Forex Analysis Method- Autoregression

The premise behind autoregressive methods is that previous values in the time series directly influence the current value in the time series. Mathematically, this can be expressed as

Yx +1 = AYx + BYx −1 + CYx −2 + ε

where,

x the time increment

Y(x) the price at time index x

A the first regression coefficient

B the second regression coefficient

C the third regression coefficient

ε the error factor, whose sum approximates zero

This equation infers that the time-series closing price on any given day is the sum of the closing prices on the three previous days, all adjusted by regression coefficients. The number of inde- pendent variables on the right side of the equation determines the autoregressive order of the model.

Autoregression has numerous supporters in the realm of techni- cal analysis. It also has several variations and enhancements, such as the autoregressive integrated moving-average (ARIMA) time-series model introduced by George Box and Gwilym Jenkins in the early 1970s. This model frequently is designated as the ARIMA( p, d, q ) model, where p is the autoregressive order, d is differencing order, and q is the moving-average order.

Forex Analysis Models - Fourier Transform Model

In Forex trading, the fast Fourier transform is another popular method among technical analysts for extracting cycles from a time series. The basic assumption is that any (well-behaved) curve can be approximated as the sum of a finite number of sinusoidals and is based on the following Fourier series:

Yx = A0 /2 + ΣAn cos(nπx /L)+ ΣBn sin(nπx /L)

The transform operations calculate the values for the cosine amplitudes A and the sine amplitudes B in a similar fashion to the simple trigonometric regression above. Most analysts prefer to download an Internet utility to handle the complexities rather than code it themselves.

Forex Analysis Models - Simple Sinusoidal Model

In Forex trading, if security prices were not cyclical, they would tend to go off the top or bottom of the charts. This alone justifies the examination of a simple sinusoidal model. The current method identifies the most dominant sinusoidal in the time series using the conventional model:
where,

Y (x ) = A * cos(x * θ)+ B * sin(x * θ)+ µ

x the independent variable, time

Y(x) the dependent variable, the price at time index x

A cosine amplitude

B sine amplitude

frequency, expressed as cycles per time unit

the arithmetic mean of the time series.

The crux of this regression is based on a fundamental trigono- metric identity, specifically the following multiple-angle relationship:

cos nθ = 2 cosθ cos(n − 1)θ − cos(n − 2)θ

Once the frequency has been isolated and extracted, the two amplitudes can be calculated relatively simply.

In forex trading, unfortunately, very few security time series exhibit a distinct single-cycle property for prolonged periods of time. However, the sinusoidal regression may be applied iteratively. That is, calculate the primary cycle coefficients, and remove that cycle from the original time series. Then perform the regression a second or third time.

Forex Analysis-Formula

In Forex trading, within the technical analysis family, econometric models are unique because they belong to the only category that generates a continuous stream of discrete numeric values as the forecast. For example, if the analyst has determined that a particular time series exhibits distinctly linear properties, then the following linear regression model should be used:

Y (x ) = Ax + B + ε

where,

x the independent variable, time


Y(x) the dependent variable, the price at time index x

A the slope

B the intercept

ε the error factor whose sum approximates zero.

By solving for the regression coefficients A and B, the trader can estimate the next value in the time series Y(·) by incrementing the value of x in the linear model.

Technical FOREX Analysis

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to predict market direction or to generate buy and sell signals. Many technical stud- ies share one common important tool: a price-time chart that emphasizes selected characteristics in the price motion of the underlying security. One great advantage of technical analysis is its “visualness.”

FOREX-IDENTIFYING PRICE FORMATIONS
In forex trading, proper identification of an ongoing trend can be a tremendous asset to a trader. However, the trader also must learn to recognize recurring chart patterns that disrupt the continuity of trend lines. Broadly speaking, these chart patterns can be categorized as reversal patterns and continuation patterns.

FOREX-REVERSAL PATTERNS
In forex trading, reversal patterns are important because they inform the trader that a market entry point is unfolding or that it may be time to liq- uidate an open position.

FOREX-CONTINUATION PATTERNS
In forex trading, continuation pattern implies that while a visible trend was in progress, it was interrupted temporarily and then continued in the direction of the original trend.

The proper identification of a continuation pattern may prevent a trader from entering a new trade in the wrong direction or from exiting a winning position too early.

FOREX Analysis

In Forex trading, probably the most successful and most used means of making decisions and analyzing Forex markets is technical analysis. The difference between technical analysis and fundamental analy- sis is that technical analysis is applied only to the price action of the market. While fundamental data often can provide only a long-term forecast of exchange-rate movements, technical analy- sis has become the primary tool to analyze and trade short-term price movements successfully, as well as to set profit targets and stop-loss safeguards, because of its ability to generate price-specific information and forecasts. Technical analysts are by nature chart mongers. The more charts there are, the better is the forecast.
 
From years now, technical analysis in the futures markets has focused on the six price fields available during any given period of time: open, high, low, close, volume, and open interest. Since the Forex market has no central exchange, it is very difficult to esti- mate the latter two fields, volume and open interest. 

