how Factors Caused Foreign Exchange Volume Growth?

Foreign exchange trading is generally conducted in a decentralized manner, with the exceptions of currency futures and options. Foreign exchange has experienced spectacular growth in volume ever since currencies were allowed to float freely against each other. While the daily turnover in 1977 was U.S. $5 billion, it increased to U.S. $600 billion in 1987, reached the U.S. $1 trillion mark in September 1992, and stabilized at around $1,5 trillion by the year 2000.

Main factors influence on this spectacular growth in volume are indicated below.

For foreign exchange, currency volatility is a prime factor in the growth of volume. In fact, volatility is a sine qua non condition for trading. The only instruments that may be profitable under conditions of low volatility are currency options.

Business Internationalization

In recent decades the business world the competition has intensified, triggering a worldwide hunt for more markets and cheaper raw materials and labor. The pace of economic internationalization picked up even more in the 1990s, due to the fall of Communism in Europe and to up-and-down economic and financial development in both Southeast Asia and South America. These changes have been positive toward foreign exchange, since more transactional layers were added.

Interest Rate Volatility

Economic internationalization generated a significant impact on interest rates as well. Economics became much more interrelated and that exacerbated the need to change interest rates faster. Interest rates are generally changed in order to adjust the growth in the economy, and interest rate differentials have a substantial impact on exchange rates..

Increasing of Traders Sophistication

Advances in technology, computer software, and telecommunications and increased experience have increased the level of traders' sophistication. This enhanced traders' confidence in their ability to both generate profits and properly handle the exchange risks. Therefore, trading sophistication led toward volume increase.

 

Increasing of Corporate Interest

A successful performance of a product or service overseas may be pulled down from the profit point of view by adverse foreign exchange conditions and vice versa. An accurate handling of the foreign exchange may enhance the overall international performance of a product or service. Proper handling of foreign exchange generally adds substantially to the rate of return. Therefore, interest in foreign exchange has increased in the past decade. Many corporations are using currencies not only for hedging, but also for capitalizing on opportunities that exist solely in the currency markets

Computer and Programming development

Computers play a significant role at many stages of conducting foreign exchange. In addition to the dealing systems, matching systems simultaneously connect all traders around the world, electronically duplicating the brokers' market. The new office systems provide full accounting coverage, ticket writing, back office processing, and risk management implementation at a fraction of their previous cost. Advanced software makes it possible to generate all types of charts, augment them with sophisticated technical studies, and put them at traders' fingertips on a continuous basis at a rather limited cost. 

Developments in Telecommunications

The introduction of automated dealing systems in the 1980s, of matching systems in the early 1990s, and of Internet trading in the late 1990s completely altered the way foreign exchange was conducted. The dealing systems are online computer systems that link banks on a one-to-one basis, while matching systems are electronic brokers. They are reliable and much faster, allowing traders to conduct more simultaneous trades. They are also safer, as traders are able to see the deals that they execute. The dealing systems had a major role in expanding the foreign exchange business due to their reliability, speed, and safety.

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Main Stages of Recent Foreign Exchange Development

The main phases of the further development of the Forex in modern
times were:

• signing of the Bretton Woods Accord;
• constitution of the international monetary fund (IMF);
• emergency of the free-floating foreign exchange markets;
• creation of currency reserves;
• constitution of the European Monetary Union and the European Monetary Cooperation Fund;
• introduction of the Euro as a currency.

The Bretton Woods Accord was signed in July 1944 by the United States, Great Britain, and France which agreed to make the currency market stable, particularly due to governmental controls on currency values. In order to implement it, two major goals were: emphasized: to provide the pegging (backing of prices) of currencies and to organize the International Monetary Fund (IMF).

In accordance to the Bretton Woods Accord, the major trading currencies were pegged to the U.S. dollar in the sense that they were allowed to fluctuate only one percent on either side of that rate. When a currency exceeded this range, marked by intervention points, the central bank in charge had to buy it or sell it, and thus bring it back into range. In turn, the U.S. dollar was pegged to gold at $35 per ounce. Thus, the U.S. dollar became the world's reserve currency.

The purpose of IMF is to consult with one another to maintain a stable system of buying and selling the currencies, so that payments in foreign money can take place between countries smoothly and timely.

The IMF lends money to members who have trouble meeting financial obligations to other members, on the condition that they undertake economic reforms to eliminate these difficulties for their own good and the good of the entire membership. In total the main tasks of the IMF are:

• to promote international cooperation by providing the means for members to consult and collaborate on international monetary issues;
• to facilitate the growth of international trade and thus contribute to high levels of employment and real income among member nations;
• to promote stability of exchange rates and orderly exchange agreements, and [to] discourage competitive currency depreciation;
• to foster a multilateral system of international payments, and to seek the elimination of exchange restrictions that hinder the growth of world trade;
• to make financial resources available to members, on a temporary basis and with adequate safeguards, to permit them to correct payments imbalances without resorting to measures destructive to national and international prosperity.

