So you need to understand how to determine market cycles if you want to become a successful trader. Lets discuss these market cycles now. The four major market cycles are: 1) Trending, 2) Consolidating, 3) Breaking out of a consolidation and 4) Corrective.

Remember the saying, Trend is your friend. Trending is when the market starts to move consistently in one direction either up or down. An uptrend means each higher high is higher than the previous high and each lower low is also higher from the previous low. Similarly for the down trend!

Consolidating is when the market is struck between two horizontal support and resistance levels. On a chart, it will look like a sideways horizontal line.

Now what is breaking out of a Consolidation? After the market has been consolidation for at least 20 bars Breaking out of a Consolidation is when there is a sharp increase or decrease in the price.

Corrective is a short sharp reverse in prices during a longer market trend. In addition to these four market cycles, many traders also use Elliott Wave Theory to determine waves which are also an indication of market cycles.

There are five Elliott waves and each one has its own relevance in determining the trading strategy. However, using Elliott Waves is somewhat advanced for most traders. You need to have a thorough understanding and ability to correctly determine which wave the market is in at that point.

Incorrectly identifying the market with either the four market cycles or by using the Elliot Waves can be a costly mistake. For example suppose the market is only in consolidation and you incorrectly determine that the market has entered a trend.

You might enter a trend trade and get immediately stopped out. Your best plan of action should be constant observation. Market experience is the best teacher and only overtime you will be able to correctly figure out the market cycle.

Right side of the chart is always an unknown quantity for the trader until it reveals itself. Hindsight is always perfect but trying to predict the markets can be an elusive and impossible endeavor.

The markets have four cycles just as there are four seasons in a year. You need to learn what the different market cycles are in addition to having a trading system. That means you should develop the skill of correctly identifying the different market cycles at the right time.

If you want to become a successful trader than you should be adapt at identifying the market cycle. Effectively identifying the market cycles is a skill that all successful traders have mastered. You need to learn how to adopt your approach to those cycles to remain profitable. For example in a choppy, sideways bracketed market, you need to adopt your system and rules so that you do not get whip sawed and stopped out a lot.

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Only 12 common currency countries out of these above 15 countries constitute the European Monetary Union (EMU). These 12 countries share a single monetary policy dictated by the European Central Bank (ECB). All these above countries share the common currency Euro except Denmark, Sweden and United Kingdom.

EMU has a highly developed and efficient fixed income, equity and the futures market. The EMU is the worlds second largest economic powerhouse after the United States. This makes EMU the second most attractive investment market for domestic and international investors.

US assets have had solid returns historically. United States absorbs something like 70% of the total foreign savings as a result. In the past, the EMU had difficulty in attracting foreign direct investment or large capital inflows. The primary reason was the United States. The present global financial crisis has hurt the US and EU economies deeply. It is expected that a major restructuring of the global financial system will take place eventually that makes EMU far more attractive.

However, with the EMU beginning to incorporate even more members in Eastern Europe, Euros importance is expected to increase. Induction of new members will further increase the size of EMU. The capital flows to Europe is expected to increase as well.

With foreign central banks expected to diversify their Euro reserve holdings even further, demand for Euro is expected to continue rising. EMU is in fact a trade driven and a capital flow driven economy. Trade is very important to the national economies within EMU.

EU exports comprise almost 20% of the world trade. While EU accounts for only 17% of the world imports! Because of the size of the EMUs trade with the rest of the world, it has significant power in the international trade arena. Unlike United States, EMU does not have large trade deficit or surplus.

Both EU and the United States are two very important members of the World Trade organization (WTO). United States is the largest trading partner of EU. The formation of EU allows individual member countries to group as one entity and negotiates on an equal playing field with the United States. International clout is one of the primary reasons in the formation of EU.

Leading export markets for EU are the United States, Switzerland, Japan, Poland and China. Leading import sources for EU are United States, Japan, China, Switzerland and Russia.

Large numbers of EU based companies concentrate their research, design, innovation and marketing part of the activity in EU while outsourcing most of their manufacturing to Asia. EU is primarily a service oriented economy. Services account for more than 70% of the EU economy while manufacturing, mining and utilities account for around 20% of the EU economy.

