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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.

Options are contracts that give the holder the right (but not the obligation) to take on a position in an underlying instrument at a previously agreed price. They are only valid for certain time periods, as determined by the terms of the contract.

If you are holding a long position in Call options and you exercise them, you will take on a long position in the underlying.

If you are holding a long position in Put options and you exercise them, you will take on a short position in the underlying.

The actual mechanics of (Exchange Traded) Puts and Calls are similar. They have the same data fields, etc. just reward different directions of market moves. Also, more advanced option trading strategies involve selling (often referred to as ‘writing’) Put and Call options.

Call Options

An example that is more granular in nature will flesh out the details and illustrate the opportunities made available to you by trading Puts / Calls.

Long Call

 

Call Options: Long position

Strike Price: $260

Expiry date: Day 37

In the example the solid blue line shows the price of the Underlying instrument. This rises over time and when it exceeds the Strike Price of the Call option then exercising the option (giving instruction to convert the option into a Long position in the underlier) will result in profit.

Technically speaking, exercising the option involves receiving the underlying instrument at a price of $260 but in practice it is typical that instead of processing the trade‘long-hand’ the cash reflecting the profit ($270-$260) is just reflected in your account.

Note the date at which exercising the Call options becomes advantageous is day 20. Prior to that day you would have been able to buy the underlying instrument in the open market at a price ranging from $246 to $259 rendering the option to buy them at $260 worthless. Between days 20 – 37 the price of the underlier in the open market is higher than the strike price of $260 and exercising the option would be profitable.

Long Put

Put Options: Long position

Strike Price: $260

Expiry date: Day 37

In the below example the solid blue line again shows the price of the Underlying instrument but is this time showing bearish price action. As you are long Puts, when the price of the underlier is below the Strike Price of the option then exercising after day 20 (instructing to convert the option into a Short position in the underlier) will generate profits. For example, on Day 37 exercising the option would see you sell at $260 and you could buy the same amount and flatten the position at the lower price of $238.

Note the date at which exercising the Call options becomes advantageous is day 20. Prior to this day you would have been able to sell the underlying instrument in the open market at a higher price than $260.

While the principles behind trading options are relatively straightforward, options remain something that only the most experienced trader should consider. There are lots of nuances and minor details that need to be taken into account. Just one example is that European Options can only be exercised on Expiry Date,butAmerican Options can be exercised at any point up to Expiry. There are many more quirks associated with Options, making them something you need to approach with as much caution as interest.

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.

Commodities are notoriously volatile, which means there are opportunities to make a great deal of money. Political upheaval, unexpected weather events, and economic forces continually move prices in the commodities market. It’s a market that draws investors of all kinds, although commercial investors (those involved in producing, processing, or using the commodity) are by far the largest players.

In the U.S., there are two major futures exchanges: The CME Group, which resulted from the merger between the Chicago Mercantile Exchange and the Chicago Board of Trade, and their subsequent acquisition of NYMEX and COMEX, and ICE Futures.

The CME Group trades in multiple markets, including financial products, energy, grains, precious metals, and livestock. ICE Futures also trades in the commodities markets, but as owners of the New York Stock Exchange, they also trade in equities futures.

Roughly 35 commodities trade on the U.S. exchanges. Some, like oil and wheat, have been on the exchanges forever, while other commodities come and go depending on investor interest in trading them.

Commodities can be broken into three main categories: Agriculture, metals, and energy. There are a few others that defy easy categorization, such as rubber, lumber, and amber. Below is a list of commodities currently traded on the two major U.S. exchanges.

Agriculture

  • Corn
  • Wheat
  • Soybeans
  • Soybean oil
  • Soybean meal
  • Oats
  • Rough rice
  • Palm oil
  • Canola
  • Coffee
  • Cocoa
  • Sugar
  • Frozen orange juice
  • Live cattle
  • Lean hogs
  • Feeder cattle
  • Milk
  • Non-fat dry milk
  • Butter
  • Cheese
  • Whey

 

Energy

  • Ethanol
  • Methanol
  • Natural gas
  • Liquid natural gas
  • Coal
  • Crude oil
  • Heating oil
  • RBOB (unleaded gas)
  • Benzene
  • Ethylene
  • Propylene

 

Metals

  • Gold
  • Silver
  • Iron ore

 

Because they’re traded on the open market, commodities futures are an accurate representation of the price of raw materials on a given day. Forecasting is another matter entirely. Although commodities analysts spend their time digging into every possible variable affecting supply and demand of their assigned commodity, emotions play a definite part in the futures market.

