Using Trend-line Analysis in FOREX

Wikipedia defined the word trend as: 1) "the process of getting others to follow/copy, of their own free will your actions and/or style"; 2) "In statistics, a trend is a long term movement in time series data after other components have been accounted for"; and 3) "In market trends, it is a prolonged period of time when prices in a financial market are rising or falling faster than their historical average, also known as 'bull' and 'bear' markets, respectively." Definitions two and three better defines the use of trends in foreign exchange, and in layman's term, trends are the "trader's best friend."

There are several strategies and techniques that may be used in analyzing trends to get the most out of trading profits. In any markets, trend analysis is very important and the same applies with forex markets. Currencies in the world have the propensity to move in trends because of the different macroeconomic factors such as global trade and interest rates, international policies, and effects of political movements.

Let us be more precise here. Trend in forex may be described as a foreseeable response to price at its own level of support or opposition over a period of time. To illustrate, prices recover when they are near the apex in an upward trend. However, in a down ward trend, the opposite happens - reversals to price increase happen when it is near the opposition levels. This is, in fact, the first tool in identifying a trend - to determine opposition and support levels. This is called the trend-line examination.

Trend-line examination is frequently underrated. Some analysts say that much subjectivity is used into it and that it is retrospective. There is some grain of truth to those criticisms but they fail to notice the truth that trend-lines aid concentration on the essential price designs, weeding out extraneous factors in the market. Thus, we can say that trend-line analysis must be the first process to ascertain the being of a trend. Following such, if trend-line analysis does not show the existence of a trend, then probably, there is none.

Trend-line analysis may be best utilized using longer series of time say, daily to weekly. After this, we may carry them over into hourly timeframes where levels of support and opposition may be ascertained. This methodology has the benefit of providing more prominence to the more significant aspects in trends first rather than the less important details. Using this method, a trader reduces the risk of following a temporary leg up in the trend and missing a major long-term upward trend.

Forex: The Development of Exchange Controls

By 1914 and the outbreak of World War I, the world's foreign exchange system was quite developed and formed an efficient system of payment for international economic transactions.

In general, as a result of the expansion in international commerce, the twentieth century witnessed substantial growth in all phases of foreign exchange, despite a number of governmental restrictions. More and more foreign exchange business was transacted by the use of telephone, Telex, and telegraph. Instead of formal meeting places where traders gathered to transact business, foreign exchange markets became a multinational structure linked by communication networks.

A number of restrictions on free foreign exchange dealings were inaugurated by many countries during the years of World War I, as well as in those immediately following. Governments began to fear the effect on their economies, or the war effort, of letting capital and reserves move freely among the industrial countries.

As the war progressed, intervention in the foreign exchange markets was practiced by many of the belligerents and some of the neutrals, and various systems of exchange controls were adopted. The gold standard was abandoned by several European countries shortly after the outbreak of the war, only to be readopted later by some nations and finally abandoned by all, including the United States during the Great Depression.

In a country where the gold standard was abandoned, some form of the gold exchange standard was usually installed in its place. Under that standard, paper money is employed as the domestic currency and the country maintains a reserve of gold and convertible foreign exchange (convertible to gold), other currencies, or both) so it can protect its rates of exchange, continue to trade during periods of balance of payments deficits, and instill confidence in its currency.

Under the gold exchange standard, foreign exchange transactions are carried out by means of various forms of credit instruments and gold is only rarely employed for that purpose.

After 1918, the currencies of some European countries depreciated rapidly because of rampant monetary inflation, and sometimes little attempt were made to support their rates of exchange. With the advent of the Great Depression and its devastating effects upon the national economies, governments appeared to be at their wit's end to discover and apply remedies. Country after country devalued its currency.

The devaluing countries hoped that lower exchange rates would increase their exports by making their goods cheaper abroad and simultaneously check imports by increasing the prices of imported goods. Between 1933 and 1934, the United States devalued the dollar by raising the price of gold from $20.67 to $35.00 per fine troy ounce, a reduction of 59.06 percent.

However, the competitive devaluations did not have the anticipated results, because the devaluation of one currency was frequently countered by that of another.

In World War II, as in World War I, most of the belligerents and many of the neutrals adopted stringent exchange controls in an effort to associate declining international reserves. The declines in reserves resulted from a dire need for imports and an inability to export in sufficiently large amounts to balance imports.

The exchange controls were continued in the years immediately following the war and remained in effect during the postwar years until the late 1950s and early 1960s. In addition, the governments of a large number of countries intervened frequently and often massively on the foreign exchange markets in an effort to protect their exchange rates.

FOREX: Daring to Take the Risk?

There are numerable risks an investor should consider when trading in FOREX, especially when transactions are prone to immediate and sudden rate changes. So what are the factors involved in such risks and is it worth trading despite them?

Certain risks involved in Forex trading would be greatly affected by factors such as a company's basic purposes, an organization's mechanism and reason for achievement, a company's management which would strongly define its success or downfall, and the presence of a company's resources, and luck. It is understood that the Forex market stands independent from other comparable markets for the main reason that it is outside the boundaries of exchange. Due to the development of communication facilities, banks or operation houses are able to trade directly and do not need any special organization like stock exchange. Such a market has grown and developed at a quick pace worldwide, and is therefore, difficult, if not almost impossible to curtail.

Apart from the fact that there is hardly any regulation procedure in the Forex market for any single country, we can therefore surmise that such a market's broker is not required to possess any license or certification. The market is not an adjusted one despite the various potential problems that it can hold for a trader. Such qualities such as trust and honesty are essential in the continuous running of operations, and yet there are a potential number of risks, there are always ways in order for one to curb the risk of unnecessary financial exposure.

The Forex investor must at least know the basics of technical analysis. He or she should be able to understand and interpret financial charts and its movements. It is certainly one way of being less risky when it comes to one's investment as even those traders who are experienced are still unable to absolutely predict the market's behavior. Certain tools such as "stop-loss orders", which contain guides on how one can exit his position if the price of a currency has reached a particular point, are one of the obvious and common techniques to minimize one's investment risk.

Although certain risks are definitely present when trading in the Forex market, one should not be put off by them. Despite the risky factors involved, numerable companies from western countries like those of Europe and North America still participate in the Forex trade business, having it as their primary source of income. In fact, it is still known and indicated as one of the most fair and open trade investment opportunities one can find globally!