Forex traders need to stay aware of policy makers’

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Since the financial crisis the global economy has been gripped by near constant volatility, uncertainty, complexity and ambiguity leading to an almost permanent interventionist stance by central bankers. This has created difficult markets for some forex traders.

And those interventions have been dramatic.

There’s been the quantitative easing programmes of the US Federal Reserve, the Bank of England and now the Bank of Japan. The Swiss National Bank effectively killed any prospect of serious CHF rallies by putting a cap on the exchange rate. And even the European Central Bank may this year join the party with some new shock and awe of its own.

Forex traders often find that perfectly valid calls based on technical analysis, sometimes even supported by fundamentals, are rendered useless because a central banker thought their currency was becoming too strong and said so.

By Justin Pugsley, Markets Analyst MahiFX, Follow @MahiFX on twitter.

This environment has made the carry trade a more risky strategy along with systematic trading strategies based on following trends. Those strategies are more vulnerable to the short sharp bursts of action, which are typical of news and event driven markets.

ECB governing council – considering more intervention

ECB governing council 2014 Mario Draghi

Systematic versus discretionary

The current environment, which could persist for years given fears over deflation and the constant focus on exports, could persist for years. To be successful forex traders have to be adaptable.

This has made discretionary trading more popular – where trades are based more on judgement calls rather than signals generated by a system. Since 2008 funds run by discretionary traders have regularly outperformed those using a systematic approach.

However, while the discretionary approach can work well for talented traders, it does have the flaw that there are so many variables in the forex markets, particularly these days, that it is difficult to assess their importance or even be aware of them all.

Where the systematic approach still plays a strong role is when it is being used over shorter time frames, anything from a few minutes through to a couple of days. That means capturing smaller trends and movements more often, but trading more regularly, does of course come with its own set of risks.

But whatever approach forex traders take, they do need to understand the position of policy makers, their motivations and the dynamics driving their decision making. That means reading their speeches and thinking carefully about what they mean and how their comments will translate into action.

The fact is the world economy is still fragile and has huge debts. That means policy makers are likely to remain interventionist for a long time. Therefore forex traders will need to be more flexible and adaptable and get used to seeing trends quickly destroyed when they go against the wishes of certain policy makers.

More: Forex Markets Likely to Goad ECB into Action

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About Author

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice

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