subject: As Numbers Increase, Profits Reduce [print this page] For anyone wanting to be a forex trader a warning, the market isn't getting any more efficient Foreign Exchange trading is the latest trend amongst retail investors Before the trend catches on to you as well, note the fact that the FX market is unpredictable now, making it impossible to capitalize the same as an easy money generator.To confirm the same the test of an efficient market, volatility ratios, can be done.
The thought here isn't complex. Past price movements having no influence on future ones is a necessary, but not sufficient characteristic of efficient markets. Fortnightly volatility is equitable to the weekly volatility multiplied by the square root of two in this case, since the volatility of price moves rises with the square root of time.
Whether or not prices follow random walk can be seen by comparing the actual volatility to random walk volatility Seeing actual volatility to be below random walk volatility would imply prices mean revert, this implies rises following falls in a period.
My chart shows the ratio of actual to random walk volatility for three main exchange rates.. The subsequent fall of the pound after a few weeks of rise is suggested hence.
But one shouldn't forget the ratios appraoch one, almost 12 per cent of it. Betting on the inefficiency can lead to losing a fortune because of the negligible nature of it. One would see that this is true to the findings that profit making has hit the lows since 1990s because of the realization of momentum effects.
One can see deviations over a short period of time from the random walk. If you can anticipate surprises even better than the general market then money making is possible even in a random walk.
Our data shows clearly how exchange rate moves are random over a 17 year period. The efficiency of a market would be brought down in extremely short periods.
What if traders could be aware that there is a possibility that the US dollar would lose its worth next year. it would appear as if money making would have been possible had the dollar been purchased at its low pint since it over reacted and then mean reverted.
Still, the market is not inefficient. It is not a risk free profit that one makes when they invest in the dollar at its low point, it is a reward for taking the crash risk. Variation in the crash risk is one of the likely character in the exchange rates in the recent years.
It is clear for everyone to see. Since banks enjoy two advantages over retail investors, they can do it. In the first place, banks have the advantage of being aware of client FX orders, this can foretell the future exchange moves.
Banks virtually pay zero amount for trading, thereby making hoovering a profitable venture since they have a cheap hoover. Forex Trading can prove to be risky for investors unaware of these edges.
