinguish between the two.

Central banks and monetary policy go hand-in-hand, so you can't talk about one without talking about the other. While some of these mandates and goals are shared by the different central banks.

Central banks have their own unique set of goals brought on by their distinctive economies. Ultimately, monetary policy boils down to promoting and maintaining price stability and economic growth. To achieve their goals, central banks use monetary policy mainly to control the following:  the interest rates tied to the cost of money,  the rise in inflation,  the money supply,  reserve requirements over banks,  and discount window lending to commercial banks Types of Monetary Policy Monetary policy can be referred to in a couple different ways.

Contractionary or restrictive monetary policy takes place if it reduces the size of the money supply. It can also occur with the raising of interest rates.

The idea here is to slow economic growth with the high interest rates. Borrowing money becomes harder and more expensive, which reduces spending and investment by both consumers and businesses. Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate. The cost of borrowing money goes down in hopes that spending and investment will go up.

Accommodative monetary policy aims to create economic growth by lowering the interest rate, whereas tight monetary policy is set to reduce inflation or restrain economic growth by raising interest rates. Finally, neutral monetary policy intends to neither create growth nor fight inflation.

They might not come out and say it specifically, but their monetary policies all operate and focus on reaching this comfort zone. They know that some inflation is a good thing, but out-of-control inflation can remove the confidence people have in their economy, their job, and ultimately, their money. By having target inflation levels, central banks help market participants better understand how they the central bankers will deal with the current economic landscape.

Let's take a look at an example. Back in January of , inflation in the U. shot up to 3. Mervyn King, the governor of the BOE, followed up the report by reassuring people that temporary factors caused the sudden jump, and that the current inflation rate would fall in the near term with minimal action from the BOE.

Whether or not his statements turned out to be true is not the point here. We just want to show that the market is in a better place when it knows why the central bank does or doesn't do something in relation to its target interest rate. Simply put, traders like stability. Central banks like stability. Economies like stability. Knowing that inflation targets exist will help a trader to understand why a central bank does what it does. Round and Round with Policy Cycles For those of you that follow the U.

dollar and economy and that should be all of you! It was the craziest thing to come out of the Fed ever, and the financial world was in an uproar! Wait, you don't remember this happening? It was all over the media. Petroleum prices went through the roof and milk was priced like gold.

You must have been sleeping! Oh wait, we were just pulling your leg! We just wanted to make sure you were still awake. Monetary policy would never dramatically change like that. Most policy changes are made in small, incremental adjustments because the bigwigs at the central banks would have utter chaos on their hands if interest rates changed too radically.

Just the idea of something like happening would disrupt not only the individual trader, but the economy as a whole. That's why we normally see interest rate changes of.

Again, remember that central banks want price stability, not shock and awe. Part of this stability comes with the amount of time needed to make these interest rate changes happen. It can take several months to even several years.

Just like traders who collect and study data to make their next move, central bankers do a similar job, but they have to focus their decision-making with the entire economy in mind, not just a single trade. Interest rate hikes can be like stepping on the accelerator while interest rate cuts can be like hitting the brakes, but bear in mind that consumers and business react a little more slowly to these changes.

This lag time between the change in monetary policy and the actual effect on the economy can take one to two years. The Who's Who of the Central Bank We just learned that currency prices are affected a great deal by changes in a country's interest rates. We now know that interest rates are ultimately affected by a central bank's view on the economy and price stability, which influence monetary policy.

Central banks operate like most other businesses in that they have a leader, a president or a chairman. It's that individual's role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Steve Jobs or Michael Dell steps to the microphone, everyone listens. Using the Complex conjugate root theorem, the answer is yes! Yes, it's important to know what's coming down the road regarding potential monetary policy changes.

And lucky for you, central banks are getting better at communicating with the market. Whether you actually understand what they're saying, well that's a different story.

So the next time Ben Bernanke or Jean-Claude Trichet are giving speeches, keep your ears open. Better yet, use the trusty BabyPips. com Economic Calendar to prepare yourself before the actual speech. While the central bank Chairman isn't the only one making monetary policy decisions for a country or economy, what he or she has to say is only not ignored, but revered like the gospel. Okay, maybe that was a bit dramatic, but you get the point.

Not all central bank officials carry the same weight. Central bank speeches have a way of inciting a market response, so watch for quick movement following an announcement. Speeches can include anything from changes increases, decreases or holds to current interest rates, to discussions about economic growth measurements and outlook, to monetary policy announcements outlining current and future changes.

