The Complete Guide to Trend-Following Indicators

Trend-following indicators are technical tools that measure the direction and strength of trends in the chosen time frame. Some trend-following indicators are placed directly on the price panel, issuing a bearish signal when positioned above price and a bullish signal when situated below price. Others are drawn below the panel, generating upticks and downticks from 0 to 100 or across a central ‘zero’ line, generating bullish or bearish divergences when opposing price.

Most trend-following indicators are ‘lagging’, meaning they generate a buy or sell signal after a trend or reversal is underway. The moving average is the most popular lagging trend-following indicator. These indicators can also be ‘leading’, meaning they predict price action before it starts by using multiple calculations and comparing momentum in different time frames. Parabolic Stop and Reverse (Parabolic SAR) is a popular leading trend-following indicator.

These indicators have three primary functions. First, they attempt to alert the technician to a developing trend or an impending reversal. Second, they attempt to predict short- and long-term price direction. Third, they confirm observations and signals in the price pattern and other technical indicators. Signal reliability is limited to the settings used to draw the trend-following indicator. For example, a 50-day moving average and a 200-day moving average generate unique buy and sell signals that may work in one time frame but not the other.

Simple Moving Average (SMA)

The Simple Moving Average (SMA) measures the average price across a range of price bars chosen in the settings by the technician. Closing prices are commonly used in the calculation but the open, high, low, or median price is often applied as a substitute. The indicator is a highly-effective technical tool used to evaluate the strength of the current trend and to determine if an established trend will continue or reverse. The SMA is less effective for prediction in sideways and rangebound markets.

The calculation simply sums up prices over the chosen period and divides by that period. Each data point adds to a line placed in the same panel as price. Interactions between price and the moving average generate bullish and bearish divergences that evaluate trend strength and direction. For example, price falling below a 20-day SMA in an established uptrend denotes unusual weakness while price lifting above the 20-day SMA in a downtrend denotes unusual strength. The direction of the SMA also generates a divergence when opposing price action.

Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) measures the average price across a range of price bars chosen by the technician, placing greater weight on more recent data points. The EMA is a ‘weighted moving average’, meaning that price bars are not treated equally in the calculation.  This moving average responds more quickly to recent price action than the simple moving average, theoretically generating earlier buy and sell signals.

The calculation assumes that recent price action will have a greater impact on trend direction than an equally weighted data series. However, this weighting also tends to generate more false signals than the SMA. Examining several EMAs at different time intervals can overcome the shortcomings of this moving average but the added complexity requires stronger interpretation skills. The 20-day, 50-day, and 200-day EMA combination has grown popular among traders in recent decades. The direction of the EMA and its relative positioning with price generate convergence-divergence relationships that are useful in trade management.

Average Directional Index (ADX/DMS)

The Average Directional Index (ADX/DMS) measures the strength or weakness of an active trend. The quality of trend strength should correlate strongly with the persistence of the trend and capacity to generate profits for the trend-following trader or investor. ADX uses moving averages in several time frames to generate three lines that cross higher or lower through a panel with values between 0 and 100. These lines are designated ‘ADX’, ‘+DMI+’, and ‘-DMI‘.

ADX measures the strength or weakness of an uptrend when +DMI is above -DMI, indicating that prices are rising. Conversely, ADX measures the strength or weakness of a downtrend when +DMI is below –DMI, indicating that prices are falling. ADX with values at or below 25 denotes a weak trend or rangebound market, lowering the reliability of this trend-following strategy. ADX direction also generates momentum signals, with a trend gathering strength when rising and losing strength when falling.

Moving Average Convergence-Divergence (MACD)

Moving Average Convergence-Divergence (MACD) is a highly popular technical tool developed by Gerald Appel in the 1960s. MACD analyzes the relationship between moving averages set at different intervals, generating a set of directional lines or a histogram that gauges current momentum and price direction. The indicator is commonly calculated by subtracting at 26-period EMA from a 12-period EMA. A 9-period EMA of the MACD, called the ‘signal line’, is then added to the plot.

MACD emits an assortment of visual data that generates crossovers, divergences, and sharp directional swings. The MACD histogram draws the distance between MACD and signal line and has become the most popular method to apply this indicator.  A bullish divergence occurs when the histogram turns higher at an extreme below a zero line while price is falling and a bearish divergence when the histogram turns lower at an extreme above a zero line while price is rising. Crossovers above and below the zero line can also generate potent buy and sell signals.

Parabolic Stop and Reverse (Parabolic SAR)

Developed by RSI creator Welles Wilder Jr, the Parabolic Stop and Reverse (Parabolic SAR) is used by technicians to confirm trend direction and to generate reversal signals. However, signals are only applicable within the time setting applied to the indicator. Indicator data points generate dots above or below price on the main chart panel. The calculation applies an ‘invisible’ trailing stop, forcing the indicator to change direction when hit, marking a potential reversal in trend. The indicator often generates reliable signals in strong trends and whipsaws in rangebound markets.

Parabolic SAR is most useful when analyzed in combination with the overall price pattern and other trend-following indicators. The trader or investor can also use the indicator as a tool to manage long and short positions, raising or lowering the stop loss after each data point to match the price of the last dot. Keep in mind this indicator issues continuous buy or sell signals, forcing the technician to look at other data to avoid over-trading.

Additional Trend-Following Indicators

Accumulative Swing Index – evaluates the long-term trend through changes in opening, closing, high, and low prices.                                                                                                                                    

ADX/DMS – measures the strength or weakness of an active trend and how long it may persist before a reversal.                                                                                                                             

Alligator – uses three Fibonacci-tuned moving averages to identify trends and reversals.

Aroon – evaluates whether a security is trending or rangebound and, if trending, the strength or weakness of the advance or decline.                                                                                                        

Aroon Oscillator – applies data from the Aroon indicator to determine if a trend is likely to persist. The oscillator generates a zero line that, when crossed, signals potential changes in trend.

Elder Ray Index – evaluates buying and selling pressure by separating price action into bull and bear power. The output is used to determine trend direction and high odds entry/exit prices.

Gator Oscillator – is used as an alternative to the Alligator indicator, drawing green and red histograms to determine if trends are getting stronger or weaker.

Linear Regression Forecast – uses regression analysis to compare price action to the expected mean, looking for high odds reversal signals.

Linear Regression Intercept – uses regression analysis to compare price action to the predicted value, looking for high odds reversal signals.

Linear Regression R2 – analyses the reliability of price vs regression prediction.                                                                                                                     

Linear Regression Slope – determines the average rate of change when using regression analysis and compares price action to the expected mean.

QStick – identifies trends by examining a moving average of the difference between the opening and closing price of a hourly, daily, weekly, or monthly price bar.

Rainbow Moving Average – plots multiple weighted moving averages to determine price extremes over the examined period.                                                                                                          

Rainbow Oscillator – uses rainbow moving averages to evaluate trends by plotting bandwidth lines at the edges of a histogram.                                                                                                    

Random Walk Index – compares an asset’s movement to random movement to determine if its noise or signal. The indicator issues buy and sell signals, depending on trend strength or weakness.

RAVI – also known as the Range Action Verification Index, the indicator evaluates current trend and projects future trend intensity through a histogram plotted with two moving averages.

Schaff Trend Cycle – identifies trends and issues buy and sell signals by examining acceleration and deceleration of price change over time.

Shinohara Intensity Ratio – evaluates trend intensity by plotting Strong Ratio (Strength) and Weak Ratio (Popularity) lines.                                                                                                                                               

Supertrend – draws an overlay across price action that seeks to identify current trend direction.                                                                                                      

Swing Index – predicts price action in short-term trading strategies through crossovers above and below a zero line.                                                                                                                                       

Time Series Forecast – uses linear regression to identify divergences between current price and the expected mean. It is constructed to be more flexible than basic linear regression analysis.

Trend Intensity Index – tracks correlation between price movement and volume levels to evaluate the strength or weakness of a trend.

TRIX – displays percentage change of a triple smoothed exponential moving average in an effort to filter out inconsequential price movement.

Typical Price – draws a straight line plot of the average price for each bar to generate a more realistic view of developing trends than using closing prices.

Vertical Horizontal Filter – measures the intensity of trends by looking at the highest and lowest prices over the specified time period.                                              

Weighted Close – calculates the average price between the high, low, and close of each bar, placing greater weight on the close.

ZigZag – connects plot points on a price chart that reverse whenever the asset reverses by more than a specified percentage.

The Complete Guide to Momentum Oscillators

The momentum oscillator is a technical tool that issues a signal when a price move or trend is about to start. It can fluctuate between an upper and lower band or across a zero line, highlighting relative strength or weakness within a specific time frame. Many oscillators generate values between zero and 100 while band placement near those extremes denotes ‘overbought’ or ‘oversold’ conditions that raise odds for a reversal. They can also feature multiple lines that generate signals when ‘crossing over’. Strongly-trending securities can get overbought or oversold and stay that way for long periods.

These are forward-looking indicators rather than trend-following indicators, with crossovers and reversals at band extremes often defining pauses in the broader trend, rather than trend reversals. These types of indicators generate the most potent buy and sell signals when looking for convergences or divergences within a set of time frames, like monthly, weekly, and daily charts. They can also issue potent trend breakout and reversal signals when used in conjunction with moving averages and other lagging indicators that apply moving averages to create values.

An oscillator can generate useful guidance when the underlying trend isn’t clear and the trader focuses on buy or sell ‘cycles’, as opposed to ‘signals’. The reasoning is easy to understand. A buy cycle doesn’t necessarily translate into higher prices while a sell cycle doesn’t necessarily translate into lower prices. However, cycle alternation often foretells the transition from a trend into a trading range, and vice-versa. It can also predict when the established trend’s trajectory is going to increase or decrease.

Stochastic Oscillator

Stochastic

The Stochastic oscillator was developed by George Lane in the 1950s. It’s become hugely popular since that time due to a high degree of accuracy in determining when it’s a good time to buy or sell a security. The indicator looks at an instrument’s closing price and compares that value to the price range over a specified time period. The ability to close higher within those values lifts the Stochastic to a higher number between zero and 100. A security typically enters the overbought zone when above 80 and the oversold zone when below 20. The 5-smoothed or 5-3-3 Stochastic setting is highly effective for position and swing trading.

The Stochastic generates two lines, a lead line and a signal line that ‘crosses over’ when certain conditions are met. Use this indicator to determine if a security is engaged in a buy or sell cycle within the time period under examination. The indicator’s power of prediction grows geometrically when comparing buy and sell cycles in multiple time frames. For example, a security engaged in a monthly Stochastic buy cycle may also be engaged in a weekly Stochastic sell cycle. Correct interpretation when these types of cycles are in conflict can generate excellent trade entry and exit timing, as well as windfall profits.