Speculators who believe a shortage of a particular commodity is on the horizon bid up the price in hopes of making a fat profit. Other traders see prices climbing and launch a bidding war, pushing them even higher. Through it all, the underlying dynamics of supply and demand haven’t really changed, and when the bidding war ends, prices plummet.

The oil market is a perfect example of this phenomenon. In the second quarter of 2008, global oil consumption was about 85 million barrels, while production during the same period was over 86 million barrels. Under the laws of supply and demand, oil prices should have gone down, but instead they rose from $88 to $110 per barrel during that time. The EIA blamed the increase on a massive inflow of cash into the oil futures market. In fact, the price reached a high of $145 per barrel, completely unmoored from actual global supply and demand. To say commodities futures are a risky and volatile market is an understatement.

You can trade commodities futures as an individual investor, but if you’re new to commodities, a safer way to dip your toe in the market is through commodities ETFs and commodities mutual funds. These funds tend to smooth out volatility through broad exposure to the entire market of commodities futures.

Some Day Traders enjoy significant profits over a long period, and some make profits for a while then give it all back in losses. Most reports indicate the majority of Day Traders close their accounts within a year, either because of cash losses, or through realizing they don’t have the time available to commit to making it a success.

To become a profitable Day Trader is difficult. It requires study, preparation, discipline and time. One common mistake that is often made at the outset is to set a profit target, and even worse, think of that as required income, for example, “I need to make $2,000 per month to pay my bills”. Don’t start there!

The alternative approach is to measure trading performance in terms of percentage points rather than in absolute terms. Ask a professional portfolio manager at an institutional asset manager what their performance is like and you’ll likely be answered in terms of “Up or down x% on the month and Up or down y% on the year”. These guys, being paid salaries to trade, don’t talk in absolute cash terms until it’s time to negotiate their end of year bonuses. What’s more, the majority are going to be delighted if they make a 20% annual return. In fact, a portfolio manager with returns over that number would have to work hard at attracting new institutional grade investors. Some investors would draw on their gut feeling that ‘somewhere in there’ the risk return ratio must be skewed towards risk. Others might argue that “OK, you obviously had a good idea that worked out, but I really needed to be in the trade from the beginning”.

If you’re looking to open a day trading account and have £5,000 capital available, then taking the account to £6,000 over the period of a whole year would in percentage terms put you in line with successful institutional investors. On the other hand an annual return of £1,000 might not be the kind of number you were thinking of when running with the idea of taking up Day Trading. It’s clear at this point that profitability in cash terms is dependent on the amount of capital you put up and the risk return profile you decide to run.

Step back for a moment and consider how your trading methodology would be different if your target was to achieve a relatively modest return (say 10%), but not to exceed it, and are given a long-time window in which to trade. You may have twenty trading ideas that you are currently looking to put on. But in this different environment it’s not a question of which of the twenty would be proved to be good trades, it is more, which few of them are the best to use to meet the target. This cherry-picking of trades does mean you might not put on trades that turn out to be very profitable which is obviously frustrating but is what demo accounts are for. It does however mean you might not put on the other trades that would have gone on to lose you money and that is crucial.

VWAP is typically used to help youtrade intoand out of positions improved price levels. VWAP is the ratio of the value traded to total volume traded over a particular time period. It is a measure of the average price at which a stock is traded.

If you are looking to enter into a long position over the course of a day, then you’d be ‘buying the dips’ which can be thought of as buying when price is lower than the daily VWAP. As you could sell short, or at least take profits when price is above VWAP we begin to see how a sideways market creates the opportunity for profits to be made by trading around VWAP.