It is important for most of the countries to hold large amounts of reserve currencies to reduce exchange rate risk and transaction costs. Most international trade transactions involve the British Pound, the Japanese Yen and the US Dollar.

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All major euro crosses are highly liquid. Now EUR/USD cross is the most liquid currency. The movements of EUR/USD currency pair are used as the primary gauge to judge the health of both European and the United States health. Euro is also known as the anti-dollar since it is the dollar fundamentals that have dictated the movements in the EUR/USD pair from 2003-2008.

EUR/JPY and EUR/CHF are very liquid pairs too and are used to judge the health of the Japanese and Swiss economies. EUR/USD and EUR/GBP are great trading currencies as they have tight spreads, make orderly moves and rarely gap.

Euro is still a new currency. It was launched in 1999. Euro has unique risks. There are number of risks unique to the Euro. The most important is the exposure to the economic, political and social development of 15 member countries in the EU.

Although more countries are expected to join EMU, however, if a member country drops Euro and reverts back to its original national currency because it believes that ECB actions are not in its best interests, it could affect the stability of the entire region.

ECB has the power to determine monetary policy for its 15 member countries. However, we can say Euro is a currency without a country. With that comes the political pressure of 15 governments. This political pressure frequently tests the actions of ECB.

The present global financial crisis is unlike any in the past. However, the rapid response of ECB to the present global financial crisis in the shape of deep liquidity injections has transformed its reputation. The spread between 10 year US Treasuries and 10 year bunds can indicate Euro sentiment.

Another important interest rate that you must know as a forex trader is the Euro Interbank Offer Rate (Euribor). This is the rate offered from one large bank to another on interbank term deposits. Traders and investors tend to compare the Euribor futures rate with the Eurodollars futures rate.

Lower spreads make the European assets less attractive. Higher spreads between the two rates makes the European fixed income assets more attractive. Merger and Acquisition activities between US and European multinationals have important implications for EUR/USD pair. Large deals if in cash have often significant short term impact on EUR/USD.

Important indicators for Euro are Harmonized Index of Consumer prices (HICP), M3, German Unemployment, Preliminary GDP that includes France, Germany and Netherlands, German Industrial Production, Individual country budget deficit. The largest countries in EMU are Germany, France and Italy. Study of the economic data of these three large countries is also important.

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Why do investors need to exchange their domestic currencies for foreign currencies? Many want to invest in foreign assets. For that they need to convert their domestic currency into foreign currency. Companies involved in import and export business need foreign exchange to order new consignments or make payments. Multinationals need foreign exchange to repatriate profits. Big banks need foreign exchange and the list goes on. The forex market does no exist in a vacuum. You may have heard of other markets that exist like the gold, stocks, bonds, oil, futures and commodities.

There is a fair amount of noise and misinformation about the supposed relationship among these markets and the individual currency pairs. You can always find some correlation between two markets over time.

All these individual financial markets function according to their own internal dynamics based on data, news, positioning and sentiment. However, always keep this in kind that all the various financial markets are markets in their own right.

These markets will occasionally overlap and display varying degrees of correlation due to various underlying economic factors. So you should view each market in its own right perspective and trade accordingly.

However, its always important to be aware of whats going on in the other financial markets. Lets discuss some major financial markets and see what conclusions we can draw for currency trading.

Gold: Gold is commonly viewed as a store of value in times of economic and political instability and uncertainty. Gold is also considered to be an alternative to the US Dollar and a hedge against inflation.

Gold prices have been rising for the last two years. There is an uptrend in the gold prices. Many investors are flying towards safety and investing into gold as a hedge against deflation and the present financial crisis. A weaker US Dollar is generally accompanied by higher gold prices and a stronger US Dollar is accompanied by lower gold prices. Over the long term, the relationship between Gold and US Dollar is mostly inverse or negative.

This makes short term relationship between the gold prices and US Dollar generally tenuous. However, in the short term, each market has its own dynamics and liquidity. Overall, the gold market is much smaller than the forex market.

