1 year in and still a NEWB!

Beginner Questions
#1

Hello.

I’ve been at this strong for one good year, well a little less but almost, and I have learned a lot. I owe a lot of it too b-pips and alot of people on these forums. I have tried to contribute from time to time from what I have learned so far.

I feel now though I am at a road block. I state of confusion, not knowing where to go next. See, I am one of those people that has to know where things are going and how things work. Learning FOREX, I end up asking myself and others more questions than ever to get certainty.

My latest question to myself that has me turned around on everything I learn is how the market actually works. You know the whole supply and demand aspects of it. Thinking deeper in this and reading on it a bit, my thoughts have gathered and came up with the conclusion that with the laws of supply and demand, there is no need for technical analysis in FOREX.

Ill explain my thought (reasoning). Everyone knows that the more of the currency you have in the market the weaker its going to be and the less the more valuable its going to be due to supply and demand. As banks, companies, forex gurus buy or sell the pertaining currency it either floods or dries up in the market, moving the price. If you were to watch say usd/jpy and usd seems strong, says interest rate increase, you want too buy. Well over in Canada, they decide to hike there interest higher, so banks, companies, forex gurus buy the Canadian dollar, sell US and whoop…there goes the US dollar weaker due too the sell off. Well if your hear watching usd/jpy…you have bought but its going the wrong way? Its getting weaker because the sell off in USD/CAD is stronger than the buying in USD/JPY.

So I am confused how you can possibly keep up with pairs because then you would have to know the economic factors that factor in on each pair that pertains the two currencies you are trading. Also, TA falls apart because if the laws of supply and demand are in effect, its doesnt matter if there are over bought or oversold conditions, the supply and demand is going to determine where price needs to be.

Maybe I’m lost and I am in one of those starting out crisis but its does make sense to me and through my practice trading, I have been shown this.

SOrry for the long post but just was something I wanted to get out there. See if anyone has anything to comment about it. Thanks guys/gals.

Adam

#2

Here’s a little sticking point in your thinking. In a general global sense, the strongest currencies on the planet are the ones with the greatest money supply. Think about the USD, the EUR, the JPY, etc. Their supply of money dwarfs that of the more regional currencies, but the demand for the majors due to international monetary transfers, trade, etc. by far offsets the larger supply.

To say that banks, companies, etc. could possibly flood or dry up the supply of a currency is well off the mark. Money supply is a function of economic processes involving lending and deposits. The process of forex trading (in terms of speculation anyway) is money supply neutral.

…TA falls apart because if the laws of supply and demand are in effect, its doesnt matter if there are over bought or oversold conditions, the supply and demand is going to determine where price needs to be.

When you speak of TA in terms of overbought/oversold you are speaking only of one small portion of the TA approach (one I do not subscribe much too myself). Forex prices track changes in the demand for a currency vis-a-vis other currencies (notice I did not include supply in this consideration because it really isn’t relevent as noted above). TA primarily uses price to indicate changes (or potential changes) in the demand for one currency vs another. Actually, more correctly, TA in forex is the analysis of market psychology regarding the value of one currency vs another since the perception of value (or the lack thereof) influences demand.

Remember, supply and demand cannot directly influence prices. They are only statistics. It is people and what they think that actually drive prices through their actions.

#3

Hey Rhodytrader,

I was kind of hoping you would look at this post and reply.

So if I understand you correctly, the supply of each currency does not matter in trading? “The process of forex trading (in terms of speculation anyway) is money supply neutral.”

If demand for a currency is high this drives the price higher, which would increase the supply of the other currency that is being sold off right?

I guess I am looking at too big of a picture here. When larger sums of money are traded for others for exchange of lets say exports and imports. Money has to be exchanged, and I see this affecting the supply and demand of each currency. That is people making that happen, which to me seems would alter the price of each due to this.

Do you know of any readings that would help me better understand?

As for my thought on TA. I understand that TA helps give you the psychology of the market, but for example say you base your indication of where price is going to go with your TA, you think you have it figured out but at the same time, another pair that holds a currency you are looking at has a different set of TA analysis. and there analysis is against your pair. It just seems there are so many other factors that can affect your current situation with what you just analyzed with your TA, with everyone else analyzing against you.

Sorry if this all sounds scrambled, its just the way I understand it. Again thanks for your time and help.

Adam

#4

I would say money supply does matter but not quite how you put it. Forgetting forex the price of money tends to be the interest rate which central banks target these days and by doing so are either directly or indirectly impacting the money supply. We know that interest rates move currencies so it does work a full circle and there are all sorts of figures which come out where people are looking at the money supply�. Monetarists would also say that inflation is some sort of function of the money supply.
I�m not too sure if this is what you are really thinking of and I agree with rhodytrader that the money supply can�t possibly flood or dry up.
However what you said has some merit. When I was first introduced fx it was explained to me that about 1% of fx trading is for international trade purposes 99% for speculation but speculative flows are short term and therefore we would like to learn more about the trade flows to learn a long term trend. That�s why balance of payments and associated trade flows are so important even though they will count for little of the volume.

