Is there really some kind of logic to short term FOREX trading? Or is it the case that...?

Question

... only over longer periods of time can there be any rationale to currency price movements, as regards the fundamentals of the economy.

In other words, is intraday trading more like setting chips on a roulette table?

Also, how much of the future (i.e., to what period of time in the future) is priced in to a currency? Does trading in anticipation of the future (speculation) create severe irrationality in price movements in currency? Is speculation a majority of the force behind currency price levels?

Technical analysis sometimes feels like meaningless, wishful thinking.

Also, how do hedge funds trade currencies? Which market do they go through (directly through banks and central banks?) or do they use the market makers that individual traders use?

What is the most theoretically (and practical) way to go about trading currencies? I don't mind sleeping 3 hours a day for fundamental analysis, I've done it- but am I winning for the reasons I think I'm winning?

Answer 1

Hi,

This might interest you:

http://where-to-invest.blogspot.com/sear...

Answer 2

In my experience it's a roulette table but so far I've been lucky I guess.

Answer 3

Great questions!  Some of these require a far more extensive answer than this space is designed for, but I'll give them a shot and invite you to explore the subtleties further on...

Q1: Is it the case that only over longer periods of time can there be any rationale to currency price movements, as regards the fundamentals of the economy?

A1: Most people tend to think that there's some kind of disconnect between technical and fundamental analyses that compels them to choose between one or the other as a trading style.  The fact is they are simply different ways of looking at the same thing - the history of human responses to changes in international economic circumstances.  In our classes we view market fundamentals in the same way you might review a weather report and a contour interval map before going into an unknown territory.  Like those tools, fundamental perspectives will give you a sense of the overall terrain (is the land flat (common to the EUR/GPB, for example), filled with steep and sudden rises and falls (perhaps the territory for the GBP/JPY), gradually sloping (the USD/CHF), full of rain and thunder (highly volatile due to changes in the political climate), etc.  Technical analysis is like the road map, GPS unit and compass that you take with you as you set out.  

By knowing the territory from the broader perspective of the fundamentals you will know better if a turn in the market represents a probably avenue to an 8-lane expressway (large trading opportunity), or is more like to dead-end quickly, or offers access to a lovely country lane with some pleasant views (a modestly successful, short term trade).  A keen understanding of the Technical indicators will keep you on course to find the turns in the market and also help you gauge how long to stay on that road once you've made the decision to turn into it (take a trade).

Q2: Is intraday trading more like setting chips on a roulette table?

A2: No, for starters, trading is not at all like gambling where there are clear boundaries and limits that don't exist in trading, or are at best less clear.  In Roulette, for example, if you place a bet on one number, you have exactly a 35:1 payoff if that number is rolled and a 2.67% chance that it will be.  Your maximum loss will be the amount you place on the table and never more (see: http://wizardofodds.com/roulette - for a precise table of odds, etc.)  In the market you can lose more and gain more than is implied at the start of any trade because the market conditions, unlike the Roulette table are constantly subject to changing world events.  

Still, intra-day trading can be just as effective and profitable as any other trading term because market patterns are fractal in nature, which means that they reproduce chart patterns that reflect human response at all scales of time.  So a short term pattern of response, which typically represents fewer players, still looks very much like the longer term patterns produced by more players so long as you don't try to trim it to too small a period of time, and thus reduce the liquidity and predicability of the trade by doing so.

The fractal nature of the markets bear witness to the consistent nature of human responses, which reflects, among other things, the way our brains are wired, which changes not at all over time and thus our collective behavior tends to replicate history over and over again.

The real difference in the markets today is a consequence of the ever increasingly rapid availability of data,which requires faster and faster adaptation to market stimuli/response patterns.  This means that if you have the proper skills, you can be even more successful in collecting pips as an intraday trader than are inter-day and longer term position players who simply weather the ups and down of a pair while you can benefit on both sides, long AND short, if you understand how to.  Hence the comment by one of the other people here that those with the large accounts tend to win more often - I disagree that that's necessarily true even though it's an historical truth because the speed with which market participants are now engaged is changing the entire dynamic of trading in ways never seen before.  I predict that the successful short term traders will soon begin to outdistance and out perform the trend traders and long-term position holders, if they haven't already done so.  It's a matter of re-calibrating your understanding of the market to see more clearly what's going on in there.  We've tested both methods and our traders are far more adept at collecting profits on an intraday basis than are those who trade longer terms. Hands down. No contest.

