The first secret to trading currencies is pretty simple: Follow the fundamentals.

How do you do that? First of all, pay attention to what central bankers are saying about their economies. This is important. They may not always give you all the facts, but you can usually get at least an idea of what they will do next from their statements.

Central bankers will give you their thoughts on their respective economies. And if they don’t tell you outright, you can tell by their actions. For example, when central bankers raise rates, it means they’re fighting inflation. That’s usually a good sign for the country’s currency. However, if inflation is shrinking or if the central bank is in “rate cut” mode, then it’s bad for the currency.

If the economy is growing (according to its GDP numbers), then that’s another plus for a country and its currency. On the other hand, a falling GDP either means a country is slowing or the economy is shrinking rather than expanding. Either way, that’s a bad thing for the currency.

So to find the perfect currency pair to trade, you need to play “matchmaker.” Match up the best-looking country with high inflation and rising interest rates to the ugliest country with the worst fundamentals (lower inflation and slashed interest rates). Once you have your “best-of” and “worst-of” currencies, simply trade the good country vs. the bad country.

For example, let’s say you decided the U.S. dollar was the “ugliest” currency in the world because the U.S. is slowing and the Fed just cut rates. You also decided that the euro was the best-looking currency. In this instance, you would buy the EUR/USD pair.

In my opinion, there is one thing that separates the novices from the professionals in the Forex market: Novices gamble and professionals trade.

This is a key distinction because it’s the reason countless new currency investors have trouble trading in the Forex market.

So what separates gambling from trading? In a word: Risk.

Successful traders take calculated risks. They gauge the risks to each trade and allocate their funds accordingly. In other words, they think about what they could lose on a trade - rather than just the possible gains.

To be successful, you need to think about how much you’re betting on each trade. Take this into account when you’re placing each order. Make sure no one trade can wipe out your account.

This is how the professionals trade. And even though you aren’t trading billions, you can still profit from the same strategy.

The US Dollar Index (USDX) is an index that measures the value of the US Dollar relative to a basket of foreign currencies (EUR, JPY, GBP, CAD, SEK and CHF).

In 2008, the Index has hit its historical low levels as the US Dollar has been hammered while oil, gold and commodities prices were soaring. Analysts and investors still consider that the negative correlation between the greenback and commodities is valid.

Fundamentally, the global economic outlook has not changed since the correction started around mid-July. Therefore it makes sense to admit that the current price actions on both currencies and commodities markets are based on charts and technical analysis.

The US Dollar went too low too fast according to the market, especially while the Euro-zone struggles with weak growth and high inflation. Market players also consider that the fundamentals do not justify the recent rising prices on energy tangible assets; that Asian demand may slow, and that speculators have driven the price up too high.

As a result, the charts recently illustrated this with obvious oversold levels on the US Dollar. From the high posted in July 2001 (at 124.365 points) to the recent historical lows (posted last April and last July), the US Dollar Index has lost more than 42% of its value.

Where the current correction could lead the Index?

Let’s have a look at a daily medium-term chart. Broadly speaking, the Dollar Index has been declining since July 2001, as mentioned above. Only one significant countertrend occurred during this 7-year period, it is when the Index bounced back during the year 2005. A consolidation phase followed during the 9 first months of 2006, and then a new bearish trend started, backed by the global commodities boom.

The historical low has been posted on April 22 this year, at 71.455 (point B on the chart). The Index rebounded slightly and then slid back to this low level on July 15 (point C on the chart) before rebounding sharply. It’s a double-bottom pattern which constitutes a solid support basis for the price action.

Consequently the Index has been climbing by roughly 8% over the past month. It is now at 77.35. However a pull back is more than likely soon. Indeed, this sharp rebound is not sustainable at the current pace. A trend is always the succession of different waves and of corrective moves.

Two elements argue for a short-term pull back. First the oscillators show obvious overbought levels. The 14-day RSI has jumped above 85, which has not occurred since 1997. Second, there are two intermediary resistance levels that should convince investors to sell back the US Dollar.

The current level is indeed the 38.2% Fibonacci retracement ratio of the last bearish trend occurred between October 2006 and April 2008 (between point A and point B).

A further move up would lead the Index towards other resistance levels. 78.5 is the level of a significant previous low posted on the last day of 2004 (point D). As previous lows often become new highs, there is there some potential US Dollar sellers ready to take advantage of a pull back.

In this scenario, the Index may fall back to 75, where there should have some intermediary support. It would be a healthy correction and a new basis for a further bullish momentum.

Midday Market Roundup 18/08/08
August 18 2008 - Australasian Investment Review – (AIR)

We have started off the week OK – up 36 – the SFE Futures suggested an 8 point fall in the market this morning. Resources up 1.4%, Financials up 0.4% after another 6% fall from Babcock & Brown this morning with Babcock & Brown Power down 30.6% on news of a big provision. MQG also down 2.6%. Market is waiting for BHP Billiton’s result – Last year they came out at 3:55pm. Expecting record $15.7bn profit. Commentary on China all important and will set tone for the resources sector which has fallen over 25% since May 19th.