It’s worth considering the crucial implications of the market changing from ‘sideways’ to ‘trending’, or vice versa. Interpreting VWAP to be in essence a short-term moving average allows you to consider a ‘break out’ of price action as not only a signal that momentum is building but also, in what direction it is heading. Instead of trading the regression back towards VWAP, you would build a position into a momentum trade.

Of course the two strategies involve putting on completely different positions. If you were selling in a sideways market, you’d be buying in a trending one. Getting that wrong can clear out your account in next to no time which is why being able to identify whether a market is sideways, or trending is so crucial to your trading performance.

The trading strategy ‘Opening Range Breakout’seeks to profit from price action signals at market open. It’s a popular strategy among day traders looking to trade short term, specifically intra-day, momentum. Some traders use Technical Analysis and candlestick charts to identify breakout is occurring. The VWAP, and more specifically, a situation when short term price crosses VWAP, can also be used as an indicator of breakout. In practice you’d probably use both indicators in conjunction.

The below chart taken from Interactive Brokers shows: VWAP as a yellow line and price action as red and green candlesticks. The blue and purple lines are the high and low standard deviations range, respectively. Half way through today’s trading session we can see the market today has been moving sideways. Selling when price was above VWAP and buying when it was below would have been profitable. Trading a breakout strategy would have brought about significant losses.

Source: Interactive Brokers Demo Trading Platform 20181129

Getting down into the detail of the calculation we see the supporting text from this broker explains the exact details of their methodology:

“Intraday Volume Weighted Average Price

Tracks VWAP throughout the day and displays as a colored line linking VWAP values at varying times throughout the one-day period. By default, the line that tracks Intraday VWAP is bracketed within a high/low standard deviation range. The standard deviation is calculated for the same period as the VWAP, and the range can be adjusted by modifying the number of Standard Deviations within the settings of the Intraday VWAP.

Intraday VWAP is calculated as: VWAP=[sum (Volume_bar_i * Typical_price_i)]/sum(volume_bar_i) where i is the intraday bar number. If we use a 1 min daily bar chart, the calculation is made from the first minute with i=[1;N] where N is the last bar number of the chart, Typical_price_i = VWAP_on_bar_price_i => This is the VWAP we currently store and volume_bar_i is the volume for the bar i. If no volume is available for the product (i.e. for IND, CASH and CMDY), use 1 as volume for each bar.”

Source: https://www.interactivebrokers.com/en/software/tws/usersguidebook/technicalanalytics/intradayvwap.htm

VWAP is a useful tool that allows opportunities to finesse entry and exit into positions. It is also a useful indicator for trading sideways and trending markets; unfortunately knowing which type of market you are in is the tricky bit.

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 Conclusion

Because 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.

Spread is a term that relates to price.

When trading in the CFD there will be an Offer price and a Bid price quoted by the broker platform. The Offer is the best price at which you can execute a buy trade and the Bid price is the best price you can achieve if selling. The difference between the two prices is the Spread.

The City Index platform is below quoting the ability to trade in Danone CFD and Sell at 62.550 and Buy at 62.580. The Spread in this case is 0.03 Euro Cents.

Spread is largely driven by market liquidity. Generally the case is that the greater the amount of trading activity the tighter the spread will be. More buyers and sellers being present means there is more chance of finding someone who takes the other side of the trade to you.

Particular instruments can see the spread narrow or widen according to liquidity in the market, for example, due to time of day. Although it’s pretty much possible to trade some Index and Forex CFDs 24-hrs a day the spread will typically be tighter during what are seen as ‘market hours’ and will then widen when markets are quieter.

Other instances of Spread widening can be during times of extreme market volatility. At those times the spread widens because market participants are unsure of a realistic value and are reluctant to take on a position that they might not be able to move on if the market in general is undergoing extreme shifts.

You will also find different Broker Platforms apply different spreads on the same CFDs. As Spread is a cost that you have some control over, shopping around for the tightest Spread is a quick win and should form part of your Broker Comparison Analysis.

