Page 43 - Ultimate Guide to Currency Trading

While it is best to get refreshed and walk away from your trading desk after a few
good days in the FX market, you should still stay at least a tiny bit connected to the
trading world. This connection might come from checking your favorite financial
Essential website on your smart phone or iPad while away from your office.

After news such as this, it is quite possible that the Paris market's CAC40 has gained over 1.6
percent, and London's FTSE100 has gained over 1.1 percent. These European stock market gains can
be very positive news to the trader of the euro versus the Swiss franc. In fact, it may be that the value
of the Swiss franc has been gaining against the euro as the negative European news has been
developing, and now the pressure has come off the euro versus the CHF since the problem has come
to a positive conclusion. The major cross might have gone from a previously valued EUR/CHF 1.15 to a
new stronger valued EUR/CHF 1.168, a nearly 1.5 percent gain over the past two days!

Evaluating FX Pairs with the News

It is clear with this example that it is necessary to re-evaluate where the new value of the FX pair
stands in relation to the developments in the news. Although it is true that this particular pair has a
good chance of moving from its current level, it might also be that it will move in the opposite
direction from when you last observed it. You might have been anticipating an appreciation in the EUR
versus the CHF on Thursday when you left for your weekend of skiing, and fully intended to go long
the EUR and sell the Swiss franc. Upon returning from your trip, you would re-evaluate. Considering
the up and down nature of FX pairs, you might decide to look at the opposite trade, going long the
Swiss franc and selling the EUR, all in anticipation of profit taking in the world's stock markets and the
inevitable swinging back of the EUR/CHF pair as the world scales back its risk appetite (which it always
does at some point).

Overview of Fundamentals and Pair Valuation

There are several ways to evaluate the price of a currency pair. One of the easiest to understand
methods is called fundamental analysis. When you read the fundamentals, what you are doing is
getting to know the economic and financial situations of the areas of the world and countries that use
the different currencies to trade. Most countries allow their currencies to move relatively freely
against the other currencies of the world. They allow the market to determine the exchange rate
between their home country and their trading partner. These exchange rates are determined by a
combination of supply and demand and speculation. In any case, most central banks allow the
currency they control to adjust up and down in an ever-moving wave pattern. They know that if a
currency becomes too strong against a trading partner, economic forces will naturally lower the price
of the currency over time, even if it takes a few years. With this system the central bankers of the