Page 46 - Ultimate Guide to Currency Trading

the law of fives. Some technical analyses look at where the 200-day moving averages touch the 50-day
moving averages; the convergence is considered a strong indicator.

If you are having a difficult time understanding how technical analysis works, don't
worry! Many Forex traders at proprietary trading houses leave the actual analysis up
ALERT to the research department. You can use your FX broker or full service broker's reports
as a kind of private research department of your own FX trading house.

Other technical are for the market as a whole, and include stock market indicators (remember,
the up-and-down movements of some currencies are directly related to the market's risk appetite,
and are indirectly linked to the world's stock markets' ups and downs). These technical indicators
include the Chicago Board of Exchange (CBOE) Volatility Index, more commonly known as the VIX
Index. The VIX Index monitors the volatility of the market, and is used to measure stock and stock-
option traders' emotional feelings about the market. If this VIX Index is higher than normal, then the
world's stock markets are usually falling (or free-falling as sometimes happens!). If this is the case, it
would be best for you to short high-yielding currencies such as the AUD and NZD and go long safe-
haven currencies such as the USD, JPY, and especially the Swiss franc. This is because some currencies
such as the AUD and others (SEK, for example) have their up-and-down movements very closely timed
to risk sentiment. Others have their performance tied to bad times: the worse the market does, and
the more people are afraid of losing money, the more they will go up. This is the case of the lower-
yielding currencies such as USD and JPY. The Swiss Franc also holds a safe-haven status, as its
country's central bank and economy are able with-stand harsh times.

Using Both Fundamental and Technical Indicators

Using a combination of both fundamental and technical indicators can yield you a very strong trading
system. For example, things might look promising after reading the Norwegian central bank's Norges-
Bank website (www.norges-bank.no/en). Some of the information that you read on the Norges-Bank
website might lead you to believe that the currency has the chance to get stronger.

TABLE 5-1: FUNDAMENTAL INFORMATION TO FUNDAMENTAL ANALYSIS

What, You Are Lo for in Fundamentals Question To ask
The Currency's Rate of Return Are current interest rates relative to other
currencies?
Current Account Is Balanced or in Surplus Is the country taking in more foreign currency
than it is sending out through trade?
Governance Is the central bank consistent and well managed?
Economic Policies Is the central bank implementing constructive
methods of growth with limited inflation?
Interest Rates Is there a hint of an interest rate hike in the near