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Forex

If you’ve spent time watching forex markets, you know the primary driver of price action is economic reports and the news releases that accompany them. While beginning traders are cautioned to avoid trading around the news because of volatility, more experienced and professional traders are always following world events to help them make trading decisions.Here we’ll discuss trading the news in forex in more depth.

Why Trade the News in Forex?

The economic news that’s relevant to the forex markets is the major economic statistics from all the world’s governments. That includes information related to interest rates, inflation, trade, employment and much more.All of these news releases provide market participants with new information about the performance of the various economies around the world. Because currency values are heavily influenced by the strength and weakness of a country’s economy, these news reports are crucial to forex traders. The volatility that often accompanies news releases can present a number of opportunities for trading currencies.

The most significantnews for Forex Markets

There are a variety of economic news reports and each has a different degree of impact on currency values and forex markets. News regarding interest rates and inflation tends to have the greatest impact. News regarding central bank opinion will also strongly influence currency values. Regionally, news from the United States has the most impact on markets since the U.S. dollar is involved in roughly 90% of all currency transactions.Initial market reaction to most news will last anywhere from 30 minutes to four hours, but on a broader level some news can have an impact on the market for several days. This is especially true for interest rate changes or news regarding central bank opinions.When choosing which pairs to focus on for news trading it’s best to stick with the most liquid pairs that have the tightest spreads. These include the EUR/USD, GBP/USD, USD/JPY and the USD/CHF.The USD/CAD and AUD/USD present special opportunities as they are particularly sensitive to news regarding commodities, especially price swings in the market for crude oil.

The Economic Calendar and Forex Trading

To get started with news trading in forex the first thing you’ll need is an economic calendar. You can find online economic calendars at any number of sites. They list the economic news events, the date and time of release, and typically the previous result and the consensus expected result.Traders will want to see where the data is in relation to the expectations, since these expectations are usually already priced in. If the actual data misses expectations by a wide margin, this is when the most volatility occurs in the forex markets.Generally speaking, data that is better than expected will cause the currency to gain against rivals, while data that is worse than expected will cause the currency to retreat against its rivals.As an example, if the consensus estimate is for the U.S. economy to add 248,000 new jobs, but the data shows just 196,000 jobs added, the U.S. dollar will likely drop against rival currencies, at least initially.

Strategies for Trading the News in Forex

There’s more than one way to trade the news. Some traders try to forecast what the news will be and place their trades ahead of the news release based on their own analysis.While this might seem risky, you have to understand that there are often clues to economic data before it’s released. For example, prior to the release of jobs data you could look at the employment component of the latest PMI report. If that number has increased, it’s also likely that the number of jobs has increased.A second group of traders waits for the news to be released and then trades based on the market reaction to the event. This requires dexterity and speed, and there are cases where the initial reaction is in the wrong direction, so these trades must be carefully watched.A third strategy is to avoid the actual fundamental data and focus on price. These traders will often look for a breakout move from a prior range and trade in whichever direction the breakout occurs.Consider the above chart of the EUR/USD. The pair had been trading in a range of 1.1220 to 1.1450 throughout the month of November 2018. On November 28 there was a speech given by Jerome Powell, the head of the U.S. Federal Reserve. Federal Reserve chairman speeches are known to move the market, but there’s no knowing in what direction ahead of time. In this case it moved the pair higher, and you can see where the buy stop and profit targets could have been. The trader would have also placed a sell stop below the current market price of 1.1285, probably at the 1.1270 level given the daily range.

Risks in Trading the News in Forex

Trading the news in forex does come with some risks. One is that spreads often widen ahead of news releases, thus increasing the cost to get into and out of the market. Another challenge comes from slippage in the market. Slippage occurs when you place an order at a certain price, but because the market is moving so fast you get filled at a worse price. During the volatility after a news release this price might be much worse.The volatility that often accompanies news releases, and can create trade opportunities, also makes trading forex around the news a challenge. It’s not unusual for a trader to be right about market direction, but they get stopped out anyway because of wild swings around the news release.

