The first blog : The first blog

Bollinger Bands with ADX | Sigma Forex Strategy

2008-09-16T07:21:01Z

Bollinger Bands with ADX:

Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time.

Using ADX with Bollinger Bands over 20 days period of time give strong signals:

Signal to buy:

When
the price below the lower band of Bollinger (20, 2) & DI+ over DI-,
ADX line cross 20 level, ADX and DI+ rising and DI- falling.

Signal to buy:

When
the price above the upper band of Bollinger (20, 2) & ADX line
cross 20 levels and rising where DI+ falling and DI- rising.

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RSI, ADX with Parabolic SAR | Sigma Forex Strategy

2008-09-16T07:06:29Z

RSI, ADX with Parabolic SAR

The
three where developed by J Welles Wilder, using RSI, ADX and Parabolic
SAR for average 14 days will show great signals in entering the orders
& closing them.

Signal to buy:

1- When RSI cross 30 level and rising up

2- SAR dots below the price chart

3- DI+ over DI-, ADX line cross 20 level, ADX and DI+ rising and DI- falling.

Exit when SAR dots make a cross with the price chart & ADX moving below 30 from above while above +DI and �DI

Signal to sell:

1- When RSI cross 70 level & falling down

2- SAR dots over the price chart

3- ADX line cross 20 levels and rising where DI+ falling and DI- rising.

Exit when SAR dots make a cross with price chart & ADX moving below 30 from above

& above +DI and �DI

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RSI with Momentum | Sigma Forex Strategy

2008-09-16T06:58:22Z

RSI with Momentum

It measures the amount of change in commodity�s price during a period of time.

Using both RSI & Momentum for average 14 days will enable a solid strategy in determining signals.

Signal to buy:

RSI rises above 50 but stays below 70, and momentum rises above zero.

Signal to sell:

RSI falls below 50 but stays above 30, and momentum falls below zero

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MACD with Parabolic SAR | Sigma Forex Strategy

2008-09-16T06:46:05Z

MACD with Parabolic SAR

Parabolic SAR is more popular for setting stops than for establishing direction or trend.

Parabolic SAR is base on the following rule: to shift the levels of closing prices only in direction of opened position.

If there is a long position opened before, it is possible to increase the level of closing prices, but not to decrease it.

If the short position is opened, it is possible to decrease the level of closing prices.

The indicator can be very effective if a filter of some sort is used like MACD.

If
we were long the market, then only long signals would be taken and the
short signals ignored as long as the filter has given a buy signal and
remains in buy.

Now you can confirm the signal by using the both indicators.

Signal to buy:

When MACD bars is over 0 level and rising, signal line below bars end and rising and SAR dots below price chart.

Signal to Sell:

When MACD bars is below 0 level and falling, signal line over bars end and falling and SAR dots over price.

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MACD with RSI | Sigma Forex Strategy

2008-09-16T06:37:21Z

MACD with RSI:

The MACD proves most effective in wide-swinging trading markets.

Crossovers: the basic MACD trading rule is to sell when the MACD falls below its signal line.

Average Convergence/Divergence rises above its signal line.

It is also popular to buy/sell when the MACD goes above/below zero.

Overbought/oversold conditions: The MACD is also useful as an overbought/oversold indicator.

When
the shorter moving average pulls away dramatically from the longer
moving average (i.e., the MACD rises), it is likely that the security
price is overextending and will soon return to more realistic levels.

Divergence:
An indication that an end to the current trend may be near occurs when
the MACD diverges from the security. A bullish divergence occurs when
the Moving Average Convergence/Divergence indicator is making new highs
while prices fail to reach new highs.

A bearish divergence occurs
when the MACD is making new lows while prices fail to reach new lows.
Both of these divergences are most significant when they occur at
relatively overbought/oversold levels.

Zero Line Crossovers: A
crossing of the MACD line up through zero (the centerline) is
interpreted as bullish, or down through zero as bearish.

Some analysts choose to buy or sell when the MACD goes above or below zero.

