10 January 2017

Long versus Short Term Time Frames in Forex

The markets have been under the long shadow of the crisis of 2008 and looked at only in terms of the Dow and similar US market indices, it can be seen that recovery happened, and indeed the Dow itself is looking at 20,000, that is it exceeded its pre-crisis highs. However currencies move in more complex ways that the Dow, as there is both up and down, and reasons for seeing either as good or as bad, and changing these views as well.

But one could look at the movement of currencies and look for structures (or long term patterns in value) in the way they move and say has that structure continued, and is it a good one. Asking whether it is a good one or a bad one, is problematic. This is because long upward or downward trends can be good (or bad) for traders, but is this necessarily what is wanted in a currency considered in its functional role, that is stability with ranges may be more preferred to some extent for a time, in terms of the wider context of currencies, depending where those ranges are.

Will the events of this year, either create new long term structures or bring it back to the way it was. One pointer to this possibility, is someone old and something new, that is the return of Fed Funds rate rises. That's the way it was before the crisis, and the extended low interest rates could be seen as affecting currencies and they way they move.

So will the return of rising rates, change both of these markets, or will any effect be delayed or altered by changes which may have occurred since 2007. A point about markets is that they are influenced by current events, but what they really look to is the future. Not the future as it happens, but the future as it is expected at the time of news release, in the case of news events, and then the future over varying time frames. Thus the major change seems to happen when the surprise happens and what actually happens can be less immediately dramatic, but significant nonetheless.

As currencies move back and forth they tend to return to the same value. This has the effect of making support and resistance important in currencies. The Dow has a direction, and retracements will tend to find support on trend lines, not on past value, on the long term view.

In currencies, support is not support in this sense it is more like regions at which changes may occur in present momentum and direction. So in currencies support is more like actual resistance, in moves which can favour either direction. The effect of external events on currencies can cause immediate changes in volatility which can then end up with changes in direction, perhaps contingent on support or resistance. While the Dow could be seen as responding to changes, within constraints of support and resistance, until these can be overcome. Thus support is support, which at some stage holds, or does not hold. In the crisis it held, eventually and a provided a base with readjusted potential.

When a currency returns to a past support level it is not particularly referencing the past, in the way the Dow might. This is because certain events can cause major drops in the Dow, and these have a certain similarity. This can be the case in currencies, and indeed interest rates can be seen as a recurring event which makes a current price reference past events.

But it is also possible for a currency to return to past value in an entirely different situation, if the motive for such moves is seen as a set of initial conditions from where the currency can move, but within patterns set to some extent by the market it is in. The difference may stem from what it is that these instruments are made of, that is the Dow references to some extent the growth of a set of companies and Forex references a set of complex relative valuations of currency pairs.

The capacity for Forex to move within patterns, where up and down is valid, makes for a freedom in valuation in this market. Trading can be seen as enhancing the patterns and this sense of valuation freedom, as it may tend to access detail within moves which ultimately have a reference to external events. So it is not simply that complex moves occur, because directional moves can be evident on time frame and extended in real time on longer term time frames. It is rather that within even these moves are complex moves which trading provides a window into. Which means that what pattern is playing out around value can be as crucial as what resistance or support the pair is near. So short term time frames can be seen as potentially getting into the detail of the complexity of moves, rather than merely fluctuations.