Forex Macro Moves vs Forex Micro Moves

Forex Macro Moves vs Forex Micro Moves

Forex is a volatile market. It comes in different flavours of volatility. This article looks at volatile moves which make a splash in a wider arena, but may have an explanation in the smaller, day trading time frame.

The Forex market is actually relatively constrained. The Forex markets consists of Forex pairs and these are under the eye of Central Banks, which may intervene if they move too far in a given direction. They may intervene if their headline Currency Pair moves too rapidly, even if not moving very far.

This kind of volatility, which is to say rapid moves, may be catalyzed by fundamental factors. Behind it may be an market that is already unstable. This means that the market may be a Bear market prone to react sharply to news, which it otherwise may not be so reactive to. This said, the Forex market may have a kind of consistency that makes it less like a Bull/Bear market, that is it may mirror on the macro scale features on the micro scale.

The micro scale can be viewed on news trading. In news trading, traders are speculating on a sharp directional move catalyzed by a release in news data. However the market can react in unexpected ways. But given some factors aligning, such as a surprise, then it may react sharply. But in this case it may then oscillate. This can happen very quickly, even in less than a minute (or so).

The gold standard is perhaps a move which moves in a given direction, then stablises or continues in the same direction. However these kinds of move tend to suggest an overall market change and by their very nature are hard to successfully predict. That is the more a surprise a data release is, the more it comes as luck whether the trade is entered in the correct direction.

Trading into the news is problematic, as spreads can widen and orders may not go through (and the move may oscillate), so a position can be taken in the quiet time before the release. Though the time before release can be a very volatile time as well, that is an early position may be subject to intense volatility.

It is an interesting question about whether the actual reaction of the market is 'expected' by the market. Is there a hidden logic to the Forex market ? If the Forex market is viewed as a system, then the reaction would be the 'expected' reaction, but this does not mean there is a logic to it, in any wider sense. If there were, then it would be predicatable, except perhaps that the logic rebuilds itself in a way which is not observable.

Traders look for clues to indicate in effect whether there is a Forex logic. This is one way of looking at technical analysis, in that it explictily separates wider market logic (fundamental data) from Forex causality, as evidenced in the chart. The reason perhaps technical analysis is so prevalent in the Forex market is because of the lack on a wider logic, forcing the trader to look for clues where they can.

From a human perspective, fundamental analysis can perhaps be seen as more natural, in that it is based on a chain of causality from real word events. Technical analysis is less naturalistic, indeed it can be frustrating in that is does not have a causality, it is based rather on past patterns, but perhaps with an underlying belief that there is a logic underlying the appearance and formation of these patterns.

Because there is a persistent guessing element to pattern formation, traders may end up using machines to trade for them, cutting through the doubt and second guessing that trying to trade on pattern formation can bring, but with the downside of drawdown this brings. Drawdown may be tackled by adjustments to the computer program (i.e. the robot) but this brings back the human element.

The formation of a conjecture about the Forex market may encompass different perspectives from time frame to analysis

So this uncertainty at the micro scale may itself scale into the macro scale, that is sharp moves significant on a time scale for a wider audience than Forex day traders. Underlying these kinds of moves, which may be entirely unexpected in their appearance, may be a logic in the market which reacts as it processes data (assuming it does), by sharp revaluations.

This does mean that there may be a wider story to the moves, perhaps presaging a market turn or some other way the market is adjusting to valuation over time. There is a time factor to valuation, as speculators and other actors are looking for future moves, not present moves, even if grounded to some extent on past moves in technical trading and other approaches which look for past pattern formation to apply to the future (from a given time point in a present).

One reason to think that there may not be Bull/Bear cycles is partly from the fact these are relative valuations and partly from the fact that the Forex market has its own cycles, which seem to some extent independant from overall Bear or Bull markets.

This however does not mean that Bull and Bear markets do not affect the Forex market, in fact sharp changes in other markets may have an apparent effect in the Forex market. A classic example being the sharp changes in risk currencies when there is a profound market event, for example in the run up to ther 2008 crash. In this sense transitions into Bull and Bear markets may have an effect on Forex valuations, on the micro and macro scale

What is being suggested is that the logic in the Forex market while it may be hidden, might reveal itself in structures that scale, from micro to macro. That is, these structures are the logic and may at least have an explanatory power in terms of giving some clarity to moves on the macro scale.