The
RSI indicator ranges in value from 0 to 100, with numbers above 70
indicating overbought conditions and fewer than 30 indicating oversold

Signals to buy:

When the MACD rises above the Signal line & above Zero

When the RSI rises above 30

Signal to sell:

When the MACD falls below the Signal line & below zero

When the RSI below 70

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ADX with Stochastic | Sigma Forex Strategy

2008-09-16T06:28:24Z

ADX with Stochastic:

ADX: define trend force, whether the trend will develop further or will gradually weaken.

Three lines in ADX:

1) +DI (Yellow)

2) -DI (Red)

3) ADX line (Blue)

Stochastic: compares a stock's closing price to its price range over a given period of time.

Using the both will give traders great forecasting trend strength.

Two lines in Stochastic:

1) %K: This is the number of time periods used in the stochastic calculation.

2) %D: This is the number of time periods used when calculating the moving average of %K.

Signal to buy:

When
either %K or %D falls below the line, and then again crosses the bottom
level upwards or when the curve %K crosses the curve %D from below
upward.

When +DI is higher than -DI

Signal to sell:

When
oscillator grows above the line, and then crosses the top level
downwards or when the curve %K crosses a curve %D from top to downward.

When +DI is lower than �DI

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Professional Sigma Forex

2008-09-16T06:13:54Z

Forex Professionals

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A reliable & powerfull trading platform that include more than 40 indicators.

A detailed illustration for indicators.

An updatable Indicator that show you signals to buy & sell.

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Forex Vs. Stocks | SigmaForex

2008-09-16T06:04:23Z

Forex Vs. Stocks:

Forex	Stocks
24 hour market	Open only a few hours a day
Most liquid market in the world	Limited liquidy especially in the smaller capitilzation stocks
High leverage 100:1 leverage on standard-sized accounts	50% leverage at most 2:1 leverage to the average stock investor
Slippage is usually very limited	There is usually slippage on every order
No commissions	Commissions on every trade
Can go long or short easily	Harder to go short with uptick rule and possiblity of borrowed shares being called
Can make as many trades you want	Daytrading limitations on how many trades you can do in a period of time
Limited risk, most forex brokers will automatically close your positions when your account balance goes to zero	It is possible to have a negative balance after an adverse move in the market
Minimum slippage and order errors	More room for slippage and error
Can short-sell anytime	Need to obey uptick rule in order to short-sell
Minimum slippage and order errors	More room for slippage and error

Relative strength Index

Relative Strength Index (RSI) is a popular momentum oscillator developed by J. Welles Wilder.

The
RSI indicator ranges in value from 0 to 100, with numbers above 70
indicating overbought conditions and fewer than 30 indicating oversold
(Go long when RSI falls below the 30 level and rises back above it) or
on a bullish divergence where the first trough is below 30.

If the
RSI rises above 30, it is considered bullish, while if the RSI falls
below 70, it is considered bearish (Go short when RSI rises above the
70 level and falls back below it

or on a bearish divergence where the first peak is above 70).

Forex Vs. Futures | SigmaForex

2008-09-16T05:51:12Z

Forex Vs. Futures:

Futures is
Exchange traded contracts are not issued like securities, but they are
"created" when one party buys (goes long) a contract from another party
(who goes short). In the beginning there are no contracts, so the
number of long contracts must equal the number of short contracts. This
always goes through the exchange, which means that the exchange is the
counter party for all trades. However, the exchange does not take any
net positions. In this way clients do not know with whom they have
ultimately traded. Compare this with securities, in which an issuer
issues the security. After that, it is a legal entity that is traded
independently of the issuer. Even if the issuer buys back some
securities, they still exist. Only if they are legally canceled can
they disappear.

Forex	Futures
Largest and most liquid market in the world	Liquidity dependent on month of traded contract
24-hour trading action for 5.5 days a week	Varying trading hours based on the markets
Can profit in both bull and bear markets	Tend to have extended bearish periods
Can short-sell anytime	Trading restricted by limit up/down rule
Minimum slippage and order errors	More room for slippage and error
100:1 leverage on standard-sized accounts	Smaller leverage
Extremely low margins 1% or better	Higher margins usually 5-8%
No commissions	Commissions on every trade
Most liquid market in the world	Limited liquidy
Instant executions, all-electronic market	Delayed fills possible in open markets
No limits on market moves	Some markets have maximum daily movement limits that can trap you in losing position
Usually free streaming quotes	Expensive fees for streaming quotes

Relative Vigor Index

It
was generated by John F. Ehlers. Relative Vigor Index (RVI) calculation
is based on the idea that in a rising market the closing price is
usually higher than the opening price, and on the bearish market the
closing is usually below the opening price.

