It has been roughly 14 years since I started trading currencies. I’ve seen a lot of changes over the years, in both the way that people approach the market and quite frankly, the way the market behaves to specific types of news. The thing about trading is there is always a “special situation” that you need to be aware of. In that sense, there is nothing concrete, and it seems like the rules are always changing.
For example, it used to be that people would do what is known as the “carry trade”, which was when you bought a currency that yielded more interest than another one. One of the most common trades would be to buy the New Zealand dollar and short the Japanese yen because it gives you a “positive carry” at the end of every day. This worked quite well for some time, at least until the Great Financial Crisis.
There was an automated Forex trading system back then that would simply buy JPY-related pairs every time they fell. I won’t say the name of it, but it was quite popular. It worked like a charm for several years, as the carry trade was in fashion. However, once the GFC kicked off, people stopped getting excited about owning riskier assets and started it going for low-yielding assets that were considered to be much more stable. This is when the carry trade came completely undone.
The point is that things change. Things are not always the same, and you cannot have a hard rule for anything. For example, it used to be that good economic news was good for the currency. However, since the Great Financial Crisis, we have seen bad news be preferred. Why is this? Because traders are hoping that the central bank will keep monetary policy easy, and therefore lift risk assets such as stocks or higher-yielding currencies.
This upside-down thinking reminds me of trying to learn French. I’m in the process of punishing myself by trying to learn this language that does not pronounce half of the letters in any given word. Furthermore, what is known as “irregular verbs” that don’t follow the patterns of most verbs. In French, the ending of a verb will change according to the pronoun being attached to it. There are large groups of French verbs that have the same type of end change. However, there’s always an exception. This is obnoxious, and quite frankly makes me question my grandfather’s resolve to help liberate France. (Just kidding, of course.)
This is very much like learning the trade. You think you can know everything, but the reality is that there is always going to be some type of exception. This is normal, and I think that trading has given me some of the patients necessary to learn how to speak French. After all, 14 years later I still learn little bits and pieces that can be useful. For example, recently the stock market has been trading almost lockstep with five-year credit default swaps. It wasn’t that long ago I had no idea what importance the CDS market had on risk appetite.
Another thing to think about is this past week. The European Central Bank during the first week of September 2022 announced a 75 basis point rate hike. By the end of the day, the Euro had lost ground. It ended the day negatively, despite the fact that we had seen a rate hike. I would also point out that recently I’d seen somebody talking about how much money he was going to make as “The Merge” was coming in the Ethereum market over the next couple of weeks. The point is that both of these scenarios prove that the market is forward-looking and has already priced both of these outcomes. Unfortunately, a lot of rookie traders don’t understand that markets are constantly trying to predict the future, and not reacting to things that are expected. In other words, there are a lot of nuances.
When trying to learn a language, you may have questions like “Why pronounce the last letter of this work, but not the exact same last letter of the next one?” I’d say the same thing about trading, why is it that this particular market is moving another one last year, but this year nobody pays attention to it? Essentially, it’s the same thing. It’s because people are behind both situations, and for whatever reason have paid attention to one thing, yet not the other. This is the trick in trading and in learning a new language. Humans are not very rational by their very nature, and therefore somewhat unpredictable. Both studies take an extreme amount of flexibility, and of course quite a bit of patience.
No matter where you are in either endeavor, you will never know everything. In a sense, I think that might be why learning to trade is such a unique challenge. In other words, if you cannot enjoy the process of learning, and you are just here for getting rich, you will never have the resiliency necessary. One of my favorite quotes is “We use the money to keep score. Most of us would play this game for free.”