Interest Rate and interest Rates Differentials

The Following is an email i recieved from Tom Yeomans, (news trader)

Interest rates and interest rate differentials How often have you heard the saying that economists can't trade? I researched this saying a bit, and find that that carries over from the traditional, much smaller markets. Tiny markets like stocks, metals, and e-trading do not always work the way they are supposed to using economic fundamentals. Indexes, futures, options and derivatives, stocks are emotional and usually irrational since speculators control prices. Brokers in those market may be able to move the market at times, but it all boils down to traders and their emotions.


The foreign exchange is the economists element. The largest unregulated "market" on the planet. Estimates of volume range from 2 to 3 trillion a day. There is nothing that comes close to it in volume. It encompasses every facet of our modern lives. We are so completely dependent on the value of our countries currency for survival that it's difficult for most people to fully comprehend.


Retail FOREX and the worldwide Foreign Exchange are entirely different.



Retail forex is new and tiny. Retail forex offers speculators huge leverages and control prices within themselves. The real foreign exchange does business through huge banks and much different players.
The business of foreign exchange is conducted by economists. The opinion and valuation of high ranking economists on currency prices is the bottom line on world prices. (Just watch what happens even on our little forex intranet when a bank president speaks.) The retail forex market and their hoards of irrational, uninformed traders doesn't come close to determining currency prices around the world. (They do have an impact on their little over the counter derivatives intranet, but that's another subject.)
Folks, please understand that no serious economist, central bank president, or multi-billion dollar transaction will hang in the winds waiting for the candle to cross the moving average line. Technical analysis may have a place for some approaches under some conditions, but bottom line economics determines price. Decisions about actual currency prices are made using (mostly) sound economic principles.


The price of a currency is not determined by technical analysis. Get used to it or you will lose your money trying to trade retail forex. Don't bother firing off a letter to me about technical analysis cause believe me, I have heard whatever it is you are going to say. I have tried to personally train more than three thousand people to do what I do and if two dozen people are still around making money trading forex, I would be surprised. None of the angry letter writers are around anymore. Some went on to teaching and selling technical systems, I suppose but they are not making money trading forex. So, please, don't bother wasting my time with a letter trying to convince me technical analysis works. Just like all the others over the years, don't bother trying to rationalize why you can't ( won't) attempt to understand simple economics and the particulars of the environment your are trading in.


Instead of hanging around message boards and forums, try going to Amazon and select a few books on general economics and fundamental trading. I have heard every hair brained system and watched day after day as people made money trading fundamentally with me in the morning, but couldn't get a grip on themselves and pissed it all away in the afternoon using technical analysis.


That type of thinking is exactly why people fail to make money in the forex market. It is why 100 out of a 100 websites claiming to have some super terrific system for trading are making more money selling you their "fits all dumb people in all markets" system than they could possibly make trading with it. There is no such thing as no-brainer trading.


I have been sending out newsletters for more than a decade. Originally, I wrote for a group of programmers in Linux and BSD. Universities and colleges around the world used my books on exploiting holes in networks and software. I am not bragging, I am qualifying what I am about to tell you. I am speaking to the serious people who were just like I was a few years ago falling for the mirrors and hype. This list contains people who have known me for years. Although I may not have met them face to face, I consider them my friends. If you don't like what I have to say about trading fundamentally instead of technically, the unsubscribe button is at the bottom of this letter.


Those who want to actually make money on a consistent basis in forex without having to resort to selling something to stay alive, should let me speak as openly as possible about your chances. I don't take live trading students anymore and you have most likely bought my book, so this is straight talk. I have written twelve technical books exploiting holes and weaknesses in computer intranet systems. ( See link at bottom of my main page.)


When you open a live trading account (demo as well), you are actually placed into an intranet. Not the internet. Retail forex, is a closed network called an intranet. Unlike regulated markets with regulated prices that can be shared among different platform software, forex brokers have their own " internal exchange". The feed is fixed to the platform. Their particular intranet.


The interbank, another term they confuse people with, can be one of dozens of outfits loosely gathered together for the sole purpose ( in my opinion) of coordinating and checking the prevailing prices from other retail brokers to make sure they are all around the same area. Various interbank's, various nuances in the data.
Makes sense so far?


The technical data from forex feeds cannot be reliability used to predict currency movements before the release of economic releases in a retail forex platform since the data is manipulated in various ways by individual brokers for use exclusively on their platform. Their intranet. Even with perfect data, it can't be done consistantly!


Haven't you noticed that during slow times everyone is at about the same price but it all changes during an economic release. There are no two data sources alike. At times in my room, I have seen two people on the same broker platform get different prices.


I hope this strikes a few of the math oriented readers as common sense.
Since the input figures used for determining the calculations on RSI , SAR, stochastic or moving averages vary according to the broker supplying you with the data, doesn't it make sense to suspect its ability to accurately predict future moves based on the flawed and filtered historical data. (That is only one of the reasons why back testing is a horrible way of testing systems.) Do they may manipulate it? This could explain why certain people with certain platforms get a buy signal when others get a sell.


