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Do you think adaptation to the realities of the market is the most important thing?

 

Many times in the past I’ve written about the need to adapt, the need to be able to change your behavior relative to the market because the markets are ever changing.

 

I’ve stated that mechanical systems may be workable, but for only a short time relative to the life of markets.  You must learn to trade what you see and to understand what you see on a chart.

 

When I first began trading there was no such things as futures contracts for foreign currencies.  Why didn’t they exist?  Because there was no need for them!  In the 1970’s all that changed when the US dollar went off the gold standard and began to float against other currencies. Following that, the Chicago Mercantile Exchange began to create currency futures to provide a place where currency traders could hedge the risks associated with dealing in foreign currencies.  Some of these risks are direct and some are indirect.  Direct risk is involved for those who deal directly in foreign exchange.  Indirect risk involves companies who export or import, and receive payments or make payments in the currency of another country.

 

Ever since currency futures were created, they have been in a state of flux.  At one time, for purposes of futures trading, currency gyrations centered on a massive move away from currency futures to more direct trading in the forex markets. Currency futures, while maintaining their volume and open interest figures, for a time, became actually less liquid than they had been previously. 

 

Volume and open interest did not reveal the picture of what was happening in the currency futures pits.  Volume and open interest levels were being maintained by fewer and fewer futures traders.

 

In the period from 1992 to around 2002, we witnessed currency futures moving from “red-hot” to “cool” and then hot again insofar as speculators are concerned. Foreign exchange, which in 1992 was one of the hottest plays, first turned dull and then back again to exciting.

 

That this has happened can be seen in areas of which most futures traders are ignorant. Several years ago foreign currency traders were being paid huge salaries and anyone with a track record could virtually name his price. Following that, currency traders were no longer in great demand.  Now, once again, there is a huge demand for successful currency traders.

 

Currency futures at one time have become but a small representation of the $2 trillion dollar foreign exchange market.  Professional currency traders used forex, forwarding contracts, derivatives of all kinds, and the futures pits, to deploy their various trading and hedging strategies.  Looking at only the futures was like the blind man trying to tell what an elephant is like by feeling only the tusks.

 

In past years, foreign exchange desks at banks, insurance companies, brokers, and other institutions were seen closing down and firing hundreds of employees. Today, they are again looking for currency traders. You see, markets change and to succeed adaptation is absolutely necessary.

 

In the 1990s, Midland Bank closed its foreign New York office laying off dozens of people.  Frankfurt Bank had pulled out of New York and Tokyo closed down its foreign exchange desk.  At that time, the world’s largest foreign exchange trader was Citicorp.  In the D-Mark alone, they shrank from 39 traders working at 17 different locations around the world to 4 D-Mark traders all working in one room.  Now, of course, there are not D-Mark traders. Keep in mind that these were traders who had been to a greater or lesser extent using the currency futures. The result at that time was that there were fewer big fluctuations in the currency futures than there once were and therefore much less profit.

 

However, today, just the opposite is happening. Central banks are presently making much greater interventions in the currency markets.  They have stopped publishing targeted exchange rates. Such action by the central banks leaves currency speculators at a loss for what to do, and the result has been a huge surge in forex trading both in the Interbank market and in the currency futures markets.

 

Because today forex brokers abound and are actively marketing the idea of currency speculation, it is having a profound effect on the foreign exchange planning of individuals, companies, and nations.

 

If some day there results in being only 3 major currencies used by everyone on earth, who would need thousands of traders to trade them?  There would be far fewer currency misalignments to provide a basis for trading.  But that is not the way the world is moving. The picture I just presented ignores the rise of China as a major economic force on the world scene. Almost certainly, the Chinese currency will become a major trading vehicle. The same is true for other emerging countries. Brazil is a good example. Some of them will no doubt have important currencies from the point of view of world trade.  But will these currencies be traded in the futures markets or in forex?

 

The changes in just this one area – currency trading – are an example of how things rapidly change and point out the need for traders to adapt.  There have of course, been many other changes in recent years. The advent of all-electronic markets has produced markets of a completely different kind.  Computers have brought about the ability to trade in various time frames. New exchanges have created new markets and new contracts – so many, in fact, that it is difficult to know exactly where to direct ones trading efforts. It is now possible to trade virtually around the clock. It seems that somewhere, some market is trading.

 

And now, there are no longer any futures floor traders at what was once the New York Board of trade. My oh my, how things do change.

 

Joe Ross

Trading Educators Inc.

 

Joe Ross, trader, author, trading educator is one of the most eclectic traders in the business.  His 50+ years include position trading of shares, and futures.  He daytrades stock indices, currencies, and forex.  He trades futures spreads and options on futures, and has written books about it all - 12 to be exact.  Joe is the discoverer of The Law of Charts™, and is famous for the Ross hook™ and the Traders Trick Entry™.