In Conclusion

Trading the news in forex can present some excellent opportunities for traders, but it also presents plenty of risks. New traders may want to observe and paper trade news releases for some time to get comfortable with the volatility often generated by the news.Once you have a grasp of how markets react to various economic news reports you will be better armed to take advantage of future news releases.Having additional strategies that give you good opportunities for trading is a good idea and considering the number of economic news reports regularly released news trading strategies should be something you consider adding to your toolbox.
In forex, fundamental analysis covers the state of global economies. It includes research into economic growth, trade, capital flows, manufacturing, employment, interest rates and other economic variables. Traders use this research to determine the current value of national currencies.The reason traders want to determine the value of currencies is that they believe the price of a currency is not necessarily equal to its value. In fact we could say that is always true, and that’s why currency prices are always changing. In short, markets always price currencies too high or too low, and fundamental analysis tries to uncover the true value of currencies to give traders an edge in the markets.This also shows how technical analysis differs from fundamental analysis. Where fundamental analysis looks at everything except price, technical analysis is focused on nothing but price. This means fundamental analysis is often best for medium and long-term trading plans, while technical analysis is better for the short-term day-to-day and even minute-to-minute moves in the forex markets.

News and Forex Fundamentals

As a forex trader you’ll quickly notice that the largest movements in forex markets are caused by news reports. This is all tied in with fundamental analysis and how it attempts to place the correct value on currencies.Forex traders and others involved with financial markets watch a number of indicators that provide clues to a country’s economic growth, trade balance and the flow of capital. These indicators are released in reports that come out on a weekly, monthly or quarterly basis. You can find out when various reports are due and what their results are by using an online forex calendar.Here’s how fundamental and technical analysis differ dramatically:With technical analysis traders receive new information every second as price quotes are updated in real-time. Fundamental updates come once a week at most, and in some cases only once every three months.Thus fundamental analysis actually mimics real-world changes. Capital flows gradually, and changes where it accumulates slowly. Economic strength also ebbs and flows gradually. As an economy strengthens it becomes more attractive to foreign investors. That attracts new capital, which serves to further strengthen the economy, and often improves trade balance.All of these things require investors to have the national currency of the country. This increases demand for that currency and also tends to increase the value of the currency.Of course, if economics was that simple, we’d all be rich. Currencies react to many factors besides economic growth and capital flows,and in some cases the value of currencies is manipulated by governments and central banks. In fact, one of the direct results of monetary policy is a change in the value of a country’s currency.In any case, the release of any economic reports is accompanied by traders examining those reports for signs of strength or weakness in the economy. Prior to the release of the report, economists and other financial professionals will forecast the data. Any significant difference from the forecasts is likely to cause forex market volatility.That potential volatility is why new forex traders are cautioned to avoid placing trades around major news releases.

Major economic indicators for Fundamental Analysis

While there are dozens of fundamental economic reports that can influence forex markets, some are of major importance. Three are interest rates, inflation, and gross domestic product (GDP).

Interest Rates

Every forex trader monitors interest rates, and more specifically any changes in interest rates are a major fundamental indicator to the true value of currencies. While you’re probably familiar with different types of interest rates, when forex traders talk about interest rates, they mean the nominal interest rates set by central banks.The nominal interest rate is the rate that the central bank charges commercial banks for borrowing money from them.Interest rates are arguably the strongest fundamental factor in currency prices. That’s because interest rates can influence so many other factors of the economy. Interest rates influence trade, borrowing, investment, inflation, capital flows and even employment.If fundamental analysis of the forex markets is your goal the best place to begin is with a study of global interest rates.

Inflation

Inflation reports focus on changes in the price of goods and services over time. Each country’s central bank has an inflation target it is trying to hit, so inflation reports can often foreshadow changes in monetary policy. If inflation becomes too strong the central bank may cut interest rates or lower money supply. The reverse of inflation is deflation, which is when goods and services become cheaper because the value of money is increasing. This can be good for a short time, but it soon leads to a slowdown in economic growth. When conducting fundamental analysis with respect to inflation forex traders always assume central bankers will adjust monetary policy to keep inflation within a target band.

