A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

Changing Markets

Written by A Forex View From Afar on Friday, August 22, 2008

As 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.

Related Posts by Categories

  1. 0 comments: Responses to “ Changing Markets ”

TheLFB Team & The View From Afar Blog

© 2008 A Forex View From a far Trading Blog

Trade Desk View

Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

Want to subscribe?

Subscribe in a reader.