Friday, April 25, 2008

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The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

Disbelief � that markets are patterned and largely predictable by technical analysis alone

Joyous �irrational exuberance� � at having found a �crystal ball� to foretell the future

And finally the correct, and useful response � �Wow, here is a valuable new tool I should learn to use.�

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature�s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions� and � as recent discoveries have confirmed � in market prices.

Natural systems, including Elliott wave patterns in market charts, �grow� through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this �punctuated growth� appears in market data is only natural � as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, �Everything that thrives must have setbacks.�

Basic Elliott Wave PatternThe first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: �impulse waves,� and �corrective waves.�

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and invest http://www.elliottwave.com/club/EWI-basic-tutorial/default.aspx

More Thoughts On Forex

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Before the advent of Internet and ecommerce, only big corporations, multinational banks and wealthy individuals could trade currencies in the Forex market through the use of the proprietary trading systems of banks. These systems required as much as US$1 million to open an account. Thanks to advancements in online technology, today investors with only a few thousand dollars can have access to the Forex market 24 hours a day and around 5 � days of a week.

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I use very primitive Forex charting methods. Please read 8 hour charts of EUR/GBP with 20 and 40 MA, and read round figures and breakout (from consolidations, then you will realize the method cannot be more primitive than that, but still deadly effective). Buy on dips towards the support and add up on breakout of that consolidation treating the two as one trade with same stop loss and "keep them" as long as the market moves in your way.

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What is a myth: A myth is often thought to be a lesson in story form which has deep explanatory or symbolic resonance for preliterate cultures, who preserve and cherish the wisdom of their elders through oral traditions by the use of skilled story tellers.

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Unquestionably, in Forex trading systems, speed is of the essence in these hectic times. Every nanosecond counts when you are trading using five minute charts. The most basic Forex trading systems rely on moving averages. The more "sophisticated" systems use combinations of moving averages of both price and volume. The most "expensive" systems incorporate stochastics, which are the mathematical techniques for a non-linear science.
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European Mid Morning Update 24th April 2008

Thu, 24 Apr 2008 03:53:38 -0400
Early Europe awaits numbers

Releases from Europe:

April Forecast Actual
French Business Confidence Indicator 108.0 106.0
French Production Outlook Indicator - 13.0 - 9.0
Italian Consumer Confidence Index 99.6 99.8

French business confidence declined in April but the outlook improved mildly as did Italian consumer confidence. The past month has seen numbers look a little better although retail sales has looked a little vulnerable. A strong Euro still will provide a little more confidence. However, the Italian report was accompanied by a statement “With regard to prices, the view of the current dynamic is worsening, though the expectations for the next 12 months are more positive.”

So not all doom and gloom at this point but clearly very vulnerable to further rises in inflation, losses in employment levels and to any shocks to the banking system.


The following economic releases are due today:

March
U.K. Retail Sales (MoM) - 0.3%
U.K. Retail Sales (YoY) +4.3%
U.S. Durable Goods Orders (MoM) +0.1%
U.S. Durable Goods Orders ex transp (MoM) +0.5%
U.S. New Home Sales (MoM) - 1.0%
U.S. New Home Sales 584K

April
German IFO: Business Climate 104.3
German IFO: Current Assessment 111.0
German IFO: Business Climate 98.0
U.K. CBI Quarterly Industrial Trends
U.S. Initial Jobless Claims (19th) 375K
U.S. Continuing Claims (12th) 2960K


To come today are a few numbers that could generate some reactions.

The U.K. releases its retail sales for March together with the CBI Industrial trends. The outlook has been overwhelmingly bearish for the U.K. but numbers have been holding up in general but as we move further into the year and consumers are sapped of confidence as inflation rises, the impact on retail sales could well be decisive.

The immediate view for the Pound is still mildly bearish but probably stalling around 1.9690-10 to see a reversal higher.

The German IFO survey probably takes the top spot for market interest. Last week’s ZEW survey saw a positive current situation but the outlook was particularly bearish. Anything too damning could weigh heavy on the Euro – key supports at 1.5792-1.5814.

Finally the States releases its durable goods numbers and new homes sales for March. Needless to say the market is still particularly sensitive to bad U.S. data but even at its worst I can only see a period of consolidation develop and not quite yet any new lows against the Euro.


Note important support and resistance areas:

USDJPY EURUSD USDCHF GBPUSD
Res: 104.63-90 1.5985-18 1.0249-82 1.9944-72
Res: 104.18-25 1.5914-26 1.0192-20 1.9830-70

Spt: 103.01-21 1.5814-32 1.0103-29 1.9741-46
Spt: 102.32-66 1.5710-65 1.0020-60 1.9690-16

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