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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.


Options are contracts that give the holder the right (but not the obligation) to take on a position in an underlying instrument at a previously agreed price. They are only valid for certain time periods, as determined by the terms of the contract.

If you are holding a long position in Call options and you exercise them, you will take on a long position in the underlying.

If you are holding a long position in Put options and you exercise them, you will take on a short position in the underlying.

The actual mechanics of (Exchange Traded) Puts and Calls are similar. They have the same data fields, etc. just reward different directions of market moves. Also, more advanced option trading strategies involve selling (often referred to as ‘writing’) Put and Call options.

Call Options

An example that is more granular in nature will flesh out the details and illustrate the opportunities made available to you by trading Puts / Calls.

Long Call

 

Call Options: Long position

Strike Price: $260

Expiry date: Day 37

In the example the solid blue line shows the price of the Underlying instrument. This rises over time and when it exceeds the Strike Price of the Call option then exercising the option (giving instruction to convert the option into a Long position in the underlier) will result in profit.

Technically speaking, exercising the option involves receiving the underlying instrument at a price of $260 but in practice it is typical that instead of processing the trade‘long-hand’ the cash reflecting the profit ($270-$260) is just reflected in your account.

Note the date at which exercising the Call options becomes advantageous is day 20. Prior to that day you would have been able to buy the underlying instrument in the open market at a price ranging from $246 to $259 rendering the option to buy them at $260 worthless. Between days 20 – 37 the price of the underlier in the open market is higher than the strike price of $260 and exercising the option would be profitable.

Long Put

Put Options: Long position

Strike Price: $260

Expiry date: Day 37

In the below example the solid blue line again shows the price of the Underlying instrument but is this time showing bearish price action. As you are long Puts, when the price of the underlier is below the Strike Price of the option then exercising after day 20 (instructing to convert the option into a Short position in the underlier) will generate profits. For example, on Day 37 exercising the option would see you sell at $260 and you could buy the same amount and flatten the position at the lower price of $238.

Note the date at which exercising the Call options becomes advantageous is day 20. Prior to this day you would have been able to sell the underlying instrument in the open market at a higher price than $260.

While the principles behind trading options are relatively straightforward, options remain something that only the most experienced trader should consider. There are lots of nuances and minor details that need to be taken into account. Just one example is that European Options can only be exercised on Expiry Date,butAmerican Options can be exercised at any point up to Expiry. There are many more quirks associated with Options, making them something you need to approach with as much caution as interest.


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.


Commodities are notoriously volatile, which means there are opportunities to make a great deal of money. Political upheaval, unexpected weather events, and economic forces continually move prices in the commodities market. It’s a market that draws investors of all kinds, although commercial investors (those involved in producing, processing, or using the commodity) are by far the largest players.

In the U.S., there are two major futures exchanges: The CME Group, which resulted from the merger between the Chicago Mercantile Exchange and the Chicago Board of Trade, and their subsequent acquisition of NYMEX and COMEX, and ICE Futures.

The CME Group trades in multiple markets, including financial products, energy, grains, precious metals, and livestock. ICE Futures also trades in the commodities markets, but as owners of the New York Stock Exchange, they also trade in equities futures.

Roughly 35 commodities trade on the U.S. exchanges. Some, like oil and wheat, have been on the exchanges forever, while other commodities come and go depending on investor interest in trading them.

Commodities can be broken into three main categories: Agriculture, metals, and energy. There are a few others that defy easy categorization, such as rubber, lumber, and amber. Below is a list of commodities currently traded on the two major U.S. exchanges.