To execute these goals the IMF uses such instruments as Reserve tranche which allows a member to draw on its own reserve asset quota at the time of payment, Credit tranche drawings and stand-by arrangements are the standard form of IMF loans, the compensatory financing facility extends financial help to countries with temporary problems generated by reductions in export revenues, the buffer stock financing facility which is geared toward assisting the stocking up on primary commodities in order to ensure price stability in a specific commodity and the extended facility designed to assist members with financial problems in amounts or for periods exceeding the scope of the other facilities.

Since 1978 free-floating of currencies were officially mandated by the International Monetary Fund. That is the currency may be traded by anybody and its value is a function of the current supply and demand forces in the market, and there are no specific intervention points that have to be observed. Of course, the Federal Reserve Bank irregularly intervenes to change the value of the U.S. dollar, but no specific levels are ever imposed. Naturally, free-floatingcurrencies are in the heaviest trading demand. Free-floating is not the sine qua non condition for trading. Liquidity is also an indispensable condition.

A tool for people and corporations to protect investments in times of economic or political instability is currency reserves for international transactions. Immediately after the World War II the reserve currency worldwide was the U.S. dollar. Currently there are other reserve currencies: the euro and the Japanese yen. The portfolio of reserve currencies may change depending on specific international conditions, for instance it may include the Swiss franc.

The creation of the European Monetary Union was the result of a long and continuous series of post-World War II efforts aimed at creating closer economic cooperation among the capitalist European countries. The European Community (EC) commission's officially stated goals were to improve the inter-European economic cooperation, create a regional area of monetary stability, and act as "a pole of stability in world currency markets."

The first steps in this rebuilding were taken in 1950, when the European Payment Union was instituted to facilitate the inter-European settlements of international trade transactions. The purpose of the community was to promote inter-European trade in general, and to eliminate restrictions on the trade of coal and raw steel in particular.

In 1957, the Treaty of Rome established the European Economic Community, with the same signatories as the European Coal and Steel Community. The stated goal of the European Economic Community was to eliminate customs duties and any barriers against the transit of capital, services, and people among the member nations. The EC also started to raise common tariff barriers against outsiders.

The European Community consists of four executive and legislative bodies:

1. The European Commission. The executive body in charge of making and observing the enforcement of the policies. Since it lacks an enforcement arm, the commission must rely on individual governments to enforce the policies. There are 23 departments, such as foreign affairs, competition policy, and agriculture. Each country selects its own representatives for four-year terms. The commission is based in Brussels and consists of 17 members.
2. The Council of Ministers. Makes the major policy decisions. It is composed of ministers from the 12 member nations. The presidency is held for six months by each of the members, in alphabetical order. The meetings take place in Brussels or in the capital of the nation holding the presidency.
3. The European Parliament. Reviews and amends legislative proposals and has the power to adopt or reject budget proposals. It consists of 518 elected members. It is based in Luxembourg, but the sessions take place in Strasbourg or Brussels.
4. The European Court of Justice. Settles disputes between the EC and the member nations. It consists of 13 members and is based in Luxembourg.

In 1963, the French-West German Treaty of Cooperation was signed. This pact was designed not only to end centuries of bellicose rivalry, but also to settle the postwar reconciliation between two major foes. The treat stipulated that West Germany would lead economically through the cold war, and France, the former diplomatic powerhouse, would provide the political leadership. The premise of this treaty was obviously correct in an environment defined by a foreseeable long-term continuing cold war and a divided Germany. Later in this chapter, we discuss the implications for the modern era of this enormously expensive pact.

A conference of national leaders in 1969 set the objective of establishing a monetary union within the European Community. This goal was supposed to be implemented by 1980, when a common currency was planned to be used in Europe. The reasons for the proposed common currency unit were to stimulate inter-European trade and to weld together the individual member economies in order to compete successfully with the economies of the United States and Japan.

In 1978, the nine members of the European Community ratified a new plan for stability—the European Monetary System. The new system was practically established in 1979. Seven countries were then full members—West Germany, France, the Netherlands, Belgium, Luxembourg, Denmark, and Ireland. Great Britain did not participate in all of the arrangements and Italy joined under special conditions. Greece joined in 1981, Spain and Portugal in 1986. Great Britain joined the Exchange Rate Mechanism in 1990.