But don't despair if you can't tune in to the live event. As soon as the speech or announcement hits the airwaves, news agencies from all over make the information available to the public. Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information are involved.

Much like how the market reacts to the release of other economic reports or indicators, currency traders react more to central bank activity and interest rate changes when they don't fall in line with current market expectation.

It's getting easier to foresee how a monetary policy will develop over time, due to an increasing transparency by central banks.

Yet there's always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected. It's during these times that marketing volatility is high and care should be taken with existing and new trade positions. Los Angeles Hawks vs. the New York Doves Yes, you're in the right place. Tonight's match puts the L. Hawks up against the N. You're in for a treat. Wait, what?! Whoops sorry, wrong subject. We really just meant hawks versus doves, central bank hawks versus central bank doves that is.

Central bankers can be viewed as either hawkish or dovish, depending on how they approach certain economic situations. Central bankers are described as "hawkish" when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment.

For example, "The Bank of England suggests the existence of a threat of high inflation. Dovish central bankers, on the other hand, generally favor economic growth and employment over tightening interest rates. They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action. And the winner is It's a tie! Well, sort of. You'll find many a banker "on the fence", exhibiting both hawkish and dovish tendencies.

However, true colors tend to shine when extreme market conditions occur. Long-term Market Movers There are several fundamentals that help shape the long term strength or weakness of the major currencies. We've included what we think are the most important, for your reading pleasure: Economic Growth and Outlook We start easy with the economy and outlook held by consumers, businesses and the governments. It's easy to understand that when consumers perceive a strong economy, they feel happy and safe, and they spend money.

Companies willingly take this money and say, "Hey, we're making money! uh, what do we do with all this money? And all this creates some healthy tax revenue for the government. They jump on board and also start spending money. Now everybody is spending, and this tends to have a positive effect on the economy.

But you get the idea. Both positive and negative economic outlooks can have a direct effect on the currency markets. Capital Flows Globalization, technology advances and the internet have all contributed to the ease of investing your money virtually anywhere in the world, regardless of where you call home. You're only a few clicks of the mouse away or a phone call for you folks living in the Jurassic era of the 's from investing in the New York or London Stock exchange, trading the Nikkei or Hang Seng index, or from opening a forex account to trade U.

dollars, euros, yen, and even exotic currencies. Capital flows measure the amount of money flowing into and out of a country or economy because of capital investment purchasing and selling. The important thing you want to keep track of is capital flow balance, which can be positive or negative.

When a country has a positive capital flow balance, foreign investments coming into the country are greater than investments heading out of the country. A negative capital flow balance is the direct opposite. Investments leaving the country for some foreign destination are greater than investments coming in. With more investment coming into a country, demand increases for that country's currency as foreign investors have to sell their currency in order to buy the local currency.

This demand causes the currency to increase in value. Simple supply and demand. And you guessed it, if supply is high for a currency or demand is weak , the currency tends to lose value. When foreign investments make an about-face, and domestic investors also wants to switch teams and leave, and then you have an abundance of the local currency as everybody is selling and buying the currency of whatever foreign country or economy they're investing in.

Foreign capital love nothing more than a country with high interest rates and strong economic growth. If a country also has a growing domestic financial market, even better! A booming stock market, high interest rates What's not to love?!

Foreign investment comes streaming in. And again, as demand for the local currency increases, so does its value. Countries sell their own goods to countries that want them exporting , while at the same time buying goods they want from other countries importing.

Have a look around your house. Most of the stuff electronics, clothing, doggie toys lying around are probably made outside of the country you live in. Every time you buy something, you have to give up some of your hard-earned cash.

Whoever you buy your widget from has to do the same thing. importers exchange money with Chinese exporters when they buy goods. And Chinese imports exchange money with European exporters when they buy goods.

All this buying and selling is accompanied by the exchange of money, which in turn changes the flow of currency into and out of a country. Trade balance or balance of trade or net exports measures the ratio of exports to imports for a given economy. It demonstrates the demand of that country's good and services, and ultimately it's currency as well. If exports are higher than imports, a trade surplus exists and the trade balance is positive.

If imports are higher than exports, a trade deficit exists, and the trade balance is negative. Net importers first have to sell their currency in order to buy the currency of the foreign merchant who's selling the goods they want. When there's a trade deficit, the local currency is being sold to buy foreign goods. Because of that, the currency of a country with a trade deficit is less in demand compared to the currency of a country with a trade surplus.

