Trading currency defines the operations of buying and selling currency on exchange market in order to make profit. Frequently, the procedure is connected with speculative trading. To obtain more benefits from the currency trading, a person operates on exchange rates, their fluctuations, the behavior of other players in exchange market, and the necessity to develop own strategic path.
The forex trading requires the knowledge of bid usage, offering the rates during trading currency, sagacity and forecasting vision as current events may change the course of business. Moreover, the participants in forex appear as either competitors or parties of trading transaction, therefore experience in the market psychology should assist the player in exploration the trading strategies.
The Currency Pairs
Currency trading occurs due to the fluctuations in the exchange rate, at which certain currency can be traded for another. Currency pairs are quoted together. The factors that cause the shifts are economic fluctuations, inflation, production, the growth of industries, political events, etc. They have objective strength and do not depend on currency trading, instead determine forex outcome and tendency.
The chosen pairs include the most popular, common and demanded currencies based on the official rates: EUR/USD (the Euro and the US dollars), USD/CAD (the US dollars and the Canadian dollars), GBP/USD (the British pound and the US dollars), EUR/CHF (the Swiss franc and the Euro), and USD/JPY (the US dollars and the Japanese yen). The selected pairs are economically stable and liquid among the currencies presented in the exchange market. Their active strength enables the player to use the knowledge and quantities to earn money on their pair fluctuations.
The pair of EUR/USD is the most recognizable and common in the exchange market due to its widespread and reliable utilization in the world economy. The currency pair has relatively brief history due to the recent entrance of EUR into trading, monetary unification of the European Union, and its introduction in the participant countries of the Eurozone. First EUR/USD exchange occurred in 1999 with the ratio of 1.1795 that could not stabilize and decreased in value. Later in 2000, with the increase in circulating of new currency in Europe, the currency pair was 0.8225.
Consolidated Euro led the pair to the consequent increase in the exchange rate above the parity border of 1.0000 in 2002. The high growth of the currency pair continued to remain on the level of 1.6037 in 2008 during the mortgage crisis. Since trading on the peak level, the pair has reached the downside bounded by the debt crisis in Greece, and traded on 1.1876 in 2010. The Greek crisis influences current rate that has failed to 1.0984 from May, 2015. Nevertheless, the pair is admitted to have high sales.
USD/CAD pair defined the amount of the Canadian dollars required to pay for one US dollar. The currency pair is affected by the oil price and the tendency of prices for primary goods. The pair exchange quote is inputted to the calculations based on the sale of Canadian oil in the world market and in each country individually. During the history of the USD/CAD exchange existence beginning in the 1970s, the pair requires a trader to look through the prices for primary goods in order to obtain a benefit in the exchange market. Currently, USD/CAD possesses neutral position in the forex. The present position of the pair has risen to 1.3089 from the earliest fluctuations near 1.000 in the 1970s.
Currently, GBP/USD increased to 1.5628, which is sufficient increase to claim the growing tendency of selling. The total number of transactions referring to the GBP/USD pair in the exchange market is close to 12 %. The bid remains attractive for traders due to its high volatility. Its historical rate tendency can be compared with EUR/USD. The maximum for the USD/GBP currency pair was fixed at 2.11 dollars for one pound in 2007, while the minimum was indicated below 1.35 dollars for a pound in 2008. The exchange pair is considered deceptive due to the pound’s instability in the level of global market resistance, which is comparative to EUR/USD. The pound in the pair often creates a false impression on the other forex pairs and quotes. Finally, the currency pair rates react to political events in the countries, so a trader in the EUR/GBP market should have the updated news from Britain.
EUR/CHF represents the stability of currency rates. It has low volatility and high liquidity. One of the most advanced periods of trading is European session. The influencing factors are the interest rate differential between Switzerland and the Eurozone, political situation within the EU, and the overall trend in the currency market. In the times of crisis, the Swiss franc remained the most stable currency in the market, but its rise against the Euro worries Switzerland. The currency pair is suitable for trading strategies that do not adapt to the rapid swings. The current rate is at the 1.0624 level.
