Beware the Hindsight Advice of Price Movements "Experts"

Vlad Gubernat is a full-time trader based in Romania who shares his thoughts on his blog, JLTrader.

There are a lot of "experts" out there who will purport to know the reasons for every 20pip move in a currency pair or stock index. I just want you to think about it for a minute. You will see how impossible it would be for the analyst, strategist or whoever writes these pieces to ascertain just why those who bought or sold during the day did so.

In order to make statements like "a better than expected Ifo report drove the euro higher" with any degree of accuracy it would be necessary to get in touch with every buyer and seller for the day, find out their reasons for the trade and then strike a balance.

These buyers and sellers are all across the globe, from the traders with a $500 account to the big banks and hedge funds dealing in billions. It is therefore absurd to place any reliance on statements that this or that was the reason for the advance or the decline.

This is not only to emphasize the necessity of taking these kinds of reports with a big grain

of salt, it is also to prove that no one actually knows what produces these small moves. None of the known events (the ones you can find, for instance, in a Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest trading market by volume. According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD). Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate. With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds. Emphasis on Retail Trading for ForexTrading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market. All one needs is a computer, an internet connection, and an account with a forex broker. Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential. Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence. The main two fields of trading are known as technical analysis and fundamental analysis. Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value. Read this Term calendar) in and of themselves move a currency pair.

If you spend enough time observing the market, you will notice that the price action cannot consistently be reconciled with the reasons given by the "experts."

For example, if this month the Ifo is better than expected and the Euro finishes higher the day of the announcement, there shouldn't be any surprise if next month, with a still better than expected reading, the Euro will finish lower.

It is not the news nor the actual readings, nor the officials' statements that produce the fluctuations, but the effect of all these things on the minds of traders. Every buy or sell order has a reason behind it, a hope or a fear, and all the news, facts or officials' statements have a certain influence on the minds of traders and investors, causing them to execute those orders. It is therefore not the day's developments per se, but their effect on the minds of individuals which is the underlying cause of the price movement.

To better illustrate all this, let's use the most recent example available, today's opening gap in euro. Supposedly, the Greek parliamentary elections on Sunday had something to do with it.

It sounds plausible, but then why did the AUD/USD gap down as well? And why did the EUR/USD not only close the gap, but is higher at the start of the European session than it closed on Friday night? If we want to be sincere with ourselves, the answer is that we don't know. And as traders, we don't really have to know.

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