Gross Domestic Product (GDP)

Gross domestic product measures the value of all the goods and services produced by a country over a given period, usually quarterly or yearly.While an increase in GDP can be a good thing, since it indicates strong production, it needs to be matched by strong trade data and demand for the products and services being produced. If all these elements are in place a rising GDP usually indicates increased value for the country’s currency.

In Conclusion

The three fundamental factors of interest rates, inflation and GDP are the major indicators that every fundamental analysis of forex markets should include.They generate more impact to forex markets than all other factors combined in nearly every case. Beginning with these three fundamental factors and understanding how they impact forex markets will create a strong foundation for any fundamental analysis.
A trendline is a diagonal line that connects points serving as support or resistance. If the diagonal line connects points of support, it is called an uptrend line. If it connects points of resistance, it is called a downtrend line. Traders use trendlines to make educated guesses as to where the price will reverse.

An example trendline

From this chart, we can see that JPY/USD encountered three points of resistance from January to March, 2018. The first was hit in mid-January. The second was hit in early February. And the third was hit in late February. A diagonal line can be drawn connecting these three points. This implies that JPY/USD was in a downtrend during this time-period.We can also see that from March to November, two major areas of support were hit. The first came in late March, while the second came in October. A diagonal line can be drawn connecting these two areas of support. This implies that JPY/USD was in an uptrend during this time-period.

Drawing a trendline

To draw a trendline, simply locate two major tops or bottoms and connect them with a diagonal line. This line should not cross the price at any point. For example, the chart below shows an incorrectly drawn trendline.It might be tempting to draw the uptrend line this way, since it shows the price bouncing off the line four or five different times. However, this trendline is incorrect because the price passes through the line several times, instead of merely bouncing off it.By contrast, here is another valid uptrend line that could be drawn from this chart. This could be considered an alternative to the one shown in the first imageA few points that should be kept in mind when using trendlines:
  • A trendline can be drawn with only two points. But the strongest lines have at least three points to them
  • The steeper a trendline is, the less reliable
  • The more often a trendline is tested, the stronger it is
 

Channels

Once we have a trendline drawn, we can draw a channel. Channels give us even more information about a particular trend.To draw one, simply create a line that is parallel to the uptrend or downtrend line already drawn.As with normal trendlines, the defining lines of a channel should not cross the price. A channel that slopes upward is called an ascending channel. A channel that slopes downward is called a descending channel.

How to trade using trendlines and channels

Here are a few ways to trade using trendlines and channels:
  • Buy at the bottom of a channel. Sell at the top
  • Go short at the top of a channel and buy back at the bottom
  • To limit risk, put a stop just above the top of a channel or just below the bottom
  • Buy and hold during an uptrend. Sell when the trend breaks down
  • Go short during a downtrend. Exit when the trend breaks
 Trendlines are diagonal lines that connect areas of support and resistance. When combined together to make channels, trendlines can be a useful tool to find entry and exit points in trades.
Monetary policy in each country is set by their respective central banks and is formulated to achieve a specific economic mandate. With central banks and monetary policy so inextricably intertwined there’s no way to talk about one without also talking about the other.Because monetary policy is directly tied to interest rates, inflation and economic growth, it has a major impact on forex markets. Even a hint from central banks that monetary policy will change can cause huge moves in currencies.You’ll find that some of the mandates held by the world’s central banks are similar, however, each one has its own unique and distinctive goals that are developed based on the specifics of that country’s economy.No matter what the goals and mandates of a central bank might be, monetary policy is concerned mostly with maintaining and promoting price stability, along with encouraging economic growth.Central banks have several tools they use to achieve their goals:
    • Money supply
    • Inflation
    • Interest rates
    • Bank reserve requirements
    • Lending to commercial banks
 Economies, markets and traders all like stability. When central banks can give them stability through the tools at their disposal currencies will also remain fairly stable.