USD/JPY takes the second place of the total volume of transactions in the exchange market. The historical tendency reveals the high dynamics and volatility. The USD/JPY pair is one of the most treacherous, unpredictable trade pair, which is able to bring the sufficient profits and significant losses. The pair is very sensitive to the events in the US, Japan and the world; it reflects the processes occurring in the politics and economy. The current rate has strengthened to 123.85 that showed a certain decrease in 2015.
Type of Analysis
The trading decisions derive from the technical analysis of data. The strategic mindset prompted to rely on statistics, the historical performance, and developed scientific forecasts. The factual background of the currency rates in previous periods of political and economic changes enables to perform the trading transactions. The currency had a tendency to reiterate its behavior as a reaction to the influence of outside stressors and interactions. The pairs’ tendencies were particularly justified by the forecasting assumptions on the base of the trading decisions.
The technical analysis was addressed to the market demand for the pairs, the direction of dynamics of each currency pair, and study of the exchange market. As opposite to fundamental analysis, the analytical decisions do not accept intuition and emotions in the decision-making. Instead, it applies the forecasting figures according to the economic cycle. Since the events and phenomena in the financial life tend to recur, the tendencies of the currency pairs are descended from the same international or national influences. Therefore, the most precise expectations and calculations should be grounded on the proper and accurate consideration of the market dominants, statistical reviews, and probable long-term extrapolation.
The identification of patterns is accomplished through the use of charts, oscillators, technical indicators, and other graphical tools that reflect the market activity. For example, the statistical tools allowed selling USD and CHF on the increase, and purchasing JPY on the drop. Therefore, the transaction made more money through the expectations based on the technical outputs. Thorough and rigorous research of details reflected in the data of the currency fluctuations supported successful trading decisions. The market psychology based on the results of technical analysis facilitated the use of appropriate strategy in the exchange market.
As it was mentioned above, the technical analysis required the proper examination of current events that lead to the currency changes. Emerging news constitute the important component of making the trading decision.
For example, the recent news informed that EUR/USD regains the rate of 1.10, which led to the gain-taking mood of the investors (“EUR/USD regains 1.10”, 2015). Thus, the information resulted in selling USD to make money. Nevertheless, the situation was complicated due to the low economic indicators, like the employment index (“EUR/USD soars more than 100 pips”, 2015). Therefore, the trading decision should be temporarily delayed to avoid losses at the cheapest point of USD.
Attention of a trader should be dedicated to the news about USD/CAD, especially in the terms of oil prices falling (“USD/CAD eyes again 1.31”, 2015). Recent information about the position of UDS/CAD at 1.30 motivated to sell USD, while the oil prices confirmed the efforts of a trader to sell CAD (Appendix C). Therefore, it is necessary to observe the Canadian macro indicators.
The fall of Canadian GDP reflected on the currency of the country (“Canada GDP dropped 0.2% in May”, 2015). The decrease by 0.2% revealed the weakness of the national economy along with the decrease in manufacturing output. Therefore, the data is a sign that it would be beneficial to buy economically weak Canadian dollars.
The information about unemployment in European Union that is expected to grow to 11% influences the desire to sell Euro at higher prices (“European Monetary Union unemployment rate”, 2015). Since unemployment had no significant effect on the rates of the European currency, trading operation of selling will not increase more than 0.1 on a lot. The same process followed after the news about austerity measures for the Greek government, which influenced the liquidity of the Euro currency (“Greek PM Tsipras survives, vote on a bailout program in September”, 2015).
The news about currency cap of the Swiss franc that hit Switzerland Central Bank also prevented the trading transactions as the currency led to the decrease in the exchange rate (Clinch, 2015). Certain perspective to sell EUR at the attractive price was brought by the news about recovery of EU in next year (Ranasinghe, 2015). The facts will strengthen the expectations for EUR sales growth (Appendix A).
Japan’s Central Bank noted the increase of the consumer price index, which has led to a reduction in demand for goods in the households (Shaffer, 2015). Based on the above-mentioned information, the trading decision to buy the Japanese yen will be inhibited, as it will not be profitable in the light of the described events.
The situation with the household debt in the USA will keep the USD selling, while the expectations of a trader may be directed to its purchasing. The reasons are the weakness of the US economy, and the recession status that was confirmed by the American economists (Olick, 2015; Belvedere, 2015; Appendix B). Therefore, the USD can be the object of purchase as the trading decision, particularly in the pair of EUR/USD.
