I do not plan on calculating fair value but use the fundamental backdrop in the decision making process. I am also interested in how other traders use this to formulate their own decisions (not a play by play but in general terms). I actually have looked at Soros and have found great information. I have actually asked a question on the ET econ forums regarding a value he uses which measures speculative cash flows which I would like to figure out myself (the only way I can think of now is to use COT reports which show spec interest). If you have more info, that would be great.
Practically speaking, that's the best way to think of fundamentals in this market -- just as a backdrop. Currencies aren't like commodities when it comes to supply and demand, with central banks printing/holding all they like you just can't think in those kinds of terms. Perception, and anticipation of perception, is king. Soros's attitude is that the market is usually "wrong" at any given moment in regards to the fundamentals, meaning that "reflexive" perception often dislodges price from any "rational" notion of value. Not only must you find the right fundamentals to key off of, you must also be wary of when exactly the market is going to recognize your same opinion, for if it chooses to ignore it, you can still lose your shirt even if you are eventually right.
Yes I do agree with you. Soros notes that his goal is to figure out exactly which elements matter and sway perception of the market's participants and then focus on that.
Soros might be a good example. I remember studying his Great British Pound trade against another currency, might be the Deutschmark. I vaguely recall the trade happening about 1992 or 1993. I recall about 1993 the Bank Of England was defending the Pound, attempting to keep the exchange rate between limits. I remember reading that Soros judged the British economy to be too weak to justify the rate of exchange against the Deutschmark and perhaps other currencies as well. Those are the fundamentals. The exchange rate began to decrease. I do not know if speculators started the exchange rate decline or if it happened for commercial reasons. Year 1993 was when I remember learning just how powerful speculators are. I remember reading the speculators had more money than the central banks. I remember reading the central bank could not hold the exchange rate within the exchange limit. Exchange rate started to decrease and Soros sold huge amounts of British Pounds. The charts show the exchange rate decreasing for many months. I recall reading George Soros made a $ 10 billion profit from the trade, although $ 10 billion seems a bit much maybe it was $ 1 billion. In any case it was a big pile of money. All the elements are in this story: The presence of the correct fundamentals for a big change in exchange rates. Price began to break support levels. I recall reading that Soros encouraged his chief trader Stanley Druckenmiller to increase the bet size. The charts show a big sudden change in exchange rate. I do not have technical indicators from the period but by examining the charts I expect MACD and perhaps stochastics and RSI to confirm a downward trend at the time. Perhaps Soros and Druckenmiller followed the trend for six months or so. I do not know when they exited the trade. Since they made a big profit I assume they held their position for most of the trend.
Another chart for George Soros and Stanley Druckenmiller's Great British Pound trade about 1992 or 1993.
I am quite familiar with that trade. I am quite familiar with Soros' works as well (I have read all three of his more important books (Alchemy, Soros on Soros, and Soros by Kaufman). What I am interested in is more in the way of a discussion of current issues rather than talk about a trade in hindsight. I actually have found a bunch of resources and discussions which have answered most of my questions and where I have been able to see real time analysis.
mahras2, Interesting thread, I'm currently exploring a style of trading FX from a book first published in 1923 called "Method in Dealing in Stocks: Reading the Mind of Market on a Daily Basis" by Josephy H. Kerr, Jr. I won't try to explain the whole methodology here but just a few of the basics. What Kerr looked at was how the mkt reacted to news to determine who was in control of the mkt at the time. He looked at 3 elements - price, volume, and the news, to determine supply and demand and the quality of such. His pv interpretations of supply and demand are somewhat similar to Wyckoff (who coincidentally also published his work around the same period, 20's and early 30's) but he adds the element of news to the equation. (And before I go any further, I'm using currency futures as a proxy for the FX so I can use volume; for instance the GBP/USD has a pretty much perfect positive correlation to the GBP futures contract.) Kerr divided mkt participants into 2 groups, the Insiders and the Public (the latter also including short-term professional traders), and he observed 2 conditions of the mkts, the Internal condition, which is the longer-term, and which is determined by the "amount of stock in the hands of the insiders on the one hand and the public by the other", and the Technical condition, which is the shorter-term, which is also determined by the insiders but more by the public (and the short-interest). Here I'll just quote: Although the internal and technical conditions are sometimes synonymous, yet the long swings are controlled by the internal condition and the short contrary swings by the technical condition, so that we frequently have the seeming anomaly of a strong internal condition and a weak technical condition. This occurs in the bull mkt after a good advance, when the higher prices have given weak holders tempting paper profits. The profit-taking which results (and the insiders take some profits too) will increase the floating supply. A drop in prices will have to occur before the condition is strengthened by the absorption of stock by those who only buy on declines. Anyone familiar w/Wyckoff can hardly help but notice the similarities to his principles in the above statement. And yes, I realize there is no floating supply in the fx mkts, but I believe the principles still apply. Kerr sets forth certain general principles of supply and demand and he looks at "regular" or "irregular" price action and uses those to determine who is in control. One then looks at the cumulative analysis to determine the strength/weakness of the mkt in both the long and short-term. For instance, two principles: 1) Favorable News induces weak public buying and strong selling. 2) Unfavorable News induces strong buying and public selling. Now, as I said, these are general principles, and this is just part of the puzzle, but let's examine it a moment in the most simplistic fashion: Say a mkt has been in a trading-range and breaks out on strong vol and good news. Of course this is positive, this is regular action (good news, mkt up) but what if instead it was bad news? This would be irregular action (bad news, mkt up). Would this latter condition not show a more insistent strength in the mkt than the former? Remember, this is looked at relative to the cumulative condition of the mkt. (Was there already a strong internal condition suggested by previous mkt action?) Or say the mkt breaks out on strong vol and no news, or inconsequential news? (Because when determining whether news is good or bad, there are also certainly degrees of importance.) So analyzing the 3 conditions - up on good news, up on no news, up on bad news - each speaks differently as to the internal and technical strength of the mkt and the move. Kerr actually has 36 formulas for each possible combination of factors of pv/news - mkt up/down, mkt neutral, mkt breakout/breakdown, all on either high or low vol. Consider neutral. Let's say the mkt has rallied to the top of a trading-range and we have a neutral day on bad news and low vol. Would not the failure of the mkt to react to the bad news at resistance suggest some internal strength? OTOH, what if it was a neutral day at resistance on high vol and good news; does this not suggest selling on the part of the smart money into the good news? I've only explained a small aspect of Kerr's theories. The book is much more complex, yet I think every word of it makes perfect sense and it seems to apply to FX more than any other mkt. For what other mkt is moved more by news than currencies? Hardly a day goes by that there is not some kind of economic release for this or that currency, which not only effects it but the cross as well. H
That book sounds excellent. Thanks for the recommendation, I will be sure to check it out. News can be a pretty interesting to watch to see the market's reaction which can tell a lot about the participant's hands (which the book notes based on your review). Its definitely a valid method. A book that has been recommended on a variety of journals and websites is this: http://www.amazon.com/Exchange-Dete...=pd_bbs_1/104-2482697-9513562?ie=UTF8&s=books The author's previous book (which the new book covers) sells for ~400 bucks used on amazon. I will be receiving it this weekend and then I can post a review regarding it. Other than that there are a bunch of various blogs that I found which provided quite interesting information. If anyone has any more resources they would like to share feel free to go ahead.