A v rajwade forex charts
First, the past is no certain guide to the future …….. Second, if some level is not going to be reached, why are you being paid for taking the risk of its reaching that level? In any case, there are few stable relationships between cause and effect as we saw in Chapter 3.
Too often, the dollar goes up or down for no reason other than that it has gone up or down! In our view, for most companies, it is not advisable to look at treasury as an active profit centre: a large number of cases of huge losses have been reported in both the domestic and the global market, by companies looking at treasury as a profit centre. Besides, the need for effective controls cannot be over-emphasised. If fundamentals are useless in predicting exchange rates, if technical analysis is not of much use, the forward rate as a predictor of the future spot rate has proved equally unreliable.
Most research suggests that it is not even an unbiased indicator, that is, one which errs on both sides more or less equally. To cite one of many examples, through the period over which the dollar doubled in value against most major currencies, it was continuously at a discount in the forward market, given the high United States interest rates. More recently, between April and August , when the yen moved for JPY 89 to a dollar to JPY , it was continuously at a premium in the forward market.
References 1. International Finance, November. Indeed, hedging is the exact opposite of trading or speculation. The distinction is also important given the fact that, in general, exchange regulations in India permit use of derivatives only for hedging there is one exception: the currency futures market can be used by any Indian entity for trading as well.
Again, hedge accounting rules prescribed by Accounting Standard 30 are applicable only if the derivative qualifies as an effective hedge, a point discussed in detail in a later Chapter. Clarity on the various issues is essential for financing risk management policies, an integral part of corporate governance.
In this chapter, we discuss and define these concepts and focus on the regulatory and governance issues involved. Price risk can, in general terms, be defined as the uncertainty of outcome resulting from changes in market prices. To take a simple example, while deciding to import steel, the importer thought that a dollar would cost Rs By the time of payment for the import, the dollar may well be worth more or less than Rs. In the cited example, the possibility of the unfavourable movement is the currency fluctuation risk.
The example also shows that the other side of the risk coin is reward, should the exchange rate movement be in a favourable direction. Risk is no doubt uncertainty of future prices but of a particular type: namely prices whose probability distribution on a future date, can be estimated with a reasonable degree of reliability. Indeed, it is the probability distribution which allows measurement of risks which is at the heart of risk management.
In Chapter 1, we have classified currency fluctuation risks into three types—transaction exposures, translation exposures and economic exposures. Broadly speaking, economic exposures are not considered as hedgeable risks in terms of both the regulatory and accounting standard definitions; in contrast, transaction and translation exposures are hedgeable risks.
To be sure, the RBI has defined hedge effectiveness in relation to interest rate futures, a point we would come to later. We therefore need to go to other sources for defining the term. Eiteman, Arthur I. Stonehill, Michael H. Hedges are undertaken to reduce risk by protecting an owner from loss.
It would be evident from the above definitions that hedging cannot be aimed at either saving costs or earning profits; it is a transaction undertaken to reduce price or exchange risk, defined as the uncertainty of outcome; the 50 Currency Exposures and Derivatives risk of prices moving adversely. Saving in costs or earning profits through currency fluctuations, as a rule, requires one to deliberately take risks — this is trading or speculation, and not hedging.
While hedging may lead to prices or exchange rates more beneficial than the prices of unhedged exposures, this is not the primary objective of hedging a risk: in any case, such an outcome will be known only after the event!
Another qualitative criterion follows from the definition of hedging. The change in the value of the underlying exposure and the hedge i. There is an obvious confusion about the concept of hedging: hedging can never be a tool for making money either through reducing cost or increasing earnings. To make money, you need to speculate, take risks, not reduce them by hedging!
Confusing the two is dangerous! The regulations are notified in the Gazette of India, then communicated to Authorised Dealers, i. This is available on the RBI website. The scheme of exchange regulations in India casts a lot of responsibility on the Authorised Dealers who, in effect, are agents of the RBI for implementation of the regulatory framework.