Net exporters, countries that export more than they import, see their currency being bought more by countries interested in buying the exported goods. It's all due to the demand of the currency. Currencies in higher demand tend to be valued higher than those in less demand. It's similar to pop stars. Because she's more in demand, Lady Gaga gets paid more than Britney Spears. Same thing with Justin Bieber versus Vanilla Ice. The Government: Present and Future The years and have definitely been the years where more eyes were glaringly watching their respective country's governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that would end the woes felt in our wallets.

Instability in the current government or changes to the current administration can have a direct bearing on that country's economy and even neighboring nations. And any impact to an economy will most likely affect exchange rates. That's right! No wonder you're here to get some education! There's just way too much information to try to process and way too many things to confuse any newbie trader. That's some insane information overload if we've ever seen it.

But information is king when it comes to making successful trades. Price moves because of all of this information: economic reports, a new central bank chairperson, and interest rate changes. News moves fundamentals and fundamentals move currency pairs! It's your goal to make successful trades and that becomes a lot easier when you know why price is moving that way it is. Successful traders weren't born successful; they were taught or they learned.

Successful traders don't have mystical powers well, except for Pipcrawler, but he's more weird than he is mystical and they can't see the future. What they can do is see through the blur that is forex news and data, pick what's important to traders at the moment, and make the right trading decisions. Where to Go for Market Information Market news and data is made available to you through a multitude of sources.

The internet is the obvious winner in our book, as it provides a wealth of options, at the speed of light, directly to your screen, with access from almost anywhere in the world. But don't forget about print media and the good old tube sitting in your living room or kitchen. Individual traders will be amazed at the sheer number of currency-specific websites, services, and TV programming available to them.

Most of them are free of charge, while you may have to pay for some of the others. Let's go over our favorites to help you get started. Websites Our top pick of a forex news-specific website is FreshPips. Make a mental note that the name of the website is eerily similar to the one you're currently on. Oh wait, FreshPips. com is just another apple out of the basket of "Pips.

com" websites see all of them here. We're not ashamed about promoting FreshPips. Put on this planet to help you unearth and share interesting and useful forex news and research, handpicked from the web by forex traders, from the biggest news sites to little known blogs, FreshPips. com reveals the finest materials as voted on by our users to help you become a smarter forex trader.

It covers the areas of analysis, commentary, economic indicators, psychology, and specific currencies. Traditional Financial News Sources While there are tons of financial news resources out there, we advise you to stick with the big names. These guys provide around-the-clock coverage of the markets, with daily updates on the big news that you need to be aware of, such as central bank announcements, economic report releases and analysis, etc.

Many of these big players also have institutional contacts that provide explanations about the current events of the day to the viewing public. Financial TV networks exist 24 hours a day, seven days a week to provide you up-to-the-minute action on all of the world's financial markets. In the U. You could even throw a little BBC in there. Another option for real-time data comes from your trading platform.

Many brokers include live newsfeeds directly in their software to give you easy and immediate access to events and news of the currency market. Check your broker for availability of such features not all brokers features are created equally.

It's all possible with an economic calendar. The good ones let you look at different months and years, let you sort by currency, and let you assign your local time zone.

Yes, economic events and data reports take place more frequently than most people can keep up with. This data has the potential to move markets in the short term and accelerate the movement of currency pairs you might be watching. Lucky for you, most economic news that's important to forex traders is scheduled several months in advance. So which calendar do we recommend? We look no further than our very own BabyPips. com forex Economic Calendar to provide all that goodness! If you don't like ours which we highly doubt , a simple Yahoogleing search will offer up a nice collection for you to examine.

Market Information Tips Keep in mind the timeliness of the reports you read. A lot of this stuff has already occurred and the market has already adjusted prices to take the report into account.

If the market has already made its move, you might have to adjust your thinking and current strategy. Keep tabs on just how old this news is or you'll find yourself "yesterday's news.

Economic data rumors do exist, and they can occur minutes to several hours before a scheduled release of data. The rumors help to produce some short-term trader action, and they can sometimes also have a lasting effect on market sentiment. Institutional traders are also often rumored to be behind large moves, but it's hard to know the truth with a decentralized market like spot forex.

There's never a simple way of verifying the truth. Your job as a trader is to create a good trading plan and quickly react to such news about rumors, after they've been proven true or false. Having a well-rounded risk management plan in this case could save you some moolah!

And the final tip: Know who is reporting the news. Are we talking analysts or economists, economist or the owner of the newest forex blog on the block? Maybe a central bank analyst?

