Posts Tagged ‘currency’

It is debatable whether or not momentum traders are trend-followers. There is no debate when it comes to flow-based currency speculators. The very act of using order flow information for the purpose of trading in the currency markets requires that the user is following the trend suggested by that flow data. Currency speculators who focus on flow, use that information to anticipate the continuation or end of a trend. Clearly, with flow products, both the quality and the relevance of the flow data are crucial elements in deciding whether or not to use such products as one’s primary information source for trading. There is no point in using a flow product where the order flow is neither reflective of the currency market as a whole nor has any impact on it. Flow-based currency speculators can certainly earn excess returns, but as with other trading approaches discipline is needed. Unlike in the case of the momentum trader where the model creates the signal irrespective of all other factors and therefore the trader’s only job is to execute according to that signal, there is still a significant degree of discretion and interpretation in flow-based currency speculation. For instance, temporary seasonal factors can distort flow. If the flows model were passive, this would mean that a trading signal would be triggered irrespective of this important consideration. That said, the aspect of discretion automatically increases the possibility of misinterpretation and making mistakes. As with most types of trading or currency speculation, experience counts.

As noted previously, there are a wide variety of currency speculators and therefore it is no easy task to explain their methods or techniques since they too vary widely. The techniques of currency speculation vary widely, just as with stock market speculation. Indeed, the analogy is a good one. Just as in equity investment where you have “top down”, “bottom up”, “value investing”, “growth or income” investing, so in currency markets you have speculators or investors — however one likes to term them — who focus on the macroeconomic “big picture”, long-term currency valuation, microeconomic factors affecting currencies, money flow and technical analysis. The titles are perhaps different but the guiding principle is the same; what separates and differentiates the framework within which they analyse the market. Below, we attempt to summarize the types of techniques and strategies with which currency speculators approach the currency markets.