It’s unfortunate that a lot of new traders are under the impression that the placement of a stop loss enables them absolutely control their losses. Such is not the case. There are times when the market is moving so quickly that a stop loss cannot be filled and this can spell financial disaster for the trader with limited resources.Am I suggesting that one shouldn’t trade the Forex? Certainly not, but having talked with a number of institutional traders over the years, each learned early on that he won’t have a job the following day if he executed an order anytime within two hours before or after of the issuance of any major US governmental report. And this only makes sense - the professionals are traders, not gamblers.
Indicators That Historically Cause the Greatest Volatility
A 2004 report from DailyFx Research showed the following indicators having the greatest volatility. Keep in mind the movements are averages. In many instances movements were dramatically higher because the reports were either far better or far worse than the experts anticipated.
US Non-Farm Payrolls - Unemployment. - Average Move - 124 Pips
US FOMC Interest Rate Decisions - Average Move 74 Pips
US Trade Balance - Average Move 64 Pips
US CPI - Inflation - Average Move 44 Pips
US Retail Sales - Average Move 44 Pips
A gambler might look at these numbers and think that they afford an incredible opportunity to make money. Professional traders, however, see them as a temptation to be avoided.
To Stay Out of Trouble Stay on Top of Major Indicators
The easiest way to avoid making the mistake of trading during highly volatile periods is to keep track of these major US indicators, creating your own calendar or monitoring the one provided by the Federal Reserve Bank. I don’t mean to sound like the ugly, self-absorbed American here. The US government is certainly not the only one issuing important reports that impact the currency market but it is by far the most popularly traded currency. If you are focusing on trading the euro, pound, yen, and Austrian dollar against the USD, you’ll want to keep track of those announcements as well.
In addition to avoidance, you might also want to visit Mellon Bank’s Forex resource center. They offer a free daily Fx report in a US and European edition, a Week Ahead Preview, Exchange Rate Forecast, as well as an on-going Economic Commentary. A lot of what is contained in these reports is over my head, but in checking them every day I remind myself that pivot point trading works but only when the market is reasonable stable.
Technical and fundamental analysis are the primary methods used to analyze forex markets when making trading decisions. Both are extremely important aspects of forex investing and new investors should take the time to learn and understand market forces before attempting to trade the forex market.
Fundamental analysis in the forex market focuses on economic indicators, asset markets and political developments that determine forces of supply and demand as it pertains to foreign currency valuation. Economic indicators include data and economic releases pertaining to interest rates, inflation, unemployment, money supply and productivity. Asset markets include stocks, bonds and real estate. Political developments include any financial, social or political event that can impact the level of confidence in a nation’s government (and ultimately the confidence in that nation's currency).
Know exactly when each economic indicator is due to be released. Keep a calendar on your desk or trading station that contains the date and time when each stat will be made public. You can find these calendars on the N.Y. Federal Reserve Bank Web site and then by searching for "economic indicators." The same information is also available on many other sources on the Web or from the company you use to execute your trades.
Other Major Indicators
The Gross Domestic Product (GDP) - The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods - Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.
Retail Sales - The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.
Housing Starts - The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
Additional Reading
Think You've Been Trading the Forex? Think Again
Advantages and Disadvantages of Non-Dealing Desk Trading
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