Relative Strength Index

Relative Strength Index

Welles Wilder Jr. introduced the Relative Strength Index (RSI) in 1978. RSI examines the characteristics of recent price change to evaluate momentum and to identify overbought or oversold readings that predict cycle reversals. Like other oscillators, RSI fluctuates between zero and 100, with a reading above 70 typically denoting an overbought security while a reading below 30 typically denotes an oversold security.  Unlike Stochastic, RSI generates just a single value that changes in reaction to the latest price bar.

RSI is constructed by looking at a computation in which average gains are divided by average losses over a specified period. 14 (days, weeks, or minutes) is the indicator’s most popular setting. The plot is placed below the price chart, generating a convergence when top and bottom panels move in the same direction and a divergence when moving in opposite directions. A rising RSI when price is falling marks a bullish divergence that often works well with a pullback strategy while a falling RSI when price is rising marks a bearish divergence that can support all sorts of profitable short sales.

Money Flow Index

Money Flow Index

Money Flow Index (MFI) looks at price and volume to identify overbought and oversold conditions. The indicator oscillates between zero and 100, rather than carving a traditional pattern.  As with RSI, MFI generates convergence-divergence signals when comparing the trajectories of price and indicator, with divergences often producing the most profitable buy or sell signals. In addition, the calculation looks at volume’s contribution to price action, encouraging technicians to call it the ‘volume-weighted RSI’. MFI hits overbought above 80 and oversold below 20 and, like RSI, 14 (days, weeks, or minutes) is the most popular setting.

MFI separates up days from down days, measuring volume generated by those sessions. Indicator plots are characterized as “Positive Money Flow’ when rising and ‘Negative Money Flow’ when falling, often matching up well with accumulation-distribution indicators.  For example, falling volume while price is rising above the overbought level can turn the MFI lower, generating a bearish divergence that warns about an imminent reversal. The indicator works best when used in conjunction with pattern analysis, looking for instances when a higher high or lower low in one plot isn’t matched by the other plot.

Price Rate of Change

Price Rate of Change

Price Rate of Change (ROC) measures momentum by looking at the percentage change in price between the current bar and a specified prior period. Unlike other oscillators, the ROC indicator plot starts at a central zero line and moves into positive or negative territory, depending on price movement over the examined period. In addition to generating convergence and divergence data, crossovers through the zero line also elicit buy and sell signals. ROC values are unbounded, meaning they can go well above 100 or well below -100. As an example, Gamestop ROC reached 1,800 during the historic 2021 short squeeze.

A rising ROC above the zero line confirms an uptrend within the applied setting while a falling ROC below the zero line confirms a downtrend. Rangebound price action generates ROC oscillation around the zero line, limiting its usefulness. In addition, signals only apply to the time period under examination and different settings always produce different signals. Signals also change when looking at different chart intervals, like daily, 60-minute, or 15-minute views. As a result, comparisons between intervals also generate convergence and divergence that requires interpretation. Many platforms default to a 14 ROC setting but 9 and 25 have also grown popular in recent years.

Commodity Channel Index

Commodity Channel Index

Commodity Channel Index (CCI) evaluates trend direction and strength, generating a plot that market technicians use to identify the best times to enter or exit a position. CCI also works well as a trade filter, identifying dull markets when it’s best to stand aside. The indicator examines the difference between the current price and an historical average price set by the technician. 20 periods is a popular setting. A CCI above zero indicates the current price is above the historic price while a negative CCI indicates the current price is below the historic price.

Unlike RSI and Stochastic, CCI values are unbounded and can go above 100 or below -100, making arbitrary overbought and oversold bands less useful for signal generation. As a result, the technician needs to compare current CCI extremes to prior turning points, which will change from asset to asset. As with other momentum oscillators, CCI can diverge from price, signaling potential weakness in an uptrend and potential strength in a downtrend. Pullback strategies often work well in timing long and short entries into these divergent conditions.

Additional Momentum Oscillators

Awesome Oscillator – evaluates momentum to determine if bulls or bears are controlling price action of a security.

Center Of Gravity – is a forward-looking indicator that generates crossovers to identify high odds turning points in rangebound markets.

Chande Forecast Oscillator – measures the percentage difference between a closing price and a linear regression line over a specified time period. An oscillator reading above zero predicts higher prices while an oscillator reading below zero predicts lower prices.

Chande Momentum Oscillator – subtracts the sum of losses over the specified time period from the sum of gains over the specified time period, and divides the total by the sum of all price movement over the specified time period.

Coppock Curve – calculates a 10-month weighted moving average of the sum of the 14-month and 11-month rates of change of an index to determine long-term momentum.

Disparity Index – evaluates the current price of a security in relation to a moving average.

Ease of Movement – is a volume-weighted indicator that gauges how easily price moves up or down through a formula that subtracts the prior average price from the current average price and divides the difference by volume.

Ehler Fisher Transform – isolates price movement to determine when a security hits an extreme, raising odds for a reversal.

Elder Force Index – quantifies the relative power needed to move price by comparing current price to prior price and multiplying by trading volume during the period.

Elder Impulse System – combines trend-following and momentum data to identify inflection points where a trend is likely to accelerate or slow down.

Fractal Chaos Oscillator – seeks to determine the choppiness or trendiness of a security, returning to zero in choppy conditions and hitting +N and -N extremes in trending conditions.

Intraday Momentum Index – combines candlestick and relative strength data to determine when a market is overbought or oversold.

Market Facilitation Index – measures the strength or weakness of price movement, seeking to determine if an uptrend or downtrend will persist or reverse.

Momentum Indicator – evaluates the strength or weakness of price movement over time, seeking to identify high odds reversal signals.

Pretty Good Oscillator – measures the distance of the close from the specified simple moving average, modified by the average true range over the same period.

Price Momentum Oscillator – applies smoothing calculations to Price Rate of Change to determine relative strength and weakness.

Price Oscillator – calculates the difference between pre-chosen moving averages, looking for overbought-oversold and convergence-divergence signals.

Price Volume Trend – looks at directional movement and trend intensity through a cumulative plot that multiplies volume by price percentage change over a given period.

Prime Number Oscillator – identifies high odds turning points by taking the prime number closest to the current price and calculating the difference between the nearest prime numbers across a specified time period.

Pring’s Know Sure Thing – interprets price rate-of-change data through a plot that identifies overbought or oversold extremes.

Pring’s Special K – evaluates trend intensity in multiple time frames to build a comprehensive view of asset cyclicity. It is primarily used to identify reversals before they unfold and to locate high odds entry/exit levels.

Psychological Line – computes the ratio of rising price bars to the total number of price bars over the specified time period. A reading above 50% indicates bulls are in control while a reading below 50% indicates bears are in control.

Relative Vigor Index – measures trend strength by contrasting the closing price to the trading range over a specified time period.

Stochastic Momentum Index – refines the Stochastics oscillator, applying a broader range of price settings and placing more weight on closing prices.

Ultimate Oscillator – applies weighted moving averages in multiple time frames to measure momentum.

Valuation Lines – calculates and displays the average of visible prices by applying multiple standard deviations.

Williams %R – measures trend momentum over the specified time period by drawing an oscillator bounded by 0 and 100.

The Complete Guide to Comparison Indicators

The comparison indicator is a technical tool that analyzes relationships between two or more securities, indices, or markets. It compares prices, volume, and/or volatility, determining which instrument is relatively stronger or weaker over the chosen time frame. This type of analysis elicits a series of convergence and divergence signals, with the leading instrument generating a bullish divergence when it gets even stronger compared to the lagging instrument, and a bearish convergence when it gets even weaker compared to the lagging instrument.

This type of analysis may also measure correlation, which is the tendency of one security or indicator to mimic the behavior of another security or indicator. Correlation analysis first measures the relationship between two securities, or a security and a technical indicator. The resulting values are then strung together in a new indicator that visualizes how changes in one variable over time influence changes in the other variable.

This plot allows the technician to predict how price behavior in a correlated market will influence investment or trading returns. When computing correlation, one security or indicator is considered to be the dependent variable while the other security or indicator is considered to be the independent variable.  The calculation determines if a change in the independent variable is expected to result in a similar change in the dependent variable.

Plot

Plot

The Plot function simply adds a second security to an Advanced Chart price panel and examines relative strength and weakness between instruments. This built-in charting function normalizes divergent security behavior by replacing Y-axis prices with percentage change. The first security becomes the independent variable when performing this analysis while the second security acts as the dependent variable and can be substituted with other securities, as needed.

Comparison and correlation analysis can be accomplished in several ways with the Plot function. The easiest method just scans price action over days, weeks, or months, looking for relative highs and lows to occur at the same time. Crossovers between securities are especially useful in this analysis because it identifies turning points and divergences, in which one security shifts from a leading into a lagging relationship with the other security. The Plot function is used in conjunction with the Correlation Coefficient and Performance Index indicators.

Correlation Coefficient

Correlation Coefficient

Correlation Coefficient indicator evaluates the relationship between a security price and a related technical indicator, or two securities. As noted above, correlation is measured by choosing an independent variable and comparing performance against a dependent variable, which is usually a related security. Indicator output ranges from plus 1 to minus 1 (+1 to -1), with perfect positive correlation at the upper limit and perfect negative correlation at the lower limit.

A perfect positive reading specifies that any change in the independent variable will generate an identical change in the dependent variable. Conversely, a perfect negative reading specifies that any change in the independent variable will generate an identical but opposite change in the dependent variable.  Not surprisingly, a correlation coefficient of 0 specifies there is no relationship or correlation between the two variables.

The direction of the dependent variable’s plot over time depends on whether the coefficient is positive or negative. When the coefficient is positive, the dependent variable will move in the same direction as the independent variable. Conversely, when the coefficient is negative, the dependent variable will move in the opposite direction of the independent variable. Choosing an appropriate holding period is critical when applying this analysis to trade management because correlation tends to oscillate over time, generating frequent whipsaws.

Performance Index (PI)

Performance Index

Performance Index is used in conjunction with the Plot function. The indicator compares a security’s price to a benchmark index or other security, generating a line that turns green above a reading of 1.0 and red below a reading of 1.0. A reading of exactly 1.0 indicates perfect correlation with the underlying security or index. A security that outperforms a benchmark index should generate higher returns in a trend-following strategy than a security that underperforms a benchmark index.