Extreme movements in the gold prices tend to attract currency traders attention and usually influence the US Dollar in a mostly inverse fashion. At the same time, gold traders tend to keep an eye on whats happening to the US Dollar.

Oil: The global economy runs on oil. In 2008, crude oil prices skyrocketed from $60-70 to almost $150. It was being predicted at that time that oil prices will reach $200. It made the whole world jittery. Oil prices rise is a cause of inflation in almost every economy in the world. Then all of the sudden the bubble burst in a few months. Were the hedge funds involved in the sudden increase in the oil prices and than their collapse? A lot of confusion is usually spread on the relationship between oil and US Dollar and other currencies like CAD and JPY. Correlation studies show no appreciable relationship to that effect in the short run which is where most of the currency trading is focused. The idea behind these theories is that if the country is an importer of oil, its currency will be hurt by the higher oil prices and helped by lower oil prices.

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Over the counter means that the buyers and sellers make a binding contract with each other after agreeing on the price and this is not carried through an exchange unlike the forex futures trading that is carried out through the exchange like CBOT, CME etc.

What are the advantages of a centralized market over OTC market? There is a better price discovery in a centralized market and there is trading anonymity something that big players want to hide their trails. There are several other advantages of a central exchange too like the counterparty risk for the trade is reduced. Forex traders in the spot forex market carry out their activities by dialing directly with one another or through brokers on telephone or internet.

In 2007, Chicago Mercantile Exchange (CME) along with Reuters launched FXMarketSpace; the worlds first centrally cleared global forex market place. In this centrally cleared system, CME will act as the clearing house and guarantee the performance of all the contracts for both buyers and sellers.

Unfortunately FXMarketSpace is an institutional trading platform and is not open to retail forex traders. Only sophisticated investors with net worth of more than $20 Million can trade on the FXMarketSpace.

There are many players involved in the spot forex market. Recently NFA (National Futures Association) had also passed certain new rules that make it more skewed against the small investor like you and me. The spot forex market is still skewed against the retail forex trader. Why is it so?

The spot forex market has always been an unfair playing field for the big boys. It became possible to introduce trading platforms for the retail investors with the advent of the internet. Previously spot forex trading was the playfield of the big banks, multinationals and the hedge funds.

The forex market differs from other traditional financial markets. Things deemed illegal in most of the other financial markets are simply considered part of the game in the forex market. Insider trading, front running, price shading etc are all regularly seen in forex trading and have no legal repercussions whatsoever. Retail spot forex is seeing a lot of growth in the recent years. A mushroom growth of online forex brokers took place. Many did not have even enough capital with them to start the brokerage business. Most of these forex brokers behave like bucket shops. But this is the way; the spot forex market has developed over the years.

It is essential for you that you understand the nature of the spot forex market and who are the main players. Why they trade forex? What type of advantages they have over the retail forex traders?

Over the counter nature (OTC) of the spot forex market means that currency transactions do not take place at any single place. Instead OTC means that the spot forex market is spread all over the globe.

Players in the spot forex market range from those who trade billions of dollars daily to those who only trade just a few thousand dollars daily. A players access to the spot forex market depends on the quantity of transactions of large amounts of money. Now who are the main players in the forex market against whom you as a retail forex trader will be competing?

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If you have been a tourist to another country, you would have definitely converted your domestic currency into travelers cheques. Now a day you dont need any conversion, your credit card company will automatically do the conversion for you. There many players in the forex markets. Big banks, multinational companies and other institutions require foreign exchange to carry out their day to day business. While commercial and financial transactions in the currency markets represent huge nominal sums, they still pale in comparison to amounts based on speculation. By far the vast majority of the currency trading volume is based on speculation.

Traders buying and selling currencies for short term gains based on minute to minute, hour to hour and day to day fluctuations. Almost something like 90% of the volume in currency trading is speculative in nature.

