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Forex Trading Methods - Elliott Waves
The Elliott Wave principle is a form of technical analysis that attempts to forecast trends in the financial markets and other collective activities, named after Ralph Nelson Elliott (1871–1948), an accountant who developed the concept in the 1930s, he proposed that market prices unfold in specific patterns, which practitioners today call Elliott Waves. Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the financial market could be predicted by observing and identifying a repetitive pattern of waves. In fact, Elliott believed that all of man's activities, not just the financial market, were influenced by these identifiable series of waves.
Elliott based part of his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.
In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios.
There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.
Theory Interpretation
The Elliott Wave Theory is interpreted as follows:
- Every action is followed by a reaction.
- Five waves move in the direction of the main trend followed by three corrective waves (a 5-3 move).
- A 5-3 move completes a cycle.
- This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
- The underlying 5-3 pattern remains constant, though the time span of each may vary.
Let's have a look at the following chart made up of eight waves (five up and three down) labeled 1, 2, 3, 4, 5, A, B and C.
You can see that the three waves in the direction of the trend are impulses, so these waves also have five waves within them. The waves against the trend are corrections and are composed of three waves.
Impulse Patterns
The impulse pattern consists of five waves. The five waves can be in either direction, up or down:
Wave 1 - Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower, the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
Wave 2 - Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 - Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1 (also known as The Golden Ratio).
Wave 4 - Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, the most distinguishing feature of fourth waves is that they often prove very difficult to count.
Wave 5 - Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high, the indicator does not reach a new peak). At the end of a major bull market, bears may very well be ridiculed.
Corrective Patterns
Corrections are very hard to master. Most Elliott traders make money during an impulse pattern and then lose it back during the corrective phase.
Wave A - Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B - Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C - Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
An impulse pattern consists of five waves. With the exception of the triangle, corrective patterns consist of 3 waves. An impulse pattern is always followed by a corrective pattern. Corrective patterns can be grouped into two different categories:
1. Simple Correction (Zig-Zag)
There is only one pattern in a simple correction. This pattern is called a Zig-Zag correction. A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.
2. Complex Corrections (Flat, Irregular, Triangle)
Flat Correction - In a Flat correction, the length of each wave is identical. After a five-wave impulse pattern, the market drops in Wave A. It then rallies in a Wave B to the previous high. Finally, the market drops one last time in Wave C to the previous Wave A low.
Irregular Correction - In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning of Wave A, or below it.
Triangle Correction - In addition to the three-wave correction patterns, there is another pattern that appears time and time again. It is called the Triangle pattern. Unlike other triangle studies, the Elliott Wave Triangle approach designates five sub-waves of a triangle as A, B, C, D and E in sequence. Triangles, by far, most commonly occur as fourth waves. One can sometimes see a triangle as the Wave B of a three-wave correction. Triangles are very tricky and confusing. One must study the pattern very carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift thrust. When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as Wave 3. When triangles occur in Wave B, the market thrusts out of the triangle in the same direction as the Wave A.
Conclusion
The premise that markets unfold in recognizable patterns contradicts the efficient market hypothesis, which says that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott wave principle among investors would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.
Wave prediction is a very uncertain business. It is an art to which the subjective judgment of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed. Critics also say the wave principle is too vague to be useful, since it cannot consistently identify when a wave begins or ends, and that Elliott wave forecasts are prone to subjective revision. Some who advocate technical analysis of markets have questioned the value of Elliott wave analysis.
The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story. The account is especially persuasive because Elliott Wave has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.
Forex Trading - Parabolic SAR
In the world of short-term trading, experiences are defined by a trader's ability to anticipate a certain move in the price of currencies. There are many different indicators used to predict future direction, but few have proved to be as useful and easy to interpret as the parabolic SAR. The parabolic SAR is a technical indicator that is used by many traders to determine the direction of currency’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. Sometimes known as the "stop and reversal system", the parabolic SAR was developed by the famous technician Welles Wilder, creator of the relative strength index, and it is shown as a series of dots placed either above or below currency’s price on a chart.
Calculation
The Parabolic SAR is calculated almost independently for each trend in the price. When the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly, on a downtrend, the SAR appears above the price and converges downwards.
At each step within a trend, the SAR is calculated ahead of time. That is, tomorrow's SAR value is built using data available today. The general formula used for this is:
SARn+1 = SARn + α(EP – SARn)
Where SARn and SARn+1 represent today's and tomorrow's SAR values, respectively.
The extreme point, EP, is a record kept during each trend that represents the highest value reached by the price during the current uptrend — or lowest value during a downtrend. On each period, if a new maximum (or minimum) is observed, the EP is updated with that value.