The basic signals of Relative Vigor Index (RVI) are:

1-�� Bullish divergence / bearish convergence - the main signal pointing to the weakness of the current trend.

2-��
A good moment to open a sell / buy position is the crossing of the RVI
line by the signal line from above/below once the bullish divergence /
bearish convergence has appeared on the chart.

3-�� In a flat market an exit from the overbought / oversold area is a signal to sell / buy.

Forex Vs. Options | SigmaForex

2008-09-16T05:43:20Z

Forex Vs. Options

Options
are financial instruments that convey the right, but not the
obligation, to engage in a future transaction on some underlying
security. For example, buying a call option provides the right to buy a
specified quantity of a security at a set strike price at some time on
or before expiration, while buying a put option provides the right to
sell. Upon the option holder's choice to exercise the option, the party
who sold, or wrote, the option must fulfill the terms of the contract.

Types of options:

Exchange
traded options (also called "listed options") is a class of exchange
traded derivatives. Exchange traded options have standardized
contracts, and are settled through a clearing house with fulfillment
guaranteed by the credit of the exchange. Since the contracts are
standardized, accurate pricing models are often available. Exchange
traded options include:

Stock Options.

Commodity Options.

Bond options and other interest rate options.

Index (equity) Options.

Options on futures contracts.

Over-the-counter,
or OTC options are traded between two private parties, and are not
listed on an exchange. The terms of an OTC option are unrestricted and
may be individually tailored to meet any business need. In general, at
least one of the counterparties to an OTC option is a well-capitalized
institution. Option types commonly traded over the counter include:

1) Interest rate options.

2) Currency cross rate options.

3) Options on swaps or swaptions.

Employee stock options are issued by a company to its employees as compensation.

Forex	Options
Largest and most liquid market in the world	Liquidity depends on underlying asset & expiry date
24-hour trading action for 5.5 days a week	Not 24-hour. Varying trading hours based on the exchanges
Easier to calculate stop beforehand	Difficult and unreliable to place stops on underlying asset
Minimum slippage and order errors	More room for slippage due to lack of liquidity
100:1 leverage on standard-sized accounts	Leverage depends on the type of option transaction you want to engage in. Selling Naked Calls or Puts generally requires a huge amount of margin
No commissions	Commissions on every trade
Most liquid market in the world	Limited liquidy
Limited risk, most forex brokers will automatically close your positions when your account balance goes to zero	It is possible to have a negative balance if you write an option
Instant executions, all-electronic market	Delayed fills possible

Forex History with SigmaForex

2008-09-16T05:35:13Z

Forex History

FOREX
(Foreign Exchange) is the largest financial market in the world, and
includes trading between large banks, (Central banks, Commercial Banks,
Investments Banks) currency speculators, multinational corporations,
governments, and other financial markets and institutions.

The
average daily trade in the global FOREX and related markets currently
is over US$ 3 trillion where all the transactions achieved over the
counter (OTC) that there is no specific place for trading.

It
began with gold exchange between countries. As a country's economy
strengthened, its imports would increase until the country ran down its
gold reserves, which were required to support its currency. As a
result, the money supply would diminish, interest rates escalate and
economic activity slowed to the point of recession. Ultimately, prices
of commodities would hit bottom, appearing attractive to other nations,
who would rush in and amid a buying frenzy inject the economy with gold
until it increased its money supply, driving down interest rates and
restoring wealth into the economy. Such boom-bust patterns abounded
throughout the gold standard until World War I temporarily discontinued
trade flows and the free movement of gold.

