one of the many trading software out there to helpyou trade. Regardless of how you decide to trade remember this, confirmation, confirmation, confirmation. I love to say this as you can never have toomuch confirmation before placing a trade.
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Introduction
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Economic Indicators
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Inflation Indicators
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Employment Indicators
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Consumer Spending Indicators
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Leading Indicator
INTRODUCTIONAny news that has a bearing on the economy, whether directly or indirectly,is considered fundamental. This news may include the changes in the economy, changes to interest rates, political elections, and natural disasters. Inorder to allow navigation through the changing universe of fundamentals,news is classified into one of four categories: economic factors, financialfactors, political factors, and crises.Not only will economic data differ among counties, but their importance, timing, and dates of release also differ. Economic data usually arescheduled for release in advance, and times and dates of releases are easilyavailable, at least in the industrialized nations.73Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for terms of use.
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Political factors, unlike economic data, vary in terms of dates and timesand certainly have a huge impact on the foreign exchange market (theFOREX). The U.S. market is more stable than those of other countriesbecause most elections occur every 4 years and new nominations areannounced to the public in advance.In other countries, such as Italy, governments are less stable, and thetiming of parliamentary elections cannot be forecasted in advance. To theextreme side, we can look to the fall of the Soviet Union, the new future ofIraq, and the political tensions between France and Germany and theUnited States.Financial factors are partially timed and predicted. Discount rates arechanged by central banks such as the Federal Reserve (Fed) in the UnitedStates, the European Central Bank (ECB), and Bank of Japan (BOJ), andalthough the changes in rates are kept in high secrecy, markets watchclosely and make their predictions in advance. While rate changes aremostly unknown in advance, the dates that the central banks meet are available in the financial news.A crisis may or may not have a huge impact on a country’s currency.Most recently, while Allied forces entered Iraq, the U.S. dollar saw littlechange as the war started and ended, but the kidnapping of Mikhail Gorbachev, then president of the Soviet Union, had a sharp effect on theFOREX.
ECONOMIC INDICATORSEconomic indicators by far provide the most information of all the fundamental factors. Unlike the financial, political, and crisis factors, economicfactors occur in a steady stream, at certain times, and more often. It isextremely important for you to be aware of these economic announcementsso that you can to make informed decisions on entering, exiting, or adjusting your positions.Traders around the world have their eyes glued to their monitors wheneconomic data are announced, but knowing when these announcements areto be made is only half the battle. Forecasting the proper trend will generate true profits.
ECONOMIC DATA RELEASEEconomic data generally are released on a monthly basis, except thegross domestic product (GDP) and the employment cost index (ECI),
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which are released quarterly. While several indicators are releasedweekly, very few have an impact on the FOREX. All indicators areannounced in pairs.The first number is the new number, and the second one is the perviousnumber for comparison. It is important to remember that most reports arereleased between 8:30 and 10:00 A.M. (EST).
SOURCES OF INFORMATIONInformation about upcoming economic indicators is available in all the leading newspapers, such as the Wall Street Journal, the Financial Times, andthe New York Times. While newspapers are a great resource, it seems that theInternet is still where many traders turn for information. Trusted Web sitesinclude http://money.cnn.com, http://www.bloomberg.com, and http://moneycentral.msn.com/investor/home.asp. Another good source is to go to theNew York Federal Reserve Bank Web site at http://www.ny.frb.org/. All haveeconomic indicators and a calendar for upcoming announcements.
THE GROSS NATIONAL PRODUCT (GNP) ANDGROSS DOMESTIC PRODUCT (GDP)The GNP is said to be the most significant economic indicator, and manyanalysts agree that it strongly measures economic performance as a whole.GNP is the sum of all goods and services produced by U.S. residents bothin the United States and abroad.On the other hand, the GDP refers to the sum of all goods and servicesproduced in the United States by both domestic and foreign companies.The GDP figures are more popular outside the United States.
CONSUMER SPENDINGConsumer spending is more psychological in nature and measures consumer confidence rather than actual spending. Consumer spending is madepossible by personal income and discretionary income, so consumer confidence is important for those who have discretional income in order toswitch to buying from saving.
