Rarely Predictable market lacking drivers.

One of the major characteristics of the FX market is its unpredictability often based upon the level of liquidity.  Over the past few years, liquidity has risen constantly. It started with the birth of the euro twenty years ago and has continued as technology has driven execution standards to a new level. The expectations of retail traders have grown along with the level of liquidity to a point where there is no differentiation between market makers and market users.

The famous case of the HSBC trader who made close to eight million dollars from a single, albeit huge, trade illustrates that point perfectly. The corporate client apparently asked for a price in around eight billion dollars.It is unknown what spread was quoted or even if a two-way price was requested but the degree of risk being taken by the bank needs to be compensated in some way. To clear such a trade through the market will cause more than a ripple as orders are hit.

The furore that followed the discovery of how much was made by the trader/bank from the trade masks several possible outcomes, the very real risk that was taken on by the bank and the disregard or lack of understanding often shown by those with no experience of market making.

Profits are hard to find and harder to cling on to

Whatever the reason for the market acting as it does from time to time, the fact remains that is becomes notoriously difficult to make money. For example, Sterling has been in a narrow range for the past week or so, possibly the seeming predictability has blinded a few traders. It did me! I was convinced yesterday morning that the break of 1.4020 was going to be a prelude
of both a new range and a money-making opportunity. All I managed to do was get short at the bottom!

I doubt or at least hope I wasn’t the only one with that predicament. It cost me ten ticks to prove to myself that the buyer’s orders were still where they had been, so I live to fight another day.

When the market is like this it becomes easy to become “married” to an idea and miss opportunities as they present themselves. A well-defined range can be used to both be long on the way up then short as the top is reached., It pays to be prepared and have tight stops near the support or resistance level as complacency can kick in and that is when the trend reverses and the support melts like frost on a spring day.

NFP to provide a little volatility.

Well, at least we can look forward to the employment report due for release this Friday for a little activity but too much reliance on a single event either turn around a poor week or to “gild the lily” often ends in disaster.

It is hard to say what is tougher to take; the continuation of a poor run or giving back a decent run simply by overextending or getting the feeling that at last we have found alchemy and we know what is going to happen.

All we can do is rely on our strategy and trading rules. If one rule is to be square over the numbers, that rule was put in place for a reason and needs to be observed.

This Friday could be a watershed for U.S. monetary policy. There is a clear underlying view that the Fed wants to hike four time this year, there more following the recent increase and is simply waiting for favourable data. A pickup in wage inflation would be a useful jumping off point so expect a dollar rally is the hourly earnings increase is close to 3%. The headline could and should be totally ignored other than by those who enter the sweepstakes that are springing up everywhere.


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