The more reading and watching you do of forex news and media, the more finance and currency professionals you'll be exposed to. Are they offering merely an opinion or a stated fact based on recently released data?

The more you know about the "Who", the better off you will be in understanding how accurate the news is. Those who report the news often have their own agenda and have their own strengths and weaknesses. Get to know the people that "know", so YOU "know". Can you dig it? Market Reaction There's no one "All in" or "Bet the Farm" formula for success when it comes to predicting how the market will react to data reports or market events or even why it reacts the way it does.

You can draw on the fact that there's usually an initial response, which is usually short-lived, but full of action. Later on comes the second reaction, where traders have had some time to reflect on the implications of the news or report on the current market.

It's at this point when the market decides if the news release went along with or against the existing expectation, and if it reacted accordingly. Was the outcome of the report expected or not? And what does the initial response of the market tell us about the bigger picture? Answering those questions gives us place to start interpreting the ensuing price action.

Consensus Expectations A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts. Economic forecasts are made by various leading economists from banks, financial institutions and other securities related entities.

Your favorite news personality gets into the mix by surveying her in-house economist and collection of financial sound "players" in the market. All the forecasts get pooled together and averaged out, and it's these averages that appear on charts and calendars designating the level of expectation for that report or event. The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number.

Incoming data normally gets identified in the following manner:  "As expected" - the reported data was close to or at the consensus forecast. Whether or not incoming data meets consensus is an important evaluation for determining price action. Just as important is the determination of how much better or worse the actual data is to the consensus forecast. Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out. However, let's remember that forex traders are smart, and can be ahead of the curve.

Well the good ones, anyway. Many currency traders have already "priced in" consensus expectations into their trading and into the market well before the report is scheduled, let alone released.

As the name implies, pricing in refers to traders having a view on the outcome of an event and placing bets on it before the news comes out. The more likely a report is to shift the price, the sooner traders will price in consensus expectations.

How can you tell if this is the case with the current market? Well, that's a tough one. You can't always tell, so you have to take it upon yourself to stay on top of what the market commentary is saying and what price action is doing before a report gets released. This will give you an idea as to how much the market has priced in.

A lot can happen before a report is released, so keep your eyes and ears peeled. Market sentiment can improve or get worse just before a release, so be aware that price can react with or against the trend.

There is always the possibility that a data report totally misses expectations, so don't bet the farm away on the expectations of others. When the miss occurs, you'll be sure to see price movement occur. Help yourself out for such an event by anticipating it and other possible outcomes to happen. Play the "what if" game. Ask yourself, "What if A happens? What if B happens? How will traders react or change their bets? What if the report comes in under expectation by half a percent? How many pips down will price move?

What would need to happen with this report that could cause a 40 pip drop? Come up with your different scenarios and be prepared to react to the market's reaction. Being proactive in this manner will keep you ahead of the game. What the Deuce? They Revised the Data? Now what? Too many questions in that title. But that's right, economic data can and will get revised. That's just how economic reports roll! Let's take the monthly Non-Farm Payroll employment numbers NFP as an example.

As stated, this report comes out monthly, usually included with it are revisions of the previous month's numbers. We'll assume that the U. economy is in a slump and January's NFP figure decreases by 50,, which is the number of jobs lost.

It's now February, and NFP is expected to decrease by another 35, But the incoming NFP actually decreases by only 12,, which is totally unexpected. Also, January's revised data, which appears in the February report, was revised upwards to show only a 20, decrease.

As a trader you have to be aware of situations like this when data is revised. Not having known that January data was revised, you might have a negative reaction to an additional 12, jobs lost in February. That's still two months of decreases in employment, which ain't good. However, taking into account the upwardly revised NFP figure for January and the better than expected February NFP reading, the market might see the start of a turning point.

The state of employment now looks totally different when you look at incoming data AND last month's revised data. Be sure not only to determine if revised data exists, but also note the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases. Revisions can help to affirm a possibly trend change or no change at all, so be aware of what's been released. Market Sentiment The market has feelings too, you know. Get ready to learn all about market sentiment!

Lessons in Market Sentiment 1. What is Market Sentiment Every trader has his own opinion about the market. The combined feeling that market participants have, that's what you call market sentiment, young Padawan.

Commitment of Traders Report Gauging market sentiment may not be as difficult as you think. The Commitment of Traders COT report can be a clue on whether the market is bearish or bullish.

