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Old 04-05-2008, 11:51 PM   #1 (permalink)
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How Central Banks Move the Market


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In my opinion Forex Capital Markets (FXCM) offers the most comprehensive services, and best trading experience for the active trader.




Next Lesson - Full Forex Trading Course

In our last lesson we looked at how the advent of online trading platforms has begun to level the playing field for individual traders, allowing a much greater access to favorable pricing than was previously available. In today’s lesson we are going to continue our discussion on the structure of the FX market, with a look at who the different players in the market are and how the motives of each affect us as individual traders.

While the 10 largest banks which make up the forex Interbank market account for over 75% of the over $3 Trillion in daily trading volume, there is actually a level of participants with even more clout in the market. While generally no where near as active as the banks just mentioned, the Central Banks of countries also participate in the forex market, and as they have such deep pockets, have huge clout when they decide to enter the market.

There are two main reasons why a central bank would participate in the forex market which are:

1. To fix the value of its currency to a particular level: Unlike the main currencies which we are going to be focusing on in this course, the currencies of many developing countries are fixed in value to the dollar or to some other currency or basket of currencies. This is done to try and promote international competitiveness in the market and a currency environment that is more conducive to economic stability.

Probably the most talked about example of a country that does this is China who up until recently maintained a fixed value of their currency against the US Dollar. A central bank normally accomplishes this by buying their own currency when the value gets too weak creating more demand for the currency and therefore driving the value up, and selling their own currency when it gets to strong creating a greater supply of that currency and therefore lowering its value back to the desired level.

2. To protect the value of a floating currency from extreme movements: Unlike China and many other developing economies in the world, the US, The Euro Zone, Japan and the other major economies of the world have what is known as a floating exchange rate. Very simply what this means is that instead of having the value of the currency pegged to something else which therefore determines its value, the value of the currency is determined by market forces.

Although the values of these currencies float freely in the market most of the time, as a currency’s strength or weakness in the market has such a dramatic affect on a country’s international competitiveness, there are rare instances where a central bank will intervene in the market even with the major currencies. Normally this is only seen after large one directional moves in the market over a long period of time, to the point where the country’s stability or competitiveness is being severely damaged. As Japan’s economy relies heavily on exports the most notorious central bank for interventions is the Bank of Japan, however both the European Central Bank and the Federal Reserve have intervened in the currency markets in the pasts.

While some interventions have limited affect on exchange rates others, as you can see from the chart here of a past Bank of Japan intervention, can have a dramatic affect on the market.

Because of this often times a central bank can do what is termed a verbal intervention, where simply the talk of intervention is enough to have the desired affect on the market.

That’s our lesson for today, In tomorrow’s lesson we will look at the next level of participants in the market and how they affect us as individual traders, so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to leave them in the comments section below, and good luck with your trading!

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Old 04-26-2009, 09:40 AM   #2 (permalink)
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USD Index


Hi David,

Thanks for the great videos.

You talked about floating currencies and how they get their values and how governments can intervene to decrease or increase their currencies.looking at,for example EUR/USD chart,we know the Euro is going towards parity with dollar in the next few month(based on technical and fundamentals).but when you look at USD Index you have few big reasons for dollar to go UP.
My question is which one follows other? I mean does for instance Euro/USD (or USD vs baskets of other currencies)define and set USD Index value or USD index has its own domestic valuations and does not necessarily take the similar patterns and movements? (or is there ONE USD value so when USD Index is going UP we should necessarily expect the EUR/USD to go DOWN??)
I hope I make sense here and was able to ask my question!

I will appreciate your answer.

Many Thanks,

Mike
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Old 04-27-2009, 02:03 PM   #3 (permalink)
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Hi Mike,

Glad to hear from you.

Quote:
looking at,for example EUR/USD chart,we know the Euro is going towards parity with dollar in the next few month(based on technical and fundamentals).
I think there are a lot of people who would disagree with that statement however that does not neccessarily mean your analysis is wrong, I just want to make sure that it is clear that you are in the minority if you think EUR/USD is going towards 1.