The Bretton Woods
Agreement in 1944, fixed national currencies against the dollar, and
set the dollar at a rate of USD 35 per ounce of gold. The agreement was
aimed at establishing international monetary steadiness by preventing
money from taking flight across countries, and to curb speculation in
the international currency market. Due to the World War II, the economy
of many nations has suffered. During the sixties, however, national
economies moved in different directions which paved way to its collapse.

The
Agreement was finally abandoned in 1971, and the US dollar would no
longer be convertible into gold. By 1973, currencies of major
industrialized nations became more freely floating, controlled mainly
by the forces of supply and demand which acted in the foreign exchange
market. Prices were floated daily, with volumes, speed and price
volatility all increasing throughout the 1970s, giving rise to new
financial instruments, market deregulation and trade liberalization.

In
the 1980s, cross-border capital movements accelerated with the advent
of computers and technology, extending market continuum through Asian,
European and American time zones. Transactions in foreign exchange
rocketed from about $70 billion a day in the 1980s, to more than $1.5
trillion.

While FOREX has been traded since the beginning of
financial markets, on-line retail trading has only been active since
about 1996.

The FOREX market is a non-stop cash market where
currencies of nations are traded, typically via brokers. Foreign
currencies are constantly and simultaneously bought and sold across
local and global markets and traders' investments increase or decrease
in value based upon currency movements. Foreign exchange market
conditions can change at any time in response to real-time events.

Stochastic Oscillator

George C. Lane developed the Stochastic Oscillator in the late 1950s.

It�s
a technical indicator which compares a stock's closing price to its
price range over a given period of time. The belief is that in rising
market stocks will close near their highs, while in a falling market
they will close near their lows.

The Stochastic Oscillator contains four variables:

1) %K Periods: This is the number of time periods used in the stochastic calculation.

2)
%K Slowing Periods: This value controls the internal smoothing of %K. A
value of 1 is considered a fast stochastic while a value of 3 is
considered a slow stochastic.

3) %D Periods: This is the number of time periods used when calculating the moving average of %K.

4) %D Method: The method (Exponential, Simple, Time Series, Triangular, Variable, or Weighted) used to calculate %D

Signals for buying & selling:

-
The signals of buying given when oscillator (either %K or %D) falls
below the line, and then again crosses the bottom level upwards or when
the curve %K crosses the curve %D from below upward.

- The signals
of selling when oscillator grows above the line, and then crosses the
top level downwards or when the curve %K crosses a curve %D from top to
downward.

Technical Analysis with SigmaForex

2008-09-16T05:26:53Z

What to Look For in Technicals?

Find the Trend

One
of the first things you'll ever hear in technical analysis is the
following motto: "the trend is your friend." Finding the prevailing
trend will help you become aware of the overall market direction and
offer you better visibility�especially when shorter-term movements tend
to clutter the picture. Weekly and monthly charts are more ideally
suited for identifying longer-term trends. Once you have found the
overall trend, you could select the trend of the time horizon in which
you wish to trade. Thus, you could effectively buy on the dips during
rising trends, and sell the rallies during downward trends.

Support & Resistance

Support
and resistance levels are points where a chart experiences recurring
upward or downward pressure. A support level is usually the low point
in any chart pattern (hourly, weekly or annually), whereas a resistance
level is the high or the peak point of the pattern. These points are
identified as support and resistance when they show a tendency to
reappear. It is best to buy/sell near support/resistance levels that
are unlikely to be broken.

Once these levels are broken, they
tend to become the opposite obstacle. Thus, in a rising market, a
resistance level that is broken, could serve as a support for the
upward trend; whereas in a falling market, once a support level is
broken, it could turn into a resistance.

Lines & Channels

Trend
lines are simple, yet helpful tools in confirming the direction of
market trends. An upward straight line is drawn by connecting at least
two successive lows. Naturally, the second point must be higher than
the first. The continuation of the line helps determine the path along
which the market will move. An upward trend is a concrete method to
identify support lines/levels. Conversely, downward lines are charted
by connecting two points or more. The validity of a trading line is
partly related to the number of connection points. Yet it's worth
mentioning that points must not be too close together. A channel is
defined as the price path drawn by two parallel trend lines. The lines
serve as an upward, downward or straight corridor for the price. A
familiar property of a channel for a connecting point of a trend line
is to lie between the two connecting point of its opposite line.