How do you get a hold of the COT report? It's as easy as , baby! Understanding the Three Groups Meet the different playas in the futures trading field: hedgers, large speculators, and small speculators! The COT Trading Strategy Yeah, we know. The COT report looks like a giant gobbled-up block of text. But don't fret! There's actually a pretty simple way to use it. Picking Tops and Bottoms When the market sentiment shifts, should you go with the speculators or the hedgers?

Your Very Own COT Indicator Studying the School of Pipsology is about to get sweeter! Are you ready to create your very own COT indicator? Getting Down and Dirty with the Numbers Put your thinking caps on because we're gonna get down and dirty with the numbers to calculate for the percentage of speculative positions!

What is Market Sentiment How's Mr. Market Feeling? Every trader will always have an opinion about the market. I'm pretty bullish on the markets right now. When trading, traders express this view in whatever trade he takes. But sometimes, no matter how convinced a trader is that the markets will move in a particular direction, and no matter how pretty all the trend lines line up, the trader may still end up losing.

A trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That's right This combined feeling that market participants have is what we call market sentiment.

It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market. How to Develop a Sentiment-Based Approach As a trader, it is your job to gauge what the market is feeling.

Are the indicators pointing towards bullish conditions? Are traders bearish on the economy? We can't tell the market what we think it should do. But what we can do is react in response to what is happening in the markets. Note that using the market sentiment approach doesn't give a precise entry and exit for each trade.

But don't despair! Having a sentiment-based approach can help you decide whether you should go with the flow or not. Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.

In stocks and options, traders can look at volume traded as an indicator of sentiment. If a stock price has been rising, but volume is declining, it may signal that the market is overbought. Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish. Unfortunately, since the foreign exchange market is traded over-the-counter, it doesn't have a centralized market.

This means that the volume of each currency traded cannot be easily measured. OH NOOOO!!!! Without any tools to measure volume, how can a trader measure market sentiment?! This is where the Commitment of Traders report comes in! Commitment of Traders Report The COT Report: What, Where, When, Why, and How The Commodity Futures Trading Commission, or CFTC, publishes the Commitment of Traders report COT every Friday, around pm EST.

Because the COT measures the net long and short positions taken by speculative traders and commercial traders, it is a great resource to gauge how heavily these market players are positioned in the market. Later on, we'll let you meet these market players. These are the hedgers, large speculators, and retail traders. Just like players in a team sport, each group has its unique characteristics and roles.

By watching the behavior of these players, you'll be able to foresee incoming changes in market sentiment. You're probably asking yourself, "Why the heck do I need to use data from the FX futures market?

Activity in the futures market doesn't involve me. So what's the closest thing we can get our hands on to see the state of the market and how the big players are moving their money? Yep, you got it The Commitment of Traders report from the futures market. Before going into using the Commitment of Traders report in your trading strategy, you have to first know WHERE to go to get the COT report and HOW to read it.

htm Step 2: Once the page has loaded, scroll down a couple of pages to the "Current Legacy Report" and click on "Short Format" under "Futures Only" on the "Chicago Mercantile Exchange" row to access the most recent COT report. Step 3: It may seem a little intimidating at first because it looks like a big giant gobbled-up block of text but with a little bit of effort, you can find exactly what you're looking for.

To find the British Pound Sterling, or GBP, for example, just search up "Pound Sterling" and you'll be taken directly to a section that looks something like this: Yowza!

What the heck is this?! We'll explain each category below. For the most part, these are traders who looking to trade for speculative gains.

In other words, these are traders just like you who are in it for the Benjamins! If you want to access all available historical data, you can view it here. You can see a lot of things in the report but you don't have to memorize all of it. As a budding trader, you'll only be focusing on answering the basic question: "Wat da dilly on da market yo?! These players could be categorized into three basic groups: 1. Commercial traders Hedgers 2. Non-commercial traders Large Speculators 3. Retail traders Small Speculators Don't Skip the Commercial - The Hedgers Hedgers or commercial traders are those who want to protect themselves against unexpected price movements.

Agricultural producers or farmers who want to hedge minimize their risk in changing commodity prices are part of this group. Banks or corporations who are looking to protect themselves against sudden price changes in currencies or other assets are also considered commercial traders. A key characteristic of hedgers is that they are most bullish at market bottoms and most bearish at market tops.

What the hedgehog does this mean? Here's a real life example to illustrate: There is a virus outbreak in the U. that turns people into zombies. Zombies run amok doing malicious things like grabbing strangers' iPhones to download fart apps.

