If you trade forex, you already know that the GDP report is one of the most appreciated pieces of information in the marketplace. It is comprehensive, provides a picture of national economic activity on a meaningful time frame, and has important implications for such variables as the unemployment rate, central bank rates, and inflation. We do not pretend that the small space of this page will allow us the chance to make a detailed exposition on the subject,  but we do aim to present a few salient points of the report as they relate to trading decisions, and market trends.

The GDP report provides a snapshot of all economic activity that take place inside the borders of a nation. Any economic activity that in some way leads to the production of goods or services is included in the report. If a foreign firm employs workers in the U.S., for example, the products created by U.S. workers will be accounted for in the report. On the other hand, if an American firm operates one hundred factories outside in Mexico, and generates billions of dollars in income from its activities there, none of it will be made a part of the GDP report, since no production takes place inside the national borders.

The GDP report is not generally regarded as a forward-looking indicator, and indeed, few of the information contained in it has a great degree of relevance for the future dynamism of the economy. On the other hand, no one has a crystal ball that can show the future, so central bank authorities include the information presented by this report in their evaluation of inflationary pressures. In particular the GDP deflator is an important piece of data that tells us how much price pressure is generated by domestic production. It differs from the CPI in that it does not account for import prices. By looking at this indicator, economists can isolate the domestic portion of the inflation spectrum, which can then help them decide the impact of currency fluctuations on price rises at home.

The GDP report accounts for all production in a country, but it only calculates the values of final goods. In other words, the report does not calculate the number and dollar value of tires, car motors, but only measures the dollar value of automobiles created by domestic industries. As a result, it provides a compact, yet detailed overview of national economic activity.

The GDP report is one of many economic indicators, and it must be taken in the context of other indicators that contribute to the big picture as it exists in reality and in the minds of traders. By familiarizing yourself with the GDP number and its details you may gain a significant edge over traders who are ignorant of its meaning and significance. This particular indicator is relatively straightforward, and if you are a trader, there is no justification for not studying and comprehending it to the maximum extent possible.

Forex or Foreign Exchange is the simultaneous buying of one currency and the selling of another. Currencies are traded in pairs. The Forex Market has more buyers and sellers and daily volume than any other market in the world and takes place in major financial institutions across the globe. The forex market is open 24 hours a day five days a week.

Buying/Selling

In the forex market, currencies are always priced in pairs and all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to buy the currency that increases in value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.

Quoting Conventions

Currencies are quoted in pairs. The first listed currency is known as the base currency and the second is called the counter or quote currency.

Currencies are quoted using five significant numbers, with the last placeholder called a point or a pip

For example a EUR/USD quote 1.1345/1.1350

Like all financial products, forex quotes include a “bid” and “ask” or a —sell“ and a —buy“ price. By quoting both the bid and ask in real time, brokers ensure that traders always receive a fair price on all transactions. As in any traded instrument, there is an immediate cost in establishing a position. This cost will vary between the different brokers and is sometimes called —spread“.

For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader‘s cost, which can be recovered with a favourable currency move in the market.

Margin

The margin is a performance bond, or good faith deposit, to ensure against the total loss of your account. Trade stations have margin management capabilities. In the event that funds in the account fall below margin requirements, the broker‘s dealing desk will close all open positions. This prevents clients’ accounts from falling into a negative balance, even in a
highly volatile, fast moving market.

The new NFA rule requires a minimum 1% margin at all time to maintain an open trade. (Note this may change from time to time so although we use 1% as the example at some stage in the future the margin maybe different. However using similar calculations one can easily calculate the new margins) Some deal stations automatically calculate this according to the
formula and hence the margin requirements are continually varying.

Based on a 1% margin requirement

Example 1: GBP/USD
rate: 1.7442/1.7447
account type: 100 000/lot account
1% leverage: 100 000×0.01 (1%) =1000units

When you are long (buy) GBP/USD, the margin required is:

1.7447 (GBP/USD) x1000 (units of base currency GBP) = USD1744 for each lot.
Some brokers require $1,800 margin for GBP pairs.

Example 2: EUR/USD

rate: 1.2326/1.2331
account type: 100 000/lot account
1% leverage: 100 000×0.01 (1%) =1000units

When you are long (buy) EUR/USD, the margin required is:
1.2331 (EUR/USD) x1000 (units of base currency EUR) = USD1233 for each lot.
Some brokers require $1,300 per lot in margin for EUR based pairs. In general, a margin of $1,300 allows you to control a $100,000 spot currency position. This is an efficient use of trading capital as the leverage in futures and stock markets is much less.

Example 3: Where the USD is the BASE currency, the margin requirement is
USD1000
(ie 1% of 100 000)

When you are long (buy) USD/CAD, USD/CHF etc the margin required is: =
USD1000 for each lot.

Forex Market and Locations

The forex market is a seamless 24 hour market and is open 5 days a week. At 5 pm Sunday, New York time, trading begins as markets open in Sydney and Singapore. At 7 pm the Tokyo market opens, followed by London at 2 am and finally New York at 8 am. (Time is based on New York time) As a trader, this allows you to react to favourable/unfavourable news by trading
immediately. The trading of forex takes place all over the world and is not located in any one central location. Deals are done between a variety of traders, from banks to managed funds to individual traders

Size of the Forex Market

Forex trades approximately US$1.85 trillion a day and is by far the most liquid market in the world. It takes the NY Stock Exchange THREE MONTHS to trade the same USD value as the forex trades each and every day making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other
market. If you compare this to the US$30 billion per day futures market, it becomes clear that the futures markets provide only limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.