FOREX- Currency weightage chart

This chart gives the weightage of various currency against US dollar.

Currency	Weight (%)
Euro	57.6
Japanese  yen	13.6
British pound	11.9
Canadian dollar	9.1
Swedish krona	4.2
Swiss franc	3.6

 

FOREX- DX

The U.S. Dollar Index (ticker symbol DX) is an openly traded futures contract offered by the New York Board of Trade (NYBOT). It is computed using a trade-weighted geometric aver- age of the six currencies

IMM currency futures traders monitor the U.S. Dollar Index to gauge the dollar’s overall performance in world currency markets. If the U.S. Dollar Index is trending lower, then it is very likely that a major currency that is a component of the U.S. Dollar Index is trading higher. When a currency trader takes a quick glance at the price of the U.S. Dollar Index, it gives the trader a good feel for what is going on in the Forex market worldwide.

FOREX- Spread

In Forex trading the difference between the bid price and ask price is called the spread. The big-figure quote is a dealer expression referring to the first few digits of an exchange rate. These digits often are omitted in dealer quotes. For example, a USD/JPY rate might be 117.30/117.35 but would be quoted verbally without the first three digits as 30/35. The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round turn means both a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. In the case of the EUR/USD rate above, the transaction cost is 3 pips.

FOREX- Bid Price and Ask Price

BID PRICE
The bid is the price at which the market is prepared to buy a spe- cific currency pair in the Forex market. At this price, the trader can sell the base currency. The bid price is shown on the left side of the quotation. For example, in the quote USD/CHF 1.4527/32, the bid price is 1.4527, meaning that you can sell one U.S. dollar for 1.4527 Swiss francs.

ASK PRICE
This ask is the price at which the market is prepared to sell a specific currency pair in the Forex market. At this price, the trader can buy the base currency. The ask price is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532, meaning that you can buy one U.S. dollar for 1.4532 Swiss francs. The ask price is also called the offer price.

FOREX- Pips & Ticks Understanding

In any forex trading, a pip is the smallest unit of price for any foreign currency. Nearly all currency pairs consist of five significant digits, and most pairs have the decimal point immediately after the first digit; that is, EUR/USD equals 1.2812. In this instance, a single pip equals the smallest change in the fourth decimal place, that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equals 1/100 of a cent.

One notable exception is the USD/JPY pair, where a pip equals US$0.01 (one U.S. dollar equals approximately 107.19 Japanese yen). Pips sometimes are called points. Just as a pip is the smallest price movement (the y axis), a tick is the smallest interval of time along the x axis that occurs between two trades. (Occasionally, the term tick is also used as a synonym for pip.) When trading the most active currency pairs (such as EUR/USD and USD/JPY) during peak trading periods, multiple ticks may (and will) occur within the span of one second. When trading a low-activity minor cross-pair (such as the Mexican peso and the Singapore dollar), a tick may occur only once every two or three hours.

In forex trading ticks, therefore, do not occur at uniform intervals of time. Fortunately, most historical data vendors will group sequences of streaming data and calculate the open, high, low, and close over reg- ular time intervals (1, 5, and 30 minutes, 1 hour, daily, and so on).

Currency Pairs, Base Currency, Quote Currency

CURRENCY PAIRS
Every Forex trade involves the simultaneous buying of one cur- rency and the selling of another currency. These two currencies are always referred to as the currency pair in a trade.

BASE CURRENCY
The base currency is the first currency in any currency pair in any forex trading. It shows how much the base currency is worth, as measured against the second currency. For example, if the USD/CHF rate is 1.6215, then one U.S. dollar is worth 1.6215 Swiss francs. In the Forex markets, the U.S. dollar normally is considered the base currency for quotes, meaning that quotes are expressed as a unit of US$1 per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the Euro, and the Australian dollar.

QUOTE CURRENCY
The quote currency is the second currency in any currency pair in any forex trading. This is frequently called the pip currency, and any unrealized profit or loss is expressed in this currency.

FOREX- SPOT market

A spot market is any market that deals in the current price of a financial instrument. Futures markets, such as the Chicago Board of Trade (CBOT), offer commodity contracts whose delivery date may span several months into the future. Settlement of Forex spot transactions usually occurs within two business days.

FOREX understanding

Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in pairs, for example, the Euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

The foreign exchange market (Forex) is the largest financial mar- ket in the world, with a volume of over $2 trillion daily. This is more than three times the total amount of the stocks, options, and futures markets combined. Unlike other financial markets, the Forex spot market has no physical location, nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centers. This fact has a number of ramifications that we will discuss here and coming post.

FOREX intro

Trading in the foreign exchange currency markets recently has exceeded $2 trillion a day, and this figure is expected to double within the next five years. The reason for this astonishing surge in trading popularity is quite simple: no commissions, low transaction costs, easy access to online currency markets, no middlemen, no fixed-lot order sizes, high liquidity, low margin with high leverage, and limited regulations. These factors already have attracted the attention of both neophyte traders and veteran speculators in other financial markets.