Types of Monetary Policy

Monetary policy is described in several ways. Each has a different impact on forex markets based on the activities being performed by the central bankers.Monetary policy is called restrictive when the central bank is actively reducing the money supply. A monetary policy is also considered restrictive when the central bank is raising interest rates. The term restrictive is used because both of these actions make it harder, or more restrictive, to borrow money. The net effect is that business and consumers both reduce their investment and spending.A country’s currency will often become stronger when monetary policy is restrictive. Higher interest rates encourage foreign investment, and a reduced money supply is a reduction in supply, which can drive the value of currencies higher.The opposite of restrictive monetary policy is expansionary monetary policy. This is when the money supply is increased, or the interest rate is being decreased. This will often lead to a weaker currency as supply increases and demand decreases.Related to expansionary monetary policy is accommodative monetary policy, which seeks economic growth through lowered interest rates to spur borrowing, spending and investing. The opposite of accommodative monetary policy is tight monetary policy, where interest rates are increased to restrain economic growth and reduce inflation.Accommodative monetary policy encourages a weaker national currency, while tight monetary policy creates a stronger currency. This was clearly seen in many world economies following the 2007-2009 financial crisis when many central banks became extremely accommodative, and currency values fell sharply.And finally there is neutral monetary policy, where the central bank is looking to maintain growth and inflation at their current levels.It’s important to note that central banks do not directly set inflation rates, but that they generally have an inflation target which they try to reach through the means at their disposal. In many cases this inflation target is 2%.Central bankers use inflation targets to let markets know how they plan on dealing with changes in their country’s economy. They know some inflation is helpful for growth, but too much or too little inflation will cause the economy to either overheat or remain stagnant.It’s interesting to note that forex markets don’t need the central bank to actually make changes to monetary policy to react. Currency values can change dramatically simply based on comments made by central bank members during speaking engagements.For example, the head of the Federal Reserve is closely watched. If he says that he feels the economy is getting too strong markets will take this as a sign that monetary policy will become more restrictive in the future. The U.S. dollar would most likely strengthen against rival currencies as a result.That will happen even if monetary policy remains quite accommodative at the time. Traders try to anticipate what the central banks will do with monetary policy far in advance of when it actually occurs. It’s often not as important what actually happens versus what markets believe will happen.In the U.S. there are even Federal Funds futures where traders can speculate on future interest rates. And there’s also a related FedWatch Tool that shows the probability of interest rate hikes or cuts based on the Fed Funds futures.In ConclusionBecause monetary policy deals with changes in money supply and interest rates it has an often huge impact on the forex market. Even rumors or hints of changes to monetary policy can cause massive moves in currency values.In some cases this is very useful information for traders, because it gives them a long-term picture for the forex market. For example, if monetary policy is expected to raise interest rates consistently over the next 18-24 months there’s a good chance that the currency will get consistently stronger over that time frame as well. This knowledge can help traders plan their trades.
A Fibonacci retracement level is a horizontal line that shows where reversals are likely to occur during a retracement. Fibonacci levels are derived from the “Fibonacci ratios” discovered by the mathematician Leonardo Pisano Bogollo, who was known by the nickname “Fibonacci.” Fibonacci levels can often be used successfully as entry or exit points in trades.

What is the Fibonacci Sequence and Fibonacci ratios?

The Fibonacci sequence begins with zero and one. After zero and one, each successive number is the sum of the previous two. The first ten numbers in the sequence are 0, 1, 1, 2, 3, 5, 8, 13, 21, and 34. A Fibonacci ratio is derived by dividing one number in the sequence with a number that follows it by a certain number of places.For example, if any number in the Fibonacci Sequence is divided by the following number, it results in approximately 0.618 (61.8%). The higher the two numbers get, the closer they get to 0.618. For example, 3 / 5 = 0.6, 5 / 8 = 0.625, and 13/21 = 0.61764 rounded to four decimal places. For this reason, 61.8% is considered to be a Fibonacci ratio.Similarly, any number in the sequence divided by the number two places higher results in approximately 0.382 (38.2%). So 38.2% is considered to be a Fibonacci ratio. 23.6% is another example. It is the approximate result of one number in the sequence divided by the number three places higher.