The bulk of the spot currency trading almost like 75% takes place in the so called major currencies which represent the worlds largest and most developed economies. Additionally activity in the forex market frequently functions on regional currency blocs basis where bulk of the trading takes place between the USD bloc, JPY bloc and the EUR bloc representing the three largest economic regions.

Forex markets are highly liquid. Liquidity represents how much faster or easier it is to buy or sell an asset. In other words, liquidity is the level of buying or selling volume available at any given moment for a particular asset or security. A highly liquid market like the forex can see large trading volumes transacted with relatively minor price changes.

At any given moment, dozens of global financial centers are open such as Sydney, Hong Kong, Tokyo or London and currency trading desks in those financial centers are active in the market. The forex market is open and active 24 hours a day from the start of the business hours on Monday morning in the Asia-Pacific time zone straight through to the Friday close of business hours in New York.

There is no official starting time for trading day or week. But for all practical purposes the market kicks off when Wellington, New Zealand, the first financial center opens on Monday morning local time. It roughly corresponds to Sunday afternoon in US, Sunday evening in EU and early Monday morning in Asia.

Forex markets are unlike the stock markets or for that matter any other market. As pointed out above currencies are always traded in pairs. You can go long as well as short on any currency pair. In the stock market, you cannot go short on any stock. There is an up tick rule as well that prevents you to go short on a particular stock. Unlike other financial markets, you can see around the clock action in the forex markets except on weekends. Forex markets are open 24/5. Sunday open represents the resumption of trading after the Friday close of trading in North America. This is the first chance for the forex market to react to news that may have happened during the weekend. Prices may have closed New York trading at one level. However, they may start trading at another level altogether at the Sunday open.

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What should be your next step as a position trader? The next step for the position trader would be to open a long position in EUR/USD pair keeping in view the overall strength of Euro and the weakness of US Dollar. This simultaneously provides the position trader with long Euro position and a short US Dollar position.

The long term directional bias has been formed by the position trader on the basis of fundamental analysis. Going long on Euro and at the same time short on US Dollar, this combined trading position fulfills the fundamental outlook of the position trader on both the currencies.

However, pinpointing the best time for the trade entry as well as setting risk managed control strategies is best accomplished by using technical analysis. Position trading depends on using fundamental analysis in identifying a profitable position in the currency market and then using technical analysis in setting up the actual trade.

So the position trading uses fundamental analysis in pairing strength with weakness. Now this concept fits extremely well with the forex markets as all currencies are traded in pairs unlike the stock market or for that matter other financial markets.

Position trading with the strength/weakness model is the most logical fundamental method for approaching long term forex trading. Trading forex requires a directional commitment on two currencies for each trade, so position trading is ideal for forex trading.

You only invest in stocks that go up and down but two stocks can never be paired together in stock trading. You can buy different stocks to diversify your portfolio but can never pair two individual stocks the way you can pair two currencies in forex trading. Buying one currency because it looks like it will become stronger while simultaneously selling another currency because it looks like it will become weaker is a better way to trade as compared to stocks and other financial markets.

Your first step as a position trader should be to do fundamental research and analysis on all major currency pairs. Analyze the Central Bank policy statements, economic growth factors of these countries, global economic news etc to identify the currency with the strongest positive future prospects and the currency with the strongest negative future prospects at a given point in time.

Suppose you identify AUD and JPY as the strongest gainer currencies in the foreseeable future while CAD and CHF as the strongest loser currencies by performing fundamental analysis. Possible currency pairs for position trading could be long AUD/CAD, long AUD/CHF, short CAD/JPY and short CHF/JPY.

After this, you can enter the trades with the help of technical analysis and hold them as long as they move in the correct direction disregarding minor corrective swings and market noise because the price action is never ever linear. It is always up and down with minor trends superimposed on major trends.

If done properly, position trading can be one of the most effective methods of extracting long term profits from the forex markets. Position trading maybe the most difficult method of approaching forex trading for the beginners and inexperienced traders! It requires a great deal of patience and faith in ones own analysis to weather the inevitable swings against the trading position. Do you have the patience to become a successful position trader?