The α value represents the acceleration factor. Usually, this is set to a value of 0.02 initially. This factor is increased by 0.02 each time a new EP is recorded. In other words, each time a new EP is observed, it will increase the acceleration factor. This will then quicken the rate at which the SAR converges towards the price. To keep it from getting too large, a maximum value for the acceleration factor is normally set at 0.20, so that it never goes beyond that. For currency trading, it is preferable to use a value of 0.02.
The SAR is recursively calculated in this manner for each new period. There are, however, two special cases that will modify the SAR value:
- If tomorrow's SAR value lies within (or beyond) today's or yesterday's price range, the SAR must be set to the closest price bound. For example, if in an uptrend, the new SAR value is calculated and it results to be greater than today's or yesterday's lowest price, the SAR must be set equal to that lower boundary.
- If tomorrow's SAR value lies within (or beyond) tomorrow's price range, a new trend direction is then signaled, and the SAR must "switch sides".
Parabolic SAR
One of the most important aspects to keep in mind is that the positioning of the "dots" is used by traders to generate transaction signals depending on where the dot is placed relative to the asset's price. A dot placed below the price is deemed to be a bullish signal, causing traders to expect the momentum to remain in the upward direction. Conversely, a dot placed above the prices is used to illustrate that the bears are in control and that the momentum is likely to remain downward.
The first entry point on the buy side occurs when the most recent high price of an issue has been broken, it is at this time that the SAR is placed at the most recent low price. As the price of the currency rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. This accelerating system allows the investor to watch the trend develop and establish itself. The SAR starts to move a little faster as the trend develops and the dots soon catch up to the price action of the issue.
Parabolic SAR and the Short Sale
The parabolic SAR is extremely valuable because it is one of the easiest methods available for strategically setting the position of a stop-loss order. As you become more acquainted with technical indicators, you'll find that the parabolic SAR has built up quite the positive reputation for its role in helping many traders lock-in paper profits that have been realized in a trending environment. You can also see that professional traders who short the market will use this indicator to help determine the time to cover their short positions.
It is important to note that this indicator is extremely mechanical and will always assume that the trader is holding a long or short position. The ability for the parabolic SAR to respond to changing conditions removes all human emotion and allows the trader to be disciplined. On the other hand, the disadvantage of using this indicator it that the signals can lead to many false entries during periods of consolidation. Being whipsawed in and out of trades can often be extremely frustrating, even for the most successful traders.
Complimenting SAR with other indicators
Given the mechanical properties of the parabolic SAR, it is no surprise that it is a favorite among traders who develop their own strategies. In trading, it is better to have several indicators confirm a certain signal than to solely rely on one specific indicator, so most traders will choose to compliment the SAR trading signals by using other indicators such as stochastics, moving averages, candlestick patterns etc.
For example, a reversal of the dots from below the price to above is much more convincing when the price is trading below a long-term moving average than when it occurs when the price is above the moving average. Having the price remain below a long-term moving average suggests that the sellers are in control of the direction and that the recent reversal could be the beginning of another wave lower. Furthermore, a signal is considered stronger each time that an additional indicator confirms the same trend.
Conclusion
The parabolic SAR is a fairly good tool for traders looking for a strategic method of gauging a stock's direction or for portioning a stop-loss order. As illustrated above, this indicator proves to be extremely valuable in trending environments, but it can often lead to many false signals during periods of consolidation. This indicator is simple to implement into any strategy, but like all indicators, it is usually best if it is used in conjunction with other indicators to ensure that all information is being considered.
Why Trade Currencies?
You trade currencies for hedging and speculative purposes. During the regular course of a business day, corporate treasurers, private individuals, and investors have currency exposure. If you have bought Euros and you expect the exchange rate to go down, then you can sidestep your currency exposure by selling your Euros for the U.S. dollar.
Wireless Currency Trading
Do you invest in currency trading? Would you like to take the currency trading market with you wherever you go? Then wireless currency trading may be the perfect solution for you.
Stock Investing
The three largest stock exchanges by market capitalization are the New York Stock Exchange, Tokyo Stock Exchange, and NASDAQ. Through these stock exchanges, well over trillions of dollars worth of stock are traded on a daily basis. For stock and forex brokerages, the approach to investing is quite different than the stock investing practices that are accomplished by an amateur investor with a small nest egg.
Forex Trading - Technical Indicators
Many of the common charts encountered in the toolkit of Forex traders are composed of a graphed series of technical indicators. So, in order to understand those charts, the student of Forex investing will do well to study those indicators.