Fibonacci level example

A Fibonacci level is a horizontal line that is 61.8%, 38.2%, 23.6%, or some other Fibonacci ratio distance away from a significant high or low. For example, consider this chart of USD/CHF.In the chart, USD/CHF has peaked at around 0.998 and gone into a steep downtrend. It has then paused at 0.987. The 61.8% Fibonacci level of this downtrend line is approx. 0.994, the 38.2% level is around 0.991, and the 23.6% level is approx. 0.989. If a counter-trend rally occurs here, we should expect the price to pause or even reverse as it hits these levels. For this reason, a trader who wants to enter a long trade could use these levels as possible take-profit points. A trader could also wait until the price reaches one of these levels and use it as an entry point.

How to draw Fibonacci levels

To draw Fibonacci levels for a downtrend, first find a significant peak in price. Then, click and drag until you reach the trough in the downtrend. When you reach the trough, release the mouse button. For an uptrend, do the reverse: click and drag from the trough to the peak, then release.

How to use Fibonacci levels with other indicators

Like other Forex tools, Fibonacci levels are not 100% accurate. But their accuracy can be improved by combining them with other indicators. Here are two examples of other Forex tools that can be combined with them.
  • With support and resistance - When a Fibonacci level is also a line of support or resistance, this provides stronger confirmation that the line will hold. 110.206 and 109.909 in the following chart are examples of this.
  • With trendlines - When a trendline crosses a Fibonacci level, this provides further confirmation that a reversal could occur in this area. The white circles on this chart at 38.2% and 23.6% can serve as examples
 The Fibonacci retracement tool indicates price levels that correspond to Fibonacci ratios. These are areas where retracements are likely to come to an end as the dominant trend reasserts itself. For this reason, Fibonacci levels can be a useful tool for traders to find profitable opportunities.
In Forex, a moving average (MA) is a line that depicts the average price of a currency pair over a number of previous periods. For example, a 10-day MA is a line where each point is made up of the average price for the past 10 days.Moving averages show dynamic levels of support and resistance. Prices often struggle to break through moving averages. And once the price does break through, it tends to carry momentum.

Moving average example

In this chart, the red line is the 10-day moving average. The price hit this line several times in September, 2018. But the first few times, this line offered resistance, and the price failed to break through. In late September, this line was finally broken.A strong rally followed this break as the price moved from 0.96662 to 0.99537. When this rally lost momentum around October 9th, the price returned to the 10-day moving average, which now offered support. The price then attempted to break this support, first in the second week of October and then again in late October and early November. In both cases, the 10-day moving average provided strong support, and the price continued upward.

Types of moving averages

Moving averages can be either simple or exponential.

Simple moving average

The points to a simple moving average (SMA) are calculated by adding the closing prices of the last X periods and dividing them by X, where X is the number of periods specified.For example, the point corresponding to the 21-hour SMA for USD/CHF at 12:00 noon can be calculated by adding the prices for USD/CHF at 12:00 noon, 11 a.m., 10 a.m., etc. all the way back to 3 p.m. the previous day (21 hours earlier), then dividing them by 21. If this point is recalculated and plotted each hour, it results in the 21-hour SMA.A simple moving average can be used to gain a broad overview of the direction a currency pair is trending. Because an SMA does not emphasize recent price action, it is slower to respond to changes in trend than an EMA is. For this reason, an SMA is most useful when the trader wants to filter out the “noise” of recent price spikes.

Exponential moving average

The points to an exponential moving average (EMA) are calculated using the following equation: {Current closing price times [2 ÷ (time period + 1)] + [EMA point from the prior day times {1 – [2 ÷ (time period + 1)]}}.EMAs respond more quickly to current price action than do SMAs. For this reason, they are favored for shorter time periods and for circumstances where a trader wants to catch sudden changes in trend. The moving average in the screenshot near the top of this page is an example of an EMA.Here are a few ways to trade using moving averages.
    • If the price is below the moving average, wait for it to rise until it hits the MA, then sell
    • If the price is above the MA, wait for it to fall until it hits, then buy
    • Wait for an MA of a shorter time-period to cross the MA of a longer time-period from below. Buy when this happens. Exit when the crossover happens in the other direction
    • Wait for an MA of a shorter time-period to cross the MA of a longer time-period from above. Sell when this happens. Exit when the crossover happens in the other direction
 Moving averages are lines that represent the average price of a currency pair over the course of a specific time-period. They can be a useful tool to determine the overall trend of a currency’s price. Because of this, they can be useful for finding profitable trading opportunities.
Relative Strength Index (RSI) is an oscillator that measures price momentum. It can be used for multiple purposes in Forex, including to identify overbought or oversold conditions, find impending trend reversals, and measure the strength of a trend.