Brokers and Market Makers

Market Maker – One that consistently makes two way prices, providing both a bid and an offer. Unlike brokers, market makers trade their capital

Broker – An individual who matches buy and sell orders in return for a commission. The bid and offer prices are those of the market participants and not of the broker.

Currency Pairs

Traders can trade a variety of currency pairs, limited only by which pairs each broker provides. Major currency pairs are typically the USD pairs for example
EURUSD GBPUSD AUDUSD USDJPY USDCHF
Cross currency pairs are pairs which do not involve the USD for example
EURGBP EURJPY GBPJPY EURCHF
EUR= Euro, GBP= Pound, CHF= Swiss Franc, JPY=Yen, AUD= Aussie $

Point/Pip Values

Point/Pip values is the US$ value for each Point/Pip (these are typical values and can vary between the different Brokers and Market Makers)
                                                        Regular      Mini
Euro =                                                 $10      ($1)
Pound=                                               $10      ($1)
Australian Dollar=                         $10      ($1)
Swiss Franc CHF=                           $7.60 ($0.76)
Canadian Dollar CAD=                  $7.30 ($0.73)
Japanese Yen =                               $8.45 ($0.85)

Major Market Participants

Traders include Governments, Reserve Banks, Large Mutual Funds, Banks,
Companies, Hedge Funds, Individual Traders.

Fundamental or Technical

The two basic approaches to analysing the currency market are Fundamental
Analysis and Technical Analysis. The fundamental analyst concentrates on
the underlying causes of price movements, while the technical analyst
studies the price movements themselves.

Fundamental Analysis
Fundamental analysis focuses on the
economic
social
political
geopolitical forces

These drive supply and demand.

Fundamental analysts look at various macroeconomic indicators such as
economic growth rates,
interest rates,
inflation,
unemployment, etc.

However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued. Do not try and analyse the fundamentals unless you are a financial expert. Let the experts do this and follow their lead by reading the charts. Be aware when announcements are due. Sometimes the experts are wrong and get caught by unpredictable actions.

Technical Analysis

Technical analysis focuses on the study of price movements. Historical
currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency, therefore, studying price action is all that is required to make informed trading decisions.

The primary tools of the technical analyst are charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.

I figured I would forward this article from ETF Trend Trading:

Although there are some very important differences  between them, it’s easy to understand ETFs if you  think of them like mutual funds.

But unlike mutual funds, which try to beat indexes  like the S&P 500 each year, ETFs try to mirror them.
 
For example, if the S&P 500 trades 10 percent higher,  the ETF that mirrors it will also trade 10 percent  higher. If the S&P 500 index trades 12 percent lower,  the ETF that mirrors it will also decline by 12 percent.

But it wasn’t until recently that a new breed of ETFs  really came of age. That’s because they don’t just  mirror the performance of indexes like the S&P 500 anymore.

The new ETFs mirror the performance of entire industry  groups, or sectors. Like the Software sector or the  Housing sector or the Energy sector or a whole country.

Here’s an example of how ETFs mirror sectors, using the Oil Services sector as an example.

I’ve been bullish on the Oil Services sector recently.

But the Oil Services sector, like all sectors, is comprised of dozens of individual stocks. That means that to mimic the performance of the entire sector, you’d have to be rich enough equally buy each and every individual stock in that sector.

You’d also have to have the time and the experience to research each stock to pick the best ones with the greatest profit potential, and to avoid a disaster like Enron among them.

Instead of buying all the stocks in the energy sector, you can now just buy shares of the Proshares Ultra Oil & Gas ETF (SYM: DIG). Since the returns mirror the sector investors who bought DIG when my trading system turned bullish made easy profits of 17% in a few days with total risk of only 2%. Not all trades are that easy, butit does happen from time to time.

As you can see from above, having the ability to easily trade sectors is one of the biggest benefits of the new generation of Exchange Traded Funds. However, having access to this tool does not automatically make you a
successful investor.

The key to the 17% profits detailed above was knowing that the Oil Services Sector was about to make a big move. The
way I teach my student to know is to follow price. Price always includes all fundamental knowledge.

By the end of these emails, my goal is not only to make you comfortable with the concept behind ETFs, but also to
give you some of the tools my paid students use to be profitable trading ETFs.

My free videos share more information that will set you apart from every other individual investor in the market.  They can be accessed from my homepage.

Here is small condensed list of the benefits of trading ETFs:

- Mirror indexes or sectors without having to buy hundreds of stocks.

- Lower expense ratios. While mutual funds can charge 1% to 3%, or more, ETFs are almost always in the 0.1% to 1% range. Over the long term, these cost differences can compound into a noticeable difference.

- Unlike mutual funds ETFs trade intraday like individual stocks. For instance, you can sell short, use a limit order, use a stop-loss order, buy on margin, and invest as much or as little money as you wish (there is no minimum investment
requirement).

- Diversification. This is one of the keys to long terminvesting success.

- Tax Benefits. Pay lower taxes than most mutual funds.

Who Issues ETFs?

Some of the major issuers include:
Barclays — iShares
State Street Global Investors — SPDRs (Spiders)
and streetTRACKS
Merril Lynch — HOLDRSs
Vanguard Group — Vanguard ETFs (formerly known as VIPERs)
ProFunds — Inverse and leveraged ProShares ETFs
Bank of New York — BLDRS (based on ADRs)

This is by no means all of them, but these major issuers offer many of the most popular and widely held exchange traded funds, and are a good place to start doing research.