G20 rioters to hang banker effigies from lampposts as city staff are told to wear disguises
Thousands of City staff told to stay at home next week
Bankers told not to wear suits and 'dress down'
Additional 2,500 police deployed at cost of £10million
City workers are being urged to stay at home or to dress down during next week's G20 summit to avoid being targeted by anti-capitalist protesters.
Unprecedented measures are being put in place to prepare for thousands of demonstrators targeting the City and Canary Wharf.
About 3,000 anti-capitalist protesters are expected, with groups next Wednesday marching to the Bank of England, holding 'flashcamps' outside the European Climate Exchange in Bishopsgate, and marching on the US Embassy.
Demonstrators have vowed to hang effigies of bankers from lampposts along the protest route.
Banks have been warned to take extra security precautions to protect their staff after vandals attacked former RBS chief Sir Fred Goodwin's Edinburgh home.
Security specialists at Kroll, the risk consultancy, said high profile bankers were 'easy targets'. Companies linked to the financial crisis are taking extra security measures for prominent staff.
An extra 2,500 police, including riot units and intelligence officers, are being deployed at a cost of £10million to tackle any violence, while security consultants are giving firms constant updates on threat levels.
The demonstrations, as 20 world leaders meet at the ExCeL Centre in Docklands to discuss how to end the world recession, are expected to be the biggest in London this decade.
Demonstrators will target the ExCeL centre the next day. Banks, insurers, accountancy firms and brokerages have all circulated emails to staff with security instructions.
One warns: 'The front door is to be permanently locked during these two days.'
Face of the financial crisis: Sir Fred
The London Chamber of Commerce have warned businesses to take security precautions, including making sure staff carry ID, keep movement in and out of the offices to a minimum and cancelling all but essential meetings.
Colin Stanbridge, chief executive of the LCCI, said: 'There will be concern among businesses at the protests but the vast majority of firms will have robust security arrangements in place.'
The financial advisory group Bluefin, which employs 500 staff in London-has told employees not to go to its office in Mark Lane in the City unless absolutely necessary.
A spokesman for the bank UBS said: 'We are telling people to be cautious. If you have client meetings do you need to have them here?"
Chris Knight, professor of anthropology at the University of East London, is organising protests under the banner G20 Meltdown.
He said: 'We are going to be hanging a lot of people like Fred the Shred from lampposts and I can only say let's hope they are just effigies. If he winds us up any more I'm afraid there will be real bankers hanging from lampposts.'
Meanwhile, the group claiming responsibility for vandalising the former Royal Bank of Scotland chairman's home has threatened further action against 'criminal' bank bosses.
A statement claiming to be from the group responsible for damage at his £3million mansion warned of further attacks, saying: 'This is just the beginning.'
The threat sparked fears of a terror campaign against those blamed for the collapse in the financial system.
Security adviser Dai Davies, a former head of Scotland Yard's Royalty Protection squad, said: 'Risk assessments will have to be carried out by the police on individuals who are concerned about their safety. If there is cause for concern then appropriate advice will be given and pre put in place.
'The developments at Sir Fred Goodwin's home will almost certainly make some other high-profile bankers want to review their own private security arrangements.'
World Stocks Plummet After Global Banks Take Action in Bid to Avoid Recession
Saviour: The Bank of England has acted as a lender of last resort to Northern Rock
Change of heart: Mervyn King
Stocks worldwide have plummeted in the wake of yesterday's unprecedented decision by leading central banks to pump billions into money markets in a bid to avoid a worldwide recession.
The Bank of England has joined the U.S. Federal Reserve, the European Central Bank and their counterparts in Canada and Switzerland to pump at least £55billion into money markets.
However this morning the FTSE 100 fell more than 70 points to 6458.7 and the markets in Japan, Hong Kong and Taiwan all suffered nervous starts to the day's trading.
Investors are worried that the shock decision by the world's banks could mean that the credit crisis is likely to get worse.
It is hoped that the loans - £ 22.7billion of which will go to the UK - will help make lending between banks easier, avoiding any repeat of the Northern Rock crisis.
The Rock ran into trouble because the current economic climate has encouraged banks to hoard their cash, rather than lend it to each other.
Northern Rock could therefore not borrow the money it needed from other banks, and was forced to go to the Bank of England as a "lender of last resort" at punitive rates.
The central banks' decision is designed to stop other lenders getting into the same situation - and to avoid panic among both consumers and the City.
It came amid signs that Gordon Brown is bracing himself for a slowdown that could dent his credentials as the architect of Labour's record of economic stability.
