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What is Currency Manipulation?

Any institutional body or someone is said to have indulged in currency manipulation when they rejig the exchange price of one currency against the other. Usually, currency manipulation is a work of large institutions or government bodies. As the supply of any currency in the market is sufficient for normal people and the average trader, they do not stand in the definition of currency manipulation. The reason is simple: its quite impossible for a single person in his/her capacity and dealing through own funds to manipulate a single currency or basket of currencies. However, if the same person has been bestowed powers by the large financial institution, be it private or government can manipulate a single currency or basket of currencies by using the same powers. Generally, a country’s central bank or central regulatory authority carries out large scale manipulations. Even Private banks and groups of banks are known to either work in their respective capacity or are complicit in massive currency manipulation operations carried out globally.

If you are surprised that private banks or group of banks together can’t manipulate the exchange quotes then check out this article. So coming back to our main topic “currency manipulator.”

What are the ways by which currency manipulation is achieved?

Ok, this question has to be answered in two different parts. The first one covers the private banks, and the second one covers the Government agencies, Financial regulators and central banks.

Currency Manipulation by Private Banks

These are some of the dirty banks who frequently indulge in currency manipulation

J. P Morgan

Morgan Stanley

Deutsche Bank

Barclays

Citigroup

Julius Baer

Royal Bank of Scotland

Lloyds

HSBC, etc.

The bank traders have several names for these banks. The names such as “The Cartel”, “The Bandits’ Club”, “One Team, One Dream” and “The Mafia” are frequently used to call these banks.

The traders who work for these banks have a very easy job. There are tools which enable them to get the number of shorts and longs across the globe for currency pairs. The traders then have to take the opposite trade. Most manipulated pair is the EURUSD and followed by most of the pairs where USD is paired. Tools such as IG sentiment Index make their life quite easy, and the banks know where the bad money is sitting.

image source: dailyfx

The above IG sentiment index shows the number of shorts vs the number of longs and the price movement of EURUSD. If you closely observe the chart as soon as the traders become bearish, the banks have gone long. This behaviour is shown towards the end of the chart. Let us check another chart here.

image source: dailyfx

The above IG Sentiment index for GBPUSD clearly shows from the beginning that the moment the traders are turning bearish, the prices are rising and vice-versa. This indicates that the moment majority of the traders have turned bullish, the banks have shorted the pair whereas when the traders have turned bearish, the banks have gone long on the pair. This is a rampant practice which is carried out by the banks on a daily basis though the extent of it could be small or large depending on the banks’ requirements.

Currency Manipulation by Government agencies, regulators and Central banks

This is something which almost every Government and its agencies do, including the central banks. There are several ways and instruments by which this achieved as any Government and its agencies have more power as compared to a group of private banks to exercise these manipulations. The idea is to provide stability to local currency. When Government agencies or the Government itself through Central banks carry out manipulation, then it is considered under the ‘protectionism policy’ of the country or in favour of national interest. The mechanisms used by these entities may not fall under the purview of local laws or in short, are quite legal. Still, in the international market, these practices could be considered illegal resulting in the country’s currency listing in the ‘currency manipulator list’. The mechanism used by these Government entities are :

Change in monetary policies and thereby change in interest rates

Bulk buying or selling of Treasury Bonds

Bulk buying and selling of other Foreign assets

Quantitative easing

Raising anti-dumping and import duties, etc.

These mechanisms could also be deployed to gain undue advantage in international trades where one nation could gain an advantage at the expense of another nation by manipulating the currency exchange.

Does Indian private and public banks also carry out currency manipulations?

So far, there are no single data to support the above question. But to an extent, every single entity carries our manipulation work which could be legal in the eye of the country’s regulators and laws while it could be illegal at the global level. But the possibility of rampant practices of manipulation to be adopted by the Indian banks can’t be denied in the future. The latest RBI circular, which allows select banks to participate in 24X7 forex markets raises the possibility for the future currency manipulation practices that could be adopted by these banks. But right now there is no data to support the above question.

Who creates the Currency Manipulator List?

The USA creates the currency manipulator list.

Which act is implemented while creating the list?

Well, there is no act for creating the list, but 1988 Omnibus Foreign Trade and Competitiveness Act requires the US Treasury to analyze the exchange rate policies of foreign countries with the USA annually. Based on this analysis the USA decides whether the country has been involved in the exchange rate manipulation between USD and the respective currency

As the Wikipedia says

Under the 1988 Omnibus Foreign Trade and Competitiveness Act, the United States Secretary of the Treasury is required to “analyze on an annual basis the exchange rate policies of foreign countries … and consider whether countries manipulate the exchange rate between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade” and that “If the Secretary considers that such manipulation is occurring with respect to countries that have material global current account surpluses; and have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments”.

What are the impacts of currency manipulation?

There are two parts to this question:

a) Impacts due to private banks

When Private Banks do currency manipulation, the immediate impact is felt by the retail traders and investors. Massive manipulation can lead to market crashes or spike. These practices also create the environment of massive volatility resulting in margin calls to both types of traders (long and short). Besides its a 24X7 market so traders might be sleeping while the banks might be manipulating during the night.

b) Impacts due to Government and central bank policies

Well, it could have both positive and negative impacts and would require separate article which will discuss in detail all the pros and cons. However, some specific points could be highlighted here. For example, imposing high import duty on similar kinds of the item can indirectly promote local products with the same quality as compared to imported item. Radial Tires frequently are subject to the anti-dumping duty to promote the local Tire manufacturers.

Frequently reducing the interest rates could have both negative and positive impact. Lowering of interest rates means the local currency becomes not attractive for investment but at the same time helps domestic industries to borrow at cheap interest rates.