The European Monetary Cooperation Fund was established to manage the EMS' credit arrangements. In order to increase the acceptance of the ECU, countries that hold more ECU deposits, or accept as loan repayment more than their share of ECU, receive interest on the excess ECU deposits, and vice versa. The interest rate is the weighted average of all the EMS members' discount rates.

In 1998 the Euro was introduced as an all-European currency. Here are the official locking rates of the 11 participating European currencies in the euro (EUR). The rates were proposed by the EU Commission and approved by EU finance ministers on December 31, 1998, ahead of the launch of the euro at midnight, January 1, 1999.

The real starting date was Monday, January 4, 1999. The conversion rates are:

1 EUR = 40.3399 BEF    1 EUR = 1.95583 DEM
1 EUR = 166.386 ESP     1 EUR = 6.55957 FRF
1 EUR = 0.787564 IEP    1 EUR = 1936.27 ITL
1 EUR = 40.3399 LUF     1 EUR = 2.20371 NLG
1 EUR = 13.7603 ATS     1 EUR = 200.482 PTE
1 EUR = 5.94573 FIM

The euro bills are issued in denominations of 5, 10, 20, 50, 100, 200, and 500 euros. Coins are issued in denominations of 1 and 2 euros, and 50, 20,10, 5, 2, and 1 cent.

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Foreign Exchange in a Historical Perspective let me explain

Currency trading has a long history and can be traced back to the ancient Middle East and Middle Ages when foreign exchange started to take shape after the international merchant bankers devised bills of exchange, which were transferable third-party payments that allowed flexibility and growth in foreign exchange dealings.

The modern foreign exchange market characterized by the consequent periods of increased volatility and relative stability formed itself in the twentieth century. By the mid-1930s London became to be the leading center for foreign exchange and the British pound served as the currency to trade and to keep as a reserve currency. Because in the old times foreign exchange was traded on the telex machines, or cable, the pound has generally the nickname “cable”. In 1930, the Bank for International Settlements was established in Basel, Switzerland, to oversee the financial efforts of the newly independent countries, emerged after the World War I, and to provide monetary relief to countries experiencing temporary balance of payments difficulties.

After the World War II, where the British economy was destroyed and the
United States was the only country unscarred by war, U.S. dollar became the
prominent currency of the entire globe. Nowadays, currencies all over the world
are generally quoted against the U.S. dollar.

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Foreign Exchange as a Financial Market let me show you

Currency exchange is very attractive for both the corporate and individual
traders who make money on the Forex - a special financial market assigned for
the foreign exchange. The following features make this market different in
compare to all other sectors of the world financial system:

• heightened sensibility to a large and continuously changing number of factors;
• accessibility to all traders in the major currencies;
• guaranteed quantity and liquidity of the major currencies;
• increased consideration for several currencies, round-the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open and
• extremely high efficiency relative to other financial markets.

 

This goal of this manual is to introduce beginning traders to all the essential aspects of foreign exchange in a practical manner and to be a source of best answers on the typical questions as why are currencies being traded, who are the traders, what currencies do they trade, what makes rates move, what instruments are used for the trade, how a currency behavior can be forecasted and where the pertinent information may be obtained from. Mastering the content of
an appropriate section the user will be able to make his/her own decisions, test them, and ultimately use recommended tools and approaches for his/her own benefit.

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CONCLUSION For Candlesticks

By using real-body support and resistance levels, we can try to improve our trading and analysis on several levels. In the short term, we can derive important counteraction trading points and improved longer-term entry levels. In the longer term, we can use real-body support and resistance to get a jump on market breakouts in a trend-trading strategy.

Let me reiterate: Candlestick charting should not be used in a vacuum. That applies to the real-body support and resistance levels as well. You should, however, take the time to try out this methodology. I'm sure you'll find it worthwhile, and a beneficial addition to your technical toolbox. It just goes to show that by keeping our eyes open, we just might be able to discover new techniques.

John Forman is a currency analyst for Technical Data, a provider of real-time and day-end market commentary and trading advice over the Telerate system. He writes mostly from a technical perspective and also has experience in trading US and Canadian government cash and futures issues, equities and the energy markets.

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A REAL- life EXAMPLE for Candlesticks lol

Figure 3, which shows the sterling/Deutschemark cross-rate, contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action and would have done well. There are two noticeable exceptions, however.

FIGURE 3: STERLING/DEUTSCHEMARK CROSS-RATE. The sterling/Deutschemark cross-rate contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action and would have done well.