Also another thing to keep in mind here is that if the EUR/USD goes to parity from its current rate of around 1.3000 this would mean that the EUR has weakened significantly against the US Dollar, not the other way around.

Quote:
My question is which one follows other? I mean does for instance Euro/USD (or USD vs baskets of other currencies)define and set USD Index value or USD index has its own domestic valuations and does not necessarily take the similar patterns and movements? (or is there ONE USD value so when USD Index is going UP we should necessarily expect the EUR/USD to go DOWN??)
The US Dollar Index is ver simply a measure of the strength or weakness against the US Dollar against a trade weighted basket of currencies. You can see each of the components of the Index at the link below:

Strength Meter.../Dollar index

So to answer your question the US Dollar Index follows the currencies which make it up, with the EUR being the largest component. With this in mind in general if the US Dollar is strengthening against the Euro (EUR/USD rate is going down), then the US Dollar Index is going to be going up and vice versa.

Hope that helps.

Best Regards,
Dave
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Old 04-30-2009, 11:24 AM   #4 (permalink)
 
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DX


Quote:
Originally Posted by David Waring View Post
Hi Mike,

Glad to hear from you.



I think there are a lot of people who would disagree with that statement however that does not neccessarily mean your analysis is wrong, I just want to make sure that it is clear that you are in the minority if you think EUR/USD is going towards 1.

Also another thing to keep in mind here is that if the EUR/USD goes to parity from its current rate of around 1.3000 this would mean that the EUR has weakened significantly against the US Dollar, not the other way around.



The US Dollar Index is ver simply a measure of the strength or weakness against the US Dollar against a trade weighted basket of currencies. You can see each of the components of the Index at the link below:

Strength Meter.../Dollar index

So to answer your question the US Dollar Index follows the currencies which make it up, with the EUR being the largest component. With this in mind in general if the US Dollar is strengthening against the Euro (EUR/USD rate is going down), then the US Dollar Index is going to be going up and vice versa.

Hope that helps.

Best Regards,
Dave
Hi Dave,

Thanks for the detailed answer.that was a interesting advise of being among the minority.my chart analysis and trading decisions are 95% based on Elliott Principles so I think I am already a contarian! decline of Euro and USD rally is merely based on this approach.(I'd like to take your view if make sense to use Elliott principles when trading E-mini or futures and options in general?)

I am relatively a newbie in FX and really enjoying listening to your lessons and pretty much everyday I am hanging about your website and taking my daily dose of listening to few videos!
I have found your futures lessons very interesting.I have installed Apex software and currently doing demo.I was wondering if you have a course or seminar which teach trading futures and E-mini S&P .I am at the moment trading currencies and found it abit stressful and volatile...I like futures and specially as you are aware,based on Elliott wave we're in wave B in S&P and DOW and wave C(where the devastation happens)is not far behind us.so want to prepare myself for it!

a personal Question,what do you trade most (spot currencies,futures,options,shares)? do you hold seminar as well? if yes,any plan to come to London U.K.?

Dave,you're doing a wonderful job with sharing your knowlage with others...

Only the Best,

Mike
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Old 04-30-2009, 03:47 PM   #5 (permalink)
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Hey Mike,

My pleasure glad I could be of some help.

Quote:
(I'd like to take your view if make sense to use Elliott principles when trading E-mini or futures and options in general?)
I do not personally use Elliott wave but I know of some traders that I respect and who are profitable which focus the majority of their attention on this. From what I know about it, Elliott Wave is not market specific so yes I would think that it could be used to trade any instrument.

