83. How Banks, Hedge Funds, and Corporations Move Currencies

Published on May 16, 2020

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Behind central banks in terms of size and ability to move the foreign exchange market are the banks which we learned about in our previous lessons which make up the Interbank market. It is important to understand here that in addition to executing trades on behalf of their clients, the bank’s traders often times try to earn additional profits by taking speculative positions in the market as well.

While most of the other players we are going to discuss in this lesson do not have the size and clout to move the market in their favor, many of these bank traders are an exception to this rule and can leverage their huge buying power and inside knowledge of client order flow to move the market in their favor. This is why you hear about quick market jumps in the foreign exchange market being attributed to the clearing out the stops in the market or protecting an option level, things which we will learn more about in later lessons.

The next level of participants is the large hedge funds who trade in the foreign exchange market for speculative purposes to try and generate alpha, or a return for their investors that is over and above the average market return. Most forex hedge funds are trend following, meaning they tend to build into longer term positions over time to try and profit from a longer term uptrend or downtrend in the market. These funds are one of the reasons that currencies often times develop nice longer term trends, something that can be of benefit to the individual position trader.

Although not the typical way that Hedge funds profit from the market, probably the most famous example of a hedge fund trading foreign exchange is the example of George Soros’ Quantum fund who made a very large amount of money betting against the Bank of England.

In short, the Bank of England had tried to fix the exchange rate of the British Pound at a particular level buy buying British Pounds, even though market forces were trying to push the value of the Pound Down. Soros felt that this was a losing battle and essentially bet the entire value of his $1 Billion hedge fund that the value of the pound would decrease. The market forces which were already at play, combined with Soro’s huge position against the Bank of England, caused so much selling pressure on the pound that the Bank of England had to give up trying to prop up the currency and it preceded to fall over 5% in one day. This is a gigantic move for a major currency, and a move which netted Soros’ Quantum Fund over $1 Billion in profits in one day.

Next in line are multinational corporations who are forced to be participants in the forex market because of their overseas earnings which are often converted back into US Dollars or other currencies depending on where the company is headquartered. As the value of the currency in which the overseas revenue was earned can rise or fall before that conversion, the company is exposed to potential losses and/or gains in revenue which have nothing to do with their business. To remove this exchange rate uncertainty many multinational corporations will hedge this risk by taking positions in the forex market which negate any exchange rate fluctuation on their overseas revenues.

Secondly these corporations also buy other corporations overseas, something which is known as cross boarder mergers and acquisitions. As the transaction for the company being bought or sold is done in that company’s home country and currency, this can drive the value of a currency up as demand is created for the currency to buy the company or down as supply is created when the company is sold.

Lastly are individuals such as you and I who participate in the forex market in three main areas.

1. As Investors Seeking Yield: Although not very popular in the United States, overseas and particularly in Japan where interest rates have been close to zero for many years, individuals will buy the currencies or other assets of a country with a higher interest rate in order to earn a higher rate of return on their money. This is also referred to as a carry trade, something that we will learn more about in later lessons.

2. As Travelers: Obviously when traveling to a country which has a different currency individual travelers must exchange their home currency for the currency of the country where they are traveling.

3. Individual speculators who actively trade currencies trying to profit from the fluctuation of one currency against another. This is as we discussed in our last lesson a relatively new phenomenon but most likely the reason why you are watching this video and therefore a growing one.

83. How Banks, Hedge Funds, and Corporations Move Currencies, Forex Algorithmic Trading Fund

Forex Algorithmic Trading Fund, 83. How Banks, Hedge Funds, and Corporations Move Currencies.

How much do successful traders make?

Thinking you make anywhere between 20% as well as 50% a year you can anticipate the adhering to as a variety for your day trading income: Less than 50k in resources – $0 after living expenditures. 250k in resources – $50k to $125k. 500k in resources – $100k to $250k+

Recommended Book for Algorithmic Trading

Algorithmic Trading: Winning Strategies and Their Rationale

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Algorithmic Trading Book - Winning Strategies and Their RationalePraise for Algorithmic Trading “Algorithmic Trading is an insightful book on quantitative trading written by a seasoned practitioner. What sets this book apart from many others in the space is the emphasis on real examples as opposed to just theory. read more…

 

Originally Published: 2013
Author: Ernest P. Chan

If you have made it this far, you absolutely now have the fundamentals to begin in algo trading. Yet what’s next?

The very first step is to make a decision if algo trading is truly something you wish to delve into. Thinking you have the programs skills, you likewise need the wish. Don’t do it since you have dollar check in your eyes. Do it for the obstacle of breaking the market’s code.

Don’t attempt to require yourself to algo trade if it does not feel ideal. Good trading means not forcing points your trading needs to fit your character, skills as well as capacities.

Next off, if you have not currently, choose a trading system, discover to program approaches with it, as well as start creating some straightforward trading algos. Take a look at example algos, as well as attempt to change them. Hands on experience with programs trading systems is key, so start as quickly as you can.

Become as skillful as you can with the trading software program as well as programs of approaches.
There are a couple of appropriate means to develop an algo trading system, as well as many more upside-down. I have actually currently shared several of the good ways, and likewise several of the negative means. You could wish to take a while, do some research, as well as seek experts in algo trading that share their methods. Just beware, as most instructors are cheats that only trade on a simulator.

Ask for student recommendations, look for independent confirmation of trading outcomes, etc. Be unconvinced your algo job relies on doing points correctly, as well as gaining from the appropriate teacher.
Of course, you can discover to algo trade the method I did:

Program an algo, examination minimally

  • Trade it cope with real cash
  • Lose cash when incorrectly
  • built algo falls apart
  • Tell yourself it will be various next time
  • Start over at action
  • On second thought do not do it the method I did it is way too expensive!

The next action, once you have a trading system you feel great around, is to take the plunge as well as trade on a tiny range with real cash. Trading with real cash adjustments points. I understand a great deal of substitute trading millionaires, but extremely couple of real cash trading millionaires.

While it is great to start trading with real cash, do not trade too early in your algo job, specifically if you have restricted trading resources. Numerous traders come under this catch, as well as burn out their accounts prior to they truly comprehend what is taking place. The markets will constantly be right here, but you can’t participate unless you have trading resources.

The last action, once you have created some trading systems as well as started online trading, is to assess your performance as well as enhance. Be truthful with yourself. If trading is not working out, ask yourself what you can do to enhance. It might be changing your advancement process, or your position sizing technique, and even simply trading various markets. The secret is you should frequently be wanting to improve. Besides, there are tons of brand-new algo traders attempting to beat you.
A Last Thought

To sum up, remember that algo trading is hard. Being a wonderful developer is only part of the problem. Yet with the appropriate skills, wish as well as advancement process, becoming successful at creating algo trading systems is definitely possible.

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