Financially, the correlation is generally considered as a statistical measurement that indicates how two different values move, one with respect to the other. In the currency market, the correlation is used to help calculate the correlation coefficient, which has a value that varies between -1 and +1; a coefficient of +1 is incredibly rare and is the result of the perfect positive correlation, which means that as one currency increases or decreases in value, the other does the same all the time. Conversely, a perfect negative correlation, called -1, will ensure that the price of one value increases or decreases in perfect opposition to the other. The correlation coefficients 0 indicate that the movements are completely random and have no correlation. Perfect correlations almost never happen between values. The correlations should not rely exclusively on the signals of purchase and sale; instead, correlations should be considered in conjunction with other market indicators.
The general direction in which an asset or market is moving is called a trend . The trends can be short-term or long-term; they can also be medium or intermediate, in terms of length. If the trend can be identified, it can be very profitable because the broker can then “negotiate with the trend” to maximize their returns.In general, negotiating with the trend tends to be the easiest and most profitable strategy of foreign exchange operations. If the market or value has a general upward trend, it is not advisable to invest in that trend when it reverses. Negotiating with the trend can be one of the most effective strategies for Forex trading and is especially useful for beginning traders.
Support and resistance
According to the Licensed Australian forex brokers : When an action or value can not repeatedly, rise above a certain point, this is known as the resistance level. The resistance level can also be referred to as the ceiling, because the prices seem to be trapped beneath it. Prices that do not fall below a certain point are known as support. This can also be referred to as the floor, since it acts to prevent the price of an asset from being pushed down beyond a certain point.Both – ceiling and floor – are important indicators for the price of an asset, but they must be taken into consideration with other indicators of the future potential price and the movement of the asset market.
In technical analysis, the moving average is a useful indicator that helps smooth the action of a price, acting as a filter that eliminates the background noise of risky fluctuation of prices. Moving averages are late indicators that follow trends based on previous prices. There are two types of moving averages that are used more frequently; these are the simple moving average, or SMA, which makes simple averages of values over certain specific time periods, and the exponential moving average, or EMA, which uses a formula that gives more weight to the most recent prices. Moving averages, called MAs, are commonly used to identify the directions of trends, as well as to determine the level of resistance and support.
Relative Strength Indicator (IFR)
The Relative Strength Indicator or IFR is a technical impulse index that makes comparisons between the magnitude of recently achieved gains versus recent losses in an effort to determine whether some assets are being overbought or oversold. Stockbrokers using the IFR must take into account that large increases and falls in the prices of an asset can cause false signals of purchase and sale. It is a good complementary tool to use it along with other tools to choose the actions. Some of the indicators that should be considered together with the relative strength indicator are support and resistance levels and market trends.
Basic strategy to negotiate with the trend
Negotiating with trends is a negotiation strategy that seeks to increase returns by analyzing the dynamics of a particular value to determine its direction. To trade with the trend, traders should enter the long position when the price is in an upward trend and in the short position when the trend is downward. The strategy works on the principle that asset prices continue their movement up or down in a short, intermediate or longer term. Once an operator opts for the long or short position, he will maintain that position until the trend begins to reverse. When trends begin to reverse, brokers should take steps to ensure that their investment is not lost.
The carry operation involves selling some specific currencies for their lower interest rates and buying others with higher interest rates. The operator benefits by acquiring the difference between these rates, which has the potential to be a substantial sum, especially taking into account the use of various types of leverage. The risks associated with the carry operation usually focus on the uncertainty presented by the exchange rates. If one of the currencies of the pair falls below the value of the other, the operator may lose his investment. The carry operations are usually done using some leverage, which means that even small movements in the exchange rates can end up translating into huge losses, unless the position has been adequately covered.
In the securities market, managing risk includes identifying, analyzing and accepting or mitigating uncertainty when making decisions regarding the investment. This is an essential part of the transaction for serious investors and fund managers, as it is an attempt to quantify the potential loss and take (or not take) measures according to their investment objectives and risk tolerance. Insufficient risk management can lead to losses and excessive consequences that are very serious for both companies and individuals.The recession of 2008 owes some of its roots to the insufficient management of risk, associated with the granting of loans to borrowers who were not properly qualified. Managing risk consists of two different steps; First, determine what risks are inherent to the investment, and then implement strategies that suit your specific objectives.