A Bank of England spokesman said: "This co-ordinated set of actions is a response to stresses in the inter-bank markets, which have increased in recent weeks, reflecting sentiment about the global financial sector.
"The actions demonstrate that central banks are working together to try to forestall any prospective sharp tightening in credit conditions."
A source at the Bank added that the latest move is not designed to prop up any individual lender, but is rather aimed at alleviating pressures in the overall market.
This is significant, because the Bank is worried that City observers could interpret the massive loan as a covert way of getting cash to a particular lender which has got itself in trouble.
The co-ordinated move took the City by surprise, fuelling fears that the global credit crunch is threatening the economic health of the world's major powers.
With the housing market in turmoil, it was seen as a pre-emptive strike to prevent a worldwide financial meltdown on the back of the American "sub-prime" mortgage crisis.
Bankers hope it will make mortgages easier to arrange amid signs that credit is drying up on the High Street.
Downing Street welcomed the move as an example of the kind of "global co-operation and preventative action" that Mr Brown has called for in the past.
It came only a week after the Bank of England cut interest rates by a quarter point.
The Federal Reserve also reduced U.S. rates by a quarter point - the latest in a series of aggressive cuts.
Yesterday's announcement marked the first joint international effort to support the markets since the September 11 terror attacks.
Observers said the scale and nature of the cash injection is unprecedented.
It underlines the parlous state of the global banking system, where some lenders have been brought to the brink of collapse because of the problems in America's mortgage market.
Experts estimate the record defaults on so-called sub-prime loans advanced to Americans with poor credit histories could lead to up to £200billion of losses at global banks.
Giants such as Wall Street's Citigroup and Switzerland's UBS have gone cap in hand to Asian and Middle Eastern investors asking for cash to support their businesses after racking up tens of billions in losses.
Britain has been far from immune, with the run on Northern Rock leading the Bank of England to hand over billions of pounds of taxpayers' money to keep it afloat.
The Bank will next week offer £11.35billion to selected commercial lenders with a UK presence.
A similar auction for another £11.35billion will take place in the New Year.
Banks will "bid" for the cash and will have to pay a premium rate.
Major British-based lenders will also be able to apply for help from the other central banks.
The loans will last for three months and the Bank could step in again if the cash injection fails to have the desired effect.
The banks will still have to provide collateral and meet certain conditions in order to get help, and only those judged to be in sound financial condition will be able to participate.
The Bank of England held a similar auction for three-month loans in September.
However, there were no bidders, because banks were worried that the stigma attached to the auction would reduce confidence in them so soon after the run on Northern Rock.
That auction had a punitive minimum rate set at one per cent above the Bank's base rate, whereas the new auctions do not have a minimum rate.
The Bank has been accused of being slow off the mark in dealing with the stress in financial markets, and some experts described its decision to participate in the global loan scheme as another Uturn from its hardline stance.
Governor Mervyn King has been reluctant to rescue big banks which are in trouble because of their foolish investments - but with the world markets under increasing pressure, he has been forced to act.
The British Bankers' Association welcomed the move, calling it a "constructive and imaginative initiative".
It added: "It is also importantly an international solution to an international issue."
Julian Jessop, of analysts Capital Economics, said the move is welcome, but that further interest rate cuts would be needed to have a real effect.
He added: "Central banks have combined to reduce the risk that the credit crunch tips the most vulnerable economies into recession. But even if these measures are successful, the world economy is still facing a marked U.S-led slowdown in 2008.
"It does not resolve the more fundamental weaknesses in the world's major economies.
"Official interest rates will still have to be cut significantly further in the U.S. and the UK, and are likely to fall earlier than generally expected in the eurozone too."
What Is Currency Trading?
Quoting Conventions In Currency Trading
In the maze of monetary policy
In a world that existed before the financial crisis, the Central Bank felt victorious. They coped with inflation and the sharp edges to smooth business cycles. They managed to organize a powerful brainstorm and develop a common way to achieve their goals, which was recently very accurately described member of the Committee on Monetary Policy Bank of England, David Blanchflauer as one tool - one goal. " The tool was a short-term interest rate, but a goal - price stability. Such minimalism meet the spirit of the times, calling for more freedom for business and less interference from the state. Continuing the growing ranks of financial markets to take into consideration in pricing risk and allocate credit efficiently. To adjust the market need, the central banks had only to turn the interest rate instrument. Yes, bankers are still interested in financial stability and high employment, but they successfully convince all around that this can be achieved through price stability, without political interference. The financial crisis, all turned upside down. It was assumed that the business cycle developed without shocks, but this has not stopped the world rolled into the deepest recession in the 1930's. Now the main threat to all life is considered to be no inflation and deflation, while interest rates in many countries, dangerously close to zero. In these circumstances, central banks do not leave, as set out in search of other improvised means to rectify the situation. In general, once a stable relationship of financial markets fell, so the Central Bank was forced to once again make decisions that were previously left to the private sector. When banks stopped trusting each other, they are from the lender of last resort have become the lenders of first instance. Now they are increasingly determining how lenders make money. Now that the reputation of the market much podmochena, the Central Bank will actively expand its supervisory powers. All this carries them into the political quagmire from which they have for years attempted to escape. Many of them are still hoping that once the crisis is over, they again take up his position apolitical technocrats, pulled the lever for single and looking for a single variable. Not in vain there? "When a question is an axiom of rationality and market efficiency, which was built all of the work over the past 15-20 years, you need to find another approach to monetary policy and regulation", - said Thomas Mayer, senior economist at Deutsche Bank.