Our traders learn to not only take over a 1,000 pips a month from the market, but to do so consistently, which, through qualifying for our professional trading team, gives them enormous benefits in being able to trade proprietary accounts that are several times larger than any average individual is likely to have available - and at no risk to themselves.  They get hired as independent contractors - truly independent! - and earn large portions of the successful trades they place in our system, benefiting from a unique system of computer-based interactive elements that give them access to appropriate amounts of capital and leverage in proportion to their skills.

Q3: how do hedge funds trade currencies?

A3: The answer to this is as variable as the number of hedge funds are in relation to account size, fund objectives, and bank relationships.  Larger ones have access to a more diverse range of bank rates since banks compete more aggressively for their business,but to some degree you can shop for a broker that gives you multiple bank feeds and better spreads, though this takes some doing.  Some can even trade with negative spreads, whereas retail players almost never see such things.  (the banks offer such things for somewhat the same reason they pay swap rates for holding overnight positions

The majority of hedge funds work to neutralize market fluctuations on behalf of international corporations and sovereign funds that need to offset any potential devaluation in the currency of a trade partner.  

For example, BMW makes cars in Bavaria, and pays its workers in Euro, but they sell their cars all over the world.  It takes more than 24 months to deliver and get paid for a planned version of a new car: e.g. the BMW 7 series starts at USD $76,200 right now - but they planned for delivery of the 2008 model sometime back in 2006 when designers were employed in Germany to start designing it.  So BMW in 2006 had to figure out what the exchange rate would be for a 2008 Model 7 series vehicle AND they had to hedge against any variations from their estimate.  So if they calculated what it would cost to design, tool, manufacture, warehouse, and ship one car based on the 2006 EUR/USD  exchange value, they might have first determined they needed something like  Ã¢Â‚¬ 56,445 to make the profit they wanted and then taken a Forex position to hedge themselves and protect the needed profits by the time the cars sold in 2008.

For the purpose of illustrating this, I'll assume the exchange rate at that time was $1.35 (I could, but didn't look it up).  That would mean they would price the car at 1.35 x €56,445 or USD $76,200.  Then they'd hedge their position by taking a long position in the EUR/USD pair so that if the USD declined, they'd make money in the currency market to offset that decline.  If the USD gained strength, they'd still be good because the price they set for the car would be paid back in dollars that would buy more Euros, offsetting the losses in their long EUR Forex position.  Incidentally, this is one of the reasons why the Forex market trends so nicely over long periods and yet another why participants don't like volatility in it.

Hedge fund managers can use any one or a mix of the various services you mention to place these trade.  They can also mix in a variety of options, and, depending on what they're covering, futures too.  This is why understanding those two markets can help your currency trading.  Doing so would be to add to your fundamental market analysis skills, like knowing the importance of various news releases is.

Q4: What is the most theoretically (and practical) way to go about trading currencies?

A4: That's a remarkably personal question.  The answer would actually require me to know a good deal more than I do about you since it depends upon many personal factors related to your psychology, account size, temperment, education, flexibility, tolerance for risk, etc.  Your comment suggests strongly that you're far too uncertain why you're winning, which suggests you don't really have a fundamentally necessary component to successful trading - a well tested trading plan.  If you did, you'd know why you were winning.

You can read more about our approach to teaching at http://www.fxdimension.info if you download the file available there.  No personal information of any kind is required to secure it for review.

Trade well, Live free,

Greg

Director of Trading Team Development

FX Dimensions, Inc.

Answer 4

Focus more on fundamentals than technical analysis. Economic news analysis is what moves the markets.

Here is a free site that shows what has happened after economic news releases:

http://www.forexnewspatterns.com

Answer 5

Hi

Answer to your first question is that intraday trading is one of the many methods out there of forex trading. Intraday trading

"if done with strict money management and one or two trades a day" is safe and can be done with very low capital.On the other hand if you have a strategy,you can enter

at right time and keep accumulating every 100 pips away from your original position. and sell all the positions at your

original entry price. The price movements are generally based on two different groups of traders(fundamental,technical),also there are so many strategies around and everyone thinks that their strategy is the best.

Ultimately person who has more holding power wins in the end.

I hope this explains

Regards

I have been trading for more than 5 years,I can be contacted at www.fxchamp.co.uk

Answer 6

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