A rising PI indicates the security is making a stronger move to the upside than the underlying index, or the security is rising while the underlying index is falling. A declining PI indicates the security is declining at a faster rate than the underlying index, or the security is falling while the underlying index is rising.  Flat PI readings indicate that both markets are gaining or losing value at an equal pace.

Price Relative

Price Relative

Price Relative indicator compares the performance of a security against an underlying index, sector, or another security through a ratio chart.  The indicator is also called the Relative Strength indicator, not to be confused with Wilder’s Relative Strength Index (RSI). This analysis generates convergence and divergence signals that may predict relative returns on active positions over time.

It is a simple plot, calculated by taking the closing price of a dependent variable (base security) and dividing it by the closing price of an independent variable (comparative security). A rising ratio indicates the base security is rising at a faster pace than the comparative security, or falling at a slower rate than the comparative security. Conversely, a falling ratio indicates the base security is falling at a faster pace than the comparative security, or rising at a slower pace than the comparative security.

The Complete Guide to Range Indicators

The range indicator is a technical tool that measures the limits of price movement over a specified time frame. It is estimated that market prices are engaged in uptrends and downtrends just 15% to 20% of the time, with the balance spent within the boundaries of trading ranges that can be relatively narrow or wide. This indicator attempts to determine the characteristics of prices caught within these ranges, seeking to predict future movement and direction.

Many range indicators look for boundaries between ranges and trends, with the technician seeking to profit when a) a trend eases into a trading range or b) a trading range yields a new trend, higher or lower. One popular method to perform this analysis identifies range boundaries and then measures the quality of price action between highs and lows. This analysis often includes volatility calculations, looking for transitions from low to high volatility, and vice-versa, to generate preliminary buy and sell signals.

Other types of technical indicators can perform sophisticated range analysis as well. For example, Bollinger Bands will expand during trends and contract during range development. Bands tend to narrow to an extreme at the starting point of a new trend and widen to an extreme at the starting point of a new trading range. Those turning points can generate actionable entry or exit signals, especially when confirmed through other forms of technical analysis.

Average True Range

ATR

Average True Range (ATR) measures volatility by examining a security’s price action over a specified time period. The initial calculation subtracts the high from the low of a single price bar and compares that value to price ranges in prior bars. The final calculation is derived from a smoothed moving average of these values (true ranges) over N periods, with ‘N’ the time setting chosen by the technician. 14 days (or periods) is the most common ATR setting.

Securities with high ATR readings are more volatile than securities with low ATR readings but the calculation does not predict price direction. Rather, it is a supplementary technical tool best used in conjunction with trend-following and momentum indicators. Many traders develop exit strategies using ATR multiples that seek to identify when volatility has reached an unsustainable level. In addition, the indicator has powerful applications in determining position size and risk.

Darvas Box

Darvas Box

The Darvas Box indicator generates rectangular-shaped boxes that rise or fall over time. Although frequently listed as a momentum indicator, the formula identifies rangebound market conditions that lower odds for profitable trend-following strategies. The rise and fall of boxes add to this analysis, signaling when the quality of price action has changed enough to permit freer directional movement, higher or lower.

Traditional Darvas Box strategies require that market participants take exposure solely in the direction of the boxes, updating stops whenever price action crosses the top threshold. The original work includes fundamental filters that prefer growth plays with strong earnings, similar to the work of William O Neil and Investor’s Business Daily. However, the indicator’s usage has expanded naturally over the years into a purely technical form of market analysis.

High Low Bands

High Low Bands

High Low Bands (HLB) are generated from a series of moving averages calculated by evaluating price action over specified time periods, which are then shifted higher or lower by a fixed percentage of the median price. Indicator calculation requires setting the specific period and appropriate shift percentage. The ‘right’ settings are market specific and need to match volatility characteristics for the chosen security or trading venue.

The indicator applies triangular moving averages instead of simple or exponential moving averages. This is a double-smoothed average, or an average of an average, that irons out suspected outliers from the final calculation.  As a result, bands are smoother than similar indicators that track fast moving market activity and are less useful for many short-term trading strategies. However, HLB can generate extremely reliable high and low predictions in rangebound markets.

Mass Index

Mass Index

Developed by Donald Dorsey in the 1990s, Mass Index evaluates the range between the high and low of a security over a specified time period. Reversal signals with this indicator are generated when a range expands to a subjective extreme and then reverses into contraction. However, the technician may also need to examine momentum, volatility, and trend-following indicators to determine the overall trend direction that will be impacted by the reversal signal.

The classic setting uses a 9-day (or period) exponential moving average (EMA) of the range between the high and low price over the last 25 days. The initial output is then divided by a 9-day EMA of the 9-day EMA used for the initial calculation. In the original usage, an indicator value that surges above 27 and drops to 26.5 issues a reversal signal. However, in modern usage, the technician needs to identify signal levels that are appropriate for the currently traded markets and securities, which can differ greatly from Dorsey’s original observations.

Pivot Points

Pivot Points

Pivot Points determine range and trend intensity in different time frames. The first level of the indicator is calculated by adding the high and low of the current bar to the closing price of the prior bar, and dividing by three. Price action in the next bar is considered bullish when above the pivot point and bearish when below the pivot point. This observation has limited value so the calculation adds support and resistance levels, notated as S1, S2, R1, and R2, based upon projections from the pivot point value.

Price movement above support or below resistance signifies a strengthening uptrend or downtrend while reversals within support (S1 or S2) and resistance (R 1 or R2) boundaries define the quality of rangebound markets, at least within the time frame used in the price chart.  These five levels can also be used to identify appropriate trade entry levels, place stop losses and trailing stops, and to locate high odds trade exit levels.

Additional Range Indicators

Anchored VWAP – attempts to identify the average price of a security over a time period chosen by the technician.

ATR Bands – are drawn around the average true range indicator to identify potential turning points and whether price is engaged in an uptrend, downtrend, or a trading range.

ATR Trailing Stops – identifies optimized stop levels using multiples of average true range indicator output.

Detrended Price Oscillator – seeks to measure the length of price cycles from peak to peak or trough to trough.

Gopalakrishnan Range Index – quantifies price movement and asset volatility by studying the asset’s trading range over a specified time period.

High Minus Low – subtracts the daily (or bar) high from the daily (or bar) low to determine average price movement over a specified time period

Highest High Value – measures the highest high over a specified time period.

Lowest Low Value – measures the lowest low over a specified time period.

Median Price – measures the most common price over a specified time period.

True Range – displays a derivative of the trading range by removing the impact of gaps and volatility between price bars.

Vortex Indicator – separates uptrends and downtrends into two continuous lines that reveal relative bull and bear power over time.

VWAP – attempts to identify the average price for a security over the entire session.

The Complete Guide to Volume Indicators

Volume indicators are technical tools to evaluate a security’s bull and bear power. Most look specifically at buying vs. selling pressure to determine which side is in control of price action. Others attempt to identify emotions that are moving the security at a particular time. For example, exceptionally high volume compared to a moving average of volume can reveal euphoria or fear while much lower than average volume can reflect apathy or disinterest.

These indicators measure shares in the equity markets, contracts in the futures markets, and tick movements in the forex markets. All versions attempt to accomplish the same types of technical analysis. When a market rises on increased volume, it is considered to be under accumulation. Conversely, when a market falls on increased volume, it is considered to be under distribution.    In addition, a market rising on decreased volume generates a bearish divergence while a market falling on decreased volume generates a bullish divergence.

Forex market volume evaluates the degree of price movement within a certain period, rather than looking at individual buy and sell transactions. Forex traders often supplement their accumulation-distribution analysis by looking at open interest in the currency futures markets. Whether equity, contract, or pair, volume is used in conjunction with price action to confirm trend strength, reveal trend weakness, and confirm breakouts and breakdowns.

Accumulation-Distribution (A/D)

A/D

Accumulation-Distribution (A/D) is a cumulative volume indicator, meaning that each data point is added to the prior data point before it’s plotted on an indicator panel. As the name states, the indicator attempts to determine if a security is being accumulated (bought over time) or distributed (sold over time). The calculation measures the closing price in relation to the price bar’s range and multiplies the result by volume for that bar.

A/D indicator direction generates convergence and divergence relationships with price that assist in trade decision-making and risk management when used in conjunction with pattern analysis and other technical indicators. Rising price when A/D is falling generates a bearish divergence while falling price when A/D is falling generates a bullish divergence. The indicator also carves orderly patterns over time that look similar to price action, with channels, trendlines, and triangles assisting prediction.

On Balance Volume (OBV)

OBV

On Balance Volume (OBV) was created by Joseph Granville in 1963 and is now the most popular accumulation-distribution indicator. OBV generates a bullish divergence when price is falling and OBV is rising and a bearish divergence when price is rising and OBV is falling. The value of OBV at a particular time isn’t important but the relationship between current and prior OBV levels determines whether accumulation or distribution is keeping up with price action.

OBV plots a running total of a security’s buy and sell volume, seeking to determine if it is under accumulation (bought over time) or distribution (sold over time). The calculation has three primary components. First, if the current price bar is higher than the previous price bar, current OBV = previous bar’s OBV + current volume. Second, if the current price bar is lower than the previous price bar, current OBV = previous bar’s OBV – current volume. Third, if the current price bar = the previous price bar, current OBV = previous OBV.

Chaikin Money Flow (CMF)

CMF

Chaikin Money Flow (CMF) was created by Marc Chaikin in the early 1980s. The indicator measures accumulation and distribution of a security over time. This is an oscillator, with values ranging from +100 to -100 and a zero line that signifies neither accumulation nor distribution. As with other oscillators, CMF generates buy, sell, and confirmation signals through bullish and bearish convergences and divergences as well as crossovers through the zero line.

Chaikin applied a 21-period (one month) setting to the indicator but that element is now customizable in charting programs and has different implications, depending on the chosen period. According to the creator, money flow persistence over 6 to 9 months evaluates accumulation or distribution by major funds and institutions. Most traders don’t need that information but CMF also reveals short-term money flow convergence-divergence when viewed with shorter time frames and settings.

Volume Oscillator (VO)

VO

Volume Oscillator (VO) identifies accumulation and distribution by examining the relationship between two volume moving averages. A fast cycle moving average of 14 days or weeks is often used in conjunction with a slow cycle moving average of 28 days or weeks but settings are customizable. The calculation simply subtracts the slow MA from the fast MA and plots the result as a line or histogram. As with other oscillators, VO fluctuates across a zero line but has no fixed upper or lower values.

VO is non-directional and expected to turn higher in both uptrends and downtrends. It generates a bearish divergence when price is rising and VO is falling and a bullish divergence when price is falling and VO is falling. The indicator also has the power to identify overbought and oversold markets and to confirm breakouts and breakdowns. In addition, crossovers through the zero line may reveal important turning points or be used to confirm other technical indicators.

