The Foreign Exchange Market, and Methods of Analysis

The Foreign Exchange Market, and Methods of Analysis

Currency trading has always contained speculation. What is new is that it has become the main thing in trading. A speculation on a small scale can be about the price of a currency adjusted basis of what is happening in politics and the economy. (It can also be about a local craze, some financiers that scare each other into ever greater risk.) But when speculation becomes too large, it becomes a downright destructive force. The international financial capitalist George Soros in his books about financial speculation termed it as a “wrecking ball” busting economies unnecessarily.

Currency Market players are like the lemming migration. They rush first one way and then turn and rushe to the other. This is because what controls a currency speculation is not what actually happens in the economy, but what some believe others think is happening in the economy.

To win in this game you have to guess what others will do. The game then goes on to buy and sell on guesses about what others will buy and sell.

This is the same principle that governs the stock market speculation, but the foreign exchange market is considerably larger and has a more direct political effect. The foreign exchange market is the fact that is, according to the neo-liberal ideology, the “measure” of political and economic proposals that is on the “right path”. Capital flows into the country, that is, if the currency is bought, then the policy is on the right path.

Now, of course, think that this is absurd. Why cannot you just ignore the currency market’s ups and downs? Why not pursue a policy that is long term and seek the support of the real economy, rather than the “market response”?

That thought has probably also struck many governments in crisis situations. The problem is that the combination of media, economists and political opponents are very difficult for a government to resist. Add to speculative attacks actually have real economic effects. Either raising interest rates in the country to protect the value of the currency, or the nation’s currency falls sharply until speculation flattens out. In both cases the harsh times affect workers worst.

Currency speculation has been effective

It requires, in other words a very strong political government, with the active support of the country’s wage earners, in order to be able to pursue a policy that “the market” does not like. It is the main reason that the politicians in country after country instead succumbed to “market demands” during emergencies.

Who is the market?

But who is it that “reacts” and “calms down”? What really constitutes the market? As for the stock market, we have previously found that, in practice, 10% of the American people who have a shareholding are of importance. 1% of the US population owns more than half the stock exchange. It is enough that some of these players will start selling or buying of a stock to move significantly on the exchange.

As for the foreign exchange market, this concentration even more grotesque. In practice it is perhaps twenty five CFOs in the major exporting companies. Bigger is not the number of decision makers who will determine if the “market” will react or not.

It is twenty-five CFOs who all have roughly the same ideological view of the world. And everyone looks at each other and trying to guess what the other will do when the Government has a particular proposal or when the Fed maintains a certain opinion. Around themselves these CFOs have few hundred analysts, bankers and “investors”. And even if we include a wider circle of officials, it’s about a small, small part of the US people whose conduct in all seriousness is called a “market reaction”. It is the American banks on behalf of the big companies in and out of the currency.

There’s a fancy word for what is happening on the currency market. It is “volatile”, ie it moves rapidly up and down.

That is partly because there are few actors who act. Partly it is enough that a big company is carrying out a major business, a merger or a takeover (and therefore has to switch into another currency) or that another company makes a profit taking to the US dollar to change.

This, then, causes large movements in the exchange rate. The problem is not primarily that the dollar moves. The problem is that every movement in a sensitive situation is interpreted politically.

Regardless of why the US dollar falls or rises, it is interpreted in the media and by the “experts” based on a policy development or decision. This is what we mean when saying that the US dollar today is a manipulable currency. It does not mean that some players actively manipulate it, but only that these movements – which may be due to speculation on lemming migration or on actual events that a company takeover – in practice, will be used as part of a political power struggle.

Politicians are then reading newspapers that in all seriousness claim that their political opinions and suggestions “get the dollar to rise and fall.” Analysts discuss increased security, control of the Fed, or higher wages that have been met with exchange interpretations. To bottom line is that the currency market – that is, the big financial players – has actual power over the dollar, not the politicians.

So is there really a way to become a successful Forex trader? Anyone who knows the most is the most successful. Often it is that easy – it’s important to have good knowledge to take informed decisions. If you have a good basis for their actions, it is easier to buy and sell at the right time. When it comes to forex, there are two main types of knowledge that affect how you shop.

Firstly, you can look at all the economic factors affecting a particular country and its currency. By doing so, you can try to predict how the currency will move over a bit longer. It may be weeks, months or years. Second, you can look at all the data available in the past. Using this data, you can analyze how the foreign exchange market changed in the past and you can probably see trends such as peaks and pits that recur periodically. This information guarantees nothing, but can give you an idea of where in the cycle a currency is.

Fundamental analysis

The method called fundamental analysis involves looking at factors that can affect a currency positively or negatively, and draw conclusions about the currency’s future. Fundamental analysis is the same as that of shares just focusing on a few other things. Here, check it on a country’s economic conditions, and those things that may have an impact on the exchange rate. There may be productivity, unemployment, the central bank’s interest rate differentials, political factors, trade surpluses or deficits and the like.

By looking at this you can hopefully say something about how a currency will be affected in the future. Then we must not forget that in the forex are always two sides of the coin, maybe you could not just look at a country without any analysis of several different countries. You want the currency you buy to be cheap and the currency you sell to be pricey. It is good to also keep track of the global economy and make more general observations for there are many things about the affect how the currency market develops.

Just because a country has good financial position and prospects are there for a strong currency, it does not always happen as expected. You can keep track of all the things that should affect a currency in a certain way but it is not sure that the market actually reacts as expected. There is always a certain level of uncertainty in the use of this type of analysis. It is based on assumptions about how things are affected and it is not always as expected.

To get better depth in the analysis you should also look at other factors that may influence how currencies behave. There are a lot of different things that can ultimately affect their behavior, for example, something as classic as supply and demand. If supply exceeds demand, the value of the currency lowers. You can also try to look at it from the psychological point of view and analyze how traders think and how they will act. If many buy a currency, the price goes up quickly, and if no one is interested the price is affected negatively. Fundamental analysis can thus be drawn to looking at basically everything that can affect the foreign exchange market, and it is not always easy to get a handle on all the factors.

Fundamental analysis is best for those who want to invest in with a more long-running perspective. If one analyzes the factors that affect a currency and sees that it should go up, you can spend a little money on this exchange and hope that you have read the situation correctly. It does not work so well for quick business (eg for day traders who typically buy and sell within minutes or hours) as it is hardly possible to see anything during such short periods.

Technical analysis

As an alternative (or perhaps primarily as a complement) to fundamental analysis can then make use of technical analysis. The technical analysis is to look at actual data on what has already happened. It analyzes thus how the foreign exchange market has changed historically, which is very reliable in itself. The data MDU has to analyze for a particular currency back in time (as long as it is correct) will give you good information on how the currency trends and cycles.

Almost every market has trends and cycles of this kind. There are recurring behaviors that are good to keep an eye on. For example, perhaps a currency has its highs and lows – periods when it goes worse and periods when it goes better. If you can use technical analysis to see where the currency is right now, you can see if it is time to buy or not. If the currency is at a peak now, it is not the best state to purchase as a sunset can be in-depth and vice versa.

The problem with technical analysis is that it is expected that the currency will continue to follow the same pattern as it did before. It is envisaged that it will continue the same way and take their decisions based on this. However, it is not always the case that a value follows a certain trend throughout. Economic factors may go in and manipulate the market so much that trends are broken. So it is never certain that technical analysis works. For this reason it is best to try to combine it with fundamental analysis.

Technical analysis is primarily a tool for those who buy and sell for short periods. If you are a day trader and make quick business and live on small changes in exchange rates cannot do any great analysis of how the exchange rate will change, but then you have to rely on the trends continue.

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