Averages

If
you believe in the "trend-is-your-friend" tenet of technical analysis,
moving averages are very helpful. Moving averages tell the average
price in a given point of time over a defined period of time. They are
called moving because they reflect the latest average, while adhering
to the same time measure.

A weakness of moving averages is that they
lag the market, so they do not necessarily signal a change in trends.
To address this issue, using a shorter period, such as 5 or 10 day
moving average, would be more reflective of the recent price action
than the 40 or 200-day moving averages.

Alternatively, moving
averages may be used by combining two averages of distinct time-frames.
Whether using 5 and 20-day MA, or 40 and 200-day MA, buy signals are
usually detected when the shorter-term average crosses above the
longer-term average. Conversely, sell signals are suggested when the
shorter average falls below the longer one.

There are three kinds
of mathematically distinct moving averages: Simple MA; Linearly
Weighted MA; and Exponentially Smoothed. The latter choice is the
preferred one because it assigns greater weight for the most recent
data, and considers data in the entire life of the instrument.

Fundamentals Affecting the US Dollar

Interest Rates

Fed
Funds Rate: Clearly the most important interest rate. It is the rate
that depositary institutions charge each other for overnight loans. The
Fed announces changes in the Fed Funds rate when it wishes to send
clear monetary policy signals. These announcements normally have large
impact on all stock, bond and currency markets.

Discount Rate

The
interest rate at which the Fed charges commercial banks for emergency
liquidity purposes. Although this is more of a symbolic rate, changes
in it imply clear policy signals. The Discount Rate is almost always
less than the Fed Funds Rate.

30-year Treasury Bond

The
30-year US Treasury Bond, also known as the long bond, or bellwether
treasury. It is the most important indicator of markets' expectations
on inflation. Markets most commonly use the yield (rather than price)
when referring to the level of the bond. As in all bonds, the yield on
the 30-year treasury is inversely related to the price. There is no
clear-cut relation between the long bond and the US dollar. But the
following relation usually holds: A fall in the value of the bond (rise
in the yield) due to inflationary concerns may pressure the dollar.
These concerns could arise from strong economic data.

Depending
on the stage of the economic cycle, strong economic data could have
varying impacts on the dollar. In an environment where inflation is not
a threat, strong economic data may boost the dollar. But at times when
the threat of inflation (higher interest rates) is most urgent, strong
data normally hurt the dollar, by means of the resulting sell-off in
bonds.

Nonetheless, as the supply of 30-year bonds began to
shrink following the US Treasury's refunding operations (buy back its
debt), the 30-year bond's role as a benchmark had gradually given way
to its 10-year counterpart.

Being a benchmark asset-class, the long
bond is normally impacted by shifting capital flows triggered by global
considerations. Financial/political turmoil in emerging markets could
be a possible booster for US treasuries due to their safe nature,
thereby, helping the dollar.

3-month Eurodollar Deposits

The
interest rate on 3-month dollar-denominated deposits held in banks
outside the US. It serves as a valuable benchmark for determining
interest rate differentials to help estimate exchange rates. To
illustrate USD/JPY as a theoretical example, the greater the interest
rate differential in favor of the eurodollar against the euroyen
deposit, the more likely USD/JPY will receive a boost. Sometimes, this
relation does not hold due to the confluence of other factors.

10-year Treasury Note

FX
markets usually refer to the 10-year note when comparing its yield with
that on similar bonds overseas, namely the Euro (German 10-year bund),
Japan (10-year JGB) and the UK (10-year gilt). The spread differential
(difference in yields) between the yield on 10-year US Treasury note
and that on non US bonds, impacts the exchange rate. A higher US yield
usually benefits the US dollar against foreign currencies.

Federal Reserve Bank (Fed)

The
U.S Central Bank has full independence in setting monetary policy to
achieve maximum non-inflationary growth. The Fed's chief policy signals
are: open market operations, the Discount Rate and the Fed Funds rate.