GOVERNMENT SPENDINGGovernment spending is very important in that its sheer size and impact onthe economy are tremendous, but it is also very influential in other ways.Due to special expenditures such as military spending, it boosts the unemployment rate and GDP and promotes investment spending.
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INFLATION INDICATORSThe rate of inflation is the rise in overall prices, and gauging inflation is avital macroeconomic task. Traders watch inflation very closely becauseone of the ways to fight inflation is by raising interest rates. Higher interestrates tend to support the local currency.Values of the real interest rate and real GNP and GDP are of the mostimportance to money managers and traders, allowing them to accuratelycompare the worldwide market. Generally, traders use nine economic tools:●
Producer price index (PPI)
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Purchasing managers’ index (PMI)
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Consumer price index (CPI)
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Durable goods
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GNP deflator
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GDP deflator
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Employment cost index (ECI)
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Commodity Research Bureau’s index (CRB index)
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Journal of Commerce industrial price index (JoC index)
PRODUCER PRICE INDEX (PPI)The PPI has been compiled since the beginning of the twentieth centuryand was called the wholesale price index until 1978. The PPI gauges theaverage changes in prices received by domestic producers for their outputat all stages of processing.Unlike the CPI, which includes imported goods, services, and taxes,the PPI compiles from sectors such as manufacturing, mining, and agriculture. Calculation of the PPI involves around 3400 commodities.
PURCHASING MANAGERS’ INDEX (PMI)The National Association of Purchasing Managers (NAPM), now renamedthe Institute for Supply Management, releases a monthly composite indexof national manufacturing conditions constructed from data on new orders,production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing andnonmanufacturing subindices.
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CONSUMER PRICE INDEX (CPI)The CPI gauges the average change in retail prices for a fixed market ofgoods and services. The CPI is compiled from a sample of prices for food,shelter, clothing, fuel, transportation, and medical services that people purchase on a daily basis.Both indexes, the PPI and the CPI, are of great help to investors indetermining whether the economy is in an inflationary state, and both numbers are announced monthly.
DURABLE GOODSDurable goods orders measure new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durablegood is defined as a good that lasts an extended period of time (over 3years) during which its services are extended.
GNP DEFLATORThe GNP figure is not helpful to traders by itself. A large number may ormay not be good for the economy, depending on the level of inflation.Therefore, the nominal GNP figure must be deflated by some price index.There are several GNP deflators, but the most commonly used is theimplicit deflator. The implicit deflator is calculated by dividing the currentdollar GNP figure by the constant-dollar GNP figure.
GDP DEFLATORThe same holds true for the GDP deflator as for the GNP deflator. Both theGNP and GDP implicit deflators are released quarterly, along with respective GNP and GDP numbers. The implicit deflators generally are regardedas the most significant measure of inflation.
COMMODITY RESEARCH BUREAU’S FUTURES INDEX (CRB INDEX)The CRB index makes determining inflationary trends easier. The CRBindex consists of equally weighted futures prices of 21 commodities. Thecomponents of the CRB index are●
Precious metals: gold, silver, and platinum
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Industrials: crude oil, heating oil, unleaded gas, lumber, copper, andcotton
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Grains: corn, wheat, soybeans, soy meal, and soy oil
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Livestock and meat: cattle, hops, and pork bellies
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Imports: coffee, cocoa, and sugar
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Miscellaneous: orange juice
The CRB index has been a popular tool that has proven reliable since thelate 1980s.
THE JoC INDUSTRIAL PRICE INDEXThe JoC index was designed to signal changes in inflation prior to otherprice indexes. The JoC index consists of the prices of 18 industrial materials and supplies processed in the initial stages of manufacturing, building,and energy production.
EMPLOYMENT INDICATORSThe employment rate is an economic indicator that is significant in theFOREX because of it importance to forecast in multiple economic areas.The employment rate normally measures the stability and soundness of aneconomy. In addition, however, the indicator is used as a major componentin calculation of the GNP and GDP.In the FOREX, the standard indicators studied by traders are the unemployment rate, manufacturing payrolls, nonfarm payrolls, average earnings,and average workweek. Generally, the most significant data come frommanufacturing and nonfarm payrolls, followed by the unemployment rate.These data are released on a monthly basis.
