How do you find value in forex?

I haven't seen this discussed much and would be good to get some feedback from some experienced traders that use this type of thinking/analysis in their assessments.

For me the value of one pair must be comparable to something else for value to be properly evaluated, just by looking at the chart of GU one can not ascertain if this is good value to buy or sell because a piece of the puzzle is missing, what can one use to help this assessment.

Is long term DXY and GBP bonds enough?

The value of a currency pair might be found in their interest rate and/or economic growth differences, but they are useless for trading. They are usually used to make economic predictions …

This is an excellent question and shows you are thinking more deeply about how the market works. I congratulate you!!

Value...it is a relative term and has a different meaning to everyone who considers it. Therefore quantifying this meaning into a number or process will be frustrating at best. Value is not measured, it is "perceived". We often use price as an indication of where people (in general) perceive value by how much they are willing to pay but this is deceptive. As you well know.

To understand how this works simply ask yourself why someone would pay literally millions of dollars for a piece of "art" that looks like something I drew in kindergarten? Or why does my mother hang on to a worthless spoon I bought her for Christmas when I was 7? The perception of value, be it sentimental or actual is subjective at best and deceptive. It is different for everyone individually.

How does this apply to trading? Since we cannot know what is in the mind of each and every trader we can never know what there perception of value is...but we DO know what the last trader was willing to pay...it is the last quote on your screen.

If you understand how order flow and volume work you will be able to"see" where (what price) the larger mass of participants where willing to transact and see how price responded to that large en mass order flow. From there you can deduce whether YOU think you wish to participate and in which direction.

What's more... your participation will also depends on YOUR perception of value and your goals for any given transaction...do you wish to hold and "invest"? Or are you looking for a quick exit? Are you willing to ride out the uncertainty of volatility? Are you willing to "live with" an open position while it is negative? All of these things effect your perception of value and will be difficult to qualify into a specific number or measurement.

Define yourself first...be specific about you goals and objectives for your trading activities. Then learn to see and evaluate the market structure in terms of order flow and volume...you will then see the price is quite meaningless in terms of expressing "value".

Good question.

First, I agree with DonPatp's comment that value is subjective. This is just my take on this topic and not a definitive answer. But several times a week, I look at this topic along the following lines.

The value of a currency pair is based on it's current price in relation to the equilibrium price range (the current price relative to the mid point of the range). The equilibrium price range is the price structure that is place to support daily PA. This price range is held in place by comparative interest rate differentials, inflation differentials, GDP differentials, etc. As long as there are no material changes to these differentials, then the equilibrium range and its unfolding drift will remain in place. What causes a shift in the range is a change in the economic fundamentals within a country, and the resulting change if the differentials. Fundamentals can change equilibrium's range and drift. And there are two aspects of FA that drive the shift: the impact of the FA (which occurs within a few days), and the potential impact of the FA (which unfolds over several weeks due to the complex and complicated nature of integrated markets). So, in a nut shell, today's PA happens within the structure of the equilibrium price range plus drift. I think the value of that trade depends on what you expect the bankers to do today, relative to that current position. One hint about that price range: you know you've got it (or, the probability that you understand it are high) by how often price finds the midpoint of the range and rests.

I applaud your efforts to better understand value, and I think this topic will drive you to a better understanding of price. Good luck!

Thanks for your replies.

Just a couple of things further i have been reading about.

On what frequency would large players need to report their profit from currency transactions? monthly or QTRLY I expect?

So in this would we expect them to be buying below or above the "their" averages? - they would have an assessment of value at any point in time when buying or selling with an obligation to report profit over a given period of time?.

If Toyota Mazda or IBM experience liquidity issues in say Germany or Saudi Arabia, then they would need to transfer Yen or US dollars over to float the losses etc

If the Saudi Riyal or the Euro are diving or gaining against the US$ or yen, how do they compensate the compounding loss of the exchange?, or what criteria do they use to initiate a hedge to absorb the currency loss?

I personally dont think trading patterns is viable long term, one must discover how large participants asses value

By the time we get these reports it will be meaningless for us to use it for forex trading.

I'm not sure what you are asking. In the USA, the IRS expects a tax filing at least once a quarter. Public or private, financial statements are prepared monthly. Most companies with currency exposures have hedged risk. I'm unaware of any trading opportunity associated with tax filings or financial statements. Is that your question?

I guess this would depend on where the "larger players" you speak of are located in the world, and what you actually mean by the term "large player". In the UK for example trading is considered spread betting and it not taxed...in the US, taxes are not assess on any open position UNLESS, they are using what's known as the "mark-to-market" method of assessing tax. This is usually only done once a year, on the last day of the year and is reserved for open futures, and options positions, not stocks, or other investment instruments..

ALL transactions are reported (either opened or closed) at the end of each business day at the time of settlement (using a clearing house). These apply usually to spot and futures transactions that are held overnight or beyond. This information is gathered and reported in the commitment of traders report done once a week by the CBOT. This report shows how many positions are open by larger interest and smaller (retail) interests.

This would be immediately detected when looking at the order flow. It matters not whether you are a "large player" or a small one, all must interact with the market in the same way...by placing orders. Larger volume (depending on how the order is executed) will either consume all available liquidity and cause rapid price movement, or (more commonly) be placed AS liquidity and absorb smaller participants' market orders, thereby stalling or even reversing price. Either way you can quickly and efficiently "see" this when you learn to observe and assess order flow on a daily basis in the markets you are watching. No one can escape the structure of the market...there is no "secret" way to get your order in and filled...it must go through the order process and be transacted...just like everyone else.

One very efficient way of hedging currency exposure is to buy a put option on the currency they are exposed to. Thus if they currency looses value relative to their own, the put will balance out the loss brining it to near zero...plus or minus the transaction costs, and the time decay.

However none of these things gives the information you seem to be looking for. I suspect you are trying to find some formula to determine direction and price point for entry/exit through a mathematical formulea process...I too have tried this...you better be very good at quaint and predictive math...

I am one who after years of pulling out my hair found peace in the simplicity of just reading the order flow day by day, candle by candle and evaluating the price response to it...it is far more satisfying both in profitability and time management.

Nothing.
Everything is relative.
However, some believe that central banks are pegging their currency to a basket of other currencies.