Let's start with the most pressing issue: what tools to use the Central Bank to stimulate the economy in the near future? Before the crisis, most of them acted with the help of a short-term interest rate (usually overnight). In itself, this rate has on economic activity is much less influential than, say, the rate on 12-month corporate loan or a 30-year mortgages. However, the relationship between these rates and the official was strong enough to allow the Central Bank to influence the overall financial conditions and, accordingly, the whole economy. Such relationship is threatened gap even before the crisis, as the gap between savings rates across countries has reduced the dependence of long-term rates on short-term. In times of crisis, when lenders were afraid for the opportunity to return back my money, there dezyntegratsiya. Central banks have responded increase its lending operations, adding the types of loans and received support, as well as extending the period of time. Fed start lending to investment banks. The European Central Bank has guaranteed unlimited amounts for a period of six months instead of weeks. Some have gone further. For example, the Bank of Japan began to buy shares, and the Swiss National Bank has intervened in the foreign exchange market.
Even assuming that the worst is behind us, the crisis has not yet ended and most countries are still experiencing a recession. None Central now will not give up their emergency measures. On the contrary, some thinking about how to expand its arsenal. The Bank of Canada and the ECB's plan to direct purchase of government or corporate bonds to improve the quality of loans. According to officials, the banks will curtail their programs only after the crisis. The Fed, for example, the law should stop certain actions, when they would not be an acute need. The bank charges a penalty interest on some of its programs, so the borrower would return to the private market as soon as able. "Exit strategy should allow us to return to a more balanced and sustainable market economy", - said Donald Kohn, the Fed zam.predsedatelya. Mervyn King, chairman of the Bank of England, meanwhile said that the exit strategy will be dictated by the inflation rate, the banks should not support non-viable markets.
New goals
It is possible that the exit would be more difficult than it seems. The study, published by the IMF last year, there was a question of "How to look" normal "situation." "Already, no one expects that the market will return to its pre-crisis state. It is clear that prior to the August 2007 market spreads that take into account the credit risk and liquidity risk were too narrow, and now they are much wider than they should be. But with this and it is not clear where is the golden mean. " Once at the beginning of this decade, the Bank of Japan became the main supplier of credit overnight, interbank market simply atrophy. Now it is many times smaller than before. European banks are now heavily dependent on the U.S. Federal Reserve (offered in the swap arrangements with the local Central Bank) and of the ECB, which provides loans in the euro for 6 months.
If the recovery will be sluggish, the Central Bank will not hasten the abandonment of support for key markets, especially if it will oppose the business and politics. In 1942, the Fed agreed to curb the long-term interest rates to help the Ministry of Finance find the money for military purposes, and only in 1951, these measures were discontinued. When the time come to sell holdings of mortgage bonds, the Central Bank may face opposition from politicians and lobby the housing market. Central Bank have to rethink not only their instruments, but also a goal. Banks and government have agreed that the need to focus on achieving low and stable inflation. By law, the Fed should pay equal attention to the level of employment and prices, but, in reality, it also focuses primarily on inflation. Unanimity of all members of the Central Bank of fabricated research departments and universities. Moreover, the adoption of this perspective has helped scientists to take a seat at the helm of the Central Bank: for example, lead not only to Ben Bernanke, Chairman of the Fed, but also the King, and Lucas Papademosa deputy. ECB chairman, and Lars Svensona deputy. Chairman of the Bank of Sweden.