Quote:
I was wondering if you have a course or seminar which teach trading futures and E-mini S&P
I have the start of a futures trading course which if you have not seen already you can find at the link below:

Futures Trading Course - InformedTrades

For the ES Specifically You may find the below resources to be of use:

Tals E-MINI S&p primer

http://www.informedtrades.com/158991...-es-video.html

http://www.informedtrades.com/159007...t-2-video.html

Quote:
a personal Question,what do you trade most (spot currencies,futures,options,shares)
My focus is primarily currencies but I also trade ETF's a fair amount which I trade in the place of futures. I would trade futures instead but I am a position trader and don't have the capital that I want to devote to a futures account which would be necessary to do it right. I also trade individual stocks occasionally. I have not traded options but it is something that I am interested in primarily as a way of hedging my spot trades.

Quote:
do you hold seminar as well? if yes,any plan to come to London U.K.?
100% of my focus right now is on building up the online portion of InformedTrades but as we grow I could see having get togethers in different countries where our members could meet in person which I would also love to attend. We are a ways off from being able to do this yet but yes this is something that I would like to do in the future.

Quote:
Dave,you're doing a wonderful job with sharing your knowlage with others...
Thanks but ultimately what makes this community the quality learning place that it is is our members like you, so thank you for your participation as well.

Best Regards,
Dave
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Old 04-30-2009, 06:14 PM   #6 (permalink)
 
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Hey Dave,

Thanks for the prompt reply.I did watch all your futures videos.the links were useful too.

why is that some traders like you ,diversify thier attentions and money on FX,shares,options,futures etc instead of focusing on ONE area of trading? is it because they want to divesify thier risk or it is a matter of interest and having more fun or is about making more money?

How much capital you're talking about is necessary to trade E-mini if we were to do it right and get proper profit?

I am delighted to join you and your community.I am a active member of Elliott wave forum at dailyFX.I met few former boys from FXCM ,was reading Ed Ponsi stuff but I liked your approach which focus on education eduaction and learning and also you cover much more areas.

I will certaily be pleased to do my bit for the community when you decided to go ahead with London! this city has so much to offer to traders and I know many people and places in the business.
one day,I will love to do what you're doing now.

Only the Best.

Mike
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Old 05-01-2009, 10:26 AM   #7 (permalink)
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Hi Mike,

Glad to hear it.

Quote:
why is that some traders like you ,diversify thier attentions and money on FX,shares,options,futures etc instead of focusing on ONE area of trading? is it because they want to divesify thier risk or it is a matter of interest and having more fun or is about making more money?
There are a couple of reasons why I do this:

1. Since I am a longer term trader I need to watch multiple instruments in order for there to be enough of the opportunities I like for which may only come along a couple of times a year if I only followed 1.

2. The FX market if affected by most of the other markets I look at so for example if I place a trade in a bond or gold ETF these are close cousins of the FX market in terms of how they move.

3. I find it more interesting this way.

Most of the people who I know that trade successfully on a shorter term basis however generally not only focus on one market but just one or two instruments within that market as there are generally many more opportunities for this type of trading.

Quote:
How much capital you're talking about is necessary to trade E-mini if we were to do it right and get proper profit?
In my opinion this depends on the style of trading. Generally the longer a trader holds positions the more capital they need. More on this at the link below:

http://www.informedtrades.com/380437...000-worth.html

Quote:
I am delighted to join you and your community.I am a active member of Elliott wave forum at dailyFX.I met few former boys from FXCM ,was reading Ed Ponsi stuff but I liked your approach which focus on education eduaction and learning and also you cover much more areas.
Sounds good I know the Jamie Seattle and Ed Ponsi well so you are in good company over there.

Quote:
I will certaily be pleased to do my bit for the community when you decided to go ahead with London! this city has so much to offer to traders and I know many people and places in the business.
one day,I will love to do what you're doing now.
Glad to hear it as this community is all about learning and helping others learn so we are glad to have you.

Best Regards,
Dave
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Old 05-01-2009, 02:24 PM   #8 (permalink)
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Hi Mike

Welcome to the site.

"why is that some traders like you ,diversify their attentions and money on FX,shares,options,futures etc instead of focusing on ONE area of trading?"