Wall Street finished higher on Friday – up 44 – The main point was oil and commodities down again on a rising US dollar. Goldman Sachs says the US dollar has bottomed. Continuing credit-related concerns amidst multi-billion-dollar buybacks of Auction Rate Securities plus some weak economic numbers.  Wachovia announced it will buyback $8.5bn worth of auction-rate-securities and pay $50m in fines, retailers close up 1.8% on better-than-expected 2Q results and the University of Michigan’s July consumer sentiment figures were up less-than-expected – suggest an economy still under pressure.

• Both BHP and RIO down 1.77% in ADR form on Friday.
• Metals mixed – Zinc up 1.33%, Aluminium up 0.22% and Nickel down 2.2%. Copper down 0.04%.
• Oil price down $1.59 to $113.46 on growing concerns about demand in industrial nations and the stronger dollar. Woodside up 122c to 5542c.
• Gold down $22.30 to $788.40. Newcrest up 40c to 2483c.
• US Bonds up with the 10 year yield down to 3.84% from 3.90%.

We have a busy week ahead with a host of results as we get into the guts of the reporting season. Most notable companies reporting include: Tuesday: CSL, Boral, Newcrest Mining, Wednesday: Coca-Cola Amatil, Perpetual, AGL Energy, Thursday: Amcor, Tabcorp Holdings, QBE Insurance and on Friday we have Wesfarmers, Caltex and Boral.

Results Today…

• Ansell’s (ANN) – GOOD - Final result has come in better-than-expected. FY net profit up 2.6% to $102.6m, better than $97.2m analysts’ had expected. Declared a final dividend of 15.5c. ANN up 5c to 1129c.
• Seek (SEK) – BELOW EXPECTATIONS - Has announced a 37.4% increase in FY net profit to $76.3m, stronger than UBS Warburg’s forecasts of $75m but below Credit Suisse’s bullish prediction of $80.7m. GSJB Were expected $78.1m. SEK up 5c to 514c.
• BlueScope Steel (BSL) – GOOD - Announces an underlying profit of $816m, up 27%. UBS Warburg expected $728m. After significant items, FY profit came in at $596m, down 13%. Declared a 27c final dividend, up from 26c last year. BSL unchanged at 1329c.
• Sino Gold (SGX) has posted a net loss of $2.6m compared to the $3.12m loss announced last year. Revenue of $100.2m. No dividend. SGX down 13c to 421c.

Other Announcements

• Babcock & Brown Power (BBP) announced it will take a total impairment charge of $452m relating to the takeover of Alinta. Reaffirmed EBITDA and has realized $40m from its decision to sell its Tamar power stations project. BBP down 30.6% to 30c.
• Babcock & Brown (BNB) has also confirmed its interim result guidance saying the guidance (profit warning) last week included the impact of the impairment charge. BNB down 19c to 426c.
• Talk of Commonwealth Bank of Australia making a $6bn plus takeover offer for BankWest having pulled out of the race to buy ABN AMRO’s Australian investment banking operations. CBA down 104c to 4265c.
• Straits Resources (SRL) announced they will sell their coal assets – Madagascar and Brunei - to its subsidiary Straits Asia for US$100.3m. SRL down 12c to 488c.
• Emeco Holdings (EHL) has successfully executed a 3 year $630m senior debt package. Cost of debt up 130bps after the refinancing. EHL up 0.5c to 109.5c.
• Perpetual (PPT) says funds under management fell slightly in July to $30.2bn from $30.3bn in June. PPT up 205c or 4.6% to 4705c. 
• Allco Finance Group (AFG) announces Credit Suisse Group has agreed to waive Rubicon America Trust’s (RAT) financial covenants and obligation to make a debt repayment until August 22. AFG unchanged at 48c.
• GSJB Were maintain their OUTPERFORM recommendation on Crown (CWN) and 1060c target price ahead of its result tomorrow. CWN down 1c to 825c.
• Fairfax Media (FXJ) only down 2c to 273c despite Citi cutting its target price on the stock by 22% to 291c from 371c. They say advertising outlook in New Zealand and regional Australia looks soft. FXJ down 2c to 273c.
• No indication from Treasurer Wayne Swan as to whether the government will approve Westpac’s (WBC) bid for St. George (SGB). He has also told the banks to follow the RBA’s lead and cut rates if the RBA does reduce interest rates at their next meeting.

Why Currencies Are Easier to Trade Than Stocks

If you’re looking for what stocks to buy, you have over 13,000 publicly traded stocks to choose from right now.

That’s a lot to weed through and it significantly drops your odds of choosing a winner. Even the best of stock pickers don’t always screen for the exact combination of things that you would look for in a stock.

However, in the currency world, there are only eight major currencies: U.S. dollar, euro, British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar and the New Zealand dollar. So this makes about seven major pairs when paired against the U.S. dollar.

If you’re trading in the FX market, you could technically also pair these currencies with other currencies besides the U.S. dollar. But even then, you only have 15-30 pairs to choose from - compared to over 13,000 stocks.

In other words, you don’t have to watch thousands of currency pairs, because the pairs are such “macro” instruments.

This makes things simpler. All you have to do is pay attention to the most important data that comes out each day on those eight currencies. The economic announcements for a country can easily be found on an economic calendar at www.dailyfx.com or www.forexfactory.com.