Federal Open Market Committee (FOMC)

The
FOMC is responsible for making decisions on monetary policy, including
the crucial interest rate announcements it makes 8 times a year. The
12-member committee is made up of 7 members of the Board of Governors;
the president of the Federal Reserve Bank of New York; while the
remaining four seats carry one-year term each, in a rotating selection
of the presidents of the 11 other Reserve Banks.

Treasury

The
US Treasury is responsible for issuing government debt and for making
decisions on the fiscal budget. The Treasury has no say in monetary
policy, but its statements on the dollar have an major influence on the
currency.

Economic Data

The
most important economic data items released in the US are: labor report
(payrolls, unemployment rate and average hourly earnings), CPI, PPI,
GDP, international trade, ECI, NAPM, productivity, industrial
production, housing starts, housing permits and consumer confidence.

Stock Market

The
three major stock indices are the Dow Jones Industrials Index (Dow),
S&P 500, and NASDAQ. The Dow is the most influential index on the
dollar. Since the mid-1990s, the index has shown a strong positive
correlation with the greenback as foreign investors purchased US
equities. Three major forces affect the Dow: 1) Corporate earnings,
forecast and actual; 2) Interest rate expectations and; 3) Global
considerations. Consequently, these factors channel their way through
the dollar

Cross Rate Effect

The
dollar's value against one currency is sometimes impacted by another
currency pair (exchange rate) that may not involve the dollar. To
illustrate, a sharp rise in the yen against the euro (falling EUR/JPY)
could cause a general decline in the euro, including a fall in EUR/USD.

Sigma Forex Market Model

2008-09-16T05:14:20Z

Asset Market Model

The
explosion in trading of financial assets (stocks and bonds) has
reshaped the way analysts and traders look at currencies. Economic
variables such as growth, inflation, and productivity are no longer the
only drivers of currency movements. The proportion of foreign exchange
transactions stemming from cross border-trading of financial assets has
dwarfed the extent of currency transactions generated from trading in
goods and services. The asset market approach views currencies as asset
prices traded in an efficient financial market. Consequently,
currencies are increasingly demonstrating a strong correlation with
asset markets, particularly equities.

Understanding Technical Analysis

The
two primary approaches of analyzing currency markets are fundamental
analysis and technical analysis. Fundamentals focus on financial and
economic theories, as well as political developments to determine
forces of supply and demand. One clear point of distinction between
fundamentals and technicals is that fundamental analysis studies the
causes of market movements, while technical analysis studies the
effects of market movements.

Technical analysis examines past
price and volume data to forecast future price movements. This type of
analysis focuses on the formation of charts and formulae to capture
major and minor trends, identify buying/selling opportunities, and
assessing the extent of market turnarounds. Depending upon your time
horizon, you could use technical analysis on an intraday basis
(5-minute, 15 minute, hourly), weekly or monthly basis.

The Basic Theories

Dow Theory

The
oldest theory in technical analysis states that prices fully reflect
all existing information. Knowledge available to participants (traders,
analysts, portfolio managers, market strategists and investors) is
already discounted in the price action. Movements caused by
unpredictable events such as acts of god will be contained within the
overall trend. Technical analysis aims at studying price action to draw
conclusions on future moves.

Developed primarily around stock
market averages, the Dow Theory holds that prices progressed into wave
patterns, which consisted of three types of magnitude�primary,
secondary and minor. The time involved ranged from less than three
weeks to over a year. The theory also identified retracement patterns,
which are common levels by which trends pare their moves. Such
retracements are 33%, 50% and 66%.

Fibonacci Retracement

This
is a popular retracement series based on mathematical ratios arising
from natural and man-made phenomena. It is used to determine how far a
price has rebounded or backtracked from its underlying trend. The most
important retracement levels are: 38.2%, 50% and 61.8%.

Elliott Wave

Ellioticians
classify price movements in patterned waves that can indicate future
targets and reversals. Waves moving with the trend are called impulse
waves, whereas waves moving against the trend are called corrective
waves. Elliott Wave Theory breaks down impulse waves and corrective
waves into five primary and three secondary movement respectively. The
eight movements comprise a complete wave cycle. Time frames can range
from 15 minutes to decades.