It's total mayhem as people become disoriented and helpless without their beloved iPhones. This must be stopped now before the nation crumbles into oblivion! Guns and bullets apparently don't work on the zombies.

The only way to exterminate them is by chopping their heads off. Apple sees a "market need" and decides to build a private Samurai army to protect vulnerable iPhone users. It needs to import samurai swords from Japan. Steve Jobs contacts a Japanese samurai swordsmith who demands to be paid in Japanese yen when he finishes the swords after three months.

In order to protect itself, or rather, hedge against currency risk, the firm buys JPY futures. In It to Win It - The Large Speculators In contrast to hedgers, who are not interested in making profits from trading activities, speculators are in it for the money and have no interest in owning the underlying asset!

Many speculators are known as hardcore trend followers since they buy when the market is on an uptrend and sell when the market is on a downtrend. They keep adding to their position until the price movement reverses. Large speculators are also big players in the futures market since they hold huge accounts. As a result, their trading activities can cause the market to move dramatically. They usually follow moving averages and hold their positions until the trend changes.

Cannon fodders - The Small Speculators Small speculators, on the other hand, own smaller retail accounts. These comprise of hedge funds and individual traders. They are known to be anti-trend and are usually on the wrong side of the market. Because of that, they are typically less successful than hedgers and commercial traders.

However, when they do follow the trend, they tend to be highly concentrated at market tops or bottoms. The COT Trading Strategy Since the COT comes out weekly, its usefulness as a market sentiment indicator would be more suitable for longer-term trades. The question you may be asking now is this: How the heck do you turn all that "big giant gobbled-up block of text" into a sentiment-based indicator that will help you grab some pips?!

One way to use the COT report in your trading is to find extreme net long or net short positions. Finding these positions may signal that a market reversal is just around the corner because if everyone is long a currency, who is left to buy?

No one. And if everyone is short a currency, who is left to sell? What's that? Pretty quiet Yeah, that's right. NO ONE. One analogy to keep in mind is to imagine driving down a road and hitting a dead end. What happens if you hit that dead end? You can't keep going since there's no more road ahead.

The only thing to do is to turn back. At the same time, on the bottom half, we've got data on the long and short positions of EUR futures, divided into three categories:  Commercial traders blue  Large Non-commercial green  Small non-commercial red Ignore the commercial positions for now, since those are mainly for hedging while small retail traders aren't relevant. Let's take a look at what happened mid-way through Soon after, investors started to buy back EUR futures.

Over the next year, the net value of EUR futures position gradually turned positive. In early October , EUR futures net long positions hit an extreme of 51, before reversing. Holy Guacamole! Just by using the COT as an indicator, you could have caught two crazy moves from October to January and November to March The first was in mid-September This would have resulted in almost a 2,pip gain in a matter of a few months!

With those two moves, using just the COT report as a market sentiment reversal indicator, you could have grabbed a total of 3, pips.

Pretty nifty, eh? Picking Tops and Bottoms As you would've guessed, ideal places to go long and short are those times when sentiment is at an extreme. If you noticed from the previous example, the speculators green line and commercials blue line gave opposite signals. While hedgers buy when the market is bottoming, speculators sell as the price moves down. As a result, speculative positioning indicates trend direction while commercial positioning could signal reversals.

If hedgers keep increasing their long positions while speculators increase their short positions, a market bottom could be in sight. If hedgers keep adding more short positions while speculators keep adding more long positions, a market top could occur.

Of course, it's difficult to determine the exact point where a sentiment extreme will occur so it might be best to do nothing until signs of an actual reversal are seen. We could say that speculators, because they follow the trend, catch most of the move BUT are wrong on turning points.

Commercial traders, on the other hand, miss most of the trend EXCEPT when price reverses. Until a sentiment extreme occurs, it would be best to go with the speculators.

The basic rule is this: every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom. Your Very Own COT Indicator Having your very own COT indicator is like having your own pony. Using the COT report can be quite useful as a tool in spotting potential reversals in the market.

There's one problem though, we cannot simply look at the absolute figures printed on the COT report and say, "Aha, it looks like the market has hit an extreme I will short and buy myself 10,, pairs of socks. What may have been an extreme level five years ago may no longer be an extreme level this year. How do you deal with this problem?

What you want to do is create an index that will help you gauge whether the markets are at extreme levels.

Below is a step-by-step process on how to create this index. Decide how long of a period we want to cover. The more values we input into the index, the less sentiment extreme signals we will receive, but the more reliable it will be. Having less input values will result in more signals, although it might lead to more false positives.