Balance of Power (BOP)

BoP

Balance of Power (BOP) measures the strength of buying and selling pressure. This oscillator is plotted in a panel with a central zero line and extremes at +1 and -1. Buyers are in control when the indicator is located above the zero line while sellers are in control when the indicator is located below the zero line. Readings near the zero line can indicate a reversal in trend or a rangebound market. Values near +1 signal an overbought market while values near -1 signal an oversold market.

BOP divides the distance between the open and close of the price bar by the distance between the high and low of the price bar. The initial result looks choppy and confusing so the calculation is then smoothed by a 14-period or other moving average. The distance above or below the zero line indicates the extremity of the positive or negative price change. It emits buy and sell signals through bullish and bearish divergences with price, as well as crossovers through the zero line.

Additional Volume Indicators

Klinger Volume Oscillator – looks at long and short-term money flow to confirm uptrends and downtrends.

Negative Volume Index – evaluates how rising and falling volume impact price movement over time.

On Balance Volume – calculates accumulation or distribution in a security over time. It generates a bullish divergence when price is falling and OBV is rising and a bearish divergence when price is rising and OBV is falling.

Positive Volume Index – evaluates how rising and falling volume impact price movement over time.

Projected Aggregate Volume – calculates the daily volume up to an intraday setting and projects total volume for the remainder of the session.

Projected Volume at Time – looks back at past sessions to project future volume over specified time periods.

Trade Volume Index – tracks correlation between price movement and volume levels to evaluate accumulation and distribution.

Twiggs Money Flow – applies a variation of Chaikin Money Flow to measure accumulation and distribution of a security over time.

Volume Chart – plots a volume histogram below each price bar.

Volume Oscillator – looks at accumulation and distribution by examining the relationship between two volume moving averages.

Volume Profile – displays the quantity of trading activity of a security at different price levels.

Volume Rate of Change – plots the percentage change of volume over a specified time period to determine if participation is rising or falling.

Volume Underlay – displays volume histograms in the same pane as price, rather than in a separate indicator pane.

The Complete Guide to Volatility Indicators

The volatility indicator is a technical tool that measures how far security stretches away from its mean price, higher and lower. It computes the dispersion of returns over time in a visual format that technicians use to gauge whether this mathematical input is increasing or decreasing. Low volatility generally refers to quiet price movement, with predictable short-term swings, while high volatility refers to noisy or dramatic price movement, with often wildly unpredictable short-term swings.

Volatility measures the degree to which price moves over time, generating non-directional information unless the data is plotted in specific visual formats. This technical element has a great impact on options pricing and market sentiment, with high volatility generating greater extremes in greed and fear. Constructed as an indicator, volatility plots a history of price movement that supplements trend, momentum, and range analysis.

Volatile instruments are considered to be more risky than non-volatile instruments. Volatility oscillates regularly between high and low states, offering a potential timing tool for traders and market timers. Specially, the lowest volatility over X periods is often a precursor for an imminent shift to high volatility that translates into trend movement and trading signals. Market lore outlines these classic dynamics, telling market players to ‘buy in mild times and sell in wild times’.

Bollinger Bands

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Bollinger Bands is the financial market’s best-known volatility indicator. Created by John Bollinger in the early 1980s, the indicator constructs three lines around price: a simple moving average acts as the middle band while equally-distanced upper and lower bands expand and contract in reaction to changing volatility. The 20-day or period SMA is the most common setting for the middle band but this value is customizable in the advanced charting program.

The calculation takes the standard deviation of the SMA, which is one way to calculate distance from the SMA over time, and applies the result to the upper and lower bands. Bands expand and contract over time in reaction to changing volatility levels. Constricted bands ‘squeeze’ price action between narrow boundaries, indicating low volatility while predicting a cycle shift to high volatility. The transition can elicit high odds entry and exit signals for many trading strategies.

Donchian Channels

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Donchian Channels construct upper, lower, and mid-range bands through examination of price extremes over the chosen time period. The highest price over the chosen period marks the high band while the lowest price over the chosen period marks the low band. The median band is constructed by subtracting the low band value from the high band value and dividing by two. The indicator is then used to investigate relationships between the current price and trading ranges over the chosen period.

As with Bollinger Bands, 20-days or periods is the most common Donchian Channel setting.  A top band that moves higher when price approaches (or a bottom band that moves lower) signals ease of movement that facilitates trend development. Conversely, a band that remains horizontal when price approaches identifies support or resistance that raises odds for a reversal and return to the median band. Bollinger Bands differ from Donchian Channels, applying moving averages that lower the impact of high and low outliers during lookback periods.

Keltner Channel

apple

Keltner Channels place bands around developing price in order to gauge volatility and assist directional prediction. Upper and lower bands are calculated as a multiple of average true range (ATR) and are plotted above and below an exponential moving average (EMA). Both the EMA and ATR multiplier can be customized but 50 and 5 are common settings. Price lifting into the upper band denotes strength while price dropping into the lower band denotes weakness.

These bands represent support and resistance regardless of inclination, with piercing through bands generating overbought and oversold trading signals in addition to marking an acceleration of the trend. Horizontal bands exert greater support or resistance than bands ticking higher or lower.  Price falling into a rising band generates a bullish divergence while price rising into a falling band generates a bearish divergence.

Ichimoku Clouds

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Ichimoku Clouds, developed by Goichi Hosada in the late 1960s, plots multiple moving averages above and below price in the form of shaded areas that are called bullish or bearish ‘clouds’. Five calculations are applied to construct the indicator, generating a cloud that represents the difference between two of the lines. Price above a cloud signals an uptrend while price below a cloud signals a downtrend. A bullish price swing into a cloud denotes resistance while a bearish price swing into a cloud denotes support.

Clouds also tick higher or lower over time, adding to the indicator’s versatility. Trend signals are expected to be stronger and more reliable when price is moving higher above a cloud or lower below a cloud. The two cloud lines are called ‘Span A’ and ‘Span B’. The cloud is colored green when Span A is above Span B and colored red when Span A is below Span B.  Price above a red cloud signals a bullish divergence while price below a green cloud signals a bearish divergence.

Historical Volatility

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Historical Volatility is plotted in a separate pane, unlike most volatility indicators. It measures the distance that price travels away from a central mean over the chosen time period. Standard deviation is often used to calculate the indicator but variations utilize other measurements. Risk increases when the indicator rises and decreases when it falls. It is non-directional, meaning that rising or falling volatility doesn’t specifically favor buying or selling strategies.

The original indicator applied a 10-period and 252-day setting to measure volatility over a year (252 = average number of trading days in a year). The technician now customizes these inputs as well as standard deviation (SD). It’s best to ‘form fit’ the calculation to a security because average volatility is expected to differ between different types of instruments and markets. Interpretation of historical volatility compares current levels with prior levels, looking for high and low extremes that may impact profits and losses. It can also be useful to compare values across highly correlated instruments to uncover ‘typical’ value and hidden divergences.

Additional Volatility Indicators

Beta – measures a security’s volatility compared to the broad market or another security.

Bollinger %b – translates the distance between price and Bollinger Bands into an oscillator plot.

Bollinger Bandwidth – calculates the percentage distance between upper and lower Bollinger Bands, seeking to identify high odds turning points.

Choppiness Index – measures whether a market is engaged in a trend or a trading range.

Chaikin Volatility – generates an oscillator that applies Moving Average Convergence Divergence (MACD) to accumulation-distribution rather than price. A crossover above a zero line indicates strength and accumulation while a crossover below a zero line indicates weakness and distribution.

Donchian Channel – constructs upper, lower, and mid-range bands through examination of price extremes over a chosen time period. The highest price over the chosen period marks the high band while the lowest price over the chosen period marks the low band.

Donchian Width – measures the price difference between the high and low bands of the Donchian Channel.

Fractal Chaos Bands – draws bands around price action, with the slope determining whether or not the security is trending or flat.

Moving Average Deviation – measures volatility by examining how an asset’s price has deviated from the selected moving average over time.

Moving Average Envelope – plots a band over price, with top and bottom extremes calculated as a pre-chosen percentage above and below a moving average.

Prime Number Bands – identifies the highest and lowest prime numbers in a trading range over a given period and plots the output as a band across price.

Relative Volatility – is a variation of Relative Strength Index (RSI) that measures the direction of volatility over the specified time period, using standard deviation calculations.

Standard Deviation – examines how far price stretches away from a central mean price over time.

STARC Bands – also known as Stoller Average Range Channel Bands, are plotted above and below a simple moving average, highlighting extreme levels that can elicit potent buy or sell signals.

Ulcer Index – predicts the drawdown, depth, and duration of asset declines through examination of highs and lows over time.

How to Spot Support & Resistance – Build a Chart Apartment Building

Want to know where and how to find and draw support and resistance levels for any asset? It is explained here along with how to know where your first two price targets should be located. Learn how to use and draw Fibonacci Extensions the right way in this short video: https://youtu.be/LKL_5g8awuA

How to Spot Support and Resistance Video

 

 

 

Forex Regulation Across Africa – The Complete Guide

Partly, this intense growth was caused by the fact that ESMA enforced new restriction laws on the maximum leverage that EU traders can use (this caused FX brokers to focus on other big markets, like Africa)

An average of over $5.1 trillion is traded daily in the Forex market. Though worldwide, there are major forex trading centres which include London, Tokyo, Paris, Sydney, New York, Zurich, Singapore, and Hong Kong. A Forex trading day starts in Australia and ends in New York. The market stays open for 24 hours a day and five and a half days a week.

There are specific regulations in countries, continents that oversee the trading of Forex. In some countries, FX trading is restricted and banned while in others, it is fully supported. In this post, our focus is on Africa as we’ll be looking at Forex regulation across the continent.

Overview of Forex Trading In Africa

Forex trading is a very competitive activity, and in Africa, it is no different. The market has experienced speedy growth over the last two decades as more Africans are being enlightened on what Forex entails.

Significantly, the last decade has seen the Forex market go from almost unnoticed to becoming one of the most dynamic industries in the content. This can be attributed to the advent of mobile devices and other technologies.

There are about 1.3 million Forex traders in Africa. South Africa and Nigeria lead the way as both countries constitute a large percentage of the total figure.

Other countries where Forex trading is gaining ground are Kenya, Egypt, Angola, Namibia, and Tanzania. This has attracted international Forex brokers like IQ Option, IC Markets, XM Forex Trading, ForexTime (FXTM), and Olymp Trade.