Relative Strength Index explained

There are three components that are used to calculate RSI: Average Gain, Average Loss, and Relative Strength (RS). The first point of Average Gain is calculated by adding together the last 14 periods of gains and dividing them by 14. For each subsequent period, the Average Gain is calculated by taking the previous period’s average gain and multiplying it by 13, then adding the current gain and dividing the total by 14.Average Loss is calculated the same way. The first point is simply the average of all losses over the past 14 periods. Each subsequent point adds this period’s loss to the previous one and then divides the total by 14.Relative Strength (RS) is calculated by taking the Average Gain and dividing it by the Average Loss. When this number is put through a smoothing function, it results in a percentage value between 0 and 100. This percentage is called RSI.RSI is a measurement of how quickly price is moving. If RSI is above 70, price is moving upward at a rapid rate. If RSI is below 30, price is falling quickly. If RSI is 50, price is either range bound or trending slowly.

RSI example

In this hourly chart of EUR/USD, the price rose rapidly between 3 p.m. Nov. 28 and 7 a.m. Nov. 29. At the same time, RSI rose from 40 to above 70. The price then began to consolidate. As a result, RSI moved below 70. On the morning of November 30, the price then began to fall, and it fell faster as the day continued. As a result, RSI moved below 30.

How to trade using RSI

There are multiple ways that traders can use RSI, including to identify overbought/oversold conditions, confirm a strong trend, find divergences, and find failure swings.

Using RSI to identify overbought and oversold conditions

If RSI is above 70, the currency pair is considered “overbought.” This means the price is moving up too rapidly and the rally is likely to consolidate soon. A trader can use this signal to exit a long trade or to start looking for opportunities to short.If RSI is below 30, it is considered “oversold.” In this case, traders may want to consider exiting short trades and getting ready for opportunities to go long.

Using RSI to confirm a trend

If another indicator suggests that a breakout is occurring, RSI can be used to confirm that the trend is strong enough be useful. In this case, RSI should be above 50% in an uptrend or below 50% in a downtrend. If the price is rising but RSI is not above 50% or if the price is falling but RSI is not below 50%, there is a greater chance that the rally or retreat will be short-lived.

Using RSI to find divergences

If RSI is moving up while price is moving down, this is a bullish divergence and indicates a possible reversal upward. If the RSI is moving down while price is moving up, this is a bearish divergence and indicates a possible reversal downward.

Using RSI to find failure swings

If RSI moves below 30, rises above 30, then pulls back and holds without going below 30 again, a subsequent move above its previous high is a “bullish failure swing.” That is a signal to buy.Likewise if RSI moves above 70, falls below 70, then pulls up again without moving above 70, a subsequent break below its previous low is a “bearish failure swing.” That is a signal to sell.RSI measures a ratio of the average gain and average loss over a period of time. It can be used to find entry and exit points and recognize impending reversals. That is how relative Strength Index works.
In Forex trading, parabolic stop and reverse (parabolic SAR) is an indicator that attempts to find places where reversals are likely. Traders can use parabolic SAR to find entry or exit points in trades. They can also use it to find stop-loss points.

