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Forex Analysis and Trading
Effective Top-Down Strategies Combining Fundamental, Position, and Technical Analyses
T.J. Marta
Joseph Brusuelas
A unique approach that reveals the most profitable trading opportunities in the world's largest market
Format: hardcover
ISBN: 9781576603390
Publisher: Bloomberg Press
Pub. Date: 12/2009
272 pages, 6" x 9"
Retail Price: $60.00
Your Price: $51.00
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The forex market is huge and offers tremendous trading opportunities. There are many different tools for analyzing the forex market. But what are the best tools and the best ways to use them to trade most effectively?
Forex Analysis and Trading organizes the most widely used—although disparate—approaches to forex analysis into one synergistic, robust, and powerful framework. This system draws on fundamental, position, and technical analyses to identify profitable currency positions, enabling traders to make the best decisions regarding major currencies.
Marta and Brusuelas are forex trading professionals with years of experience analyzing and trading every major currency.
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T.J. Marta is Founder and Chief Market Strategist of Marta on the Markets, LLC. He is Editor and Publisher of the daily Morning Minute and a regular contributor to the Overnight Express and FXstreet.com. T.J. is a respected strategist and speaker with more than 20 years of Wall Street and business experience. Marta uses his technical knowledge, market experience and passion for history to provide not only context for global developments, but more importantly, the investment implications of those developments.
T.J. has served as a US trading floor economist, fixed income strategist and G10 currency strategist at two of the largest financial services firms in the world: RBC and Citigroup. His professional affiliations include the National Association for Business Economics and the Money Marketeers of NYU's Stern School. Marta holds a BS from the University of Pennsylvania's Wharton School and an MBA from the Stern School at New York University.
Joseph Brusuelas is Director at Moody's Economy.com and is a well-known economist in the financial sector. Prior to his current position, he was the Chief Economist at Merk Funds and Chief U.S. Economist at IDEAglobal. His primary fields of interest are monetary policy, fixed income, currencies and commodities. Brusuelas was named the best forecaster during the month of August 2009 by Marketwatch/Dow Jones
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Introduction
PART I Fundamental Analysis
Chapter 1 Purchasing Power Parity
Chapter 2 Real Exchange Rates and the External Balance
Chapter 3 Exchange-Rate Determination over the Medium Term: Parity Conditions, Capital Flows, and Current Account
Chapter 4 Fair-Value Regressions
PART II Market Sentiment and Positioning
Chapter 5 Futures Non-Commercial Positioning
Chapter 6 Risk Reversals
PART III Technical Analysis
Chapter 7 Trend-Following Indicators
Chapter 8 Oscillators
Chapter 9 Technical Pattern Recognition
Case Studies
Conclusion
Index
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From Introduction
Fundamental Analysis
We begin the analysis of any currency using fundamental variables. The very broadest considerations involve purchasing power parity (PPP) and real effective exchange rate (REER) analysis. These frameworks permit an analyst to establish a contextual perspective regarding the “value” of a particular currency. These analytical tools are well suited to long-run exchange-rate determination and are useful to buy-side firms that practice buy-and-hold strategies or global firms that are engaged in long-term planning in a dynamic foreign-exchange environment.
However, the limits of the long-run approach favored by academics and some buy-side institutions are quite observable. Long-run valuations are so broad in scope, they often provide only modest value to traders or risk managers who require more detailed analysis to determine value and potential price action over a more actionable time horizon.
A more precise valuation of a currency’s fundamental fair value for the medium term can be obtained using regression analysis based on monthly economic and financial data. Regressing the currency against financial data using fifty-two weeks of weekly data further refines this estimate. Finally, recognizing that different fundamental considerations can dominate price action over shorter time horizons, one can employ regression analysis of daily price action using sixty-day time horizons to obtain short-term valuations.
Positioning Analysis
Whereas the above methods provide a robust analysis using macroeconomic and cross-asset underpinnings to explain valuations and price action, they do not always lead to profitable decisions. Too often, a purely fundamental approach ignores the psychological aspect of market behavior. According to an old, wise adage, “the markets can stay irrational longer than an investor can stay solvent.” Thus, we incorporate a second level of analysis based on measures of market positioning that allows market actors and risk managers to identify extremes and potential changes in the direction of the market.
Two publicly available measures of market sentiment are the positions reported to the U.S. Commodity Futures Trading Commission (CFTC) by non-commercial traders (sometimes referred to as speculators) and options risk reversals. The CFTC positions are collected by the CFTC once per week on Tuesdays and released on Fridays. Extremes in the positions of noncommercial traders relative to the CFTC positions in recent months allow an analyst to identify when at least one segment of the trading/investing community has not only likely exhausted its ability to contribute further to a price trend, but also could be more likely to begin trading the other way in a market, precipitating a reversal in price action. The drawback of the data is that it is published late on Friday afternoons in the United States when liquidity is low, and that it is three days old when released.
A timelier positioning indicator, although one measuring a different segment of the market, is the risk-reversal skew in the options market (risk reversals). Risk reversals measure the difference in premium for puts versus calls on a particular currency. Extreme readings suggest that options traders are “off balance” in their view regarding future price action, which suggests an increased potential for a reversal in price action. Whereas shifts in both the CFTC and risk reversals tend to correspond to shifts in price action relative to trend, they are frustratingly ambiguous in providing concrete entry or exit levels, and this leads us to the third section of our currency analysis: technical analysis.
Technical Analysis
Detractors liken technical analysis to reading tea leaves. Technical analysts retort that price action “says it all” regarding what is going on in the market and scoff at how often“fundamentalists”obstinately hold a position when price action is screaming that one’s view of how the world works “just isn’t so.” We remain firmly neutral in this bitter debate, noting only from a pragmatic perspective that if enough market participants decide that price action in regards to a channel support, a head-and-shoulder neckline, or a 76.4 percent Fibonacci retracement is important, then it probably is important.
Consequently, we are not looking to establish “black box” technical trading models, but to offer a framework that incorporates changing market sentiment and an appreciation of which specific levels or patterns could be decisive in influencing behavior and price action. In viewing the foreign-exchange markets through a multidimensional prism, a decision maker can make more informed—and profitable—decisions.
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