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CPI – Consumer Price Index

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What is CPI – Consumer Price Index

The consumer price index is an economic indicator or a metric that measures weighted average of changes in prices in a selected basket of consumer goods and services such as medical provision, food and energy. The indicator is a statistical estimate, which uses the prices of a basket of goods or services to create a sample representative of the good’s price change.

Consumer price index is calculated by assessing the changes in prices of each good and services in the sample basket of good and weighting them. The goods and services are weighted based on their importance. For example, a household’s expenditure on foods has more significance than entertainment expenditure. CPI is mostly representative of the changes in the cost of living, as it is one of the most prominent metrics used for identifying levels of inflation or deflation.

CPI’s Significance in the Forex Market

CPI, as a fundamental economic indicator, measures inflation levels in an economy. Since inflation has a direct relation with the economy’s currency, it has become one of the most important and closely tracked indicators for currency traders. Furthermore, CPI has a direct impact on the Forex market, as economic reports tend to result in significant movement in price action in the Forex market.

CPI is also known as headline inflation. This is due to its ability to track the level of inflation, cost of living, changes in aggregate wage levels, and ultimately determine price changes to reflect the market conditions for businesses. Since inflation has an inverse relationship with the real value of money or the purchasing power of money, central banks use it to determine inflation levels and try to control it through monetary policy, i.e. interest rates.

All of this makes the CPI data extremely important for Forex traders. It can provide the trader with insights into the government or central bank’s intentions of influencing the economy through monetary policy, especially when the information deviates from the government’s economic objectives.

So if the consumer price index is above the market’s expected number, it can, in most cases, leads to increase in value of the economy’s currency compared to other currencies. However, if the CPI is lower than the market’s expectations, then traders take that as a sign of weakness and an impending devaluation of the currency. Moreover, aside from deviations of the expected number causing shifts in market sentiment, revisions in the consumer price index also has a huge impact on the Forex market, as the new data provides fresh perspective on the market.

Due to all of these reasons, Core CPI and CPI are considered as the most observed fundamental indicators for Forex traders. One could even consider it an equivalent to P/E ratio in investment valuation for stock market investments, which is the most prominent fundamental financial indicator, distinguishing growth stocks from the rest. The Core CPI also has significance for Forex traders as it excludes highly volatile elements from the calculation such as food and energy goods and therefore better indicate the underlying the inflationary trend in an economy.

Conclusion

The CPI is considered as one of the most important indicators, as far as market movements and monetary policy is concerned. If you’re a Forex trader, consider assessing both fixed and chain-weighted consumer price index for better understanding of the Forex market.

Leverage – Margin Trading in FOREX

What is Leverage, How Does it Affect Trading Margin

One of the main reasons why such a huge number of traders and investors are attracted to the forex market is due to the significantly larger amount of leverage that is available to forex trader. In this article, I will be explaining what exactly leverage is and how it affects your margin.

A leveraged position in the market involves borrowing a certain amount of money that is needed for the position. In the case of forex trading, the amount is usually borrowed from the broker. Forex trading offers higher leverage, as it has a smaller initial margin requirement, which the trader can utilize and build up huge amounts of money (but the opposite can be true too!).

When an individual decides to trade in the forex market, they are required to open up a margin account. Their margin represents their ability to leverage money for trades. Traditionally, the amount of leverage provided is usually from 1:100 and goes all the way up to 1:500 or even higher. This usually depends on the broker and the size of the trader’s account. A standard trade is executed on at least 100,000 units of currency, based on this size, the broker will provide a leverage. Leverages of 1:200-1:500 are mostly used for positions of $50,000 or less.

So to be able to trade 100,000 units of currencies while using a margin of 1%, a trader will have to deposit at least $1,000 into their margin account. The leverage on such a trade would be 1:100. Comparing that to the equity market, stock traders would be provided with a 1:2, 1:15 or 1:25 on the futures market. Although, it may seem extremely risky with the 1:100 leverage, but the currencies market usually experiences a price movement of less than 1%. Since currencies have larger implication and constraints they simply cannot fluctuate as much as stocks or commodities, unless an economy was in impending doom.

Forex Leverage FxStartup

What is Leverage, How Does it Affect Trading Margin

One of the main reasons why such a huge number of traders and investors are attracted to the forex market is due to the significantly larger amount of leverage that is available to forex trader. In this article, I will be explaining what exactly leverage is and how it affects your margin.

A leveraged position in the market involves borrowing a certain amount of money that is needed for the position. In the case of forex trading, the amount is usually borrowed from the broker. Forex trading offers higher leverage, as it has a smaller initial margin requirement, which the trader can utilize and build up huge amounts of money (but the opposite can be true too!).