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Down the hierarchy in the spot forex market are the smaller banks, big multinational companies, hedge funds and other institutional investors or speculators and the retail forex brokers. The wealthier you are and the more money you have or are able to get credit for, the more chances you have of accessing this big boys club.

The independent retail traders lie at the bottom of the market structure. These big players conduct currency transactions in the interbank market if they have large capital and have credit standing with the large banks.

So there is no central exchange in the spot forex market to set the prices. Then who sets the currency prices? The retail forex trades trade through their forex brokers. They generally trade in much smaller lot sizes. Central banks are also occasionally involved in currency transactions. Unregulated nature of the spot forex market as well as poor governmental oversight lets the forex dealers to behave the way they want. Because of the tight knit nature of the forex market and its lack of regulation, the spot forex market is an unfair market for the nonprofessional to operate in.

Without a central exchange, the currency prices are set by the market makers. Market makers make the bid and ask prices based on the currency movements that they anticipate will take place.

Big banks are involved in currency speculations in a big way. Many banks have professional traders solely dedicated to trading forex for speculation. Largest banks are the major market makers and they handle billions of dollars worth of forex transactions on behalf of their clients like the other institutions and companies and also for themselves. 90% of the spot forex trading is speculative in nature. However, most of the big currency transactions take place between the big banks. Daily there is huge flow of money between the different banks globally.

This big money laden network is knows as the interbank market. Interbank market is where large banks deal with one another. The resulting massive flow of money handled by these big banks is what primarily drives the currency markets. The interbank market is not a perfect market. Since the information is not freely available, market access is restricted, manipulation takes place, governments intervene and a large number of participants in the market routinely buy and sell currencies irrespective of profit which all comes together to turn conventional trading wisdom on its head in this range bound market.

The transactions carried out by these big banks like the Citigroup, Barclays, UBS, Deutsche Bank, Bank of America, Merrill Lynch etc amounts to the greatest bulk of the total daily forex volume. Most of the trading activity takes place in the interbank market.

How do the big banks deal with one another in the interbank market? The banks deal directly with one another through the electronic brokering platforms like the Electronic Brokering Services (EBS) or Reuters Dealing 3000 Matching. These brokering services get the best available rates for the various currency pairs. Products from EBS, Currenex, FXAll etc enable banks to reach a larger client base while still maintaining control over their risk. The reality is that a small group of banks control the forex market.

These brokering systems match buying and selling requests from the bank dealers. Between these two competitors they connect at least 1000 banks together. The banks establish specific credit lines with one another in order to deal with one another in the forex market as there is no exchange to serve as each banks counterparty.

As the main market makers, these big banks constantly quote bid and offer prices to one another thereby making the market. Smaller banks that also trade forex also get access to these brokering platforms. Next large companies come.

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The global oil reserves are finite. With the rising energy demand in emerging economies like China, India and Brazil, the prices of oil are expected to rise and reach around $200 per barrel in the coming few years. We would like to factor changes in the prices of oil into our inflation and growth expectations and then draw conclusions about the course of US Dollar from them. Above all, oil is just one input among many. However, US Dollar is the currency in which crude oil gets traded in the global markets. When crude oil futures are increasing in value, the U.S. dollar should theoretically be getting more valuable. The more oil prices rise, the more U.S. dollars foreign countries are going to have to buy to purchase their oil. This increase in value of the U.S. dollar is the result of increasing demand in the marketplace. As the demand for U.S. dollars increases, the value of the U.S. dollar increases. This is not the whole story though. It is true that rising oil prices will increase the demand for the U.S. dollar, but rising oil prices also take their toll on the U.S. economy. The question is which is more important in the Forex market. It depends on the currency pair you are watching.

Stocks: Almost everyone is familiar with stocks and the stock markets. Stocks are units of ownership rights that get traded on the stock exchanges. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects.

You can think of individual countries as companies and their currencies as stocks that get traded in the global financial markets. Currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. As such there is no intuitive reason that stock market should be related to the forex market.