The tendency of USD to increase can be supported by the news about the introduction of unemployment decrease strategies (“Weekly jobless claims”, 2015). The volatility in USD exchange is not extensive; thus, the decision about the purchase of American dollar is logical in the current period.
The decrease in the national currency rate became the benefits for national economy, as Japanese government suggested (“BOJ still sees weak Yen as beneficial for the economy”, 2015). Therefore, the trading decision about JPY transactions should be mature. Nevertheless, current position of USD/JPY sharply reflects the US wage and requires proper attention to its high volatility (“USD/JPY rebounds back toward 124.00”, 2015). As the currency has increased previous week and has decreased this week, the trading decisions to buy JPY now is risky.
The market news about EUR/GDP that has reached 0.7100 motivated the decision to flood the currency market with the Euros (“EUR/GBP finds resistance”, 2015). The information about the opposite situation with GBP/EUR motivates to sell GBP at the higher price (“BP/USD is a coin with two sides”, 2015). Finally, the decision about the GBP can be made after the increase of pound interest rate (Peters, 2015). Therefore, a trader should be ready to sell GBP at higher prices after confirming the favorable conditions.
As the Swiss franc dropped from high position in the currency pair USD/CHF, it gives a market signal for a trader that encourages the trading decision to buy cheaper francs (Saettele, 2015). Recent information about soaring of CHF through the overcome cap by Switzerland created the supply of the Swiss franc in the currency exchange market (“Swiss franc soars”, 2015).
Actual technical information about GBP/USD accumulates the interest to GBP increasing its value in currency market (Forex Crunch, 2015). The data influences positively the trading decisions to start the position of GBP selling. The fact confirmed by the news about the rejection of recession by currency pair (“GBP/USD Forecast”, 2015). Therefore, the trading decisions about selling GBP at high prices were perspective.
Aspects of Behavioral Finance
Along with the practice of currency transactions, there are certain aspects of behavioral finance defined by technical analysis and market conditions. The decision was made according to the availability bias determining the use of recent information to support the trading solution. The latest news changed the decisions about selling CHF and USD in appropriate pairs. Taking into account confirmation bias, decision was directed towards GBP selling as the expectations about its growth were strong and supported by the reliable information. Confirmation bias means that a trader looks thought the information that confirms his/her decision rather than the opposite data.
After some beneficial transactions with EUR/CHF, the decision was redirected due to the belief that the currency pair would not allow to gain more in the next week. The assumption occurred according to the Gambler’s fallacy defining that a trader is more likely to stop trading even after positive results due to the belief that the same trend will not continue (Barron, & Leider, 2010). Herding/Bandwagon effect is contained in the decision to purchase EUR after the same market reaction. Therefore, the common tendency of currency market was drawing individual decision. Loss aversion/prospect theory was guiding the trading choice to make a profit from the relatively stable EUR/CHF instead of CAD, despite the possibility to have equal or higher profits. The position reflects the theoretical ability of a person to choose more favorable option with the lower probability to lose.
Interest rate risk represents one of the significant influences on trading positions as it causes currency fluctuations (Saunders, Cornett, & McGraw, 2006). It affected the selling of GBP, while the interest rate has grown increasing the profit. Payment risk affected trading operations with the USD due to its unexpected rise and inability to profit (Saunders, Cornett & McGraw, 2006). The emergence of the risk has paralyzed selling position and led to the losses. The political risk faced the trading decisions when the politicians attempted to redirect artificially the currency dynamics. The measures positively influenced the timely purchase of JPY and its expected selling.
Efficient Market Hypothesis
The hypothesis of efficient market added confidence to trading transactions and made them accurate and circumspect. As influencing factors reflected directly in the currency changes, decisions concerning higher lot were made according to the proper outputs of technical analysis. The FX market was efficient based on the influence of market stressors and emerging risks. The market opportunities and obtained analytical results were favorable for performing numerous transactions.
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Trading decisions regarding the currency market are dictated by market opportunities and impact of national and international dimensions of development. The currency pairs change their values and dynamics based on economic fluctuations, which in turn cause the change of path of market participants. It is important to consider the risks and hypotheses regarding the currency market as they facilitate efficient decisions.