Macroeconomics as a whole came in a strong dependence on the axiom of the effectiveness of markets and their ability to absorb bursts of emotions, which lead to panic and manic states. "Being involved in decision-making on monetary policy, I discovered that modern macroeconomic research is not applicable to solve the problems that we encountered," - noted Blanchflauer in his speech on March 24. For the same reason, today questioned the focus on low and stable inflation. The current recession has started on a background of stability - just as the American Depression and the Japanese "lost decade." "Not enough to follow only the inflation", - said Blanchflauer. "This approach has not been able to prevent the formation of imbalances that provoke a crisis, and it is not enough to cope with problems arising from the financial markets. We talk a lot about the need to develop new tools for regulation of the financial sector that could help prevent such crises." Bernanke and his predecessor Alan Greenspan before the crisis have argued that bubbles in asset markets is difficult to identify until they burst. A sdut them without consequences for the economy even more difficult. Central banks should intervene only if the bubbles threaten price stability. Otherwise, they should sit and wait until they burst, and then rake rubble. This position is only strengthened after the burst bubble in the market dotkomov in the late 1990's.
However, recent events show the contrary. William White, a former chief economist of the Bank for International Settlements, said that the orientation of the Central Bank to price stability over the medium term and led to the formation of bubbles. Their shlopyvanie facing deflation in the long run. This year, in many countries, inflation will be negative only due to reduction in fuel prices. But even in 2010, inflation is likely to remain below 2% - the target of many securities. In fact, many banks are not much worried, saying that inflation is "under control". However, market participants and economists fear that they will not be able to quickly raise the ante and turn its programs to encourage, when the crisis ends. And it will release inflation at will. Yet steadily falling prices would limit the ability of banks to stimulate growth, because they will not be able to delete the interest rates below inflation, that is, to make them negative in real terms.
Eric Rozengrin, chairman of the Fed in Boston, recently noted that over the past ten years, double the Fed lowered rates to zero or nearly zero. In economic modeling does not take into account this frequency, indicating a need to revise inflation targets. Also proposed to reorient the Central Bank with inflation in the price corridor. For example, each year this corridor is growing at 2%. Then, after a year of deflation at the level of 1%, the central bank will seek to inflation above 2% in subsequent years (say, 5% in two years), to return prices to earlier levels. Greg Manco, an economist from Harvard, went further, proposing to reduce the priority of inflation. "There are things worse and deflation," - he said. "And now we are faced with them."
Rather than inflation targets, the Central Bank will lose the confidence that they are the hard-won, therefore, it is doubtful that they will be happy to go to such a step. Now unlikely anyone dare to ignore the formation of bubbles, and blow them in the early stages, too, has not yet been able, because no one knows how to do it. At this stage, many are inclined to what is easier to use and the smooth management of risks in the financial system. This is called a caution at the macroeconomic level. Last year, Ben Bernanke explained, than it will be different from the normal supervision of individual banks. He noted that the risk was acceptable for a company ceases to be such when it duplicated a lot of companies. Similarly, the usual supervisory authority may require individual banks to reduce lending during the recession, while the care at the macro level refers to the fact that such actions could harm the entire system.
The principle of precaution at the macro level indicates a change in another trend that existed until 2007 - when the Central Bank refused to completely control the functions and focus solely on monetary policy. Scientists believed that the control distracts from the Central Bank to ensure price stability and has a conflict of interest: Central Bank can stimulate inflation to smooth out sharp edges in the banking system, or to support insolvent banks to protect the economy. The central banks of Austria and Britain abandoned the part of regulatory functions. The ECB was set up without them. However, fantasies of diligence at the macro level, most likely not materialize. In the identification and neutralization of bubbles, it is also helpless, like a traditional monetary policy. Moreover, while there is no any correlation between the regulatory responsibilities of the central bank and its ability to avert a crisis. U.S. Federal Reserve - the most powerful and advanced and the financial management, but problems began right under his nose. Neither the Central Bank of Australia nor the Central Bank of Canada does not have the oversight responsibility, however, the financial systems of both countries have suffered less than others. This statistic relates to the behavior of investors and the local zakonodatetlstvom, and not with those for whom follow.
The new fighters in the political arena
By Khudu whether, or for good, but after the crisis, central banks will be stronger than the monitor market processes. This would entail another change: now they can see themselves as completely apolitical. The official status of independence to protect them from political influence. In addition, the principle of "one tool, one goal of" managing the monetary policy turned into a purely technical manipulation. The distinction between central banks and policy today is no longer seen as clearly. Innovative measures often require central banks to make loans that they can not fully repay. This means that taxpayers will suffer losses. This means that without the authorization of the Ministry of Finance can not do. The distribution of credit funds and stricter regulation makes some winners and some losers, therefore, requires clarification and transparency.