This is reflected in the fact that persons in India can undertake a foreign exchange transaction only with an Authorised Dealer. The regulations keep changing from time to time as circumstances warrant. Nevertheless, the contents of the following paragraphs 4. Hedging, Trading and Risk Management Regulatory All forward contracts, involving the rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of tenor, may be allowed to be cancelled and rebooked freely….
AD Category—I banks should not offer leveraged swap structures. AD Category—I banks should not allow the swap route to become a surrogate for forward contracts for those users who do not qualify for forward cover.
The risk in an unhedged dollar payable is that of the rupee depreciating against the dollar. In fact, the transaction has created a USD: JPY risk which did not exist and, therefore, on first principles, this is a speculative transaction: the stricter definitions of hedge in AS30 will surely consider it so. It is also important to note that, for regulatory purposes, under ratio range forward contracts, the higher notional whether of bought or sold options needs to be earmarked against the underlying exposure.
Rupee: Dollar options The following points from Annexure VII of the Master Circular are particularly important: c For the present, A D category—I banks can offer only plain vanilla European options… h All the conditions applicable for booking, rolling over and cancellation of forward contracts would be applicable to option contracts also….
Definitions of these generic derivatives are provided in the Appendix A. Price fixing and offset hedges Particular attention is invited to the following paragraph in Annexure X to the Master Circular. The focus of hedge transactions shall be on risk containment.
Only offset hedge is permitted To elaborate, we quote hereunder an extract from the report of the R. In offset hedge, the physical exposure precedes or is co-terminus with the financial exposure assumed on the futures market. Price-fixing hedge arises when hedgers are not balancing their books against physical contracts but are securing protecting profits on anticipated business.
In the process the firm tries to remove the uncertain element from its business by buying or selling goods at prices that will allow them to make profits given their own business circumstances. There is sometimes a thin dividing line between hedging and speculation. Companies will have to frame definite policies on the matter of overhedging or underhedging as both are a form of speculation, and clear procedures have to be laid down as to how to get out of the situation.
General In Chapter 6, we discuss some actual cases of derivatives termed as hedges, but in substance, creating speculative exposures. It is the exact opposite of hedging. It should be noted that repeatedly canceling and rebooking hedges, even if permitted by regulations, is in substance a speculative activity, and the questions raised above apply equally to it.
While there may be no violation of either the regulations or the objects clause in leaving exposures unhedged, this should be done within the framework of a risk management policy. For listed companies, clause 49 of the listing agreement requires the framing of appropriate risk management policies, and casts the responsibility on the board.
While we discuss such policy frameworks for short term and medium term exposures in the subsequent chapter, the essential elements of any policy would be risk identification, risk measurement and risk control: indeed, these are the pillars of risk management of any trading or speculative activity. Banks, which are by far the largest traders in the currency market, have extremely rigid risk measurement and control systems, which alone allow them to make profits.
In fact, it is not so much the predictive ability as the discipline of cutting losses that is at the heart of successful speculation. Speculation requires that the company should be in a position to continuously mark-to-market the value of the derivative contract—then alone will it be possible to use stop loss reversals.
Trading also requires extremely effective internal control systems, with their implementation monitored by independent and knowledgeable professionals outside the treasury. This means that a company with a foreign currency payable could have written a put option on the currency in favour of the bank with a notional principal not exceeding the unhedged payable. Consider that a company has a dollar payable, and writes a covered put thereagainst at a strike of Rs. To be sure, this is less than the loss compared to an unhedged position.
On the other hand, if, on maturity, the rate is say Rs. There is no way to predict this. It could be argued that covered options could be written beneficially if there is a strong expectation of a favouable price movement. But, in that case, you are better off leaving the exposure unhedged rather than writing Hedging, Trading and Risk Management Regulatory Remember, writing an option is like writing an insurance policy: claims can be much higher than the premium earned.
It does not limit the risk of adverse movement in any way. One key issue on which a conscious decision needs to be made while drawing up a policy is whether to hedge the possibility of transaction or translation losses or only the accounting losses.