Agriculture

  • Corn
  • Wheat
  • Soybeans
  • Soybean oil
  • Soybean meal
  • Oats
  • Rough rice
  • Palm oil
  • Canola
  • Coffee
  • Cocoa
  • Sugar
  • Frozen orange juice
  • Live cattle
  • Lean hogs
  • Feeder cattle
  • Milk
  • Non-fat dry milk
  • Butter
  • Cheese
  • Whey

 

Energy

  • Ethanol
  • Methanol
  • Natural gas
  • Liquid natural gas
  • Coal
  • Crude oil
  • Heating oil
  • RBOB (unleaded gas)
  • Benzene
  • Ethylene
  • Propylene

 

Metals

  • Gold
  • Silver
  • Iron ore

 

Because they’re traded on the open market, commodities futures are an accurate representation of the price of raw materials on a given day. Forecasting is another matter entirely. Although commodities analysts spend their time digging into every possible variable affecting supply and demand of their assigned commodity, emotions play a definite part in the futures market.

Speculators who believe a shortage of a particular commodity is on the horizon bid up the price in hopes of making a fat profit. Other traders see prices climbing and launch a bidding war, pushing them even higher. Through it all, the underlying dynamics of supply and demand haven’t really changed, and when the bidding war ends, prices plummet.

The oil market is a perfect example of this phenomenon. In the second quarter of 2008, global oil consumption was about 85 million barrels, while production during the same period was over 86 million barrels. Under the laws of supply and demand, oil prices should have gone down, but instead they rose from $88 to $110 per barrel during that time. The EIA blamed the increase on a massive inflow of cash into the oil futures market. In fact, the price reached a high of $145 per barrel, completely unmoored from actual global supply and demand. To say commodities futures are a risky and volatile market is an understatement.

You can trade commodities futures as an individual investor, but if you’re new to commodities, a safer way to dip your toe in the market is through commodities ETFs and commodities mutual funds. These funds tend to smooth out volatility through broad exposure to the entire market of commodities futures.


Some Day Traders enjoy significant profits over a long period, and some make profits for a while then give it all back in losses. Most reports indicate the majority of Day Traders close their accounts within a year, either because of cash losses, or through realizing they don’t have the time available to commit to making it a success.

To become a profitable Day Trader is difficult. It requires study, preparation, discipline and time. One common mistake that is often made at the outset is to set a profit target, and even worse, think of that as required income, for example, “I need to make $2,000 per month to pay my bills”. Don’t start there!

The alternative approach is to measure trading performance in terms of percentage points rather than in absolute terms. Ask a professional portfolio manager at an institutional asset manager what their performance is like and you’ll likely be answered in terms of “Up or down x% on the month and Up or down y% on the year”. These guys, being paid salaries to trade, don’t talk in absolute cash terms until it’s time to negotiate their end of year bonuses. What’s more, the majority are going to be delighted if they make a 20% annual return. In fact, a portfolio manager with returns over that number would have to work hard at attracting new institutional grade investors. Some investors would draw on their gut feeling that ‘somewhere in there’ the risk return ratio must be skewed towards risk. Others might argue that “OK, you obviously had a good idea that worked out, but I really needed to be in the trade from the beginning”.

If you’re looking to open a day trading account and have £5,000 capital available, then taking the account to £6,000 over the period of a whole year would in percentage terms put you in line with successful institutional investors. On the other hand an annual return of £1,000 might not be the kind of number you were thinking of when running with the idea of taking up Day Trading. It’s clear at this point that profitability in cash terms is dependent on the amount of capital you put up and the risk return profile you decide to run.

Step back for a moment and consider how your trading methodology would be different if your target was to achieve a relatively modest return (say 10%), but not to exceed it, and are given a long-time window in which to trade. You may have twenty trading ideas that you are currently looking to put on. But in this different environment it’s not a question of which of the twenty would be proved to be good trades, it is more, which few of them are the best to use to meet the target. This cherry-picking of trades does mean you might not put on trades that turn out to be very profitable which is obviously frustrating but is what demo accounts are for. It does however mean you might not put on the other trades that would have gone on to lose you money and that is crucial.


VWAP is typically used to help youtrade intoand out of positions improved price levels. VWAP is the ratio of the value traded to total volume traded over a particular time period. It is a measure of the average price at which a stock is traded.

If you are looking to enter into a long position over the course of a day, then you’d be ‘buying the dips’ which can be thought of as buying when price is lower than the daily VWAP. As you could sell short, or at least take profits when price is above VWAP we begin to see how a sideways market creates the opportunity for profits to be made by trading around VWAP.