I really don't know much more about their data since they don't have to tell me or anyone else. No one has the legal authority or ability to watch the brokers transactions. Just like banks, there is no one but themselves or their head offices to be accountable to. Retail forex is unregulated everywhere.


Don't think for a moment that belonging to some association with expensive entry fees gives them any more credibility. (Look at Refco!) No one gets access to a forex brokers transactions or the unique algorithms their programmers create to simulate the real foreign exchange for you on their platform.


The weakest point in retail forex trading I have found to be consistent, is that the forex brokers must follow true or collectively acknowledged prices at some point. This means they must follow prices determined by forces other than themselves. Although forex brokers are given a wide amount of playing area, they must go very close to (somewhat) official prices throughout the trading day and absolutely must go in the general direction of the real exchanges in foreign currency or they would lose all clients and credibility. Yes, there is a lot more to it than what I have explained, but the bottom line is that prices will go where they have to go. Forces let the brokers mess around within a price band, but they must line up at some time. All the forex brokers in the world will not dictate prices to anyone other than the people on their intranet.


All the doji's forming on our little intranets are nothing more than a crude attempt at a crystal ball. You see a doji and I see an opportunity for someone to take the other side of my trade...Ha
.I am going outside to spread some gravel around the flowerbed. It looks terrific (weather wise) and I am ready to go out and have a terrific day. The apple blossoms are out.
Here is something that makes sense
The final report on first-quarter GDP is due out in about two weeks, and new information points to a very small downward revision to growth. Next week's data on retail sales and business inventories will provide more guidance.

Now, i cant wait to hear what the rest of FF has to say about this Forex World View

For me, i agree and disagree to what he says.

how i see the market is that Fundies set market sentiment, while u should make entries and exits based on technicals, which is the 'MIND' of the market

I thought it was a dumb article that sounds like it was written a decade ago. If he finds rates on his platform wildly wrong, then go find one that more closely follows the rates given on on the banking system connections.

Certainly FX is not centralized - so you will get quotes that can vary widely in very fast markets - but that's to be expected. FWIW, I can go to 2 supermarkets within a 20 minute walk from my house and get quotes on cherries that are off from one another by 50%. The true value is what you decide to pay for them. Most retail FX'ers I know use at least 2 live brokerages (and they shouldn't be linked, like the old unlamented Refco, and FXCM, were for awhile). If all else fails, you can then do your own arbitrage (but guess what, the opportunity rarely, if ever, comes up).

As for economists, I would suggest he actually read them, rather than write about them; viewpoints about what "true FX rates" even are is still contested, while the guidance they offer in terms of trading is probably accurate (at best) to maybe the 60% level. You want to actually trade with stoplosses to on the euro at perhaps 20 or 30 cents from whatever it is now? Be my guest...FWIW, for some reason I can't recall any economist saying that the 10 year bond rate would jump to over 5.1% since Wednesday...Think LTCM everytime you think economists (even those with Nobel Prizes) somehow fully understand the market....

He should also learn how the actual system works; and why rates go all over the place on big news. It's not market manipulation, it's simply the process of price discovery under adverse conditions. People that don't need to bet (through addiction or hedge requirements or otherwise) will simply back off until the dust settles; so there's no where for a retail exchange to hedge their own sales. OTOH, they try and promise their clients a 2 or 3 pip spread, which means they are racing all over trying to balance their positions.

As for the use of technical studies - he claims that retail markets are manipulating the market history as well. All I ask here is some proof. It's very easy to witchhunt in an uncertain environment, but frankly, my platfforms - as well as independent charts - are all pretty much in agreement. Maybe he should go back to writing software, where life is more certain....

and yet he is so confident with his views

The best thing to do is just check the facts yourself; almost all brokers now offer demo and miniplatforms - pick some different ones and watch them yourself, along with (say) reuters or even yahoo. If you can make any money arbitraging, be sure to let me know

what a crap article, no one has the crystal to predict the future but price action tells u what u are looking for. history never fails.

Show me a live account statement confirming long term consistent profitability and I will believe you. Otherwise, your views are no more valuable than those of whom you criticize.

agreed. i dont agree with TS like you. =)

Might I suggest swinging by Domino's thread that he started a while ago. His entire firm trades off of IRD's, and makes a quite handsome profit off of compound interest.

I've started to look at some interest rate differential stuff, it's a bit more complicated than it seems when inflation is added to the picture.

I posted a thread about real and nominal interest rates yesterday with what i thought would be a very basic question but got no response. This leads me to believe that either i am stupid or the question isn't as basic as i first thought. I've also done some searching and haven't found much info regarding this. Here is the thread:

http://www.forexfactory.com/showthread.php?t=300253

If anyone has an answer feel free to discuss in this thread rather than open up my dead one (If that's ok with Mr demark)

Inflation data is usually the leading indicator for future interest rates. The question isn't basic, and a basic answer really can't be given. You can find most data that affects inflation and interest rates here: http://www.shadowstats.com/. Hopefully this helps!

-Rgz