With this vast amount of forex traders, it is expected that government financial regulatory bodies will be interested in monitoring trading activities in individual countries.

Forex-Friendly African Countries

A lot of African countries are Forex-friendly, but there are minor restrictions from the government. Forex can be traded in Nigeria, South Africa, Egypt, Kenya, Namibia, Ivory Coast, and many other African countries.

Whereas Forex trading cannot be said to be legalized in these countries, it also does not break the law. Before a Forex broker can offer Forex trading services to a country’s citizen, it is mostly mandatory to acquire a trading license.

Forex-Prohibited African Countries

Currently, a complete Forex ban is not placed on any country in Africa, unlike world countries like North Korea and Israel. As stated earlier, there are minor restrictions from the government in some countries. These restrictions do not prohibit the trade of Forex but are imposed to prevent fraudulent and scam activities.

Some of these restrictions are on the maximum trading amount and the maximum amount you can have in your Forex account. These are similar to Forex restrictions imposed in countries like China and Russia. Furthermore, Forex trading with non-licensed Forex brokers is prohibited in some African countries. Likewise, you can only trade Forex for yourself and not for anyone else (identification is mandatory for most Forex brokers).

Forex trading is usually not welcomed in countries governed with strict sharia laws. As a result, countries like Algeria, Benin, Burkina Faso, Egypt, etc., may not be the best to engage in Forex trading.

Let’s consider how Forex trading is regulated in some major African countries:

Forex Regulation In South Africa

In South Africa, various regulatory trading rules are put in place to minimize Forex trading risks. These regulations are imposed by the South African Financial Sector Conduct Authority (FSCA), formerly known as the Financial Services Board (FSB). The FSCA is the body responsible for monitoring and controlling all financial activities in the country. It is the most vigorous Forex market regulation in Africa.

The FSCA regulatory policies are in line with what is obtainable from regulatory bodies overseas. Notably, all OTC derivative brokers must report all trades in a bid to organize CFDs. Through the FSCA, Forex brokers can relate with each other without resulting in conflict.

According to topforexbrokers.co.za, the FSCA license incorporates some immense benefits like that FX brokers regulated by the FSCA treat their customer in good faith and that they help them with financial education and financial literacy. Not to mention that if anything goes south, a South African trader who is trading with FSCA regulated broker can go to FSCA if they think they have been scammed by their broker or mistreated.

Forex Regulation In Kenya

In Kenya, the Capital Markets Authority (CMA) regulates all financial activities, including foreign exchange trading. Before a Forex broker can do business in Kenya, they must be registered and licensed by the CMA.

Forex was previously unregulated in Kenya. Before 2016, lots of Kenyans were trading with unregulated brokers, and there were too many reports of fraudulent activities. As a result, the Kenyan government authorized the CMA to regulate Forex trading activities in the Finance Act 2016. The principal aim of the regulation is to make the market transparent and protect investors’ funds.

The CMA drew regulatory leads from international regulatory bodies like the Australian Securities and Investment Commission (ASIC) and the United Kingdom’s Financial Conduct Authority (FCA).

Forex Regulation In Nigeria

Forex trading in Nigeria is still unregulated despite the market being one of the most active ones in the continent. However, it is perceived that the country’s apex bank is working with the Securities Exchange Commission to commence Forex trade regulation.

Despite the absence of regulation in the country, the government does not consider Forex trading illegal. There are local Forex brokers who register just like other businesses and carry out foreign exchange activities as usual. Most Forex traders in Nigeria make use of foreign Forex brokers rather than the local ones due to this lack of regulation. The trading risk is totally on the trader, so they assume the foreign brokers are more trustworthy.

Banking policies do have effects on Forex trading in Nigeria. Some Nigerian banks may prevent customers from using their electronic cards to make payments or withdraw from foreign exchange platforms. Presently, there are imposed restrictions on the amount of foreign currency a Nigerian can spend outside the country. These are individual policies that could be eliminated if the Nigerian government properly legalizes Forex trading.

How To Select The Best Forex Broker For Africa

Due to the risks involved in Forex trading, it is vital to be cautious when deciding on the best Forex broker to invest in Africa.

Firstly, you should check for the broker license. If Forex trading is regulated in your country, check to see the Forex brokers licensed by the regulatory body. For a country like Nigeria, where the market is not restricted, consider foreign brokers who are licensed by global licensing authorities.

The next thing to do is to check out the trading platforms offered by these brokers. Check for their deposit bonuses, ratings, minimum deposit, and payment options before making a decision. For a practical trading experience, a Forex demo account should be featured where you can try your hands before going live. Do not invest real money if you haven’t fully understood how the platform works.

How To Stay Safe While Trading Forex

You should avoid any unlicensed Forex broker in Africa. The amount of Forex scams in African countries is on the high side, and it has resulted in grave losses for the victims. By going with a well-licensed broker, this risk is almost eliminated, and you can trade more assuredly.

Additionally, you should be cautious when making a substantial investment when you don’t fully understand the Forex market. Likewise, you should control your emotions and don’t spend all your money on Forex trading.

Conclusion – The Future Of Forex In Africa

Interest in Forex will undoubtedly continue to rise in the coming years. The sensitization level is currently high as Forex trading is advertised on newspapers, TVs, radios, websites, etc.

There are equally Forex seminars and programs to create awareness. More overseas Forex brokers are also picking interest in offering their services to African countries. Consequently, better regulatory policies will be imposed in countries that lack them so that aspiring traders can trade safely.

Breakeven Crude Oil Production Costs Around The World

If the market price of a raw material is higher than its cost of extracting it from the crust of the earth or any other form of production, it leads to increased output. A profitable production process provides an incentive for output.

When the cost of production is higher than the market price, output declines as it becomes a losing proposition. The price cycle in commodities causes prices to rise to levels where production increases. Higher output leads to growing inventories. As a market becomes more expensive, the elasticity of demand causes consumers to look for substitutes and buying declines, leading to price tops and reversals to the downside.

When the price of a commodity falls below the cost of production, output slows. The demand tends to increase as consumers take advantage of lower prices, and inventories begin to decline, leading to price bottoms. The price cycle in a commodities market can change because of exogenous events, but it tends to be efficient. High prices lead to glut conditions, and low prices often create shortages, over time. Production cost is one of the critical variables that fundamental analysts use to project the path of least resistance for market prices.

In the crude oil market, output costs vary according to the production location. Saudi Arabia, Russia, and the United States are the three leading oil-producing nations in the world, and each has different sensitivities to output costs.

Saudi Arabia- Think turning on a garden hose

Over half the world’s crude oil reserves are in the Middle East, and Saudi Arabia is the leading producer in the region. The Saudis have long been the most potent force within OPEC, the international oil cartel. Saudi Arabia’s vast reserves make production as easy as turning on a garden hose in our backyards for the country.

Meanwhile, the Saudi economy depends on oil revenues. The rising costs of running the country have pushed the break-even level of the price of the energy commodity to over $80 per barrel on the Brent benchmark. While the nominal production cost of oil is the lowest in the world in Saudi Arabia at $2.80 per barrel, the requirements for revenues creates a wide gap between production economics and balancing the Saudi budget.

Russia- Output costs may not matter as much in the west

Russia is an enigma when it comes to the cost of production for the energy commodity. The Russians, under President Vladimir Putin, is structured as an oligarchy. A small group runs the nation’s economy. Therefore, the production cost of crude oil is an enigma and a state secret. In 2020, the Russian leader had said that he is comfortable with a Brent price around the $40 per barrel level. The statement could shed at least some light on the price level for the energy commodity that provides enough revenue to keep the system running smoothly.

The US- The marginal producer in the world

In the 1970s and 1980s, the United States was dependent on oil imports from the Middle East. Rising prices during this century, combined with reserve discoveries in shale regions, caused production to increase. Moreover, technological advances in extracting crude oil from the crust of the earth and regulatory reforms under the Trump Administration caused daily output to rise to over 13 million barrels per day, making the US the world’s leading producer and achieving the goal of independence.

The US is a marginal producer. While production costs have declined, they are still around the $30 to $40 per barrel level. The US is in a position where it is a dominant marginal producer. When the price of oil rises above production costs, the output can increase. When it falls below, the US can turn off production and import inexpensive crude oil from other nations.

In any commodity, the production cost is a critical factor when it comes to the fundamental supply and demand equation. Pricing cycles take prices above and below break-even output costs at times. Each leading producer has different requirements when it comes to prices, which makes a global analysis complicated and the worldwide break-even equation for crude oil an economic and geopolitical enigma.

What are Commodity Currency Pairs?

The currencies of countries around the world are fiat instruments, meaning that they have no backing by anything other than the full faith and credit of the nations that issue the legal tender.In the past, many currencies used gold and silver to provide support for the foreign exchange instruments, but the metals prevented countries from making significant changes in the money supply to address sudden changes in economic conditions.

Meanwhile, some countries with substantial natural resources that account for revenue and tax receipts have an implicit backing for their legal tender. The ability to extract commodities from the crust of the earth within a nation’s borders or grow crops that feed the world allows for exports and revenue flows. While those countries have fiat currencies in the international financial system, the implied backstop of commodity production makes them commodity currencies.

Commodities provide support for some foreign exchange instruments

The fundamental equation in the world of commodities often dictates the path of least resistance for prices. While demand is ubiquitous as all people around the globe are consumers of raw materials, production tends to be a local affair.

Commodity output depends on geology when it comes to energy, metals, and minerals. Soil, access to water, and climate make some areas of the world best-suited for growing agricultural products. Chile is the world’s leading producer of copper. The vast majority of cocoa beans, the primary ingredient in chocolate, come from the Ivory Coast and Ghana, two countries in West Africa.

In Chile and the African nations, the production of the raw materials accounts for a significant amount of revenues and employs many people, making them a critical factor when it comes to economic growth. Meanwhile, the Australian and Canadian currencies are highly sensitive to commodity prices as both nations are significant producers and exporters of the raw materials to consumers around the globe.

Australia and Canada have commodity currencies

Australia and Canada produce a wide range of agricultural and energy products, as well as metals and minerals. Australia’s geographical proximity to China, the world’s most populous nation with the second-leading economy, makes it a supermarket for the Asian country. Canada borders on the US, the wealthiest consuming nation on the earth. Therefore, Australia and Canada are both commodity supermarkets for a substantial addressable market of consumers.

In 2011, commodity prices reached highs, and the price action in the Australian and Canadian currencies versus the US dollar shows their sensitivity to raw material prices.