It’s worth considering the crucial implications of the market changing from ‘sideways’ to ‘trending’, or vice versa. Interpreting VWAP to be in essence a short-term moving average allows you to consider a ‘break out’ of price action as not only a signal that momentum is building but also, in what direction it is heading. Instead of trading the regression back towards VWAP, you would build a position into a momentum trade.

Of course the two strategies involve putting on completely different positions. If you were selling in a sideways market, you’d be buying in a trending one. Getting that wrong can clear out your account in next to no time which is why being able to identify whether a market is sideways, or trending is so crucial to your trading performance.

The trading strategy ‘Opening Range Breakout’seeks to profit from price action signals at market open. It’s a popular strategy among day traders looking to trade short term, specifically intra-day, momentum. Some traders use Technical Analysis and candlestick charts to identify breakout is occurring. The VWAP, and more specifically, a situation when short term price crosses VWAP, can also be used as an indicator of breakout. In practice you’d probably use both indicators in conjunction.

The below chart taken from Interactive Brokers shows: VWAP as a yellow line and price action as red and green candlesticks. The blue and purple lines are the high and low standard deviations range, respectively. Half way through today’s trading session we can see the market today has been moving sideways. Selling when price was above VWAP and buying when it was below would have been profitable. Trading a breakout strategy would have brought about significant losses.

Source: Interactive Brokers Demo Trading Platform 20181129

Getting down into the detail of the calculation we see the supporting text from this broker explains the exact details of their methodology:

“Intraday Volume Weighted Average Price

Tracks VWAP throughout the day and displays as a colored line linking VWAP values at varying times throughout the one-day period. By default, the line that tracks Intraday VWAP is bracketed within a high/low standard deviation range. The standard deviation is calculated for the same period as the VWAP, and the range can be adjusted by modifying the number of Standard Deviations within the settings of the Intraday VWAP.

Intraday VWAP is calculated as: VWAP=[sum (Volume_bar_i * Typical_price_i)]/sum(volume_bar_i) where i is the intraday bar number. If we use a 1 min daily bar chart, the calculation is made from the first minute with i=[1;N] where N is the last bar number of the chart, Typical_price_i = VWAP_on_bar_price_i => This is the VWAP we currently store and volume_bar_i is the volume for the bar i. If no volume is available for the product (i.e. for IND, CASH and CMDY), use 1 as volume for each bar.”

Source: https://www.interactivebrokers.com/en/software/tws/usersguidebook/technicalanalytics/intradayvwap.htm

VWAP is a useful tool that allows opportunities to finesse entry and exit into positions. It is also a useful indicator for trading sideways and trending markets; unfortunately knowing which type of market you are in is the tricky bit.


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 Conclusion

Because 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.


Spread is a term that relates to price.

When trading in the CFD there will be an Offer price and a Bid price quoted by the broker platform. The Offer is the best price at which you can execute a buy trade and the Bid price is the best price you can achieve if selling. The difference between the two prices is the Spread.

The City Index platform is below quoting the ability to trade in Danone CFD and Sell at 62.550 and Buy at 62.580. The Spread in this case is 0.03 Euro Cents.

Spread is largely driven by market liquidity. Generally the case is that the greater the amount of trading activity the tighter the spread will be. More buyers and sellers being present means there is more chance of finding someone who takes the other side of the trade to you.

Particular instruments can see the spread narrow or widen according to liquidity in the market, for example, due to time of day. Although it’s pretty much possible to trade some Index and Forex CFDs 24-hrs a day the spread will typically be tighter during what are seen as ‘market hours’ and will then widen when markets are quieter.

Other instances of Spread widening can be during times of extreme market volatility. At those times the spread widens because market participants are unsure of a realistic value and are reluctant to take on a position that they might not be able to move on if the market in general is undergoing extreme shifts.

You will also find different Broker Platforms apply different spreads on the same CFDs. As Spread is a cost that you have some control over, shopping around for the tightest Spread is a quick win and should form part of your Broker Comparison Analysis.