Let me state right off the bat that I’m not excluding myself when I say no one. Having clarified that, let’s delve into one of my pet trading related subjects. After I became interested in the markets, I used to look up to the nicely dressed, confidently sounding analysts who could explain every day’s price movement of a currency pair or stock index. It gave me a false sense of security, an illusory power over the market. But as the time passed, I began noticing that the reasons given for an UP move today would hold no value whatsoever in a week or a month’s time.
For example, why would the Euro rise because of a better than expected German Ifo business climate reading in February, but fall in March, despite higher Ifo readings again ? Could it be that the factors that lead to price movement are much more complex and numerous than the analysts’ commentaries would have us believe ? Could it be that they are just as clueless as the rest of us, but it’s their job to act confident and write something everyday ?
The latest case in point is the GBP. Although it’s been falling against the dollar for a month and a half, everyone ‘knows’ that on 02/09/14 it fell because a new poll put the Yes campaign within “touching distance of victory”.
There are a lot of ‘experts’ out there who will purport to know the reasons for every 50 pip move in a currency pair or stock index. I just want you to think about it for a minute. You will readily see how impossible it would be for the analyst, strategist or whoever writes these pieces to ascertain just why those who bought or sold during the day did so. In order to make statements like ‘results of a new poll send the pound tumbling’ with any degree of accuracy it would be necessary to get in touch with every buyer and seller for the day, find out their reasons for the trade and then strike a balance. These buyers and sellers are all across the globe, from the traders with a $500 account to the big banks and hedge funds dealing in billions. It is therefore absurd to place any reliance on statements that this or that was the reason for the advance or the decline.
In reality it is not the news nor the actual readings, nor the officials’ statements that produce the fluctuations, but the effect of all these things on the minds of traders. Every buy or sell order has behind it a reason, a hope or a fear and all the news, facts or officials’ statements have a certain influence on the minds of traders and investors, causing them to execute those orders.
I’d like not only to emphasize the necessity of taking these kind of reports with a big grain of salt, but also to show that no one actually knows what produces these small moves. None of the known events (the ones you can find for instance in a forex calendar) in themselves move a currency pair. If you spend enough time observing the market, you will notice that the price action cannot consistently be reconciled to the reasons given by the ‘experts’. As previously mentioned, if this month the Ifo is better than expected and the euro finishes higher the day of the announcement, there shouldn’t be any surprise if next month with still a better than expected reading, the euro will finish lower.