Friday, August 28, 2009

Tracking Forex Markets With Currency Futures Data


I sometimes hear reluctance from traders to wade into currency markets because they don't offer the same kind of volume information that we find in stocks. While that may be true for the spot market, currency futures trade in such a correlated way with their cash counterparts--and have picked up sufficient trader interest--that they can be viewed just like any futures market.

Above I've taken my Market Delta ES chart definition and simply inserted EUR/USD e-mini futures (6E). This is showing us early morning trade with 30-minute bars. Note how we are building volume (accepting value) at higher prices during the morning (side histogram), with fairly evenly distributed volume at the bid vs. offer (bottom histogram). So far, we've been oscillating around VWAP (red line) in a trading range.

Note the transition pattern early in the morning, as we had a drop to momentum lows on strong selling that then dried up over the next hour, giving us a price low, and then a reversal. A not dissimilar reversal occurred later in the morning, leading me to conclude that the market is shutting off trade to the downside and facilitating trade higher. That, of course, has implications for stocks, as it was the weak dollar that kicked off yesterday's reversal of weakness. Continued weakness in the dollar (e.g., euro strength) is currently supporting stocks in premarket trade.
.

1 comment:

zircon-212 said...

One has to be very cautious taking IMM volume at face value given the fact that the majority of F/X trading takes place in the spot market. Big funds will trade spot and then EFP (in layman's terms convert their spot position to a futures position posted on the exchange because the fund is only allowed to hold futures positions) their trades. This volume does not show up on intraday real time charts, yet definitely has a price impact. Having said that the currency markets and their correlation with other asset classes throughout the world are very important, but they may not adhere to intraday movements that work for stocks etc.