Calculate the difference between the positions of large speculators and commercial traders for each week. This would result in a positive figure. On the other hand, if large speculators are extremely short, that would mean that commercial traders are extremely long and this would result in a negative figure.

Rank these results in ascending order, from most negative to most positive. Assign a value of to the largest number and 0 to the smallest figure.

And now we have a COT indicator! This is very similar to the RSI and stochastic indicators that we've discussed in earlier lessons. Once we have assigned values to each of the calculated differences, we should be alerted whenever new data inputted into the index shows an extreme - 0 or This would indicate that the difference between the positions of the two groups is largest, and that a reversal may be imminent.

Remember, we are interested in knowing whether the trend is going to continue or if it is going to end. If the COT report reveals that the markets are at extreme levels, it would help pinpoint those tops and bottoms that we all love so much.

We dug around the forums and found this little gold nugget for you. Apparently you can download the COT indicator if you're trading on an MT4 platform and you can find the link in our COT data to indicator forum thread!

Recall that not every sentiment extreme results in a market top or bottom so we'll need a more accurate indicator. Calculating the percentage of speculative positions that are long or short would be a better gauge to see whether the market is topping or bottoming out. Going through the COT reports released on the week ending August 22, , speculators were net short 28, contracts.

On March 20, , they were net short 23, contracts. From this information alone, you would say that there is a higher probability of a market bottom in August since there were more speculators that were short in that period. But hold on a minute there You didn't think it would be THAT easy right?

A closer look would show that 66, contracts were short while 38, contracts were long. On the other hand, there were just 8, long contracts and 32, short contracts in March.

What does this mean? There is a higher chance that a bottom will occur when As you can see on the chart below, the bottom in fact did not occur around August , when the Canadian dollar was worth roughly around 94 U.

The Canadian dollar continued to fall over the next few months. Then what happened? It started to steadily rise! A market bottom? Yep, you got it. Before we start betting the farm based on our analysis of the COT report, remember that those were just specific cases of when the COT report signalled a perfect market reversal.

The best thing to do would be to back test and look at reasons why a reversal took place. Was the economy booming? Or was it in the middle of a recession? Remember, the COT report measures the sentiment of traders during a specific period of time. Like every other tool in your toolbox, using the COT report as an indicator does not always correlate to market reversals. So take the time to study this report and get your own feel of what works and what doesn't. Also, before we bring this lesson to an end, always keep in mind that market prices aren't driven by solely COT reports, stochastic, Fibonacci levels, etc.

The markets are driven by the millions of people reacting to economic analysis, fundamental reports, politics, Godzilla attacks, UFO sightings, Lady Gaga concerts - life in general! It is how you use these tools that will help you be prepared to what lies ahead. In conclusion Trading the News Extra! Reading up on the news reports may just reel you in a handful of pips! Lessons in Trading the News 1. Importance of News Like how things are in the world of Star Wars, there is always fundamental force behind each movement in the market.

Why Trade the News Trading the news is a double-edged sword. Sure, you can earn a lot of money by doing it but you also stand to lose a lot in times of increased volatility!

Which News Reports are Trade-Worthy? The most-watched news reports are from the U. Can you guess why? Directional Bias vs. Non-Directional Bias "Buy the rumor, sell the news. Trading with a Directional Bias Let's take a look at an example on deciding whether to go long or short before a report is released. Letting the Market Decide Which Direction to Take Okay, you already know which market-moving report to trade.

What do you do next if you want to let the market decide which side to take? Summary: Trading the News You could get burned a couple of times by trading the news so practice, practice, practice! It will be very rewarding once you get the hand of it. Importance of News It's not enough to only know technical analysis when you trade.

It's just as important to know what makes the market move. Just like in the great Star Wars world, behind the trend lines, double tops, and head and shoulder patterns, there is a fundamental force behind these movements. This force is called the news! To understand the importance of the news, imagine this scenario purely fictional of course! Let's say, on your nightly news, there is a report that the biggest software company that you have stock with just filed bankruptcy.

What's the first thing you would do? How would your perception of this company change? How do you think other people's perceptions of this company would change?

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Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that affects the supply and demand of an asset. If you think about it, this makes a whole lot of sense! Just like in your Economics class, it is supply and demand that determines price. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link.