Some traders feel you should focus just on one area and learn it really really well. For me, I have found that the way all the markets are related means that I can use one market as an indicator for another market.

An example of that would be to look at the US stock market and the USD. The USD is rising and dropping pretty much on safe haven/fear factor. You could argue the same but opposite is true about the stock market (one goes up, the other goes down). A trader could use the length of moves in one market to estimate the length of moves in another market.

Also, I have found that much of what applies to one market applies to all (chart reading for instance), so learning a new market is not like starting over.

Cheers
Tek
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Old 05-13-2009, 03:59 PM   #9 (permalink)
 
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USD Crisis


Quote:
Originally Posted by David Waring View Post
Hi Mike,

Glad to hear it.



There are a couple of reasons why I do this:

1. Since I am a longer term trader I need to watch multiple instruments in order for there to be enough of the opportunities I like for which may only come along a couple of times a year if I only followed 1.

2. The FX market if affected by most of the other markets I look at so for example if I place a trade in a bond or gold ETF these are close cousins of the FX market in terms of how they move.

3. I find it more interesting this way.

Most of the people who I know that trade successfully on a shorter term basis however generally not only focus on one market but just one or two instruments within that market as there are generally many more opportunities for this type of trading.



In my opinion this depends on the style of trading. Generally the longer a trader holds positions the more capital they need. More on this at the link below:

http://www.informedtrades.com/380437...000-worth.html



Sounds good I know the Jamie Seattle and Ed Ponsi well so you are in good company over there.



Glad to hear it as this community is all about learning and helping others learn so we are glad to have you.

Best Regards,
Dave

Hey Dave,I am not sure if replied to your post or not,sorry about that.it is just there are so much info and e-mails and reading which I have to deal with on daily basis on top of that you add live trading and market research etc! Thank you for your detailed reply anyway.
I remmeber,you said in few post back,that when we say dollar is going down to parity with Euro,this EURO which lose value NOT almighty USD.it was on my mind since then and couldnt figure out what did you mean?!


also follwoing USD crisis and Amero,I heard a major crisis in FX market in 1 or 2 years time is on its way which mean the end to 'paper money' and 'point' will be introduced as means of purchasing value ( ie,you work for Wall-mart and you get points' as your wage!)!

Would you see such a possibilty to occure?

Best,

Mike
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Old 05-13-2009, 05:19 PM   #10 (permalink)
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Hi Mike,

I'll jump in-

Quote:
I remember,you said in few post back,that when we say dollar is going down to parity with Euro,this EURO which lose value NOT almighty USD.it was on my mind since then and couldnt figure out what did you mean?!

If the dollar goes to parity with the Euro, it would mean that 1 Euro would buy only 1 dollar. Right now it buys more than 1 dollar.
Right now it costs more than 1 USD to buy a Euro. At parity, the cost for a Euro would be less.

Quote:
also follwoing USD crisis and Amero,I heard a major crisis in FX market in 1 or 2 years time is on its way which mean the end to 'paper money' and 'point' will be introduced as means of purchasing value ( ie,you work for Wall-mart and you get points' as your wage!)!

Would you see such a possibilty to occure?
One thing to consider is that many other countries use the US dollar as a reserve currency, meaning they hold trillions of US dollars as a back up to protect their currency (like the US did with gold until the early 70s).
For the dollar to be removed out of the system would require many many banks and governments to sell off their US dollars, and replace them with something else. Some speculate this would be the Euro, but now after the recent economic problems, the Euro's ability to replace the dollar has come into question. Therefore, while the dollar may certainly become weaker due to the non-stop printing by the US Fed, right now there may not be a possible choice to replace the dollar with.

The topic of the Amero comes up a lot. In fact, you can buy fake ones online. Ron Paul even questioned Ben B about it at a recent Fed hearing, but "The Helicopter" denied that it was even being discussed as a possibility.

Cheers
Tek
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