ABE COFNAS Planet Forex Abe Cofnas Planet Forex Currency Trading in the Digital Age Abe Cofnas Learn4X Longwood, FL, USA ISBN 978-3-319-92912-5 ISBN 978-3-319-92913-2 (eBook) https://doi.org/10.1007/978-3-319-92913-2 Library of Congress Control Number: 2018949048 © The Editor(s) (if applicable) and The Author(s) 2018 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover image © Creative-Touch / Getty Images Cover design by Thomas Howey Printed on acid-free paper This Palgrave Macmillan imprint is published by the registered company Springer International Publishing AG part of Springer Nature. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface This book is about the intersection of fundamentals, sentiment, and tech- nical analysis in the currency markets. It is written for people who are interested in gaining an edge in forex trading. In particular, for traders who are beginning to test the waters in currency trading, it provides guid- ance on how to integrate fundamental knowledge to better assess price action. For the more experienced trader who has focused mainly on tech- nical analysis, our objective is to supplement technical analysis trading with insights into which fundamental forces are impacting price move- ments. This book aims to assist traders to develop and apply a fundamen- tal and sentiment mind-set to trading currency markets. Let us think back to just before the year 2000. That was the era of dedi- cated phone lines and green screen monitors at brokerage firms. Markets were slow. As a result, the prevailing strategy was “buy and hold.” In this era, traders were at the mercy of their brokers. Information was in asym- metrical pockets of knowledge. Then the rise of computers and the inter- net destroyed the old order and changed the world of trading. Today, information is now everywhere and mostly free. But the data flow is often unreliable and mixed with rumors and hyperbole. Yet trading execution is lightning fast and as a result markets move equally fast in reaction. In today’s fast-paced globalized world of information, integrating fun- damental analysis with technical analysis is more important than ever before. The digital era has made trading at the same time easier, as data v vi Preface acquisition and trading can be done anywhere, from the beaches of Miami, to the streets of Mumbai. Smart devices enable instant trading. Yet, trading is also more complicated because markets are more complex than ever before, and more volatile as news acts as information shocks and cascades quickly through cross market asset classes. John Netto, a leading trader states: Globalization has created a swath of financial news sources, social media outlets, and inexpensive research available on the internet. This informa- tion has created a new balance, changing global macro investing from a long-term strategy focused on large thematic bets to being woven in the day-to-day price action of every asset class at every price level. The markets eat, breathe, and run on global macro themes … The interconnectivity of the world has melded global macro investing philosophies into all other investment philosophies to the point they are inseparable.1 In the age of the internet, trading experience presents many challenges to traders and one is reminded of the ancient saying in the Book of Ecclesiastes that “there is no wisdom without pain.” Currency traders experience several pain points in their journey into trading. The first is selecting the wrong pair to trade. A second pain point is putting on a trade in the wrong direction. Having targets that are based on belief rather than on evidence is a very important third pain point. Finally, after achieving a profitable trade, many traders get out too early. These pain points are very much the result of a false dichotomy that pos- tulates there is a difference between fundamental and technical analysis, or that all one needs is technical analysis to trade currency markets. A goal of this book is also to provide forex traders with what they need to know to reduce the time it takes to become good enough at forex train- ing to treat it as a profession. Malcom Gladwell famously referred to 10,000 hours as the amount of time necessary to become an expert. In chess, Garry Kasparov has referenced 10,000 patterns or 50,000 positions. For forex traders, this book on trading fundamentals and sentiment pat- terns will hopefully build the skills for successful trading in far less time. 1 The Global Macro Edge, The Pelican Trader, 2016 John Netto, Page 13. Prefac e vii Ultimately, a successful trader is one who is not only profitable, but is able to adapt to a changing global landscape. In today’s digital trading environment, the attributes of trader fitness must include an understand- ing of fundamental forces, sentiment patterns, and technical analysis. FL, USA Abe Cofnas Contents 1 W hat is Fundamental Analysis? 1 2 C ore Fundamental Forces and How to Monitor Them 13 3 U nderstanding Central Banks and their Role in Moving Currency Markets 33 4 H ow to Decode Central Bank Statements 41 5 What is Sentiment? 51 6 Sentiment Trading Set-Ups 65 7 Cryptocurrencies 79 8 T he Future of Forex Trading: Algorithms, Artificial Intelligence, and Social Forex Trading 91 ix x Contents C onclusion 97 Appendix: Resources for Sentiment Trading and Training 99 Index 101 List of Charts Chart 1.1 Resistance and support is hard to locate 5 Chart 1.2 Triangles, and channels 6 Chart 1.3 Vague bounce and breaks around Fibonacci levels 8 Chart 1.4 Jackson Pollock-inspired chart 9 Chart 1.5 Trade set-ups generate low signal/noise 10 Chart 2.1 Bitcoin BTC 17 Chart 2.2 Nov 2, 2017 Bank of England raises rates for first time since Brexit! 19 Chart 2.3 The US dollar index 21 Chart 2.4 VIX volatility 23 Chart 2.5 Yen and the US elections 24 Chart 2.6 Gold and crises 26 Chart 2.7 Inflation expectations shown in ETF 28 Chart 2.8 Crude oil on the rise 30 Chart 2.9 Dow Jones Commodity Price Index 31 Chart 3.1 Initial GBPUSD shock wave reaction to Brexit 39 Chart 4.1 Bank of England statements and key word frequencies 43 Chart 4.2 Bank of England statement word clouds 45 Chart 5.1 Candlesticks 54 Chart 5.2 Line chart 55 Chart 5.3 Generic price break chart 56 Chart 5.4 Three-line break day chart 58 Chart 5.5 Three-line break four-hour chart 59 xi