Basics of Financial Market Behavior

Most people try to approach trading or investing by trying to "predict" the future price of stocks, commodities, currencies, or the market indices.

Different people have different methods. Some use fundamental analysis: looking at a company's health, balance sheets, earnings, the economy, etc. Others use technical analysis, trying to decipher trends and patterns in stock charts.

This is the wrong approach. It has been shown repeatedly for several decades that prices are not predictable, other than a general long term rising of the markets (due to the expansion of the country and world's economies. Of course, this long term tendency to rise has only been observed for the past couple hundred years, which means it is not guaranteed to happen forever.)

In any case, the unpredictability of the markets is well documented. One need only look at history. Money manager and traders, amateur and professional alike, have a track record that is no better than simply following an index fund. This has been shown time and time again. Read the book "A Random Walk Down Wall Street" for details.

If that's the case, one should just buy and hold an index fund, right?

Not a good idea either. If you buy an index fund at the "wrong time", it's entirely possible you would have to wait years or even decades to make any money. For example, if you had bought the Dow in 1929, you would have waited 25 years to break even. If you had bought New Zealand in 1987 you would have waited seven years.

Waiting a decade to see any return on your investment is hardly an investment.

What's the proper way to approach investing or trading? The proper way to tme your entries and exits according to the following basic tenet:

• When prices go up a LOT (relatively speaking) and FAST (relatively speaking), you can expect them to come down.
• When prices go down a LOT (relatively speaking) and FAST (relatively speaking), you can expect them to go UP.

It is that simple.

How far is far? How fast is fast? To answer this, it pays to compare long term stock charts with short term ones. A good guideline is something called the 50% retracement rule. Google for it. Pick up a book on it. Or look at my other pages on this website to learn more about it.

Here are the other rules to go by:

• Absolutely do not trade on news. News is often late, misleading, wrong, or agenda-driven. See my other posts on this website for details.
• If you are an active day trader, avoid trading important government reports. Do not enter a trade prior to the report, regardless of your opinion. Markets are very volatile during these times.
• Do not attempt to forecast peaks or bottoms. Your trading should only try to catch a portion of the major move, it doesn't matter whether you miss most of it, as long as you make a profit on some of it.

Skeptical? Sound too simple to work? I challenge you to compare your returns trading this method, with any other method you may choose.

Passive investors will benefit GREATLY by being only a LITTLE active in watching the markets and by identifying major moves. Look at daily stock charts often. Look at 10-year charts every once in a while. Identify major moves and the retracements of those moves. Identify vertical zones on stock charts where you can expect to make profits by trading these retracements. Identify probable areas to BUY. Identify probable areas to SELL and SELL SHORT.

Under no circumstances should you just "Buy and Hold" because that's what your investment advisor tells you.

You management of your money should follow these guidelines, whether you actively trade individual stocks or you trade portfolios or mutual funds. The principle is the same and applies to ALL financial markets.

* Article Source: Common Sense Trading.

FOREX TRADING: Fundamental Analysis & Economic Indicators

Most FOREX traders rely on analysis to make plan their trading strategy. This article will discuss fundamental analysis. The other common form of analysis is technical analysis. After reading this article you should have a better understanding of fundamental analysis and how to use it as part of your FOREX strategy.

Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources. They are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.

Fundamental analysis will provide you with an overview of currency movements and a broad picture of the economic conditions. Most traders then will combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.

Just like most markets the FOREX market is controlled by supply and demand. Many economic factors can affect the supply and demand but the two most critical ones are interest rates and the strength of the economy. The over all strength of the economy is affected by changes in the GDP, trade balances and the amount of foreign investment.

There are many economic indicators released by government and academic sources. These indicators are usually released on a monthly basis but will sometimes be released weekly. These are pretty reliable measures of economic health and are closely followed by all traders.

There are many indicators that are released but some of the most important and commonly followed are : interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders.

Interest Rates - can cause a currency to either strengthen or weaken depending on the direction of movement. In some cases high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell of their portfolios. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.

Which of these two affects will take place depends on many complex factors, but there is usually an agreement among economic observers as to how the current change in interest rates will affect the general economy and the price of the currency.

International Trade - If there is a trade deficit (more items imported than exported) it is usually considered a negative indicator. When there is a trade deficit it means that more money is leaving the country to buy foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration. If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.

The measurement of the cost of living (CPI) and the cost of producing goods (PPI) are a couple of other important indicators. You should also watch the GDP which measures the value of all the goods produced in a country and the M2 Money Supply which measures the total amount of currency for a country.

In the US alone there are 28 major indicators, these can have a strong effect on the financial market and should be closely watched. This information can be found many places on the internet and is provided by many brokers.

FOREX ANALYSIS: How to Predict the Forex?

The object of Forex analysis, is to try and predict which way the market is likely to move. If you get your predictions right, you will make a profit, but if you get them wrong and you will lose your money. There are two types of Forex analysis: Fundamental Analysis and Technical Analysis.

Fundamental analysis involves taking into account the social, economic and political forces that influence the value of a particular country's currency. If the economy of the country is strong, and the country has a stable government, then the value of that country's currency can be expected to rise against the currencies of countries with weaker economies.

The most extreme example of a country with a weak (collapsed) economy (at the time of writing - early 2008) is Zimbabwe. The poor state of Zimbabwe's economy is largely due to horrendous government, with the theft of farm land and plundering of Zimbabwe's currency reserves by corrupt government officials. The rate of inflation in Zimbabwe is currently over 1,000 percent, so that the currency loses over 90 percent of its value every year. The value of Zimbabwe's currency is so low, that its value is now literally worth less than the paper it is printed on.

Even in stable healthy economies however, the actions of in particular, reserve banks (e.g. Federal Reserve in the U.S, Bank Of England in the UK etc.) can influence the value of the currency.

Technical analysis involves examining currency prices over a period of time to try and identify trends and patterns. For example, if the value of a particular currency has been steadily increasing over a period of several weeks, then it is likely that the trend will continue in the future, at least in the short term. The trend is the most important aspect of technical analysis. If you can correctly identify a trend, and trade in the same direction you are likely to make profitable trades. Also, the earlier you identify a trend, the more chance you have of making profitable trades.

Ideally, you need to employ both fundamental and technical analysis in your Forex trading.

For example, suppose you were charting the value of the UK pound (GBP) against the U.S. dollar in October - November 2007, using technical analysis only. You would have noticed that for several consecutive days, the GBP was increasing against the USD by around 100 pips every day. So, on November 8, 2007 (the first Thursday in November), you discover the Forex quote: GBP/USD = 2.1104/2.1109. You figure, that by the end of the trading day this should have increased to around: GBP/USD = 2.1204/2.1209. So you buy one standard lot at a rate of 1 GBP = 2.1109 USD, = 47373 GBP. You expect the GBP to rise by 100 pips, so you can sell your 47373 GBP for 2.1204 USD each = $100,450 and earn a nice $450 profit on the day's trading.

You check the exchange rate a few hours later and you discover that it has moved against you, and the Forex quote: = 2.0906/2.0911. You decide to cut your losses, and sell your 47373 GBP for 2.0906 USD each = $99,294. So instead of making $450 profit, you make a loss of $100,000 - $99,294 = $706. So what happened? The Bank of England sets the UK base interest rate on the first Thursday of every month. On Thursday November 8, 2007, The Bank of England was expected to increase the UK base interest rate, and hence lower the UK inflation rate and increase the value of the GBP. However, the Bank of England unexpectedly left the UK interest rate on hold, which caused the GBP to fall in value instead.

* Article Source: http://EzineArticles.com/?expert=Chen_Petersen