Thursday, July 25, 2013

Currencies vs. equities

Let's talk about the ways currencies differ from equities. Traders think because they both get plotted on a chart they work the same - this is not the case. The biggest differences in my opinion.

1) In equity markets downmoves are completely different than upmoves because fear is a different emotion than greed. Not the case in forex because eurusd = usdeur... the direction is an abstraction. If you are short a stock and you get a massive downday you probably want to cover. In FX the same move will probably start an avalanche.

2) FX markets are BIGGER than equities. Many times as large. You can take a multi billion dollar short term position in EURUSD without moving the market too much. Because institutions build these incredibly big positions FX markets are like a supertanker on the ocean, they don't turn on a dime. FX markets are demonstrably more trending than equities. Because institutions exhibit groupthink as a crowd you can see crowd theory in action there (Peter can tell more of this)

3) Not all FX pairs are created equal. Carry trade currencies (with an interest rate differential between the underlyings) have a built in long bias, since you effectively get paid for holding them. These markets behave differently.

No comments:

Post a Comment