The Fallacy of “Value” in the FX market.


Let me start out by saying this before I get emails I won’t respond to:

I’m sure at some billion dollar fund desk in NYC there is a spread sheet that factors in interest rates and sovereign bond values and the ration of kiwi to crumpets and they can say what the “value” of a currency is. So can there be a value, sure. Can a retail trader know it? Maybe. Does the retail trader give one hot messy crap about it? Nope.

VALUE TO A RETAIL FX TRADER

Have you ever heard anyone say these things:

  • “Man the GBPUSD has gone so far, it can’t keep going”
  • “The Australian dollar is cheap here”

That’s just a couple of them. But they expose the fallacy in FX trading.

To understand it better, let’s look at the “investment” world.

We would all do good to agree that Forex is not an investment. It’s not something that you can deduct will have a higher value or lower value in the future with any kind of clarity to make it an investment. What do we consider investments? Stocks. Bonds. Metals. Those types of things.

A stock has a value. The value isn’t “compared to another company”. It’s based on that companies performance. It can go to zero or it can gain value if the company does well and the performance is usually predictable within a certain range or window. On top of that, in any kind of investment, there is always a buy bias. Investors want to buy and hold and gain the appreciation of that value over time.

Simple right?

None of that applies to the retail FX trader. Not a single thing. There is no underlying value of a fiat currency to fall back on. They are valued in pairs for us; one vs. the other so that whole idea of performance, nah. Not here. The “performance” of the the jpy should allow it to be used for many purposes other than exchange of value.

So if we can’t look at FX the same way we want to look at other vehicles, how¬†should¬†we look at FX?

The answer is probably what draws more traders to FX in the first place. It’s so simple it’s freaking hard to accept. We want it to be difficult. We want it to be like stocks where we can find a P/E multiple and a CEO to like or dislike. We want it to be more than it is, but the fact remains:

FX trades on technical direction

That’s it.

And here’s the other secret, lagging indicators (which EVERY ONE OF THEM IS) can’t give you the information you need to beat the market. Indicators are a traders way of trying to force the natural variations of price into something that they believe is controllable and understandable.

So then, what does run the market? Orders. Transactions. and I probably have to throw manipulation in there. Price is always seeking where it can transact. Sometimes it goes there slowly, sometimes quickly. I find the places where it will go quick to take out other traders. When your stopping out on a counter trend trade, I’m taking profit. Sorry

Let me show you an example of the generic price action I believe happens. News events bring a high volume of traders to the markets. That’s a feast for market makers. They set us up. Most NFP days are stop run Z days, Like this:

2017-09-19_13-58-33

This was EURUSD on Sept 1, 2017.

Go back and look at NFP days. This is no secret. This is an example of building orders for 24 or 48 hours in the form of eliciting trades and window dressing and then taking traders out who did the right thing and put stop losses in. Price searches out places to transact. That’s it. It’s a business that’s not ours, remember?

What’s my point? Price action is generic. It’s different looks that allow orders to build and then when price moves through those areas, lots of trades take place very quickly, or what we call stop runs.

What’s the retail traders job? Figure out if a MACD or a Stochastic is better? or figure out how to identify those stops and order areas and take advantage of them?

These areas are a significant factor in how I determine direction of a pair. Why? Again, Remember, my job isn’t to predict direction, it’s to identify it and then take advantage of it. That’s it.

If you would like to find out more about this, CLICK HERE

What’s the “value of the EUR or the USD” have to do with the chart above? less than nothing. What does have value in the FX market? Pattern. Direction. Orders. Higher time frames.

All the things that are not as sexy as the next new indicator, I know. But if you want to make a business and not a video game, you will take this to heart.

Also, I will finish the Stoic posts this week. Three more to go.

Shonn

TradingLife:FXisTechnical

 

Advertisements