The many faces of the market
Everyone knows how the world and financial markets have changed over the last two years but what effect has this had on trading styles in the market?
I have never been sure how much focus there is on why FX markets move in the short term; especially when it goes against the normal flows or opinions of the majority but in my opinion a lot of it has to do with how people react to movements when their position, or risk, is based on longer term macro economic views.
Over the last twenty years trading has become more sophisticated, transparent and has advanced technologically yet there is one constant, the human element. Prior to the current global financial conditions there has been a steep year on year rise in the turnover of the FX market, with more and more risk being taken by both big players and the advent of many more smaller players. Almost all of these would look at charts, listen to the good and the great pontificate and make strategic decisions based on a morass of information and of course, on the whole, FX rates would move over a period to expected levels. Yet during this period we would always have swings and volatile movements against the trend with the obvious reasons of “against expectation” economic data or large M&A related flows being cited. However a lot of this movement was caused by the position takers or traders themselves having different risk appetites or different abilities to cope with adverse movements. This was the primary driver of the volatile intra day moves we used to see and created a trading environment that had room for all types of risk takers from pip players to long term strategists.
Fast forward to today’s environment and the change has been monumental. We have lost most if not all of the small individual investors in the currency markets, we have lost the most important thing of all, namely risk appetite and we have lost the art of having different or innovative views. The outcome of this is the day to day market we find ourselves in invariably has one view, one large daily move caused by new news and deathly periods of silence whilst the herd awaits the next set of important data or Central Bank comment. It would be good to return to the days of only two years ago but I am worried it may take so long we may lose the skill set or appetite.
With all the different guises the market takes it is important to have a broad range of abilities and styles that allow you to fit yourself to the market conditions rather than wait for those conditions to suit you. At 3DCM we have a multi-faceted team that allows this to happen. In this current climate we ensure that our primary focus is market conditions and deciding which type of trading environment we are in. At present we feel it unlikely that we will see any major trends so our energies are centred around information gathering, market flows, up and coming economic data and news focus and from here we look for short term gains. Paradoxically we believe that the market conditions mentioned above allow us opportunities to enter the market based on the psychologies of traders unwillingness to take much risk, either movement wise or time wise, which makes us believe that movements not caused by major economic conditions or news will rebound somewhat quickly.
Whatever the market conditions they certainly are creating interest and we believe opportunities.