Source: CQG

The quarterly chart of the Australian versus the US dollar currency pair highlights that highs in commodity prices in 2011 took the foreign exchange relationship to its all-time high of $1.1005. The price spike to the downside during the first quarter of 2020 that took the A$ to $0.5510 came on the back of a deflationary spiral caused by the global Coronavirus pandemic that sent many raw material prices to multiyear lows.

Canada is a significant oil-producing nation. In 2008, the price of nearby oil futures rose to an all-time peak of over $147 per barrel.

Source: CQG

The quarterly chart of the Canadian versus the US dollar currency pair shows that the record high came in late 2007 at $1.1043 as the price of oil was on its way to the record peak. The highs in raw material prices in 2011 took the C$ to a lower high of $1.0618. The deflationary spiral in March 2020 pushed the C$ to a low of $0.6820 against the US dollar.

Both the Australian and Canadian dollars are commodity currencies that move higher and lower with raw material prices over time.

Brazil’s real also tracks the prices of some commodities

Brazil is an emerging market, but the most populous nation in South America with the leading GDP in the region is a significant producer of commodities. The price relationship between the Brazilian real and the US dollar is another example of how the multiyear highs in commodity prices in 2011 sent the value of a commodity-sensitive currency to a high.

Source: CQG

The quarterly chart of the Brazilian real versus the US dollar currency pair shows that the real reached a record high of $0.65095 against the US dollar in 2011 when commodity prices reached a peak.

While the Australian and Canadian dollar and Brazilian real are fiat currencies, they each reflect the price action in the raw material markets, making them commodity currencies. The foreign exchange instruments may not have express backing of the nation’s raw material production; there is an implied backing as higher commodity prices lift the local economies and government tax revenues. Commodity currencies can serve as proxies for the asset class as they move higher and lower with raw material prices.

How To Use Technical Analysis In Forex Markets

Charts are useful tools for investors and traders as they offer insight into herd behavior. In a book written in 2004, author James Surowiecki explained how crowds make better decisions than individuals. Markets are embodiments of Surowiecki’s thesis as the current price of an asset is the level where buyers and sellers meet in a transparent environment.

When it comes to the global foreign exchange market, buyers and sellers of currencies determine the rates of one foreign exchange instrument versus others on a real-time basis. At the same time, governments manage the level of currency volatility to maintain stability. Technical analysis can be particularly useful in the currency markets as technical levels can provide clues about levels where government intervention is likely to occur.

Technical analysis includes support and resistance levels where currency pairs tend to find lows and highs. At the same time, price momentum indicators often signal where exchange rates are running out of steam on the up and the downside.

Technical analysis can breakdown at times when black swan events occur.

Futures are a microcosm of the OTC market

In the world of foreign exchange, the over-the-counter market is the most liquid and actively traded arena. The OTC market is a global and decentralized venue for all aspects of exchanging the currency of one country for another; it is also the largest market in the world. In April 2019, the average trading volume was $6.6 trillion per day. The OTC market operates twenty-four hours per day, except for weekends.

Futures markets for currency pairs are smaller, but they reflect the price action in the OTC market. When it comes to technical analysis, the futures market provides a window into the price trends and overall state of the strength or weakness of one currency versus another.

Volume and open interest metrics provide clues for price direction

The dollar versus the euro currency pair is the most actively traded foreign exchange relationship as both foreign exchange instruments are reserve currencies.

Source: CQG

The weekly chart of the dollar versus the euro futures contract displays the price action in the currency pair since late 2017. The bar chart on the bottom reflects the weekly volume, which is the total number of transactions. The line above volume is the open interest or the total number of long and short positions.

When volume and open interest are rising or falling with the price, it tends to be a technical validation of a price trend in a futures market. When the metrics decline with rising or falling prices, it often signals that a trend is running out of steam, and a reversal could be on the horizon. Volume and open interest are two technical metrics that aid technical traders looking for signs that a trend will continue or change.

Momentum indicators are powerful technical tools at times

Stochastics and relative strength indices can provide a window into the overall power of a trend in a futures market.

Source: CQG

Beneath the weekly price chart, the slow stochastic is an oscillator that aims to quantify the momentum of a price rise or decline. Stochastics work by comparing closing prices with price ranges over time. The theory behind this technical tool is that prices tend to close near the highs in rising markets and near the lows in falling markets.

A reading below 20 indicates an oversold condition, while over 80 is a sign of an overbought condition. On the weekly chart of the euro versus the dollar currency pair, the reading of 31.42 indicated that the stochastic oscillator is falling towards oversold territory in a sign that the downtrend could be running out of steam.

The relative strength indicator compares recent gains and losses to establish a basis or the strength of a price trend. A reading below 30 is the sign of an oversold condition, while an overbought condition occurs with a reading above the 70 level. At 45.55 on the weekly dollar versus euro chart, the indicator points to a neutral condition in the currency pair.

Technical analysis can fail at times

Technical analysts look for areas of price support and resistance on charts. Support is a price on the downside where a market tends to find buying that prevents the price from falling further. Resistance is just the opposite, as it is the price on the upside where a market tends to experience selling that prevents it from rising further. When a price moves below support or above resistance, it often signals a reversal in a bullish or bearish price trend.

Technical analysis is not perfect, as the past is not always an ideal indicator of the future.

Source: CQG

The chart of the currency relationship between the US and Australian dollar shows that the price broke down below technical support and experienced a spike to the downside. The price movement turned out to be a “blow-off” low on the downside that reversed after reaching a significantly lower price.

Technical analysis provides a roadmap of the past in the quest for insight into the future. Many market participants use technical analysis to make trading and investing decisions, which often creates a self-fulfilling prophecy as a herd of transactional activity can create or impede a price trend. Technical analysis is a tool that foreign exchange traders use to project the path of least resistance of exchange rates.

Some of the most influential participants in the foreign exchange markets are governments. Historical price volatility in foreign exchange markets tends to be lower than in most other asset classes because governments work independently or together, at times, to provide stability for exchange rates. Therefore support and resistance levels tend to work well over time.

What are Contango And Backwardation?

Term structure, the forward curve, or time spreads are all synonymous and reflect the price differences for a commodity over time.

In some commodities, seasonality causes prices to reach lows at certain times of the year and peaks at others. Natural gas and heating oil often reach seasonal highs during the winter months, while gasoline, grains, lumber, and animal proteins can move towards highs as the spring and summer seasons approach.

Meanwhile, the price differential for various delivery dates can provide valuable information when it comes to the supply and demand fundamentals for all commodities. Contango and backwardation are two essential terms in a commodity trader’s vocabulary.

Contango is a sign of a balanced or glut market

Contango exists in a market when deferred prices are higher than prices for nearby delivery. A “positive carry” or “normal” market is synonymous with contango.

Source: NYMEX/RMB

The forward curve in the NYMEX WTI crude oil futures market highlights the contango in the energy commodity. In this example, the price of crude oil for delivery in June 2020 was at $28.82 per barrel and was at $36.10 per barrel for delivery one year later in June 2021. The contango in the oil market stood at $7.28 per barrel.

The contango is a sign of oversupply. However, it also reflects the market’s opinion that the current price level will lead to declining production and inventories and higher prices in the future.

Backwardation signals tightness

Backwardation is a market condition in which prices are lower for deferred delivery compared to nearby prices. Other terms of backwardation are “negative carry” or “premium” market.

Source: ICE/RMB

The term structure in the cocoa futures market that trades on the Intercontinental Exchange shows that cocoa beans for delivery in May 2020 were trading at $2305 per ton compared to a price of $2265 for delivery in May 2021. The backwardation of $40 per ton is a sign of nearby tightness where demand exceeds available supplies. At the same time, the lower deferred price assumes that cocoa producers will increase output to close the gap between demand and supplies in the future.

Watch the forward curve

A fundamental approach to analyzing commodity prices involves compiling data on supplies, demand, and inventories. The term structure in raw material markets can serve as a real-time indicator for supply and demand characteristics. When nearby supplies rise above demand, the forward curve tends to move into contango. When the demand outstrips supplies, backwardations occur.

Watching the movements in term structure can provide value clues when it comes to fundamental shifts in markets. Exchanges publish settlement prices for all contracts each business day. Keeping track of the changes over time can uncover changes that will impact prices.

In tight markets where backwardations develop or are widening, nearby prices tend to move to the upside. In contango markets, equilibrium can be a sign of price stability, while a widening contango often is a clue that prices will trend towards the downside.

The shape of the forward curve can move throughout the trading day. Any dramatic shifts tend to signal a sudden change in market fundamentals. For example, a weather event in an agricultural market that impacts production would likely cause tightening and a move towards backwardation. As concerns over nearby supplies rise, the curve often tightens.

Conversely, a demand shock that leads to growing inventories often leads to a loosening of the term structure where contango rises. Observing changes in a market’s forward curve and explaining the reasons can provide traders and investors with an edge when it comes to the path of least resistance of prices.

What Is A Forward Contract?

A forward contract is an over-the-counter or exchange-traded financial transaction for the future delivery of a commodity or an asset. The buyer receives guaranteed access to the asset at an agreed-upon price. The seller receives a fixed price as well as a sales outlet from the buyer.

Forward contracts can call for payment upon delivery of the asset but may also include provisions for margin or other terms expressly agreed upon by the parties to the contract. A forward can be a useful hedging tool for both producers and consumers of commodities. However, they can also be fraught with pitfalls at times.

Forwards in the over-the-counter market

In the OTC market, a forward transaction occurs on a principal-to-principal basis between a buyer and a seller. The parties to the contract obligate themselves by contractual terms with the seller assuming the credit risk of the buyer and the buyer doing the same with the seller.

In the world of commodities, there are many derivations of the forward contract. A pre-export financial transaction is a forward where the buyer pays the seller a percentage of the value before delivery. Pre-export financial transactions require the buyer to take more risk than the seller. The price for the asset tends to reflect the higher risk undertaken by the buyer. Another form of a forward transaction is a swap, where a buyer and exchange a fixed for a floating price.

In the aftermath of the 2008 global financial crisis, changes in the regulatory environment caused many forward and swap transactions to move into clearinghouses where margin requirements lowered the potential for defaults.

Forwards are very popular in the highly liquid over-the-counter foreign exchange market. Forward transactions allow for the parties to negotiate all of the terms for the purchase and sale and they are non-standardized contracts.

Forwards on an exchange

Some exchanges offer products that are forwards rather than futures contracts. The London Metals Exchange, which is the oldest commodities exchange in the world, trades forwards on nonferrous metals, including copper, aluminum, nickel, lead, zinc, and tin. While each contract represents a standard amount of the metal in metric tons, the most actively traded product is the three-month forward. Producers and consumers favor the LME contracts as they allow for delivery of the metals each business day of the year. The LME also offers forward contracts for shorter and longer terms in all of the metals.

