The foreign exchange (forex) market has a huge trading volume giving it high liquidity and making it the largest asset class in the world. Unlike individual exchanges like the London or New York stock exchange it is geographically diverse and operates continuously 24 hours a day (except on weekends). It also encompasses a variety of factors that affect exchange rates. It has the ability to use significant leverage to enhance profit and loss margins.
The foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the large trades by commercial (and government) banks. As you go down the levels of access the volume decreases. As you might guess, the market direction is often dictated by the sheer volume of the trading done by the big commercial and government banks. Another major factor in the forex market is the financial activities of companies seeking foreign exchange to pay for goods or services. Even so, the foreign exchange done by commercial companies is relatively small compared to the volume done by banks and speculators, and their trades often have little impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency’s exchange rate.
But trade activity by the large banks is not reported by the media immediately (if at all) so, just like it would be foolish to try to drive a car by looking in the rearview mirror it is also foolish to try to trade the forex market by looking at the news.
Don’t Expect the News to Tell You Where EUR/USD Is Going Next
Retrospective explanations of market moves don’t keep you ahead of the trend …
By Elliott Wave International
On December 27, EUR/USD shot up as high as $1.3283. Forex news headlines were quick to comment:
“Dec 27 – The euro slightly extended gains against the dollar after strong U.S. new home sales data last month further lifted the market’s appetite for riskier currencies.”
But after EUR/USD hit that high, it promptly reversed and fell back down to the $1.3200 level, where it had been stuck all week.
You may ask: What happened to that “appetite for riskier currencies”?
Good question, and here’s the answer: That explanation came after the EUR/USD rally, not before.
See, it’s easy to fit the news to market action after the fact: Just grab the news story that best “explains” the move. But retrospective explanations don’t keep you ahead of the trend. To win in forex, you need forward-looking analysis, and you need it before the market moves.
On December 26, the editor EWI’s forex-focused Currency Specialty Service, Jim Martens, posted this comment on his Twitter feed:
EWI Forex Insider: @FX_ElliottWave
Now that we got the EUR rise we expected, the double zigzag rise from 1.3158 to 1.3256 leaves EUR/USD vulnerable to a decline.
Then, on the morning of December 27, Jim updated his Currency Specialty Service subscribers via this intraday forecast (excerpt):
EURUSD (Intraday) Posted On: Dec 27 2012 10:01
Last Price: 1.3269
The overlapping rise and possible double top near 1.3309 could lead to a larger correction. A flat or triangle would lead to weakness…
And here’s the decline EUR/USD saw shortly after:
Note that neither of these two forecasts mentioned the news. And for good reason: The December 27 euro-bullish news would have had you buying EUR/USD all the way into the top. Instead of the news, we at EWI look at objective Elliott wave chart patterns. That, and not the news, is what helps us to forecast the markets before they move. We don’t always succeed. However, as you can tell from this example, our Currency Specialty Service delivers true forward-looking analysis.
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This article was syndicated by Elliott Wave International and was originally published under the headline Don’t Expect the News to Tell You Where EUR/USD Is Going Next. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
