Over the last ten years the popularity of currency markets has come to the fore largely due to the savvy marketing medium of the widely accessible and free Internet. As a result currency trading has gained huge popularity. Today, there are very few people across all walks of life who have not heard of forex trading on a home computer or personal phone. Moreover, such is the depth of the story of a new style of trading that many people are willing to at least have one go and try make some money from it.
I loved cowboy movies. Larger than life, the celluloid film gunslinger became an ideal. From Butch Cassidy and the Sundance Kid, to a Fistfull of Dollars and the Magnificent Seven, the often lonely gunslinger always cut a romantic figure of heroism against all the odds. But in real life, apart from
the great Hollywood Westerns, the real historical gunslingers often really got shot down.
Somehow a long the way most people seem to have lost track of the original physical purpose of 'Foreign Exchange.'
When a national currency is used in another country it is used to pay for goods and services. For example; I maybe be in the USA and I may want to buy a German Mercedes manufactured in Germany. So to complete the purchase I must therefore buy the 'Foreign' currency of Germany, being the Euro, to pay for the Mercedes in Germany. To get the Euro amount of the intended
purchase I need to buy the Euro currency through a process of 'Exchange'. This process can be completed at my bank in the USA where I may instruct my bank to purchase the amount of Euro Currency at a rate the bank would set me in US Dollar. The result is a foreign exchange of cash for physical need. Amplify this example of a physical exchange across the entire US in a single year and we have companies as well as individuals wanting to pay for foreign goods and services. We also have capital outflows where we may wish to purchase foreign lands and make investments in foreign stocks. All these factors of comparative economics weigh in when looking at the value of a currency pair.
Through this example we have come to see that the medium of foreign exchange arises from physical needs. Yet today the value of a currency pairing has become the subject of speculation.
Soybeans grow in the US mostly in the spring and are harvested at the end of the summer. The weather can adversely or profusely affect the state of the harvest. Such a future harvest is a natural subject of opinion and speculation. Equally cotton and live cattle, or perhaps coffee and tea are crops where the future growing conditions and results may become the forum for differences in opinion and forms the basis for speculation.
In contrast to natural commodities a currency pair is an ill-suited product for speculation in my opinion because in reality it does not have a real intrinsic value unlike a handful of soybeans. A currency pair can only come into existence when the need for physical exchange of two different currencies become a necessity to complete an exchange.For example - what is the EUR/USD? It is a pairing of two completely different national currencies, The Dollar from the United States of America and the Euro from the European Union. These are two distinct currencies with fiat value only in the land of issue. But when a currency pair comes into being by virtue of trade then a value exchange rate becomes determined by the sum flow of international trade and capital flows which does not
really change rapidly in shape and format from year to year. Western industrialized economies change value through the measurement of GNP slowly from quarter to quarter. Therefore the value of a currency pair does not change drastically when examined over a quarter. But in the short term fluctuations may occur due to seasonal demand for a currency pair.
Keeping this framework in mind an individual that may wish to trade currency pairs or 'forex' in the short term where these fluctuations occur. But a trader would have to keep in mind a broad macroeconomic analysis between different economies and maintain a long term perspective of respective economic issues and agenda within the two sides of the currency pairing. A trader needs to also understand interest rate policies in the respective country, economic growth and conditions of the labor market in each respective market for the currency pair and then set this perspective against whats going on today in the valuation of the pair. All this fundamental understanding of two different economies contrasted with each other underpins the nature of the currency pair. If economic data in the US is strong and in Germany weak then naturally that perception would translate into a stronger value for the US Dollar viz a viz its counterpart the Euro.
Now back to the modern trading world, when understanding the macroeconomic framework, the habit of day trading a currency pair value is not as easy as projected by the powerful advertising blitz going on around the Internet. Today online schools train individuals to wait for market data releases and react together with the explosive fury that marks the event, hopefully for a profit.
Giving an individual forex trader a loaded gun and explaining that survival depends on how fast the trigger is pulled is akin to the old gunslinger of historical reality.
Forex day traders who hang on for data releases eventually die. The odds are not in your favor. The market is so big it is easy to get swamped in a big move by commercial banks who are the largest buyers of currency pairs for their customers. The life of the forex gunslinger is frenetic to say the least. Eventually, you are going to come across someone just a tad faster than your own twitchy finger on the trigger and just as you made your move you are going to be swamped by such a dramatic reversal that God only knows where you got your fill and where you got stopped out if at all.
If you want to trade currency pairs the correct way to trade is to look at the bigger picture and think in terms of 'days' rather than minutes to define your combat arena as a more extended window than a mere data release moment where the chances for success are greater. There are many professional traders who do not trade data release moments precisely due to the effect of 'whipsaw' reversal. Set within a context of previous trading sessions a data day would then become a study of the range of activity from high to low and contrasted with the previous sessions. There are many professional traders that trade the aftermath or at close of session rather than to be dragged into a pitched battle with huge commercial banks.
The best technical tools for a currency analyst would be as simple as the moving averages of price over time. I favor the 200 day for the long term trend, 50 day for intermediate trend, and 5 day for short term trend. The 200 day moving average reflects the comparative advantage of one currency versus the other in a pair with the sum of interest rate and trade flows represented therein. The 5 day moving average represents the blips and zigs and zags. A trend does not go up, straight or down in a simple line or linear curve. Therein for the short term trader comes the ambit for possible currency strength speculation. the 5 day moving average of course has limits and its framework of activity must be take into context of the longer term trend as identifies over 200 days. But herein one may say a window for opportunity does arise. overlay on top of this Japanese candlesticks and look for familiar reversal patterns and an opportunity may present itself when the price strays from the longer norm. A form of 'arbitrage' so to speak; and definitely more holistic in method of trading in contrast
to event-watching gunslinging.
Call it - 'strategic sniping' - rather than straight forward open shooting for glory. Market data release days may move values of pairs beyond the limits of the 5 day average or simply be contained. That's not what we are looking for now as we learn to sniper a trade and understand overbought and oversold areas of the 5 day moving average with respect to the study of the long term 200 day trend. Whether you are trading forex, stocks, commodities or bonds, the 200 day moving average is the best indicator of the long term trend and a 5 day moving average gives you an idea in the short term where the tussle is going on through a study of previous session ranges and set that within the context of the long term trend.
Head for head, one on one, the gunslinger will succumb before the sniper who bears more patience in a a study of the previous weeks trading ranges. Moreover, on the whole, although currency pairs are not ideal mediums of speculation, the minor blips and zigs in the short time horizon may become an opportunity for speculation by trading with or against the longer term trend as illustrated by the 200 day moving average which generally gives us a more bigger picture of the macroeconomic contrast of the two elements of the currency pair.
Don't get lured in by the incredible success stories that blitz across the Internet with promises of fantastic gains. Trading is a hard-learned craft like steering a boat across the seas.
The sun that burns twice as brightly perishes twice as fast.
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Futures
and Options trading involves risks of losses. No representation is
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of any trading system or methodology discussed is not necessarily
indicative of future results.
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RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO
NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN
EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT,
IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.
SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT
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LOSSES SIMILAR TO THOSE SHOWN.
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