When an individual decides to trade in the forex market, they are required to open up a margin account. Their margin represents their ability to leverage money for trades. Traditionally, the amount of leverage provided is usually from 1:100 and goes all the way up to 1:500 or even higher. This usually depends on the broker and the size of the trader’s account. A standard trade is executed on at least 100,000 units of currency, based on this size, the broker will provide a leverage. Leverages of 1:200-1:500 are mostly used for positions of $50,000 or less.

So to be able to trade 100,000 units of currencies while using a margin of 1%, a trader will have to deposit at least $1,000 into their margin account. The leverage on such a trade would be 1:100. Comparing that to the equity market, stock traders would be provided with a 1:2, 1:15 or 1:25 on the futures market. Although, it may seem extremely risky with the 1:100 leverage, but the currencies market usually experiences a price movement of less than 1%. Since currencies have larger implication and constraints they simply cannot fluctuate as much as stocks or commodities, unless an economy was in impending doom.

Tips When Using Leverage

Although, the prospect of generating huge profits without directly risking your own money may seem extremely tempting, always remember that excess leverage can result in a margin call. Margin call is when you have run out of margin in your account and your broker either asks you to deposit further margin or closes your position (Stop-Out) and you lose all your money.

Therefore a few safety precautions should always be taken to mitigate the risks associated with leveraged trading:

  • Limit your profits. This is one of the most important things you need to remember if you want to make large profits someday. Leverage trading can easily erode your equity drastically.
  • Learn to strategically use stop orders. Stops can be used to prevent huge losses in the case that price moves against your position and it can also help you take profits without continuously monitoring the market.
  • Understand your comfort level and use leverage appropriate to that. Remember, even a 1:50 leverage can completely wipe out your entire margin with a meager 2% price movement. Just because you can avail 1:50 or more, shouldn’t mean you should do so. Understand your position and utilize it to your benefit.

Conclusion

Being able to trade on leverage is an excellent option for a forex trader to have, as it can allow you to take huge profits and build up your margin. If you’re going to trade in the forex market on leverage, do so with safety precautions and mitigate your risks.

Fundamentals of the Forex Market

fundamentals forex market

“I’ve often found myself having to answer the questions “what do you do exactly?” and “Why is it important?”. Well…”

The foreign exchange market, also known as the currency or forex market, is a decentralized global market for the exchange of different global currencies. It is considered by far as the largest aggregate market of buyers and sellers in the world.

Although the main market participants involved in the forex market are institutional investors and large multi-national banks, it is open to literally anyone interested in trading foreign currencies, including individual investors. Unlike equity markets, there is no particular entity or exchange regulating the market; instead, several different financial centers around the globe function together to comprise the foreign exchange market. The decentralized market experiences a wide range of different buyers and sellers from across the world. Hence, market activity literally takes place throughout week, with the exception of weekends. The forex market is responsible for determining the relative value of various currencies across different economies and jurisdictions.

Why Does the World need a Foreign Exchange Market

The world needs a foreign exchange market to facilitate the sale and purchase of different national currencies. It exists because each country has its own national currency. To facilitate global trade, foreign exchange trading/dealing had to be formed. It allows us to determine the value of each currency compared to another, while allowing transference of risk.

Forex Market Participants

Unlike the stock market, where individual investors are either trading with institutional investors or other individual investors, there are a lot more parties involved in the forex market, all of whom could be participating for different reasons. The following will help you understand the functions and motivations of the main market participants.

Central Banks and Governments

Governments and central banks are the most influential participants in the forex markets. Central banks are an extension of a government, which are responsible to conduct governmental monetary policies. They are often involved in the maintenance of foreign currency reserves in accordance with the country’s economic goals. For example, ever since the Yuan was pegged against the dollar, China has been involved in shoring up US Treasury bills, worth millions of dollars to maintain its desired exchange rate. Since governments have extremely deep pockets, their involvement in the market has a significant impact.

Banks and Financial Institutions

Commercial banks and other financial institutions are probably the second largest participants in the forex market. For instance, an individual’s need for foreign currency will look pale in comparison with the amount of money traded between different banks. This is known as the interbank market. Banks operate with the forex market as dealers, as they will buy and sell a currency simply to sell it at slightly higher rates.

Hedgers – Risk Management

One of the biggest issues faced by businesses with cross border operations is the volatility within the foreign exchange market. The risk associated with currency fluctuations is a huge problem for multi-national corporations. Therefore, such businesses safeguard against uncertainty by employing hedging strategies, which allows them to lock in a specific exchange rate for the future. In the case that the exchange rate of a currency pair fluctuates, they will be unaffected by it; meaning they would have eliminated most of the potential losses or gains.

Speculators

Speculators are those participants that try to take advantage of the fluctuations in the exchange rate and make money by forecasting future price movements. Hedge funds are one of the largest and most controversial participants involved in speculator practices. Since these funds can take large positions in the market, their involvement can have a huge impact on the forex market. They also often impact the market simply because what they do, others follow.