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Adaptation to the realities of the market
by Joe Ross
Do you think adaptation to the realities of the market is the most important thing?
Many times in the past I’ve written about the need to adapt, the need to be able to change your behavior relative to the market because the markets are ever changing.
I’ve stated that mechanical systems may be workable, but for only a short time relative to the life of markets. You must learn to trade what you see and to understand what you see on a chart.
When I first began
trading there was no such things as futures contracts for foreign currencies.
Why didn’t they exist? Because there was
no need for them! In the 1970’s all that changed when the US dollar
went off the gold standard and began to float against other currencies.
Following that, the Chicago Mercantile Exchange began to create currency
futures to provide a place where currency traders could hedge the risks
associated with dealing in foreign currencies. Some of these risks are
direct and some are indirect. Direct risk is involved for those who deal
directly in foreign exchange. Indirect risk involves companies who export
or import and receive payments or make payments in the currency of another
country.
Ever since currency futures were created, they have been in a state of
flux. More recently, for purposes of futures trading, currency gyrations
have centered on a massive move away from currency futures to more direct
trading in the forex markets. Currency futures, while maintaining their
volume and open interest figures, are actually less liquid than they
had been previously. Volume and open interest do not reveal the picture
of what is happening in the currency futures pits. Volume and open interest
levels are being maintained by fewer and fewer futures traders.
In the
period from 1992 to the present, we’ve witnessed currency
futures moving from “red-hot” to “cool” and now
hot again insofar as speculators are concerned. Foreign exchange, which
in 1992 was one of the hottest plays, first turned dull and then back
again to exciting.
That this has happened can be seen in areas of which most futures traders
are ignorant. Five years ago foreign currency traders were being paid
huge salaries and anyone with a track record could virtually name his
price. Following that, currency traders were no longer in great demand.
Now, again, there is a huge demand for successful currency traders.
Currency
futures are but a small representation of the $1.5 trillion dollar
foreign exchange market. Professional currency traders use forex,
forwarding contracts, derivatives of all kinds, and the futures pits,
to deploy their various trading and hedging strategies. Looking at
only the futures is like the blind man trying to tell what an elephant
is
like by feeling only the tusks.
In past years, foreign exchange desks at banks, insurance companies,
brokers, and other institutions were seen closing down and firing hundreds
of employees. Today, they are again looking for currency traders.
In the 1990s, Midland Bank closed its foreign New York office laying off dozens of people. Frankfurt Bank had pulled out of New York and Tokyo closed down its foreign exchange desk. At that time, the world’s largest foreign exchange trader was Citicorp. In the D-Mark alone, they shrank from 39 traders working at 17 different locations around the world to 4 D-Mark traders all working in one room. Keep in mind that these were traders who had been to a greater or lesser extent using the currency futures. The result at that time was that there were fewer big fluctuations in the currency futures than there once were and therefore much less profit.
However, today, just the opposite is happening. Central banks are presently making much greater interventions in the currency markets. They have stopped publishing targeted exchange rates. Such action by the central banks leaves currency speculators at a loss for what to do, and the result has been a huge surge in forex trading.
Because today forex brokers abound and are actively marketing the idea of currency speculation, it is having a profound effect on the foreign exchange planning of individuals, companies, and nations.
If some day the major currencies would be the US dollar, the J-Yen and the euro, who would need thousands of traders to trade them? There would be far fewer currency misalignments to provide a basis for trading. But that is not the way the world is moving. The picture I just presented ignores the rise of China as a major economic force on the world scene. Almost certainly, the Chinese currency will become a major trading vehicle. The same is true for other emerging countries. Some of them will no doubt have important currencies from the point of view of world trade. But will these currencies be traded in the futures markets or in forex?
The changes in just this one area – currency trading – are an example of how things rapidly change and point out the need for traders to adapt. There have of course, been many other changes in recent years. The advent of all-electronic markets has produced markets of a completely different kind. Computers have brought about the ability to trade in various time frames. New exchanges have created new markets and new contracts – so many, in fact, that it is difficult to know exactly where to direct ones trading efforts. It is now possible to trade virtually around the clock. It seems that somewhere, some market is trading.
Joe Ross
Trading Educators Inc.
ProActive Futures
255 Executive Dr, Suite 410, Plainview, NY 11803 Phone: 1-877-393-5916 More
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