CONSUMER SPENDING INDICATORSRETAIL SALESRetail sales are an important indicator because they show the strength ofconsumer demand as well as consumer confidence. In the United States,this indicator is more important than in other countries such as Japanbecause the U.S. economy is more focused on consumers.A higher retail sales figure creates an economic process of forward motionin the manufacturing sector. Some months are significant for this indicator toshow positive figures. Those months are September, November, and December.The first month of the three signifies a back-to-school and back-towork month. November and December are holiday shopping months, andtraders look closely at pre-December to post-Christmas data.
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CONSUMER SENTIMENTConsumer sentiment is a survey of households that is designed to measureindividuals’ tendency for spending. The University of Michigan and theNational Family Opinion Conference Board conduct the two studies in thisarea. The index measured by the Conference Board is sensitive to the jobmarket, whereas that of the University of Michigan is not.
HOUSING STARTSThe housing starts report measures the number of residential units on whichconstruction has begun each month. A start in construction is defined as thebeginning of excavation of the foundation for the building, and the measureconsists primarily of residential housing. Housing is very interest-rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals thatinterest rates are nearing a trough or peak. To analyze, focus on the percentage change in levels from the preceding month. The report is releasedaround the middle of the following month.
AUTOMOBILE SALESAlthough the U.S. economy relies on automobile sales in terms of production and retail sales, the level of automobile sales is not an indicator mostFOREX traders follow too closely.
INDUSTRIAL PRODUCTIONThis is a chain-weighted measure of the change in production in thenation’s factories, mines, and utilities, as well as a measure of their industrial capacity and of how many available resources among factories, utilities, and mines are being used (commonly known as capacity utilization).The manufacturing sector accounts for one-quarter of the economy.The capacity utilization rate provides an estimate of how much factorycapacity is in use.
LEADING INDICATORSThe leading indicators consist of the following economic indicators:●
Average workweek of production workers in manufacturing
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Average weekly claims for state unemployment
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New orders for consumer goods and materials (adjusted for inflation)
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Vendor performance
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Contract and orders for plant and equipment
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New building permits issued
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Change in manufacturers’ unfilled orders, durable goods
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Change in sensitive materials prices
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Index of stock prices
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Money supply, adjusted for inflation
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Index of consumer expectations
These indexes are designed to offer a 6- to 9-month future outlook ofeconomic performance. These figures are also great tools to forecast inflation and deflation, and unlike the unemployment rate, which is a laggingindicator, these indicators are for a future outlook.Unlike in the stock market, when news is released, the FOREX willreact, especially the currency in question. Make sure that you know yournews. There are many alert services out there to which you can subscribethat will help you with this.Don’t be too quick to pull the trigger should a particular economic indicator fall outside market expectations. Contained in each new economicindicator released to the public are revisions to previously released data.For example, if durable goods should rise by 0.5 percent in the currentmonth and the market is anticipating them to fall, the unexpected rise couldbe the result of a downward revision of the figures for the prior month.Look at revisions to older data because in such cases the precedingmonth’s figure may have been reported originally as a rise of 0.5 percentbut now, along with the new figures, is being revised lower to, say, a rise ofonly 0.1 percent Therefore, the unexpected rise in the current month islikely the result of a downward revision of the preceding month’s data.Be careful not to place a trade when major economic news is comingout because the FOREX can move very quickly. If you are going to placetrades prior to news announcements, make sure that you are protected witha good stop loss.
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Technical Analysis Defined
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Technical Analysis Assumptions
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Bar and Candlestick Charts
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Technical Analysis Terms
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Market Patterns: Up Trends, Down Trends, and Sideways Trends
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Support and Resistance
TECHNICAL ANALYSIS DEFINEDBefore we begin an in-depth study of the PremiereTrade trading method,we must first define what technical analysis is for our purposes. Technicalanalysis is the study of historical and ongoing price data through charts,price patterns, and chart indicators. Charts display price in time intervalsusing bars or candlesticks.
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TECHNICAL ANALYSIS ASSUMPTIONSA repeat of the philosophical assumptions on which technical analysis is basedis appropriate here before we begin the study of analyzing market patterns.1.2.3.