The difference between a forward and a futures contract

The most significant difference between a forward and a futures contract is that the forward is non-standardized. Futures have the following characteristics:

  • One stated asset or commodity
  • A physical or cash settlement
  • A fixed amount of the asset per contract
  • The currency in which the asset is quoted
  • The grade or quality of the asset that is deliverable
  • The delivery month and subsequent delivery months
  • The last day of trading
  • The minimum price fluctuation per contract, which is the tick value

Futures are subject to original and variation margin. In a non-standardized forward contract, the terms of margin when it comes to a good-faith deposit and payment of market differences are subject to negotiation.

A forward contract offers less liquidity than a futures contract as the future can be offset with any other party. Many forwards can only be offset by agreement of the original parties. In futures, the clearinghouse becomes the counterpart for all purchase and sale transactions. While both futures and forwards are derivative instruments, there are tradeoffs. Futures allow for far more liquidity, while forwards often meet the needs of those buyers and sellers looking for tailor-made solutions to financial risks.

Globalism and The Economy

Is the US still the world’s leading superpower?

While the strong global economic growth of the late 19th and early 20th centuries was driven in part by the two first phases of industrialization and the transport revolution in Western Europe, successive wars on the old continent have weakened growth and European countries. Since then, globalization has given a boost to global growth, while propelling the United States to global superpower status.

earth

What is globalization?

Globalization is all about commercial interaction between different parts of the world. These flows can be exchanges of goods, capital, services, people or information. This was all made possible by the improvement of the means of communication (NICT), the containerization revolution, the very low cost of maritime transport, the increasing liberalization of trade (GATT and then WTO in 1995) and the deregulation of financial flows between countries.

Since the 1990s, globalization has accelerated, with the fall of the USSR, the rise of the Internet, the creation of the World Trade Organization (WTO, 1995) and regional free trade agreements such as NAFTA all contributing to this acceleration.

With the First World War, the United States quickly became the world’s leading economic centre

In 1945, the US held ⅔ of the world’s gold stock and accounted for 50% of global production. The new world economic order was organized by the US (IMF and IBRD in Bretton Woods in 1944, GATT in 1947), and their currency – the American dollar, or USD – became the currency of international trade. Wall Street in New York became the economic and financial heart of the world.

What made the United States a unique superpower?

The American democratic, capitalist and liberal model, as well as the American way of life, spread to the non-communist world, with the Marshall Plan (1947) and the development of multinational companies.

By the end of the 20th century, the emergence of mass media and the Internet revolution gave Americans the opportunity to influence the entire world even more.

With the development of mass consumption that began in the 1950s, many American products arrived on other markets. Some products are now an integral part of the lives of many Europeans, Asians and South Americans, such as the Visa card, sportswear such as Nike, soft drinks such as Coca-Cola, fast food such as McDonald’s, as well as American music, cinema, universities, etc.

This undeniable cultural influence, called “soft power”, is a huge source of influence for the US across the world. This “soft power” indirectly influences and positively shapes the view of the USA in the eyes of other countries. This power makes adoption of the American point of view much more palatable to other countries, all without the need for force or threat.

In addition to “soft power”, there is also “hard power”, characterized by economic hegemony, technological progress (information technology, nuclear, space conquest) and first-rate military and diplomatic power, which make it possible to impose the will and power of the United States on the rest of the world by force or intimidation.Earth from space

The US – the powerful (and criticized) nation at the heart of globalization

The American system arouses as much wonder as questions/criticism in regards to their management of the social crisis and poverty, political extremism, weak environmental protection measures, etc. It could be argued that American influence has declined in recent years, although the country remains a first-rate power that dominates many sectors of activity.

First of all, we can see heightened criticism of the American hegemony, even if anti-Americanism is not exactly a new phenomenon. Several countries (Russia and China foremost among them) and political currents reject the American model, while US involvement in foreign wars are subject to the harshest criticism.

The United States is also experiencing an increasing number of economic competitors, such as from the European Union and the BRICS countries (Brazil, Russia, India, China and South Africa). The subprime crisis in 2007 also eroded the power of the US, both immediately following the crisis, and in the years since.

China became the world’s leading economic power ahead of the United States in 2014, after 142 years of “American rule” according to IMF figures. The increased debt burden and evidence of the United States’ dependence on foreign capital (particularly Chinese capital) is also a factor that challenges US supremacy.

How has the election of Trump altered the future of globalization?

The surprise election of Donald Trump as the 45th American president invites a re-evaluation of the future of the global economic order. Movement of goods, money, and people across international borders have all certainly changed since Trump’s election, as “resistance to globalization” was one of his prominent policy themes during his election campaign, with particular emphasis on the US-China relationship.

China and the United States have an extensive – but tense – economic partnership, often triggering periods of conflict, such as the current situation. Trade tensions have significantly increased since 2018, when Trump first sought to limit Chinese economic influence with tariffs.

Trump’s plan to reduce his country’s dependence on China focuses on increasing taxes on their imported products, so American products are favored locally and purchased instead. Of course, China reacted by increasing taxes on American imported products. These trade tensions and tariffs could cut global output by 0.5% in 2020, according to the IMF. Consequently, the organization cut its global growth forecast.

”There are growing concerns over the impact of the current trade tensions. The risk is that the most recent US-China tariffs could further reduce investment, productivity, and growth,” said IMF chair Christine Lagarde.

Trump’s wish to implement US protectionist policies will have one important consequence for the country: as the USA turns inward on worldwide economic integration, this will certainly have an impact on global stocks and flows. Knock-on effects to this policy, such as retaliation from countries like China, canceled contracts with American companies and suppliers, and countries that seek to imitate Trump’s anti-globalization agenda (like Greece and Hungary), may also all lead to significant consequences for the global economy.

What consequences on the global economy can be expected if the trade war escalates?

As noted by the European Central Bank in its analysis on Implications of rising trade tensions for the global economy, the impact of an escalation of trade tensions could be felt in different ways.

”In the case of a generalized global increase in tariffs, higher import prices could increase firms’ production costs and reduce households’ purchasing power, particularly if domestic and imported goods cannot be substituted for each other easily. This could affect consumption, investment and employment. Moreover, an escalation of trade tensions would fuel economic uncertainty, leading consumers to delay expenditure and businesses to postpone investment,” declared the ECB.

How to take advantage of the changes in our interconnected global economy? 

”In response to higher uncertainty, financial investors could also reduce their exposure to equities, reduce credit supply and require higher compensation for risk,” added the European organization.

It’s worth mentioning that ”through close financial linkages, heightened uncertainty could spill over more broadly, adding to volatility in global financial markets”, which can create great trading opportunities for investors.

Thankfully, there are plenty of available instruments that can turn a profit in any market condition. You can short an Index, diversify into a new, more promising, geography or just bet on volatility. The main things to watch for when seeking such exposure is that your broker is regulated and the scope of instruments it can provide. It doesn’t hurt when a broker has a robust, efficient and reliable trading platform, such as Multibank Group.

Times of great uncertainty breed great opportunities, investors and traders can make the most of the potential changes in the world order by focusing on the most promising region, or business sector.

Bottom-Line

The United States remains one of the world’s largest economies. It is a major power that excels in many areas, with an influence that is exercised both with hard power (economic, military and diplomatic power) and soft power (cultural influence).

However, the country faces many challenges, challenges that threaten to erode its role as a superpower, such as the emergence of significant economic competition from other countries, and their recent policy shift to economic isolationism.

Highly integrated into globalization, the recent decisions of the United States regarding greater protectionism, and the hard retreat from globalization wanted by Trump, affect the world economic order and global trade flows.

The current global climate is well encapsulated by Harvard Business Review – ”the myth of a borderless world has come crashing down. Traditional pillars of open markets – the United States and the UK – are wobbling, and China is positioning itself as globalization’s staunchest defender”…


This article is brought to you by the courtesy of Multibank Group.

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How to Interpret the Economic Calendar

What is Purchasing Managers Index (PMI)?

The Purchasing Managers Index measures the economic health of the manufacturing sector. The data is collected through a survey of 400 purchasing managers in the manufacturing sector and based on five different fields: Production, new orders, inventories, Supplier deliveries and employment level. The PMI can provide information about the business condition.

Example: The PMI provides analysts, purchasing managers and company managers with the current economic activity.

What is GDP? What is Counted in GDP?

GDP or Gross Domestic Product is the total value of goods and services produced by an economy. To calculate the GDP, you add total consumption, plus investment, and government spending to the difference between exports and imports. (C + I + G + (E – I)).

Example: The GDP is a backward-looking measure of economic growth as it is usually released 4-week after a quarter has ended.

What is Consumer Price Index (CPI)?

The consumer price index is an inflation index, that reveals changes to prices directly affecting the consumer. The index is calculated by averaging the changes in prices of a weighted basket of goods and services and comparing that change to a prior period. Items that are focused on include home prices, rents, energy, and food.

Example: The CPI is the measure most widely used to quote changes to inflation.

What is Income Statement Used For?

The New Residential Construction Report is popularly known as housing starts contain statistics of housing construction activities. It is a monthly report on housing starts construction with the laying down of the foundation, grant of building permits which indicates how many new homes plan to build in the near future.

Example: The Income Statement shows a firm’s revenues and expenses, for a specific financial period. This summarises the revenue items, the expense items, and the difference between them gives the firm’s net income for an accounting period.

What is Retail Price Index (RPI)?

The Retail Price Index (RPI) is produced in the U.K. by the Nation Statistics Office and is one of two component produced to evaluate inflation at the consumer level. The index is calculated by analyzing nearly 180K price quotes of a fixed basket of goods and services. It was introduced in 1947, nearly 50 years prior to the CPI.

Example: The RPI has taken a back seat to the CPI as a way the Bank of England evaluates consumer inflation.

How Does Unemployment Rate Work?

The unemployment rate is a ratio that is calculated by dividing the number of people that unemployed by the total number of people in the labor force. This number is calculated slightly differently depending on the country that you are evaluating.

Example: In the United States this number is referred to as the U3 and is narrowly defined, but there are broader measures including the U6, which measures part-time workers as well as those underemployed which is considered a more accurate reflection of the employment situation.

What is the Impact of Interest Rate Decision?

The interest rate decision generally refers to a change in sovereign interest rates that occur at a regularly scheduled monetary policy meeting held by a central bank. Each central bank sets interest rate policy by establishing a deposit rate or borrowing rate for commercial banks in that country.