There was a boom in the Tokyo Stock Exchange a decade back. Many investors wanted to take part in that boom. But in order to invest in Japanese stocks, they needed Japanese Yen (JPY). Heavy buying pressure on JPY made it appreciate. So sometimes a relationship develops between a stock market and a currency for the time being. However, long term correlation studies bear this out that there is no major relationship between stocks and currencies. Major USD currency pairs and the US equity markets over the last five years have almost zero correlation coefficients. However, the two markets occasionally intersect.

The US stock market may drop on an unexpected hike in the US interest rates while USD may rally on the surprise move. For example, when equity market volatility reaches extraordinary levels like when S&P 500 Index loses 2% in a single day, USD may experience more pressure than it otherwise would have. But there is no guarantee of that.

Bonds: When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized. The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest rate analysis. Globalization is here to stay. At the center of the globalization phenomenon is the entity known as the bond market. As a futures trader, you are likely to deal mostly, but not exclusively, with the U.S. Treasury bond futures. However, over the next 10 or 20 years, or perhaps sooner, the European bond market, and more than likely bond markets in Dubai and China, will play significant roles in the global economy.

Financial markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians due to the relationship between rising and falling interest rates.

How can you anticipate the interest rate changes in the market? By following the bonds market! Ten-year T-note yields are the key for setting long-term mortgage rates. By watching this interest rate, you can pinpoint the best entry times for re-mortgaging, relocating, or buying rental property, and you can keep tabs on whether your broker is quoting you a good rate. Both the bond market as well as the forex market reacts to interest rate changes and inflation. Bond or fixed income markets have a more intuitive relationship with the forex markets as both are heavily influenced by the interest rate expectations. However, the short term supply and demand fluctuations interrupt most attempts to establish a viable link between the two markets on a short term basis.

Just about every country in the world with a convertible currency has some kind of bond or bond futures contract that trades on an exchange somewhere around the world. Sometimes, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up. At other times, the forex markets react first and fastest to the shifts in the interest rate expectations.

As a forex trader, you definitely need to keep an eye on the yields of the benchmark government bonds of the major currency countries to better monitor the expectations of the interest rate market. Changes in the relative interest rates exert a major influence on forex markets.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!

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In terms of the most actively traded currency pairs during the Asia Pacific trading session that means news and data reports from Australia, New Zealand and Japan are going to be hitting the market during the session.

Much of the action during this session is focused on the Japanese Yen currency pairs because of the size of the Japanese market and the importance of Japanese data to the market. The Japanese financial centers are most active during this session so you can get a sense of what the Japanese market is doing based on price movements.

European financial centers begin to open up and the market gets to its full swing about midway through the Asian trading day. European financial centers and London represent over 50% of the total global trading volume.

London, Bonn, Paris, Zurich and Geneva are important financial centers that are active during the European trading session. The forex market interest and liquidity is at its peak during the European session The European session overlaps with half of the Asian trading day and half of the North American trading day.

London is the global forex center with the highest volume of foreign exchange transactions. As a result some of the biggest moves and the most active trading takes place in the European currencies (EUR, GBP and CHF) and the euro cross currency pairs (EUR/CHF and EUR/GBP).

The trading volumes are much bigger in the European Session because of the overlap between the North American and European trading sessions. Some of the biggest and most meaningful directional price movements take place during this crossover period.

The North American trading session accounts for roughly the same share of the global trading volume as the Asia Pacific market, or about 22% of the daily global trading volume.

Most US data reports are released around 8:30 AM EST with others coming out later at around 9 AM and 10:00 AM EST. The North American morning is when US key economic data are released and the forex market makes many of its significant decisions on the value of USD.

There are some US economic reports that come out at noon or at 2:00 PM EST livening up the New York afternoon market. Canadian economic data reports are also released between 7 and 9 AM EST.

The London or European close can bring volatile flurries of activity. London and European financial centers begin to wind down their daily trading operations around noon eastern time each day.

Market liquidity and interest falls off significantly in the New York afternoon on most trading days. This can make for challenging trading conditions. On quiet days, the generally lower market interest typically leads to stagnating price action. This is the best time for scalping as the market is moving sideways.

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