These are times of extremes. We have seen multidecade highs in gold and crude oil. The future may bring unprecedented and continuing supply pressures on the resources that fuel global growth. With Asian economies reaching 7% plus rates of GDP growth, the world will face imbalances in both capital and commodity flows.
We are faced with the onset of a commodity super cycle, and with it an era of currency extremes. Contemplating gold at $800 per ounce and crude oil at $100 per barrel is no longer the preoccupation of an isolated group of delusional traders or survivalists preparing for Armageddon. Current prices are factoring in the expectation that what was once extreme may now be right around the corner.
When markets are at these extremes, traditional approaches to trading becomes less reliable. Systems that are based on algorithms that might have worked in more predictable times will break down. Traders will find technical analysis itself loses its power to prepare the trader for the next trade because it lacks the information about what causes the currency moves. The best neural net systems cannot properly weigh the impact of the next statements of Iran’s President Mahmoud Ahmadinejad. In these times, being 80% right about the next five days can mean a disastrous drawdown. When global fundamental forces are at extremes, who is to say what is overbought or oversold? For the forex trader the current era of extremes presents extraordinary challenges. The context of trading needs to be reviewed and possibly re-engineered. How can the forex trader be better prepared to trade in this era of heightened intermarket complexity? And what should the forex brokerage industry do to better serve the forex trader?
Start with the trading environment. Where do traders get their information and how do they execute trades? Current forex platforms are woefully lacking and need to evolve from only providing quotes for currency pair trading to presenting a true inter-market snapshot. Today and in the foreseeable future, trading any currency pair without tracking the real-time energy and metals complex is unwise. A change in crude oil and gold are key barometers and leading indicators for the direction of currency pairs. Look at the USD/CAD pair to see how crude oil and gold prices have supported the commodity currency to the North. The lack of access to commodity quotes in spot currency platforms put traders at a disadvantage. To add insult to injury the New York Board of Trade’s Dollar Index (USDX), one of the most important indexes, is generally not offered as part of every quote box; but it should be.
This coming period of extreme forex prices presents a unique challenge to the forex trader. It is no longer sufficient to rely on purely technical signals. With commodity prices at extremes, currency volatility also will increase. The conventional wisdom that all prices revert to a mean assumes there are no significant changes in the world. In nonaverage times, reversion to the mean is meaningless. Participating in the strong currency moves that we have been witnessing will require new strategies and different tools. Traditional tools such as stops are designed to contain intra day risks. Traders who desire to stay in longer trends will need to eschew stops and consider the use of option strategies. It is time that all forex traders have access to the same tools that professional money managers use: options. Options on spot forex enable capability of longer term trades and provide risk management not available with pure spot trading. Offering options on forex currency pairs should be a built-in feature of all forex brokerage firms. The lack of availability of forex option trading is not the result of an oversight. From the perspective of most forex firms, option trades are not as lucrative for their bottom line because the use of options requires less capital to trade and reduces the level of trading. The forex trader needs to find firms that offer option trading.
Extreme times provide increased opportunities and increased risk, for traders to maximize opportunities and minimize risk they need enhanced education and better platforms that offer all the tools that are out there.