The challenging part of Elliott Wave
Theory is figuring out the relativity of the wave structure. A
corrective wave, for instance, could be composed of sub impulsive and
corrective waves. It is therefore crucial to determine the role of a
wave in relation to the greater wave structure. Thus, the key to Elliot
Waves is to be able to identify the wave context in question.
Ellioticians also use Fibonacci retracements to predict the tops and
bottoms of future waves.

William's Percent Range

It was developed by Larry Williams. This system attempts to measure overbought and oversold market conditions.

The
%R always falls between a value of 100 and 0. There are two horizontal
lines in the study which represent the 20% and 80% overbought and
oversold levels.

Indicator values ranging between 80 and 100% indicate that the market is oversold.

Indicator values ranging between 0 and 20% indicate that the market is overbought.

But
we have to take in consideration that overbought does not necessarily
imply time to sell and oversold does not necessarily imply time to buy
so, it's very important that if an overbought/oversold indicator, such
as Stochastic or Williams %R, shows an overbought level, the best
action is to wait for the futures contract�s price to turn down before
selling.

So, you sell when %R reaches 20% or lower (the market is
overbought) and buy when it reaches 80% or higher (the market is
oversold). However, as with all overbought/oversold indicators, it is
wise to wait for the indicator price to change direction before
initiating any trade.

Fundamental Analysis with SigmaForex

2008-09-16T05:07:24Z

Understanding Fundamental Analysis

Fundamental analysis comprises the
examination of macroeconomic indicators, asset markets, and political
considerations when evaluating one nation's currency relative to
another. Macroeconomic indicators include figures such as growth rates;
as measured by Gross Domestic Product, interest rates, inflation,
unemployment, money supply, foreign exchange reserves and productivity.
Asset markets comprise stocks, bonds, and real estate. Political
considerations impact the level of confidence in a nation's government,
the climate of stability and level of certainty.

Sometimes
governments stand in the way of market forces impacting their
currencies, and hence, intervene to keep currencies from deviating
markedly from undesired levels. Currency interventions are conducted by
central banks and usually have a notable, albeit a temporary, impact on
FX markets. A central bank could undertake unilateral purchases/sales
of its currency against another currency; or engage in a concerted
intervention in which it collaborates with other central banks for a
much more pronounced effect. Alternatively, some countries can manage
to move their currencies, merely by hinting, or threatening to
intervene.

The Basic Theories

Purchasing Power Parity

The
PPP theory states that exchange rates are determined by the relative
prices of similar baskets of goods. Changes in inflation rates are
expected to be offset by equal but opposite changes in the exchange
rate. Take the classic example of hamburgers. If the burger costs $2.00
in the US and �1.00 in the UK, then according to PPP, the �-$ exchange
rate must be 2 dollars per one British pound.

If the prevailing
market exchange rate is $1.7 per British pound, then the pound is said
to be undervalued and the dollar overvalued. The theory then postulates
that the two currencies will eventually move towards the 2:1 relation.

PPP's
major weakness is that it assumes goods are easily tradable, with no
costs to trade such as tariffs, quotas or taxes. Another weakness is
that it applies only for goods and ignores services, where room for
differences in value is significant. Furthermore, there are several
factors besides inflation and interest rate differentials impacting
exchange rates, such as economic releases/reports, asset markets and
political developments. There was little empirical evidence of the
effectiveness of PPP prior to the 1990s. Thereafter, PPP was seen to
have worked only in the long term (3-5 years) when prices eventually
correct towards parity.

Interest Rate Parity

IRP
states that an appreciation (depreciation) of one currency against
another currency must be neutralized by a change in the interest rate
differential. If US interest rates exceed Japanese interest rates, then
the US dollar should depreciate against the Japanese yen by an amount
that prevents riskless arbitrage. The future exchange rate is reflected
into the forward exchange rate stated today. In our example, the
forward exchange rate of the dollar is said to be at discount because
it buys fewer Japanese yen in the forward rate than it does in the spot
rate. The yen is said to be at a premium.

