Changing Markets
Written by A Forex View From Afar on Friday, August 22, 2008As a trader, it is very important to see and recognize how the market changes and shifts from one form to another, to be prepared to ditch opinion and also to accept what is right in front of us in the charts. In the last few months, it would have been a complete waste of time to expect sustainable price action from the U.S. session. It can be very easily said that the U.S. trading hours were nothing more than an extended Asian session (or forerunner) with just a little more liquidity. Well, it seems that things are changing due to the greater degree of the moves and breakouts that came during the U.S. session in the last period of time. The bad news is we do not have two full-time trading sessions now, since lately, during the European session nothing happens except testing of supports and resistance areas.
Another way how the market can change its form is when correlations drop from a strong degree (above 80%) to a very small correlation. This usually does not happen overnight because it takes time for the market to absorb the fundamentals behind this move. Sometimes it is very important to understand what drives the relationship between the different assets as well how they act in-line with the market. A good example would be the euro-oil correlation. A couple of years ago the two assets moved rather arbitrarily and only in the last year oil has started to have a high correlation (above 80%) with the euro as the dollar dropped.
Another popular correlation often used is the euro – swissy. In a hypothetical case, if the SNB announced tomorrow that they would raise rates at the next five meetings, 1% increase each time, while the ECB kept its current monetary policy (“we have no bias”) then it is very likely the correlation between the two pairs will drop close to zero.
Looking at a perspective that the market is always trying to improve itself and take out the “weakest links”, and as long as the market will obey the rules of the open economies (…sounds strange but couldn’t find anything else), it will always try to change its features, be it trading times or correlations. Furthermore, a trader that relies on blindness of this “characteristic” will always fail in the long run. Black-boxes, quants and LTCM are here to prove this theory right.
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