Are the movements in forex pairs and the currency market, more random than other trading instruments?
It’s a common reference, which we constantly read and hear relating to currency trading; that currency pairs move in a more random nature in comparison to other securities, such as; equities, precious metals and commodities. That belief is often taken one stage further, as many traders are of the opinion that certain currency pairs not only move in a more random pattern than others, but that they have particular traits and habits unique to that currency pair. Both of these claims are false.
In the first instance it’s more likely that currencies are one of the least random, speculative products we can trade, given that the turnover on each trading day is in excess of $5 trillion, such volume will ensure that any pattern is entirely relevant to the prevailing sentiment and weight of opinion behind that currency’s worth, at every moment in the market. It’s impossible to corner the market in forex, just as it’s highly unlikely that one specific order, or trade can ever move the market.
Our forex markets can only be altered and moved by fundamental events, it’s extremely doubtful that a currency pair will react to, or have its value effected by technical indicators, such as reaching a tipping point on the MACD, RSI, stochastics etc. Although due to the often self fulfilling prophecy and nature of many of the indicators we use, when employing the use of a large moving average, such as the 200 SMA plotted on a daily chart, or the Fibonacci retracement, also plotted on a daily chart, or support and resistance recalculated and redrawn on a daily basis, we can see movement at key areas. However, this is more likely due to potentially a vast number of traders placing their orders at these points, as opposed to these indicators having any gravitational powers.
Not only is our forex market inextricably linked to the fundamental micro and macro economic data we see published every day and over the course of each week, you could put forward a coherent argument that forex movements are the complete antithesis of random markets, they could in fact be the most controlled and manipulated markets there are to trade.
Now the immediate response, after reading the words “manipulated” and “controlled”, is to confuse the statement with rigging, or unfairness; believing that there are powerful forces in our market who trade against us. There are extremely powerful forces in the forex marketplace, they do manipulate the market and they do control it, they are the tier one banks and huge institutional traders and investors who move our markets. But they don’t trade against us, neither do they engage in such activities to profit from our retail trading failings, as we are (by definition) the small fry that many of these firms are unaware of, only accounting for less than 8% of the daily turnover of the forex market.
The majority of tier one bank forex trading involves securing fixed currency prices, through forward or spot contracts, to enable the world of commerce to remain liquid and fuelled. In many ways retail forex trading is an accident of birth, as a consequence of such huge volume in the market. Our side of the market, our small fry activity, simply exists to pick off the detritus that the huge constantly moving whales create and we’ll never have the power to harpoon one of these whales, neither do we want such power. We trade in the huge wakes these moving whales leave, we can be: agile, lighting quick, use a tiny fraction of their energy, to place profitable trades and be in and out of the market without attracting any attention.
In relation to certain currency pairs having defined patterns of behaviour this is one of the most persistent and misleading myths in trading. The GBP/JPY pair has no more defined pattern of movement than the GBP/USD, other than it’s perhaps more likely to react when specific Japanese or Asian data is released or events occur, which are generally limited to Asian time zones, as opposed to London or New York time. Similarly the EUR/USD and EUR/AUD will react to time specific releases and events relating to Europe, the USA, and Australia.
Certain currency pairs don’t move in various patterns because they remain trapped in certain ranges, or due to them having certain unidentifiable characteristics, every moment in the market is unique, every trade placed likewise. The market doesn’t repeat, but it does rhyme and if you can get with that rhythm, then you can discover a world of trading opportunities.