Trading FX as a proxy Exchange Traded Instrument

[FXRaySpex]

There's a lot going on in the forex market that is generally considered unreported and unreportable.

Currency swaps and currency fixes such as those transacted by sovereign states in pursuit of genuine global commerce are but one such example. If China, for instance, agrees with the US that the US will pay China for its Chinese imports in USD rather than CNY based on a rate agreed ahead of time, not only will the US not need to buy CNY with USD to meet their payment agreements, they will produce more USD to do so.

The USD is a special case being the reserve currency, but similar deals are agreed between most major producing countries and the aggregate effect of all these deals has impact on the money markets and the forex market - even though they are not transacted through it.

There are a large number of such off-market activities which have either direct and/or tangential effect of the FX market.

It is also generally considered that spot FX, being classed as an OTC instrument, has no central exchange from which transparency of orderflow, depth of market and time & sales data can be derived or provided. While this is true in theory, in practice, all the data is available, just fragmented and distributed to a degree that any timely collection and useful evaluation of this data would be impossible.

While it is true that any attempt to collate FX volume and sales data from ALL sources would be a Sisyphean task and require far greater connectivity, computing power and processing speed than is currently available to any individual entity, the collation of a suitable number of sources with appropriate weighting for scale of business provides an extremely viable model for assessing the current status of the entire FX market.

My intention in starting this journal is many-fold. To outline additional off-market practices and their impact on the FX market, to show how by having an effective DoM and T&S on spot FX, tools available to virtually every other financial derivative traded, provides insights into likely price development which have previously been unavailable in this market, how these advantages can provide timely entries into the markets for specific majors with extremely low risk and how to assemble the rudiments of this meta-market data for your own FX trading purposes.

 

[FXRaySpex]

None of the above requires the end analysis need result in anything fancy or complex. It is sufficient for instance to know that intraday you're trading decisions are supported by considerations involving the buying of AUD and CAD and the selling of CHF and JPY.

I'll get into the basis for specifically timing entries in later posts.

 

[FXRaySpex]

You turn up at the station. You spend all day catching trains, covering distance is your business.
You’re not too worried about your destination; you just want to get a train that’s moving. Unfortunately (in most of the developed world) you’re unable to do so as health & safety regulations don’t permit passengers on the platforms once the train has moved off. So you locate yourself a short distance outside the station next to the tracks where there are fewer barriers to access. Again, you don’t care which train you get or where it’s going, you just want one that’s moving. One comes along, you manage to scramble on board at significant personal risk and you settle down to see where you’re going to end up. It slows down, shunts off into sidings and it’s the end of your journey. Or it carries on. It could just be a slow local service or even a city loop or it could be an express bound for a usefully distant location. You don’t know. Nor do you care. You know you’ll eventually get off, somewhere. And that could be right back where you started, or a bit further on, or you could actually end up in a position where it’s going to cost you time, money and effort just to get back to where you started.

You turn up at the station. You spend all day catching trains, covering distance is your business.
You know which train you want to get and your intended destination. It’s usually crowded, but you’re not sure if it will be today so you’ve arrived 30 minutes prior to departure in order to have some chance of getting a seat. You tell yourself it’s not wasted time as you can ‘work’ while sitting on the train. You’ll do no such thing of course as you’ll more likely spend time on facebook, twitter, or checking out the other passengers. Anyway, eventually you get going and you have a comfortable ride to your destination. Of course, while you’re 30 minutes early for this train, and every other train you’ll get today, all those 30 minutes add up to one or two trains you could have caught, but will not. But at least you were comfortable.

You turn up at the station. You spend all day catching trains, covering distance is your business.
You know which train you want to get and your intended destination. You want to minimise time wasted and maximise opportunities, so you turn up with sufficient time to ensure you’re getting the right train and just before it moves off. You’re not too worried about getting a seat as you don’t want to get too comfortable. Even though you know your destination, if there are indications it’s not going to get there or inexplicable delays, you want to be able to hop off at an appropriate point and catch another train that’s going to a potentially more attractive destination. Sometimes you realise the need to switch trains, but you have to wait until you get to the next station to get off and catch the interchange. Or even worse, you’re stopped – dead in your tracks are unable to move and stand helplessly by as time and opportunity drain away.

You turn up at the station. You spend all day catching trains covering distance is your business.
You know which train you want to get and your intended destination. You want to minimise time wasted and maximise opportunities, so you turn up with sufficient time to ensure you’re getting the right train and just before it moves off. You’re not too worried about getting a seat as you don’t want to get too comfortable. Even though you know your destination, if there are indications it’s not going to get there or inexplicable delays, you want to be able to hop off at an appropriate point and catch another train that’s going to a potentially more attractive destination. You have a rail-riders DependOnMe timetable and Track & Shack real-time events app which alerts you to which trains are on time or delayed, which are likely to be getting to their destination on time and where there are engineering works which will likely delay or prevent prevent smooth passage. With this information, you can plan ahead and be ready to take advantage of scheduled and unscheduled stops along the way to provide you with the opportunity to cover as much of the available network as possible with the absolute minimum of unexpected impediments to your progress.

Each day, many tens of thousands of people are using the trains you use. Over time, you notice a few familiar faces. By far the majority are strangers to you though, seen once or twice and the never again. But some of them, this core group of fellow travellers seem to be doing something in unison, together. You can’t quite put your finger on it, but it seems whenever you’re travelling in their company, though you never speak, you end up feeling it was a good day. When you don’t see too many, or any, of them, it seems also quite coincidentally, not such a good day. Feeling a little silly, you decide to only get a train where you see one or more of that core (corps?) of travellers. Then you realise it wasn’t so silly after all as this corps of travellers are all after exactly the same thing as you are – to cover as much distance as possible, as easily and quickly as possible without wasting time, effort or money in the process.