Taking note of the fact that the market is at the pinnacle of its efficiency is essential for all future forex traders. Retail investors are increasingly trading in foreign exchange. For those who are thinking on the lines joining the trend another warning in order is the fact that the FX markets are unpredictable nowadays and hence aren't the best options for easy money making.Confirming the very same fact one can opt to check an efficient market by volatility ratios.
It isn't hard to comprehend the thought here. One of the necessary conditions for efficient markets is that price movements in the past should not be an indicator of future prices. For this particular case the volatility rises in accordance to the square root of time, hence the fortnightly volatility is the same as the weekly volatility multiplied by the square root of two.
By comparing actual volatility to this random walk volatility, we can test whether prices do follow a random walk. Seeing actual volatility to be below random walk volatility would imply prices mean revert, this implies rises following falls in a period.
By seeing my chart one can see the ratio of actual to random walk volatility for three primary exchange rates. The reversion suggested here translates into a fall in the pound after few weeks of rising.
Nevertheless, the ratios touch one, as close as 12 percent of it. Betting on the inefficiency can lead to losing a fortune because of the negligible nature of it. This is in accordance with the findings that state the profit making in forex trading went away in the 1990s since investors made more sense of momentum effects.
There are deviations from a random walk over very short periods. For someone anticipating surprises in a better fashion than the market, making money from a random walk is also possible. Our data findings show a roughly random rate move for foreign exchange over a 17 year period. One cannot rule out the possilbity of shorter periods for a not so efficient market.
There is a 10% chance that the US dollar would become worthless next year, imagine what traders could do with an information like this. it would appear as if money making would have been possible had the dollar been purchased at its low pint since it over reacted and then mean reverted.
Still, the market is efficient. And the money you'd have made from buying the dollar at its low point would not have been a risk free profit, but rather a reward for taking on that crash risk. It is absolutely possible that certain moves in the exchange rates in the recent years possess the character of variation in crash risk
The point made here is clear. The two advantages enjoyed by banks over retail investors allows them to do this. In the first place, banks have the advantage of being aware of client FX orders, this can foretell the future exchange moves. Trading costs are virtually zero for banks, this makes it profitable for them since their hoover is cheaper now. Trading in Foreign Exchange is safe only if one is aware of these edges.