Example: This is the most widely watched event and a surprise can generate significant volatility.

What is Producer Price Index (PPI)?

The producer price index (PPI) is a measure of inflation at the wholesale level. The PPI is calculated by evaluating nearly 10K prices that come into the Bureau of Labor Statistics every month. The index tracts the out of nearly all industrial goods and service produced in the United States including mining and manufacturing.

Example: The PPI also focusses on commodity-based prices, such as crude oil as well as commodity-based final demand.

What is Consumer Confidence Index (CCI)?

The U.S. consumer confidence index (CCI) is an indicator that determines the level of positive or negative sentiment consumers are experiencing. The index is defined as the degree of optimism, or pessimism on the state of the economy which is calculated by evaluating the level of spending or savings.

Example: Confidence in the U.S. helps gauge spending which makes up approximately 65% of GDP.

What is the Institute for Supply Management (ISM)?

The Institute for Supply Management (ISM), is a leading supply management institute in U.S. ISM publishes monthly ISM Report on Business. This publication brings out both surveys: the Manufacturing and Non-Manufacturing. ISM index reports are constructed to reflect the status of employment, business activity, production inventories, new orders and supplier deliveries.

Example: The data in its monthly release are used as a popular economic indicator and forecaster.

What is Gross National Product (GNP)?

Gross national product (GNP), is a measurement of growth that is focused on forecasting the value of all the final products and services produced by an economy during a specific period of time that is produced domestically by country residents. The index is commonly compared to the GDP.

Example: GNP is calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income, minus income earned within the domestic economy by foreign residents.

What is IFO?

The IFO is an economic research institute in Germany and considered one of the leading economic research institutes in Europe.It undertakes both theoretical and empirical studies in the areas of the national and global economy. It brings out monthly Business Climate Index based on a survey of 7000 firms.

Example: The IFO Business Climate Index is considered as an early indicator of the situation of the German economy.

What Does Non-Farm Payrolls Mean?

The non-farm payroll report is the headline U.S. employment release that measures the net gain in employees measured during a corporate survey. The report does not include farm workers, private household employees, or non-profit Organization employees. The report is released by the Department of Labor and is separate from the household survey report.

Example: The report is released on the first Friday of every month, and is considered the most important economic data release.

What is the Retail Sales Report?

The retail sales report in the United States is a comprehensive retail demand report released by the Commerce Department. Retail sales are an aggregated measure of the sales of retail and are calculated by data sampling throughout the entire country. The report measures consumer demand and helps gauge overall consumer spending.

Example: Consumer spending makes up nearly 65% of the GDP in the United States, which makes retail sales a vital economic release.

What is Current Account?

A current account describes a nation’s balance of trade describing the investment and savings that are produced by a country. The current account is defined by the sum of goods and services export minus imports, along with net income.

Example: A current account deficit or surplus helps describe the value of exports relative to imports.

What is Housing Starts Data?

The New Residential Construction Report is popularly known as housing starts contain statistics of housing construction activities. It is a monthly report on housing starts construction with the laying down of the foundation, grant of building permits which indicates how many new homes plan to build in the near future.

Example: As per The New Residential Construction Report February 2014, the construction of new U.S. homes has reduced. But the number of applications for new building permits has increased substantially. This signals housing construction works will pick up in near future.

What are Crude Oil Inventories?

Crude oil inventories are reported by the U.S. Department of Energy and reflect the number of crude oil stocks held in reserve by refiners and oil storage facilities. The Energy Information Administration releases its estimate weekly on Wednesday’s, in its weekly oil storage report.

Example: The crude oil market generally experiences volatility immediately following the release of the EIA report.

What is Industrial Production Index?

Industrial Production Index, released by the fed is used as a monthly report on production figures. The Industrial production shows the raw volume of goods produced by industrial firms such as factories, mines and electric utilities in the United States. It indicates the overall economic activity and GDP.

Example: The monthly release provides summarizes data together with percentage changes on month-to-month and year-over-year levels.

What is ISM Manufacturing Report?

The ISM Manufacturing Report is based on a survey of purchasing and supply executives. Survey responses reflect the change, if any, in the current month compared to the previous month. A Non-Manufacturing index reflects the status of employment, business activity, new orders and supplier deliveries.

Example: Manufacturing ISM Report on Business provides valuable data used in economic analysis and forecasting.

All You Need to Know about Regulation

What is Financial Market Regulation?

Financial regulation provides guidelines, restrictions to financial institutions throughout a nation. This may be performed by either a government or non-government organization. Regulation might be in the form of regulatory transactions as accounting for revenue and expenses.

Example: Financial regulation influences the organizational structure of banking sectors, by decreasing borrowing costs and increasing the variety of financial products available.

What is MLP?

A Master Limited Partnership is a public company that combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. They are categories under Section 7704 of the Internal Revenue Code. Most MLP provides robust dividends by operating in the petroleum and natural gas storage and transportation business.

Example: These public companies are generally appealing for their large dividends and tax treatment.

What is FSA?

The Financial Services Authority was responsible for the regulating the financial services industry in the United Kingdom between 2001 and 2013. The regulatory body operated independently from the U.K. government but was assigned by the Treasury. In the wake of the 2008 financial crisis, the FSA was restructured in 2013.

Example: The Financial Conduct Authority and the Prudential Regulation Authority of the Bank of England, now has the responsibilities formerly held by the FSA.

What is Fannie Mae?

Fannie Mae is a government-sponsored enterprise (GSE), founded in the United States in 1938 by Congress. The Federal National Mortgage Association, which is the enterprise’s official name, was created during the Great Depression to make more mortgages available to low-income borrowers. Fannie Mae is one of two of the largest purchasers of mortgages in the secondary mortgage market.

Example: Fannie Mae does not originate or provide mortgages to borrowers. It purchases and guarantees them via the secondary mortgage market.

What is Ginnie Mae?

The Government National Mortgage Association (GNMA – Ginnie Mae) is a U.S. government corporation within the U.S. Department of Housing and Urban Development. The corporation does not issue, buy or sell mortgage securities and also does not purchase or sell loans. The agency guarantees the payment of interest and principal on loans for approved mortgage issuers.

Example: Unlike Freddie Mac, Fannie Mae and Sallie Mae, Ginnie Mae is not a publicly-traded company.

What is IMF?

International Monetary Fund (IMF) is a specialized organization of United Nations. IMF was formed in 1945 and has 188 member countries. It oversees international monetary policy and monitors economic, monetary and financial policies. IMF provides financial assistance to members in economic difficulties.

Example: In March 2014, theInternational Monetary Fund approved a $14 billion bailout package for Ukraine to avert bankruptcy. This financial assistance comes with tough reform conditions which will have to be implemented by Ukraine.

What is NFA?

National Futures Association (NFA) is a self-regulatory organization for the U.S. derivatives industry. It regulates futures, retail forex, and swaps. All intermediaries in derivatives market are required to be registered with the NFA. The NFA monitors the derivatives market and protects the interest of investors, participants, and intermediaries.

Example: In past National Futures Association has permanently barred many commodity intermediaries on the charges of misappropriation of investors’ funds, providing false and misleading information to investors or NFA.

What is ASiC?

The Australian Securities and Investment Commission (ASIC) helps ensure the economic integrity of the Australian financial markets by regulating its activity. ASIC is an independent commonwealth government organization. The organization mandate is the government and administers securities laws in Australia.

Example: ASiC is set up under the Australian Securities and Investments Commission Act 2001.

What is CFTC?

The Commodity Futures Trading Commission (CFTC) is an independent regulatory agency in the United States that governs the futures and options on the futures market. The agency was created in 1974. The mission of the CFTC is to create a transparent and competitive futures market and avoid systematic risk to protect investors.

Example: The CFTC would be the body that regulated the WTI futures market.

What is FOMC?

The Federal Open Market Committee (FOMC) is the monetary policy board of the Federal Reserve Bank of the United States. This committee meets multiple times during the year in an effort to set central bank interest rate policy. The FOMC has permanent and rolling members made up of Federal Reserve Regional Presidents.

Example: The Fed chair, the Vice Chair and the President of the Federal Reserve Bank of New York are permanent members of the FOMC.

What is MiFID?

The Markets in Financial Instruments Directive (MiFID) is geared to integrate the European Union’s financial markets and enhance cross board investment transactions. The goal is to enhance transparency and determine the reserve requirements a financial institution must hold.

Example: Markets in Financial Instruments Directive (MiFID) officially took effect on November 1st, 2007.

Common Financial Terms that You Need to Know

What is a Financial Market Maker?

A market maker is a dealer that is tasked with providing prices that help set the liquidity of a given security. Market makers are always willing to purchase on the bid price and sell at the offer prices. Maker makers generally make their revenue by capturing the difference between the bid price and the offer price.

Example: A currency market maker provides the liquidity available for a specific currency pair such as the EUR/USD.

How Does Forex Rollover Work?

A forex rollover is a situation where a position is being settled at some date in the future. Most forex transaction is spot, which means delivered in two business days. To rollover a position to a future date, a dealer would need to unwind the original positions and simultaneously add a new position to a future settlement.

Example: When a dealer or broker rolls a forex positions they are adding or subtraction forward points to the original position.

What is a Margin Call?

When the market value of collateral goes down, the lender asks the investor to deposit additional funds or securities so the account meets the minimum maintenance margin – this is called margin call. In trading, margin refers to cash or securities required to be deposited by the investor to the brokerage firm.

Example: If you borrow loan from a lender, you may have provided a collateral security with the value higher than the loan amount. This margin acts as a safety cushion for the banker.

What Does Financial Default Mean?

Default occurs when a party fails to pay their obligation on a loan. The language that determines if a financial default occurs can be of either interest or principal when it is due. When a default occurs the lending generally has some form of recourse such as collateral.

Example: A trading default can occur when a trader cannot pay his liability from a transaction.

How Do Financial Broker Commissions Work?

Commissions are payments received by brokers for the services they provide. Commissions are generally attached to transactions and are an additional charge that can fluctuate from broker to broker. Some brokers will avoid charging transaction-based commissions by charging a flat fee on a portfolio.

Example: Commissions will vary and in many cases are regulated by an authority.

How to Use Leverage in Financial Markets?

Funds to a company are provided by either shareholders or creditors. The debt-equity ratio is the ratio of long-term debt and shareholders equity. It is a measure of the leverage of a company. Leverage structure Ratio is based on the relationship between borrowed funds and owner’s capital.

Example: Suppose you purchase a house valued at $500,000 by a mortgage loan of $ 400,000 and own fund of $100,000. You are using financial leverage. The leverage ratio is 4:1.