IRP showed no proof of
working after the 1990s. Contrary to the theory, currencies with higher
interest rates characteristically appreciated rather than depreciated
on the reward of future containment of inflation and a higher yielding
currency.

Balance of Payments Model

This
model holds that a foreign exchange rate must be at its equilibrium
level�the rate that produces a stable current account balance. A nation
with a trade deficit will experience a reduction in its foreign
exchange reserves, which ultimately lowers (depreciates) the value of
its currency. The cheaper currency renders the nation' goods (exports)
more affordable in the global market place while making imports more
expensive. After an intermediate period, imports are forced down and
exports rise, thus stabilizing the trade balance and the currency
towards equilibrium.

Like PPP, the balance of payments model
focuses largely on tradable goods and services, while ignoring the
increasing role of global capital flows. In other words, money is not
only chasing goods and services, but to a larger extent, financial
assets such as stocks and bonds. Such flows go into the capital account
item of the balance of payments, thus, balancing the deficit in the
current account. The increase in capital flows has given rise to the
Asset Market Model.

Accumulation/Distribution (AD)

Accumulation Distribution is a price and volume indicator.

-��
When the Accumulation/Distribution moves up, it shows that the security
is being accumulated (Buying), as most of the volume is associated with
upward price movement.

-�� When the indicator moves down, it
shows that the security is being distributed (Selling), as most of the
volume is associated with downward price movement.

-�� Divergences
between the Accumulation/Distribution indicator and the price of the
security indicate the upcoming change of prices.

Profit Potential in SigmaForex

2008-09-16T04:35:38Z

Profit Potential In Both Rising And Falling Markets

In
every open FX position, an investor is long in one currency and short
the other. A short position is one in which the trader sells a currency
in anticipation that it will depreciate. This means that potential
exists in a rising as well as a falling market.

The ability to
sell currencies without any limitations is another distinct advantage
over equity trading. In the US equity markets, it is much more
difficult to establish a short position due to the Zero Uptick rule,
which prevents investors from shorting a stock unless the immediately
preceding trade was equal to or lower than the price of the short sale.

Forex Trading different roles in the FX Market

Central Banks And Governments

Policies
that are implemented by governments and central banks can play a major
roll in the FX market. Central banks can play an important part in
controlling the country's money supply to insure financial stability.

Banks

A
large part of FX turnover is from banks. Large banks can literally
trade billions of dollars daily. This can take the form of a service to
their customers or they themselves speculate on the FX market.

Hedge Funds

As
we know the FX market can be extremely liquid which is why it can be
desirable to trade. Hedge Funds have increasingly allocated portions of
their portfolios to speculate on the FX market.

Another
advantage Hedge Funds can utilize is a much higher degree of leverage
than would typically be found in the equity markets.

Corporate Businesses

The
FX market mainstay is that of international trade. Many companies have
to import or exports goods to different countries all around the world.
Payment for these goods and services may be made and received in
different currencies. Many billions of dollars are exchanges daily to
facilitate trade. The timing of those transactions can dramatically
affect a company's balance sheet.

The Man In The Street

Although
you may not think it, the man in the street also plays a part in
toady's FX world. Every time he goes on holiday overseas he normally
need to purchase that country's currency and again change it back into
his own currency once he returns. Unwittingly he is in fact trading
currencies.

He may also purchase goods and services whilst overseas
and his credit card company has to convert those sales back into his
base currency in order to charge him.

Money Flow Index (MFI)

The Money Flow Index measures the amount of money flowing in and out of a security.

It's a good measure of the strength of money flowing in and out of a security.

It
compares "positive money flow" to "negative money flow" to create an
indicator that can be compared to price in order to identify the
strength or weakness of a trend.

-�� A divergence between price and MFI often signals an imminent reversal of the trend.

-�� Readings below 20 on the scale are considered oversold (bullish).

-�� Readings above 80 on the scale are considered overbought (bearish).

When
analyzing the MFI the following should be taken into account:
divergences between indicator and price movement. If prices increase
and MFI falls (or vice versa), the probability of price turning is very
high. MFI values higher than 80 and lower than 20 signalizes
respectively about potential peak or foundation of the market.

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