In principle, everybody accepts that the accounting standard should not become a disincentive to optimum risk management; in fact, it has become so! Given the accounting rules, most of the times, the two cannot be managed simultaneously. Introduction: After globalization, the financial markets have witnessed extreme volatility, both internationally and domestically. The sector, in which the volatility has been observed most, is foreign currency market.
These unexpected changes in the exchange rates give rise to exposure which directly affects profitability of the corporate. Thus, role of Risk management has increased over a period of time. Risk is a part and parcel of any business activity and currency risk becomes more pronounced particularly for those corporate involved into cross border trade. To overcome such risks, corporates are resorting to Hedging techniques.
Here it is pointed out that speculation is a risk taking activity whereas hedging is a risk avoidance technique. Derivatives are means of managing risk and are of use to participants or traders wishing to reduce or minimize impact of such risks in cross border trade transactions.
The commonly used hedging tools are Forwards, Futures and Options. The very purpose of the present research paper is to undertake a study of hedging strategies adopted by the corporates for managing currency risk and the research also aims to come out with some guidelines to select a particular hedging tool in a given situation. Review of Literature: The researcher has reviewed the available literature of Research papers. The summary is as follows: Reeta The researcher has carried out rigorous review of literature.
Manufacturing companies classify risk as business risk and financial risk. Larger firms uses derivatives than small and medium firms. The use of derivatives is the greatest among international firms. The concern is about disclosure of derivative activity. Cost of maintaining derivatives programme is more than benefits.
Forex risk is commonly managed by derivatives. Firms having more growth opportunities and tighter financial constraints use derivatives. Swaps are used for interest rate contracts while forward and futures for currency contracts. Firms risk declines by derivative use. Leverage, size and liquidity are factors considered to use derivatives Against this background, the current research work is carried out with the following objectives: IV.
BLUES RANGERS GAME
The bars or lines on the chart might also be coloured red or green, to indicate whether the currency pair price is higher or lower than when trading opened, or when you personally opened your position. By using a detailed live chart you can detect the early stages of price movements and buy or sell accordingly. By zooming out and taking the longer view, you can identify patterns in currency pair prices that can help inform your trading strategy. Being able to identify patterns and correlations such as this is absolutely crucial for profitable forex trading.
No matter what forex trading platform or broker that you use, you will be exposed to various different types of forex trading charts. None of these are inherently better than the other, and all are used every single day by top traders in Wall Street and the City of London. However, you might find that one particular type of forex chart is easier to read than another.
Line Chart What is a Line Chart? A line chart is by far the simplest of all forex charts out there. As you probably guessed, it is a basic line graph, one that only plots the closing price of a currency pair from one day to the next. How to Use a Line Chart in Forex Trading In forex trading, a line chart is better for those who are trying to get an idea of the bigger picture. They will not tell you anything about how a forex pair changes throughout the trading day, therefore they are ideal for those trying to get a comprehensive view of the historical relationship between two currencies.
How to Read a Line Chart A line chart does not have the same level of detail as some other types of charts and is, therefore, easier to read. The x-axis will show each day, week, or month that the line represents, while the y-axis will represent the closing prices. Each connecting point in the line represents the price at which a particular currency pair closed on that day.
Pros Simply, easy to understand, and highly accessible Ideal for quickly assessing historical price changes between currencies Cons Very little data is actually included in a line chart Not possible to see inter-day price changes on a line chart Bar Chart What is a Bar Chart? Each point on the chart tells you both the opening price of a currency pair and the closing price of that same pair within a certain period, usually within a day.
A bar chart can, therefore, give a more detailed picture of the price relationship between a currency pair. How to Use a Bar Chart in Forex Trading A bar chart is incredibly useful as it allows you to easily see gaps and single out individual time periods, as the bars ensure that nothing overlaps. They can allow you to identify when a currency price has closed above a crucial point, thus signifying a potential breakout.
By looking at the inter-day price changes set against a wider trend, you can better understand the daily factors that influence a currency pair while keeping an eye out for longer-term trends. How to Read a Bar Chart A bar chart consists of a horizontal line of bars, with the bars each lying vertically across the chart. Each bar will usually represent a time period, such as a trading day. The height or the top of the bar will represent the highest price reached by the currency pair during the trading day.