Analysts have a lot to learn from meteorologists
Of the economists came to worthless. Meteorologists, at least, those who at least cares a little weather in the UK do not trust the method of extrapolation. They just know that even if the sun shines today, tomorrow may still be rainy and windy. Certainly some of what analysts have learned to meteorologists, in particular, they adjust the data, taking into account seasonal factors: but sometimes does seem that they make their forecasts almost blindly. How many economists correctly predicted a turning point in economic activity? I suspect that a bit. They also believe that the economy is capable of self-regulation. Of course, the economic processes, sometimes out of control, but most usually a long time back in a stable condition. In fact, all mathematical models used by analysts to predict the dynamics of the national economy is based on the judgment. A year ago, when Britain's economy has teetered on the brink of a credit crisis, the Ministry of Finance analysts still believe that 2009 will be better than 2008, in which they predicted economic growth of 2% (real growth rate of only 0.7%). Analysts Ministry has acknowledged that 2008 was not a normal year for the country, but they said "... the stability of the UK economy demonstrates the effectiveness of macroeconomic policies and the benefits of flexible and open labor markets and capital, goods and services. Therefore, projected after 2008 to a normalization of the situation in the financial market and adapt to new market conditions, you will begin to rise in GDP. " According to British analysts' forecasts, economic growth in 2009 amount to 2.25-2.75%. Meanwhile, independent analysts are more cautious in their forecasts, expecting growth to only 1.9%. Now, nine months later, it became clear that economic growth in Britain will fall by 3-4%. In general, the entire community of analysts badly mistaken, but the MoF has bypassed all, promising a significant improvement in 2009. At the other end of London, on Trednidl Street analysts have done their work a little better. The Bank of England, unlike the Ministry of Finance does not publish a detailed economic forecasts, but still matches the data in reference to quarterly inflation. In February 2008, analysts predicted the Bank of England in the second half of 2008 economic growth will fall sharply (to 1.5%), but, then, in 2009, restored in him peculiar V-shaped manner. It should be noted that the forecast allows for the possibility of a recession, but few analysts believed the Bank of England that recession at this stage is a real threat.
Three months later, the Bank of England has revised the short-term prognosis for the worse: now acknowledged the existence of a threat of a recession, but it is still not part of the "main scenario" the Bank. Moreover, CB is still seen the chances of economic recovery in 2009. The Bank of England was able to recognize that a recession is still a "core script" of events in August last year, but by that time the UK has seen a crisis. This is more like an attempt to get a finger into the sky, rather than on accurate forecasts. Another forecast of Ministry of Finance was published last week, when the Minister announced his budget. Yes, he acknowledged that the situation is deteriorating, however, with the expressed hope for a noticeable improvement in the future. What, in general, quite obviously, because even after the Great Depression, a period of recovery. Ideally, analysts should work much better, but, alas ... Very few were smart or lucky enough to make the correct forecast for the past year and a half. What is taught their mistakes?
The first mistake - this is arrogance. This is a very reliable last year's budget shows. The Ministry of Finance is inclined to believe the view, first expressed in a report on the budget for 2006 that the British economy can grow steadily to 2.75% per year. The longer the recession will last, the less plausible is that assessment of capacity growth. Meanwhile, the Ministry of Finance piously believed that the economy has become much more flexible and that "the result is macroeconomic stability, providing a foundation to combat the current crisis. These findings appear to be totally wrong: the main problem of instability and financial system, rather than the flexibility of the economy, labor, goods and services. The second error - it is shortsighted and lack of planning. Perhaps, analysts and are not able to accurately predict the onset of a recession, but this does not mean that it did not occur. Instead, it is a sign of great instability, and forecasts to the contrary - no more than wishful thinking. The main rule of money: "a little good", thus it is important to use large cash surplus in the favorable economic situation. However, until now, only a few countries, the government has managed to come to such results ( basically, it was the Government who are interested in winning the next election). So, when the economy suddenly gives a crash, the financial situation, often can not count on strong support.
Third mistake - this is wishful thinking. When the economy is "stray from the path, of course, want to believe that the Government simply click your fingers, and all problems will be solved. It would not. The economic crisis is usually a snow dump on the head (otherwise, the prediction would be a matter of very light). This, in turn, means that the policy in a hurry to seek appropriate ways to begin to address the problem. A year and a half ago, for example, only one offered to make the quantitative easing. Recession in the UK are rare, but tend to be protracted, despite the praises flexible economy. Since the mid 70's and until now, a recession (defined by long periods of lower quarterly values of GDP), continued from five to nine quarters. Subsequent recovery (the time that took a return to the previous peak of activity) lasted from five to ten quarters. Even when activity is restored, begins a long time working on the final normalization of the situation. The fourth problem - the indifference of the rest of the world. Governments and heads of central banks like to pretend that they are all under control. Of course, something they can change, but, ultimately, the UK economy is dependent on changes in the global economy. Meteorologists know that the events that took place in another part of the world can affect the weather conditions in the UK. Analysts, however, to think, perhaps, that the island of Great Britain, not only geographically but also economically. Let's hope that the experience of the past year and a half, finally to make and believe the opposite.
