A Rapidly Changing Currency Exchange Market

With major economic news on multiple fronts the currency markets promise to be very active. The USD is poised for movement against major currencies based on impending spending cuts in excess of $85 Billion that look likely to slow growth in the US substantially if not move it into recession. This will in turn slow many global economies if goes as widely predicted.

In Europe the GBP has been under review for several months by major credit rating agencies and it is appearing likely to lose its AAA rating. Being such a large player in the European market it could easily effect the value of the Euro as well.

As always when you trade FX, you must look at both fundamentals such as inflation and production for indicators of a currency strength as well as the technical indicators to show trending. These basics will help you make proper analysis of what currencies should do. In a volatile market (as this is expected to become in the next few weeks) as fallout from the US economy go from predictions to actualities certain market realities must be considered. The two most important are:

1. Predictions of political fallout are only that: predictions. The market and the economy do not always actually do what is predicted.

2. Currencies do not always react exactly as they should based on relevant indicators. Trading pressure and perception also move the valuation of one currency against another.

Taking these two facts into consideration when planning a trading strategy in a volatile market is essential. Though any fundamentally sound and disciplined strategy can make profits in this market some are more adaptable than others.

If you use a rule based strategy for trades a highly volatile market may prove challenging. It is less of a case that it cannot be done then a case of you must watch carefully to adapt the rules you are using to a rapidly changing situation. When a rule based strategy requires frequent changes you are losing some of the benefit of this strategy – most importantly the fact it may be time proven.

Fully automated programs or ‘robots’ as they are sometimes referred pose a similar challenge. Unless you are programming it yourself and have the ability to make adjustments it will be difficult to get a program able to adjust itself fully in a rapidly changing market.

Automated programs work off changes in the market but they cannot take into account a press release that caused a significant but very temporary shift in that market as the impetus for that change.

Discretionary strategies are by nature adaptable to any market condition. Success with this strategy in a volatile market depends on using resources to aid you in your decision making as opposed to trying to play the trend. Careful analysis of breaking news and comparing news from multiple sources will help you understand why the currency is reacting in a certain way and allow you to make a prediction as to how long it will continue to do so. A disciplined approach will keep your losses to acceptable level while seeking profits.

Rapidly changing valuations that do not necessarily follow predictable patterns or indicators are common in a market responding to political and media news. This type of market is an excellent time to look at price action strategies. Regardless of trend up or down in valuation, there will be peaks and valleys in value in the movement. A price action strategy allows multiple opportunities to take a profit due to this fact. It will also mitigate losses against any surprise changes. By setting price actions at a narrower range you may be able to make multiple smaller profits in a day or week trading to offset any relatively small losses and benefit from the markets’ volatility.

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