The lowest point of the bar will, conversely, show the lowest price reached by that pair during the same day. In addition, the line dash on the left side of each bar represents the price of the pair at the opening of the day, while the dash on the right side of each bar represents the closing price of the day.
Pros Great for assessing detailed price movements throughout the day Can allow you to identify emerging trends Cons Not as helpful when trying to see live price changes Some bar charts only use a range of one day Candlesticks Chart What is a Candlestick Chart? A candlestick chart is the most advanced type of forex trading chart and contains the widest range of data.
It is the type of chart that you are most likely to see on the trading terminals of seasoned institutional traders and investors. Although they can initially seem difficult to read, it is easy to make sense of them once you understand the fundamentals. Here is how you can read and use a candlestick chart. How to Use a Candlestick Chart in Forex Trading Candlestick charts show you exactly which direction the market is moving in, with red bars representing a lower closing price than the opening price and green bars showing a positive price trajectory.
As a forex trader, you can use these helpful indicators to identify specifically whether a currency pair is heading towards a positive or negative trajectory. Furthermore, the price ranges identified by candlestick charts can help you determine whether a currency is due for a breakout moment. How to Read a Candlestick Chart Candlestick charts are very similar to bar charts, in that they give you the high and low price for each trading day as well as the opening and closing price of a currency pair.
Falling wedges form at the bottom of a downtrend whereas rising wedges form at the top of an uptrend. Directional wedges inform about the struggle between bulls and bears when the market is consolidating. For instance, a rising wedge in a downtrend is an indication that buyers are actively pushing the price higher, but they are forming higher lows faster than they are forming higher highs.
This is a signal of buyer exhaustion and prices are likely to break lower to resume the downtrend. Pennants Pennants usually signal a small pause in a strong trend. They form in the shape of triangles, but they are very brief, with the resulting move duplicating the movement that preceded the formation of the pennant. In an uptrend, a bullish pennant will form when a small period of consolidation is followed by a strong desire by bulls to drive prices higher.
It will be a signal that bulls are charged up for another strong push higher. Flags Flags form when prices consolidate after sharp trending moves. The preceding sharp trending move is known as a flagpole. In an uptrend, a flag pattern will form when prices consolidate by forming lower highs and lower lows to signal a period of profit-taking. A break outside the upper falling trendline will be a signal that bulls are ready to drive prices higher for the next phase.
Rectangle Chart Pattern A rectangle chart pattern is a continuation pattern that forms when the price is bound by parallel support and resistance levels during a strong trend. The pattern forms in both bullish and bearish trends. When a rectangle forms, traders look to place a trade in the direction of the dominant trend when the price breaks out of the range. When a breakout occurs, it is expected that the price will make a movement of at least the same size as the range.
This means that if a rectangle chart pattern forms in an uptrend, traders will look to place buy orders after the horizontal resistance is breached. The target price movement will be the size of the distance between the support and resistance lines.
Similarly, if a rectangle chart pattern forms in a downtrend, traders will look to place sell orders after the horizontal support is breached. Cup and Handle Chart Pattern The cup and handle chart pattern is a bullish continuation pattern that forms after a preceding uptrend to signal that upward momentum will continue after a period of price consolidation. The pattern consists of two parts: the cup and the handle. The handle is a period of price consolidation after the cup, and ideally, it should not drop below the cup which handle does?
When the cup and handle pattern forms, traders can look to place buy orders on either a breakout from the handle or a breakout off the highs of the cup. The first profit target is equal to the height of the cup formation, while stops can be placed below the handle. Gartley Chart Pattern Gartley is a popular harmonic chart pattern that delivers continuation signals based on Fibonacci levels.
Gartley patterns are preceded by either a significant high or low X , followed by the ABCD correction pattern. Here are the characteristics of a Gartley pattern: The initial directional move is from X to A. The price then reverses from A to B. This movement is usually The price reverses again in the direction of the trend from B to C. The final leg of the pattern is the reversal from C to D. At point D, traders will look to enter trades in the direction of the main trend the direction of XA.