What motivates the U.S.
According to the report published by the National Bureau of Economic Research (NBER) in 1999, the importance of economic data seen in the following order:
Forex market dealers ranked economic data on their importance (change over time)
In 1997:
1. Unemployment
2. Interest rates
3. Inflation
4. Trade Balance
5. Gross domestic product
In 1992:
1. Trade Balance
2. Interest rates
3. Unemployment
4. Inflation
5. Gross domestic product
** Calculations are based on the 20-minute reaction
What is also important to take into account - is that prices are always restored from the daily rate, so that even the strongest indicator, based on a 20-minute movement of the dollar can not be a significant engine of the market rate in the general trend. According to our own analysis of the 20-minute and daily ranges, we set up the following list of economic data on their impact on the movement of the market rate:
In 2004, (20 minutes):
1. Unemployment (Non-Farm Payrolls)
2. Interest rates (Decision FOMC)
3. Trade Balance
4. Inflation (CPI)
5. Retail sales
6. Gross domestic product
7. Current account
8. Orders for durable goods
9. Inflows of foreign capital in the United States (data from TIC)
In 2004, the (day):
1. Unemployment (Non-Farm Payrolls)
2. Interest rates (Decision FOMC)
3. The inflow of foreign capital in the United States (data from TIC)
4. Trade Balance
5. Current account
6. Orders for durable goods
7. Retail sales
8. Inflation (CPI)
9. Gross domestic product
As shown in our lists, information on billing statements in non-agricultural sectors have a significant impact on the movement of the dollar against the euro, resulting in an average of 124-punktovomu range of trading for the first 20 minutes after and 192-punktovomu trading range during the day. Interest rates are also being held on the second place in both time periods, but for other indicators situation begins to change significantly. Net foreign purchases of American securities in the general case are the average movement in the 33 paragraph in the first 20 minutes, while at day basis, these data lead to the average movement of 132 points. For other economic indicators of the average ranges in 2004 for the currency pair EURUSD were as follows:
The average 20-min. range (items)
Payroll - 124
The decision FOMC - 74
Trade Balance - 64
Inflation (CPI) - 44
Retail sales - 43
Gross domestic product - 43
Current Account - 43
Durable goods - 39
Capital inflows (TIC) - 33
Average daily range (items)
Payroll - 193
The decision FOMC - 140
Capital inflows (TIC) - 132
Trade Balance - 129
Current Account - 127
Durable goods - 126
Retail sales - 125
Inflation (CPI) - 123
Gross Domestic Product - 110
* The average daily range for the EURUSD in 2004. of 111 items
As you can see, the most significant change over the past few years has undergone a balance of trade impact on the movement of the dollar against the euro. Moreover, contrary to popular belief, throughout this time period, the report on gross domestic product was one of the most important economic indicators, and led to the smallest relative motion of the pair EURUSD. One possible explanation for this may lie in the fact that reports on gross domestic product fell less frequently than other data taken into consideration (a quarterly basis to monthly). In addition, data on gross domestic product more prone to ambiguity and incorrect interpretation. For example, growth in gross domestic product, due to increases in exports will contribute positively to its currency. However, if the gross domestic product growth occurred as a result of building inventory, the impact on the currency can be rather negative. These factors are very important to keep in mind the currency traders, regardless of what (technical or fundamental) trading strategies they use. For technical traders, trading in the range, it would seem logical to stay away from the market before the publication of data on the payroll of the non-agricultural sectors, while traders trading for a breakthrough, a publication of the data on the contrary provides excellent opportunities for trade. For fundamental traders, these results are also important, because the adjustment of the exchange rate in relation to the economic news seems to be happening very quickly - a reaction beyond the 15-30 minute period after the release of data may be the result of over-reaction of investors and trade-related with the flow customers, not only to the news. Gross domestic product is, in this respect, a perfect example, because the 20-minute reaction in the list is higher than that day. Also critically important is to interpret the data in the context of how the market sees them as important at this point in time, because from time to time there is a change in focus of the market, and the once highly relevant data may not be such as having less impact on exchange rate and vice versa, respectively.
The fall of the dollar on the labor market proved short-lived
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