Profiting from currencies is a difficult game

IN 2004, Alan Greenspan denied that it was possible to make money by predicting what is going to happen to currencies. As he put it: “My experience is that exchange markets have become so efficient that virtually all relevant information is embedded almost instantaneously in exchange rates to the point that anticipating movements in major currencies is rarely possible”.

In that, he echoed the economist Burton Malkial, who once said that speculators “might as well be monkeys throwing darts at the Wall Street Journal”. What they were essentially saying is that unless you know the news before other people, it should be impossible to make a profit from trading currencies – if you can predict the future, so should everyone else be able to, and so the possibility to make a profit will instantly disappear.

And as recent events have shown, that makes markets particularly responsive to news. Fears of a sovereign debt crisis in Ireland drove the euro to a seven week low yesterday, while dovish comments by the New York Fed president, William Dudley, drove the dollar down too. Even though Ireland hasn’t gone bankrupt, and the Federal Reserve hasn’t actually changed its policy, the hint that either event might come to pass changes the potential fundamentals – forcing traders to react, not predict.

So does that mean that traders should give up? Surely not. As Amos Galvin, of Macro Currency Group, explains, markets aren’t perfectly efficient – in fact, many traders are very distracted from the fundamentals. In his opinion, the important thing is to watch indicators like interest rates and investor positioning to work out when the market has accurately priced in news – and when they haven’t, to profit from it. Profits are made not from predicting the future, but rather from accurately interpreting news.

But as Nick Hocart, of Xenfin Capital, says, it is also possible to make a profit simply by being systematic and fast. In Hocart’s opinion, there is no point in trying to predict where markets will go – instead, the best strategy is to “find trends and get onto them” before too many others do, like surfers looking for waves. He says that he has a lot more losing trades than winning ones – but the winning ones tend to win a lot more.

What traders must remember is what they are up against. In recent months, markets have been exceptionally volatile and news driven, and that is not likely to change soon. To make profits, traders will need to keep watching the news and the markets carefully and they will need to be ready to react decisively and quickly to changes. And ideally more accurately than a monkey with a dartboard.