All available information and its impact on traders and the marketare already reflected in a currency’s price.Prices move in trends or patterns.History repeats itself.
TECHNICAL ANALYSIS ALLOWS FOR AN INDIRECT STUDY OF ALLMARKET DATA, INCLUDING FUNDAMENTALSMost technical traders (technicians) would agree that the underlying forcesof supply and demand and the economic fundamentals of the market causeuptrends and downtrends. As a general rule, we are not going to concernourselves so much with the reasons why market prices move up or down.Instead, we are going to discount the reasons why and are going to trade inagreement with the supporting technical indicators.
PRICES MOVE IN TRENDSIf one cannot accept this premise, there is no point in studying technical analysis. The PremiereTrade trading method was written to help identify trends andtheir early stages of development for the purpose of trading in agreement withthe direction of those trends. We follow trends because trends have shown thatonce they are in motion, they are most likely to continue rather than reverse.Over the last hundred years or so, technicians have identified and catalogued chart patterns. They also have worked very hard at creating chart indicators (mathematical formulas) that show weakness or strength of market price.Research has shown that these patterns and indicators have worked in the past,and therefore when they repeat themselves, they work in the present and future.There has been a tendency in the past to discount technical analysis andcriticize it, calling it a “self-fulfilling prophecy.” Critics claim that becausechart patterns have been widely publicized in the last several years, tradersare quite familiar with these patterns and therefore act on them in concert,creating bull and bear markets because of bullish and bearish patterns. Critics also claim that patterns are completely subjective and therefore literallyin the mind of the beholder.However, these two criticisms contradict one another. If chart patternsand the positions of chart indicators are completely subjective and in themind of the beholder, then it is very hard to imagine how everyone couldsee the same thing at the same time.
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The more one studies chart and indicator patterns, the clearer itbecomes that reading and interpreting patterns are more an art form than askill. This admission should not intimidate the prospective technician.Instead, it should be a guiding principle to help the trader to study and learnhow to interpret patterns and chart indicators and a reminder that there maybe more than meets the eye at first glance.
BAR AND CANDLESTICK CHARTSCharts come in various different shapes and sizes. PremiereTrade recommends the use of two types of price charts: bar charts and candlestickcharts. Bar charts (Figure 8-1) display price data in vertical lines, whichrepresent price action during a given time interval. The bar connects thehigh and low of prices. The tip at the top of the vertical line is the high forthat interval, and the tip at the bottom of the vertical line is the low for thatinterval. The open and close of the bar are displayed by small horizontaldashes called tics. The tic to the left of the line is the open, and the tic to theright of the line is the close.Candlestick charts (Figure 8-2) are similar to bar charts in that the toptip of a vertical line represents the high and the bottom tip represents thelow. However, market activity between the open and the close is representeddifferently by the use of candlestick bodies. A hollow body shows a higherclosing above a lower opening. A shaded body shows a lower closing belowa higher opening. The price activity above and below candlestick bodies isoften referred to as wicks or tails. While the Japanese have used candlestickcharts for centuries, they have only recently become popular in the West.Various bullish and bearish candlestick patterns are shown in Figure 8.3a-s.FIGURE 8-1 Bar Charts
FIGURE 8-2 Candle Stick Charts
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FIGURE 8-3
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FIGURE 8-3 (continued)
(q)
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TECHNICAL ANALYSIS TERMSChart interval refers to the duration of time that passes between the openand the close of a bar or candlestick. There are chart intervals that start at 1minute and go up to daily, weekly, and even monthly. While some shortterm time intervals are used more often for entry and exit points, others areused for the different trading styles and methods with which a trader feelsmore comfortable.A superactive trader may use the 3-, 5-, 10-, and 15-minute chart intervals. A swing or position trader, on the other hand, may use the 30-, 60-,and 180-minute and daily charts to determine a possible trade.I recommend use of the daily chart, the 180-minute chart, the 60-minutechart, and the 15-minute chart. These charts can be used separately as a onechart trading system, or two or more charts can be used in combination.These charts all measure price activity using Greenwich Mean Time(GMT) or Eastern Standard Time (EST) depending on the software beingused. During EST, the difference between GMT and EST is 5 hours. During Eastern Daylight Time (EDT), the difference between GMT and EDTis 4 hours.