The initial price targets are C and A, with the final target being A stop can be placed below X for the entire trade. Continuation chart patterns offer low risk, optimal price entry points for traders to join the direction of the dominant trend. Reversal Chart Patterns Reversal chart patterns form when a dominant trend is about to change course. If there is an uptrend, a reversal chart pattern signals that the market is about to turn lower; similarly, a reversal chart pattern in a downtrend signal that the market is about to turn higher.
The most common reversal chart patterns include straight and reverse head and shoulders, double tops and double bottoms, falling and rising wedges, as well as triple tops and triple bottoms. Reversal chart patterns happen after extended trending periods and signal price exhaustion and loss of momentum.
Head and Shoulders Patterns A straight head and shoulders pattern forms in an uptrend when the price makes three highs: the first and the third highs are almost similar in height shoulders , while the second high is higher head. A neckline is drawn to connect the lowest points of the troughs formed by the formation. A reverse head and shoulders forms in a downtrend, with the second low being lower than the first and third lows. The target price will be the distance between the neckline and the head when the price breaks above the neckline.
Double Tops and Double Bottoms Double tops and double bottoms form after the price makes two peaks or valleys after a strong trending move. They signal price exhaustion and a desire by the market to reverse the current trend. Price targets, when trading double tops and bottoms, are equal to the same height as the formation. Triple Tops and Triple Bottoms Similarly, triple tops and triple bottoms form after the price makes three peaks or valleys after a strong trending move.
They also signal fading momentum of the dominant trend and a desire for the market to change course. The height of the formation also serves as the price target for a reversal when the neckline is breached. Rounding Bottom Chart Pattern A rounding bottom is a bullish reversal pattern that forms during an extended downtrend, signalling that a change in the long-term trend is due.
The formation of the pattern implies that downward momentum is declining, and sellers are gradually losing the battle to buyers. Prices then begin to advance from the low point so as to complete the right half of the pattern, a process that takes roughly the same time it took the initial left half of the pattern to form. A bullish reversal is confirmed if prices break above the neckline of the pattern.
Traders will look to place buy orders after the breakout, with the profit target being the size of the actual pattern the distance between the neckline and the low of the pattern. It is important to note that reversal chart patterns require patience as they usually take a long time to play out. This is mainly because it requires a strong conviction before investors can fully back up the opposite trend.
Neutral Chart Patterns Neutral chart patterns occur in both trending and ranging markets, and they do not give any directional cue. Neutral chart patterns signal that a big move is about to happen in the market and traders should expect a price breakout in either direction. Symmetrical Triangles Symmetrical triangles are some of the most common neutral chart patterns. A symmetrical chart pattern forms when the price forms lower highs and higher lows. The slopes of the highs, as well as that of the lows, converge to form a triangle.
The formation illustrates that neither bulls nor bears are able to apply enough pressure to form a definitive trend. No group has an upper hand, and as the price converges, one of them may have to give in. With prices converging, buyers and sellers are pitted against each other. If buyers win, prices will break out upwards; if sellers win, prices will break out downwards. Traders watch neutral chart patterns without directional bias and seek to join the momentum of the new trend How to Use Chart Patterns for Trading Chart patterns are a graphical representation of the real-time demand and supply in the market.
This means that when a chart pattern forms, the subsequent price action determines whether it is a valid or invalid opportunity to trade or hold a position. With this information beforehand, traders can evaluate whether any trading opportunity that arises is worth trading. Opening positions based on price action Price action is usually defined as the footprint of money. Price action traders read and interpret raw price action and identify trading opportunities as they occur. Trading chart patterns is the highest form of price action analysis , and it helps traders to track trends as well as map out definitive support and resistance zones.
Unlike numerous technical analysis indicators that are inherently lagging in nature, chart patterns are actually leading and allow traders to time market opportunities effectively and efficiently.
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Forex Trading For Beginners Marking Up The Charts Putting It All Together!
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