Traders' Roundtable

During my research into Forex trading I became very interested in the performance and comments of Peter Panholzer at DynexCorp. http://www.dynexcorp.com/tetra10table.shtml

I am particularly interested in the quote: "Today's major currency markets (EUR, JPY, CHF, STG) are mature and too random for conventional trend-following methods." and "...the tendency of currencies to trend seemed to be deteriorating along an irreversibly and steadily declining pattern." http://www.dynexcorp.com/trendfollowing.shtml

Panholzer discusses the Hurst exponent, fractals, and price persistency. All which seem to lead to the fact that long term trends do exist in the currency markets, especially considering the following statement, "...currency prices are clearly displaying persistence, which increases as time steps are increased."

It would appear that Dynex is contradicting themselves in regard to the deterioration of trends, particularly long term trends. This may be a result of their focus on short term strategies, "The Dynex Currency Strategy has implemented signal monitoring of an uncommonly short-term nature (4 hours to 5 minutes), during the 'round-the-clock' 24-hour cycle." http://www.dynexcorp.com/strategy.shtml

I assume that the majority of the participants in this forum are of the trend-following mindset. This said, what are thoughts on some of the comments from Dynex and the persistency of trends in the Forex markets? I tend to disagree with their assessment of trends, but at the same time cannot ignore their performance. Does anyone have insights into "conventional trend-following methods" or their comments on normal price distributions as discussed on their strategy page?

WCB

It seems strange that this company would say this. I, for one have made a significant portion of my profits for last year in GBP, EUR and CHF. To say that they do not trend seems crazy to me. I trade in a long term trend following style and thus make money when trends occur and persist.

Just my opinion, perhaps the experienced traders on the board may have something better to add...

Thanks

rs

There were outstanding trends (in my opinion ) in all the majors in the recent past: EU, BP, CHF, C$, A$ and EU/JY in particular. Everyone has a different definition of what a "trend" is I would think. If your system had a wide enough exit to follow these markets in the recent past, you had a "trend"; if it didn't, then you got chopped up. This leads into one of the most important parts of trading in my view...volatility about the mean price movement in a trend. If market A "trends" for 6 months and goes from 85 to 95 with massive 90% retracements every 3 weeks, many people would say no trend existed (as they continually got in and stopped out over and over again) while those on a longer timeframe data frequency would see a nice trend.

"How trending 'baby markets' develop into mature random markets. Panholzer points to the increase in randomness and decline of trending in the major currency markets since their inception. He contends that markets develop from 'baby' markets to mature markets. Newly opened 'baby ' markets, not being very liquid and therefore more price-driven by way of a lack of opposing market participants, display easy-to-follow trends. As they become mature and develop a large following, their inefficiencies are exploited 'away' by professional market players (who usually are willing to join new markets only as they become sufficiently liquid). "
(quote)


But I do agree his accessment on babymarkets and mature market.
Trends seems to be shorter in duration and much oscillate much faster in mature markets. I think This happens due to the change in the ratio between trend follower and non trend-follwers in a population of traders.
The problem is mature markets has too many trend-follwers getting in such others way.

How many baby markets are there? EUR was a baby market and it immediatley gave a bear trend and has since offered up a number of other good trends.

For a baby market to exist a new commodity or security needs to be invented. I do not see a 6.5 year t-bill as a new security. Nor a new euqity index. Pretty much all markets are mature markets. Does that mean all markets do not trend? I am not sure that the link between mature and treniness is so strong. 20 years ago there ere plenty of trends and in commodities that even then were mature markets.

On the flip side, electricity is not so mature an it certainly is very volatile.

Perhaps the tech sector is an example of how a baby market trended up and then down. Is it more mature now and trending less? More over, was tech a baby market? Sure the underlying technology (internet etc) was baby, but in that sense techniology indexes are always going to be baby markets.

Just some random thoughts.

damian,

In the late 90's I was salivating at the thought we would have DRAM futures (and that they would be liquid enough to trade of course). The trends (mostly down) in DRAM capacity vs. price have been incredible for many years (and of course they would have to add new contracts as new technologies surfaced as the most popular...i.e. perhaps at one point it was 128M SDRAM SIMMs and is now 256M DDR-RAM PC2700 modules or something). Clearly the choice of DRAM type would not 'fit all', but it would prehaps be an indicator of the overall market to some extent and therefore allow producers and end users to hedge.

Along the way, there are just enough upward price shocks in these massive downtrends to encourage hedging and speculation.

Anyway, I always thought a contract (or contracts) such as these would be useful both to hedgers and speculators. I guess the fact that the memory market is so fragmented has prevented it from happening (i.e. just look at all the different types of DDR RAM there are ).

Take a look at the Forex EUR/USD spread. http://www.fxcm.com

Starting in May of 2002, and continuing into the present, a VERY nice, sustained trend began around .8900.

You would have had little truoble entering this on daily charts using the Turtle rules, and by checking the longer-term trend using weekly charts. you could still be in it.

I'm not sure how this can be termed "non-trending," and the profits on the $100,000 position size, especially with pyramiding, would have been tremendous!

Dave S.

I personally trade one of the baby stock index futures which has only started trading a few years ago. I can definitely tell you it trades very differently from mature market such as the S&P or the DAX. The profit factor drop by half when I put my system I trade on the mature markets.
I guess it's just too much noise.

Oh..Chuck..your dream has come true!! I can't wait to start trading it.
hope the liquidity builds up quickly.

http://info.sgx.com/SGXWeb_DT.nsf/DOCNAME/DRAM_Futures

That's interesting to see the contract! However, I hunted around the SGX site and couldn't find data on the contract. Is it actually trading now (yet)?

I think the guys at Dynexcorp make a fair statement concerning the FX markets. When you look at the FX market it's relatively young, compared to the equity and fixed income markets. FX had larger trends in the 1980's, for whatever reasons, the trends are a little more choppy today, at the end of it, currencies are still wonderful financial opportunities. No one can deny that.

Jester