Need an account? Click here to sign up. Download Free PDF. Forex Fundamental analysis. Darren Chia. Continue Reading Download Free PDF. Content Page no. Fundamental Analysis. Interest Rates Long-term Market Movers. News and Market Data. Market Reaction. Market Sentiment. Commitment of Traders Report. Trading the News. Carry Trade. The US Dollar Index. Inter-market Correlations. Gold Correlation.

Bonds Correlation. Bond Spreads. Bond Markets, Fixed Income Securities, and the Forex Market. Global Equity Markets to Trade FX. The Relationship Between Stocks and Forex. Correlation Between Stocks and Currencies.

Inter-market Analysis Cheat Sheet. Country Profiles and Major Economies. United States of America. Euro Zone. United Kingdom. New Zealand.

Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all the factors that affect supply and demand. In other words, you have to look at different factors to determine whose economy is rockin' like a Taylor Swift song, and whose economy sucks. You have to understand the reasons of why and how certain events like an increase in unemployment affect a country's economy, and ultimately, the level of demand for its currency.

The idea behind this type of analysis is that if a country's current or future economic outlook is good, their currency should strengthen. The better shape a country's economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country's currency to obtain those assets. In a nutshell, this is what fundamental analysis is: For example, let's say that the U.

dollar has been gaining strength because the U. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation. Higher interest rates make dollar-denominated financial assets more attractive.

In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will increase. Later on in the course, you will learn which economic data drives currency prices, and why they do so. You will know who the Fed Chairman is and how retail sales data reflects the economy. You'll be spitting out interest rates like baseball statistics.

But that's for another lesson for another time. For now, just know that the fundamental analysis is a way of analyzing a currency through the strength or weakness of that country's economy. It's going to be awesome, we promise! Fundamental Analysis We already touched upon fundamental analysis in Kindergarten. Now it's time to dig a little deeper! Lessons in Fundamental Analysis 1.

What is Fundamental Analysis? If you like analyzing social, economic, and political factors that affect supply and demand, fundamental analysis is for you! Interest Rates Interest rates changes are one of the biggest fundamental catalyts out there. Heck, you could even say that they make the forex world go 'round!

The Who's Who of the Central Bank Central banks are like puppeteers. They have full control over monetary policies and their words can move markets in an instant. Long-term Market Movers As with personal relationships, it's important to consider long-term factors in trading. They may hold the key to your happiness! News and Market Data In forex trading, you've got to keep up to date with the latest news and market data to stay alive.

Be in the know by checking out these market info tools! Market Reaction A super duper important report just came out Now what?! Along your travels, you've undoubtedly come across Gulliver, Frodo, and the topic of fundamental analysis.

Wait a minute We've already given you a teaser about fundamental analysis during Kindergarten! Now let's get to the nitty-gritty! What is it exactly and will I need to use it? Well, fundamental analysis is the study of fundamentals!

That was easy, wasn't it? There's really more to it than that. Soooo much more. Whenever you hear people mention fundamentals, they're really talking about the economic fundamentals of a currency's host country or economy. Economic fundamentals cover a vast collection of information - whether in the form of economic, political or environmental reports, data, announcements or events.

Fundamental analysis is the use and study of these factors to forecast future price movements of currencies.

It is the study of what's going on in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements such as the growth of the economy, inflation, unemployment affect whatever we're trading. Fundamental Data and Its Many Forms In particular, fundamental analysis provides insight into how price action "should" or may react to a certain economic event.

Fundamental data takes shape in many different forms. It can appear as a report released by the Fed on U. existing home sales. It can also exist in the possibility that the European Central Bank will change its monetary policy.

The release of this data to the public often changes the economic landscape or better yet, the economic mindset , creating a reaction from investors and speculators. There are even instances when no specific report has been released, but the anticipation of such a report happening is another example of fundamentals.

Speculations of interest rate hikes can be "priced in" hours or even days before the actual interest rate statement. In fact, currency pairs have been known to sometimes move pips just moments before major economic news, making for a profitable time to trade for the brave.

That's why many traders are often on their toes prior to certain economic releases and you should be too! Generally, economic indicators make up a large portion of data used in fundamental analysis.

Many brokers include live newsfeeds directly in their software to give you easy and immediate access to events and news of the currency market. Below is a simple chart to illustrate the differences in lot sizes, measured in units, volume for the major pairs where the base currency is USD. Dangers of trading the news As with any trading strategy, there are always possible dangers that you should be aware of. We are looking for the price to be making higher highs but the Macd to be setting lower highs. What is it exactly and will I need to use it? Hence, Forex trading rule number one: do not trade with money you can't afford to lose. investment opportunities.

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