To my mind I used to dismiss TA but so many people use it that it becomes self-perpetuating and you�d be a fool not to look at it even it is not what you base your decisions off!

It�s a complicated world out there so good luck!!!

#5

You can’t think of forex transactions the way you would for stocks or anything like that. In forex you’re exchanging one currency for the other. Trader A is giving Trader B one currency and receiving another one back. Supply remains constant for both currencies.

Now, if more people are trying to aquire a currency they are increasing the demand for it. On the flipside, if the majority is trying to get rid of a currency, they are decreasing demand for it, and increasing demand for other currencies against it.

Do you know of any readings that would help me better understand?

Can’t think of anything off the top of my head that I would recommend, but give me some time and I might recall something.

As for my thought on TA. I understand that TA helps give you the psychology of the market, but for example say you base your indication of where price is going to go with your TA, you think you have it figured out but at the same time, another pair that holds a currency you are looking at has a different set of TA analysis. and there analysis is against your pair. It just seems there are so many other factors that can affect your current situation with what you just analyzed with your TA, with everyone else analyzing against you.

You need to realize that when you use TA (or any approach) to analyze a specific currency pair, say EUR/JPY, then you focus is 100% on the relative value of those two currencies against each other. Yes, something might happen that influences EUR from a different angle, but so long as that thing doesn’t influence the market’s view on the relative value of the JPY against the EUR, then there won’t be a meaningful change in EUR/JPY.

Your analysis of EUR/JPY is not necessarily related to your analysis of EUR/GBP, because different things can influence those two different sets of relationships. You might think events are working to make EUR stronger (rising rates, good economic growth, etc.), but if the pair you are looking at is EUR/JPY, then that strength only matters in comparisson to what is happening in JPY in that regard.

Does that make sense?

#6

Hello.

Thanks to the both of you for your replies. Believe me, I realize how complicated this can be.

Okay. I kind of want to pinpoint my situation or you can say experience with my own trading that brings about the questions I have been asking. I am going to try to make this as sensible as possible since I am writing this straight from thought, it might not make much sense to you.

You always see every one in forums, websites talking about using TA. I always based most of my decisions directly to my TA. Then you learn a little more and you find that both a little TA and Fundamentals can help your accuracy.

Now, for my trading I would constantly put on trades that followed the rules of the system, be it mine or someone elses that I was testing. I noticed I was losing a lot but the system was being followed and the money management was being followed. I started realizing that most of my losses came from economic data and it shifted the directions of price movement. Ok, so I started to think I needed to follow medium-high impact news data when ever it was coming out to make better decisions with my TA. Well I then noticed that there is data for your pairs about everyday that has some kind of medium-high impact and they all have different times they come out. I was thinking to myself how can I ever judge the direction for my TA if there is constant economic conditions coming out and could be opposite to what my TA says. Thats why I started to think that the TA is useless unless you were using a very long term approach such as buy and hold.

I don’t know, I’m just lost right now and my approaches have all failed (in my sense- more losing than winning, even with strict money managment).
The economic unknown is what is getting me because it is having great influence on my TA decisions.

#7

Don’t confuse data releases and the like with fundamentals/economics. Fundamental analysis is taking a look at the bigger picture in terms of economics and whatnot. The price moves that happen around data releases is mostly psychological. It’s just a reaction to whether the release matches or deviates from expectations and is generally only a short-term thing.

If you trade short-term, you probably want to avoid holding positions into a release because that is essentially gambling. Longer-term traders are not impacted by release driven trading.

#8

Thank you.
After doing some searching on the forums, I jsut realized I have asked this question before (301 Moved Permanently)
I guess I never did quite get it.

You say on your page that Fundamentals is looking at the countries economic outlook such as GDP, interest rates, etc… but isn
t that what these “news” events are telling us? If the BOE wants to raise interest rates then we hear about it from the news am I correct? So wouldn’t you make a decision in what you hear out of the news releases since that is fundamental information from that country? Thanks again for the help and I am reading up on several of your articles on your page.

Adam

#9

When taken all together, news and data is fundamental analysis. That is true. Any individual data release, announcement, or whatever, though, is just a blip that provides you part of the picture. Data releases are volatile and often revised. If you were to base your fundamental analysis on one report, you would be bouncing around all over the place.

Granted, there are sometimes key events that alter the fundamental landscape. They are very few, though. News and data releases essentially just help you paint the picture.

#10

Goto elliottwaves.com and take thier free lesson on elliot waves. They dive into some of the questions you have been asking here. They explain how supply and demand work with the market.