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THE DAY CHARTThe day chart shows market data in 24-hour increments. Each closed bar orclosed candlestick on the chart represents a “day’s worth” of price activity.The day chart is the longest interval chart recommended by PremiereTrade(see Figure 8-4).
THE 180-MINUTE CHARTThe 180-minute chart shows market data in 3-hour increments. Eachclosed bar or closed candlestick on the chart represents 3 hours of priceactivity (see Figure 8-5).
THE 30-MINUTE CHARTThe 30-minute chart shows market data in 30-minute increments. Eachclosed bar or closed candlestick on the chart represents 1⁄2 hour of priceactivity (see Figure 8-6).
THE 15-MINUTE CHARTThe 15-minute chart shows market data in 15-minute increments. Each closedbar or closed candlestick on the chart represents 15 minutes of price activity.Although I recommend long-term chart intervals, the choice willstrictly depend on the trader and his or her comfort with the FOREX tochoose time intervals that work best for his or her style of trading. Forsuperactive traders, a 15-minute chart may be the long-term interval, andentry and exits are determined by a 3-minute chart (see Figure 8-7).I highly recommend that you become very familiar with the FOREXbefore trading at a superactive level. Money management becomes crucial,and carefully watching the market becomes a necessity.Figures 8-4 through 8-6 illustrate chart intervals as they appear indifferent time frames. Notice how market activity becomes increasinglymore detailed on the 180- and 60-minute charts compared with the dailychart.
MARKET PATTERNS: UPTRENDS, DOWNTRENDS, AND SIDEWAYSTRENDSMarkets expand and retrace constantly. It is the nature of the market tosurge and then pause or retrace. Market prices may continue to expand forsome time, either upward or downward. However, at some point theyretrace or make corrective moves, and then they may oscillate between a
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FIGURE 8-4 EUR/USD Daily 2002–2003
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FIGURE 8-5 EUR/USD 180-Minute 2002–2003
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FIGURE 8-6 EUR/USD 60-Minute 2002–2003
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distinguishable top and bottom range of prices.These retracement moves are usually between 38 and 62 percent of theprevious trend move, which is called a continuance. As trends move, theymake a series of peaks and troughs as they move. An uptrend consists of aseries of ascending peaks and troughs, whereas a downtrend consists ofdescending peaks and troughs. A sideways trend consists of horizontalpeaks and troughs.
UPTREND/UPSWINGAn uptrend is a market consisting of price patterns of higher highs (peaks)and higher lows (troughs) in which buying pressure is the dominant force(see Figure 8-7).
DOWNTREND/DOWNSWINGA downtrend is a market consisting of price patterns of lower lows(troughs) and lower highs (peaks) in which selling pressure is the dominantforce (see Figure 8-8).
SIDEWAYS AND CHANNEL TRENDSAs we study chart patterns, one comes to mind that might be the easiest tounderstand—channel patterns. A channel pattern generally should be considered to be a continuation pattern.Channel patterns are typically consolidation areas that usually are amidpoint of the move in the direction of the trend. Research has shown thatthese patterns are generally 3 to 6 months long and vary on the short-termand minute time frames. However, they can be much longer.The trendlines run parallel in a rectangle. Supply and demand seemsevenly balanced within the pattern, whereas buyers and sellers are equallymatched each time the currency pair reaches one of the rectangle trendlines. The same highs are constantly tested, as are the same lows.As the currency pair vacillates between these two clearly set supportand resistance levels, you can trade long and short at each junction. Yourstop loss or cover point would be just beyond one of the trendlines.Volume isn’t as important as in other patterns, but there usually is alessening of activity within the pattern. As in the other patterns, though,volume should increase noticeably on the breakout (see Figure 8-9).Since these movements oscillate between a range of prices, we alsocall wide sideways trends ranger markets. Generally speaking, we avoidtrading in narrow sideways trends. Sideways trends are simply when theprice of the position moves sideways. I will use the same example. A
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FIGURE 8-7 EUR/USD Daily 2002–2003
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FIGURE 8-8 CHF/USD Daily 2002–2003
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FIGURE 8-9 GBP/USD Daily 2002–2003
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position say trades at 10 dollars and then goes to 12 dollars, and then continues to move between 10 and 12 dollars. The position goes to 12 dollarsand then back to 10 dollars, this is moving sideways or a channel.In Figure 8-10 and 8-11, compare and contrast the difference betweenup/down trends and sideways trends.
