Trading the over-the-counter currency markets provides an opportunity to hedge stock and bond investments, but it really is more of a traded market following the ebbs and flows of global commerce than it is an investment arena to plan retirement from.
Getting to know six major currency pairs would seem an easy task when compared to the tens of thousands of stock and bond options available for analysis. Forex trade is not necessarily about how each currency will move against the U.S. dollar; more important is knowing when the market will have momentum, because that is key to not getting caught in reversals and snap-backs while leveraged at 100-1.
Setting times to trade really does make a lot of sense with the near-term view that forex valuations carry. There are three main forex moving times that regularly garner attention, and therefore offer an ability to move prices with momentum. They are the 2 a.m. EDT German Dax futures market, the 6 a.m. EDT London gold/oil fixings and LIBOR rates being set, and the 11 a.m. EDT European market close. Outside of that, the return from lunch in Japan and the closing of the New York Mercantile Exchange markets really are the only other times that prices move substantially and then hold.
At the end of the U.S. session, the pattern is for Asian markets to try to initially reverse U.S. trade direction, although the lack of volume tends to soon allow pairs to find and hold support areas. The European markets tend to move in the same direction as Asian trade, and then Chicago based futures traders try to reverse things and reset their books as the London fixings are placed between 5 and 6 a.m. EDT.
At 10:30 a.m. GMT in London, telephone bids at the gold and oil fixings take place, something that sets the morning clearing prices for bullion and crude dealers that are then adjusted once again at 3.30 p.m. GMT local time. At 11 a.m. GMT each day in London, the British Bankers Association sets the LIBOR rates, something that sets the tone for lending rates between financial market participants.
The London fixings tend to force Chicago-based futures markets into a realignment program at 6 a.m. EDT that replicates the newly set fair values on oil, gold and lending rates, and by default tends to then impact USD-based currency values. It is rare for the U.S. not to push back each morning and reverse the pattern of forex trade that came before, especially if a sizable move has happened in overnight forex trade.
Forex traders really need to know what is going to trigger the technical setups, and therefore be prepared to ride momentum while it lasts. In the trading forex arena, there are different things to look for than in the equity and bond investment world; a week in forex is like a month's worth of stock trade.
It is at the three or four times in a 24-hour period that forex traders are well advised to switch tack and reverse near-term directional thinking. The European and Nymex close are the U.S.-based things to get under our belts, because then, maybe, the equity markets can reveal where they really want to go. Traders looking for moves outside of 6 a.m. and 11 a.m. EDT, and maybe 2:30 p.m. EDT may just find themselves sitting and waiting, wondering why they just bought the high of the day that then reversed.
As the global economy travels through the contraction phase of its business cycle, the leaning is toward looking at S&P futures trade to confirm sentiment. The speculators are never too far away from the S&P in times of fear; either selling into the fear of loss, or buying into the fear of missing profits. That is the reason for so much near-term volatility, and that is how things will stay until signs of GDP expansion are seen globally.
Until then. it seems that the 23-hour-a-day S&P futures trade will set up the eight-hour S&P cash market for currency traders to monitor. Trends it seems will come only when the two, GDP and equity direction, get aligned.