The first came in late December 1994, when the market finally broke down out of its range. Two things should have been noted that might have kept you out of a trade. One is the double top, or tweezers pattern in the candlestick vernacular, which took place about 10 days prior to the breakdown. That would have been your first indication that the trend was probably toward lower prices. The second indication came two days before the breakdown in the form of a shooting-star pattern, followed by a large negative real-body candlestick. This was another signal of lower prices.

The second exception was in January 1995, when the market again broke down after a consolidation. This, too, probably could have been avoided. All indications were signaling a bearish trend. That should have kept the careful trader from trading the doji day just prior to the breakdown. The doji, however, might have caused some confusion.

In addition, look at how taking those positions against the prevailing action is a great way to enter a new longer-term position. One glaring example of this took place early in January 1995, just before the second breakdown. After rallying for three days, the market approached, but never broke, real-body resistance. Prices did not stop falling until they were about 600 points lower, less than a week later.

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How to MINIMIZING THE RISKS in forex?

There is no way around the risks inherent in trading counter to the prevailing market action. All we can do is reduce the risks as much as possible by using the tools available. Happily, there are ways to do this.

First, always be aware of the longer-term picture. If the market you are planning to trade is in the middle of a strong trend, going against that action is probably one of the quickest ways to lose money. Wait until the momentum starts to ease; this will reduce your chances of getting caught on the wrong side of a breakout.

Further, this is a good time to mention a candlestick caveat: Beware of reversal patterns signaled by candlesticks in a trending market. The bond market is especially notorious for throwing out countertrend candlestick signals during major trends, and I've seen the same in other markets as well. Never look at candles in a vacuum.

So what should we look at in conjunction with candlesticks to lower our risk in the countertrend trades I am suggesting? For one, there's John Bollinger's band width indicator (BWI) as a trend indicator, which can be used by monitoring the area between the upper and lower bands. (I outlined this technique in the November 1994 STOCKS & COMMODITIES.) I like to use the BWI as an indicator of a weakening trend; I want to jump in when the slope of the BWI line starts to decrease. This is the first signal that the trend is petering out, and that at this point countertrend trades are reasonably safe.

There are, of course, other technicals that you can use. Bollinger bands themselves can be helpful, among others. Select the tool or tools that make you most comfortable.

More important than any additional indicator you could use, however, is your money management strategy. There are many ways you could trade using this methodology, and each has its own advantages and limitations. Cash or futures trading exposes you to the potential for theoretically unlimited risk, requiring tight stops and quick executions. Options could limit your risk, but probably at the cost of requiring larger moves to make them worthwhile. Of course, you may be able to tailor a combination of instruments to suit your needs.

An important factor in determining your risk exposure, and as a result how you trade, is the point at which you cut your losses. Often, there is no second support or resistance level nearby to provide a good stop-loss point, which means you'll have to use your own instinct as a guide. I find it useful to use whatever candlestick shadows there are as a rough guide to how far the market might go against me, thus letting me set reasonably good stops.

One last thing to consider: Where you're going to get out. I use a combination of techniques. Fibonacci retracement levels work fairly well, as do moving averages. I prefer to determine another support or resistance point using real bodies. Unfortunately, there are times when a significant level is not available nearby, forcing me to use other techniques.

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TRADING APPLICATIONS

One of the first uses that many technicians see for this technique is in terms of breakouts, much like in using bars. The advantage in using real-body highs and lows for support and resistance is that ranges are tighter, allowing entry into a trading position earlier than might otherwise have been the case.

Perhaps the most intriguing part of this new methodology, however, is its usefulness for day trading. Most technicians use candlesticks as a day-end indicator, but this technique gives us a greater degree of depth than is necessary for day trading. Real-body support and resistance allow us to take our analysis into the shorter time frames, which in turn allows us to get better entry points for our longer-term trades.

In my own analysis, I favor trading counter to the prevailing market action when a nearby real-body support or resistance level has been crossed intraday. This means that I recommend selling when the market has broken through very recent real-body resistance, and buying when recent real-body support has been breached. This is my strategy for trading against levels that are only a few days old, and one I recommend mostly for a very short-term position (say, day trading).

Longer-term levels require trading against the approach of a level. Often, in such cases, prices have come from a relatively long way off, and just reaching those key levels is a major achievement. Waiting for a break of support or resistance may mean missing a trade. Positions set under these circumstances can be held for longer time frames,perhaps as long as a week.

In candlestick charting, as in bar charting, the more times a level is touched, the more significant the level becomes. This is, however, a double-edged sword; if a resistance point is touched or penetrated slightly several times, it becomes more likely that a real breakout is in the offing. The wrong side of a breakout is not where we want to be. At the same time, however, the more times that a resistance point is touched, the larger the eventual decline is likely to be if the market falls instead of rallying.

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