Parabolic SAR explained

Parabolic SAR was created by Welles Wilder and popularized through his book, New Concepts in Technical Trading Systems. The formula for determining parabolic SAR is:For an uptrend: Previous SAR + Previous Acceleration Factor * (Previous Extreme Point - Previous SAR)For a downtrend: Previous SAR - Previous Acceleration Factor * (Previous SAR - Previous Extreme Point)The Extreme Point is the highest price of the current uptrend or lowest price of the current downtrend. The Acceleration Factor starts at .02 and increases by .02 every time the price makes a new high or low, with a maximum of .20.This equation produces a series of dots on a chart above and below the price. When the dots are above the price, it means the currency pair is in a downtrend. When the dots are below the price, it means the currency pair is in an uptrend. This makes it easier to spot sudden reversals in trend.

Parabolic SAR example

In the chart above, EUR/USD went into a downtrend in early August, 2018. During this downtrend, the parabolic SAR dots were above the price. However, on August 21, parabolic SAR moved below the price and indicated the trend had reversed. September 10-13, parabolic SAR briefly reversed itself and indicated a downtrend. It then went back to indicating an uptrend from Sept. 14th to 16th. Finally, it showed a reversal signal again on September 27.

How to trade using parabolic SAR

Parabolic SAR can be used to find entry points, exit points, or stop-loss points. To find an entry point using parabolic SAR, wait until this indicator shows that the trend is reversing. If the dots are below the price, go long. If the dots are above the price, go short. To find an exit point, close out a long-trade when the dots are above the price or close out a short trade when the dots are below the price.To find a stop-loss point using parabolic SAR, place your stop-loss at the exact level where the dot appears. This will allow you to place wider stops during a strong trend and tighter stops during a weaker trend.Parabolic SAR can help to identify sudden reversals in trend. This can allow traders to find profitable entry and exit points. It can also prevent traders from getting stopped-out too early (or too late) by allowing them to place better stops. For this reason, you may want to consider using parabolic SAR as part of your Forex trading toolbox.
Generally speaking, if everything else is equal, higher interest rates in a country will translate to a stronger currency relative to currencies where the country’s interest rate is lower. Of course such a simple relationship isn’t the case when we’re dealing with the real world, where there may be hundreds of influences on the value of a country’s currency.So, interest rates are a major factor influencing the value of currencies, but there are many other elements that help determine the movements of currencies in relation to one another in the forex markets.Theoretically higher interest rates will boost the value of a currency. That’s because higher interest rates help attract foreign investment, which increases the demand for the country’s currency. And on the other side of that coin lower interest rates deter foreign investment and decrease the value of a currency.The seemingly simple relationship between interest rates and forex markets is complicated by a host of other factors. One of the clearest primary factors is the relationship between interest rates and inflation. Higher inflation has the tendency to put downward pressure on a currency, so if a country can successfully increase interest rates without increasing the inflation rate there is a better chance the value of that country’s currency will rise.In addition to the relationship with interest rates, currency values are also heavily impacted by political and economic stability, as well as trade demands. In fact, these factors often have a greater influence on forex markets than interest rates at any given time. A country’s GDP or trade balance can be critical to the value of that country’s currency. This is true because greater demand for a country’s products means there will be a corresponding increased demand for that country’s currency to purchase said goods.Another potential factor in valuing currencies is the amount of debt a country holds. High levels of debt can lead to higher inflation, which we already know is a drag on the value of a country’s currency.The Turkish Lira in 2018 has been a good example of how all these factors can influence the value of a currency. Due to extremely high levels of debt and inflation running near 16% the Lira lost nearly 50% against the U.S. dollar in the first half of 2018.By late July there were increasing fears of an economic slowdown in Turkey, and a geopolitical situation was brewing between the U.S. and Turkey over the extradition of a U.S. pastor. The first week of August saw the Lira fall another 25% against the U.S. dollar to its lowest level ever. By the end of August Turkey had raised interest rates to an astounding 24% in a bid to lower inflation.In fact it had the opposite effect and by October 2018 inflation in Turkey was running above 25%. While we might expect that to keep the Lira weak, in fact it has been strengthening against the U.S. dollar in the previous two months as traders ignored the inflation effect, focusing instead on the increased political stability in Turkey.Therefore, higher interest rates don’t always lead to a stronger currency, and rising inflation doesn’t always lead to a weaker currency. Instead, traders must weigh dozens of inter-related factors to predict whether a currency will rise of fall in price.