SUPPORT AND RESISTANCEAs mentioned earlier, trends consist of ascending, descending, or horizontal peaks and troughs. Let’s now give those peaks and troughs their appropriate names and introduce the concepts of support and resistance. Thetroughs, or reaction lows, in an uptrend are called support. The peaks, orreaction highs, in a downtrend are called resistance.Support and resistance (S&R) constitute one of the oldest technicalanalysis principles. S&R is like a “tug of war” between buyers and sellers.Support levels are prices at which sellers are unwilling to accept lowerprices and buying pressure exceeds selling pressure. Resistance levels areprices at which buyers are unwilling to pay higher prices and selling pressure exceeds buying pressure.S&R principles include●
Major support is the bottom range of prices.
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Major resistance is the top range of prices.
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Intermediate support and resistance is a price level where the markettends to stall, reverse, pause, or continue between major support andmajor resistance (see Figure 8-12).
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When a resistance level is broken successfully, it often becomes support.
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When a support level is broken successfully, it often becomes resistance (see Figure 8-13).
MOVING AVERAGESA moving average is an indicator that shows the average price of a currencyover a period of time. As prices change enough to affect the average, the indicator line moves up or down in an attempt to depict the more meaningfulprice changes and reduces the depiction of the less meaningful price activity.
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FIGURE 8-10 EUR/USD Daily 2002–2003
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FIGURE 8-11 CHF/USD Daily 2002–2003
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FIGURE 8-12 GBP/ USD Daily 2002–2003
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FIGURE 8-13 GBP/USD Daily 2002–2003
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FIGURE 8-14 EUR/USD Daily 2002–2003
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There are five popular types of moving averages: simple (also referredto as arithmetic), exponential, triangular, variable, and weighted. Movingaverages can be calculated on any data series, including an open, high, low,close, or another indicator.The only significant difference between the various types of movingaverages is the weight assigned to the most recent data. Simple movingaverages apply equal weight to the prices. Exponential and weighted averages apply more weight to recent prices. The most popular method of interpreting a moving average is to compare the relationship between a movingaverage of price with the price itself.A moving average is often used to identify the trend of a market. It canbe used in conjunction with other averages to generate buy and sell signalswhen the averages cross. Moving averages of all types also can be used asa filter within a trading system to reduce whipsaws. For example, you mayonly want to take long trades when the average is moving in an upwarddirection or when price is above the moving average.Generally speaking, a buy signal is generated when price opens andcloses above its moving average. This indicates that support has establisheditself as the dominant force. Conversely, a sell signal is generated when theprice opens and closes below its moving average, indicating that resistancehas established itself as the dominant force.In strong vector trends, a moving average can act as a “price floor” inan uptrend and as a “price ceiling” in a downtrend. In sideways trends orranger markets, the moving average acts as a moving-average midpoint (seeFigure 8-14).As this chapter has shown, technical analysis is a great way to helpyour trading efforts and is probably the most widely used tool in trading.You need to find the right technical tool for your trading style.You probably have come across software that takes this informationinto account and does the work for you. This is okay. Just remember thatyou are looking for a way to trade the same way every time. Take the emotion out and place your entry and exits the exact same way every time. Thatis what the professionals do.
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ADVANCEDTRADINGCHARTS ANDINDICATORS●
Tools for Technical Analysis
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Bollinger Bands
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Directional Movement Index (DMI)
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Stochastic Indicator
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Moving Averages (Simple, Weighted, and Exponential)
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Moving Average Convergence/Divergence (MAC/D)
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Momentum
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Relative Strength Indicator (RSI)
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Rate of Change (ROC)
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Volume
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TOOLS FOR TECHNICAL ANALYSISEach chart and indicator plays a unique role in the overall analysis process.Observe how each indicator in Figure 9-1 depicts trending and nontrendingconditions. The intervals (time periods) and indicators (studies) are usefulin spotting interday or intraday turning points caused by