Severe sanctions could be placed on the country which has made to the list of the currency manipulator. Sanctions such as trade sanctions ban on the country to trade in international business zones etc. are some of the severe implications. These Sanctions could be imposed by the USA, IMF and other international bodies. The best case is the USA sanctioning China and putting the country under “The Currency Manipulator List”.

Does RBI carry out Currency Manipulation?

Too some extent yes RBI does currency manipulation but to consider it as a legal or illegal activity is quite complex and not easy to decide. We are not concerned over the legality or illegality of the actions carried by RBI. This article tries to analyze what is Currency Manipulation and its implication.

The central bank frequently intervenes to stabilize the Rupee. These interventions come when there is an appreciation or depreciation of more than 1% in a single day. Thus RBI intervenes to provide liquidity and stabilize the volatility in the currency’s movement.

How RBI intervenes?

There are several ways to carry out intervention or currency manipulation. Out of these two of the most deployed strategies are :

Buying and selling treasury bonds of foreign governments.

Buying and selling of Currency Contracts through open markets.

Should traders worry about these currency manipulations?

Well, again its a complex question and depends on the pair you love to trade. Most famous is the dirtiest. EURUSD and GBPUSD are the popular currency pairs and also the most manipulated pairs it becomes quite difficult to trade when technical indicators and fundamentals indicate a good trade but manipulation could spoil the mood.

If you are trading in USDINR pairs, then any movement above 1% during the morning hours is sure to be spoiled by RBI intervention. You are good as long as the air movement is restricted within 0.33–0.45%. But RBI doesn’t manipulate to extreme levels like the dirty group of banks mentioned above.

What is Strangle Strategy?

In this strategy, we sell deep out of the money options. We will sell one put option and one call option of the same expiry. We will sell both the contracts at a suitable gap from at the money option. For example, if USDINR is trading at 74.80 (as on Aug 12, 2020). We will be selling August or September month expiry (depending on your risk appetite). For our purpose let us sell September month expiry contracts (because already half of the august month is gone). So the strangle strategy would be to sell ten lots each of 77 strike call, and 73.75 strike put. Here is the premium detail for 77 call 10 X 0.79 X 1000 = Rs. 7900 Here is the premium detail for 73.75 put 10 X 0.2125 X 1000 = Rs 2125 Total premium collection = Rs 10,025

strangle strategy and payoff graph

I am using an online payoff graph tool, so the premium price could be wrong. But that is not the point, point is to explain the strategy and its pros and cons.

Which type of trader uses this strategy?

This strategy is deployed by option sellers and conservative traders.

Which type of market is suitable for this strategy?

This strategy works best when markets are range bound.

When this strategy would fail?

This strategy will fail when market is trending. In that scenario it is preferable to sell naked options in the opposite of the market or buy an option in the direction of the trend.

What is the maximum profit in this Strategy?

The net premium collected from the sell of both put and call option is the maximum profit in this strategy

What is the maximum loss?

The loss is infinite if the market starts to trend.

How maximum loss can be minimized?

There are two ways to reduce or minimize the loss in this strategy:

Put a stop-loss

Buy insurance premiums to protect the strategy. Here the option strategy could be hedged by buying the next strike put and next strike call. In our case will buy strike 73.5 put and strike 77.25 call to protect and hedge our risk.

What is the drawback of putting a stop-loss in this strategy?

First of all, if you are an intraday trader, then option selling in currency might not be a fruitful and rewarding job. If you plan to sell options, then selling it for a monthly expiry or weekly expiry can yield some results. However, unlike western economies, where markets are more developed, Indian markets are yet to become mature. We are still far behind our western counterparts. The system and the market timings both are of critical importance to a trader. In India, all the brokers will keep stop-loss order until the market ends. So basically stop-loss works fine during the intraday situations. You can place AMO to minimize risk for overnight positions. But unlike the stock market, currency markets are 24X7 operations, so expect a gap up or down when the exchanges open the currency derivative markets. So at night markets would be moving against our opinion and we won’t be able to do much except placing an AMO for stopping out the loss. If the market gaps up or gaps down against our wishes, then stop loss will fail.

Why buying options is much more preferred than putting a stop loss?

Buying options act like buying insurance for business operation. The magic is that you don’t need to pay anything to buy the premiums. The premium is paid from the sell of the options. In this methodology, you have to buy premium of immediate next strike price., i.e., we will buy 73.5 put and 77.25 calls. Once we buy insurance for our strategy, the payoff graph would look like as shown here

payoff graph after buying immediate options

Will buying insurance safeguard my strategy 100%?

I would say no, you buy insurance against any event leading to your death, but still, you believe that you won’t die too early. Does insurance help you to avoid accidental death? No, but it gives you peace of mind that in the event of any such circumstance, your family would be safe. The opinion with which you had deployed strategy has changed, and the market is trending. Since the idea of option selling is to sell far deep out of the money options, in the event of a strong trend or event, this strategy would fail as explained. So better is to exit at that point and change the strategy.

Should you use Technical analysis along with this strategy?

It is a personal call. If you are comfortable to use only option chain data, then you perhaps don’t require Technical analysis. However, I prefer to use Technical analysis along with the option chain to derive my opinion regarding the currency pairs movement. In one of my post I have explained, using Donchian channels, I made 45% return in my portfolio. I prefer to use this indicator along with this strategy. This is a very conservative strategy and the returns are very low and carry very low risk.

When should you exit?

The exit timing is also an essential point of discussion. Now suppose the currency pairs have started to trend but near the expiry. In that situation, it has been observed that current month options decay and volatility in the current month contracts reduce. The reason is simple people start to roll over to next month contracts where volume and volatility both are high. Still occasionally if the currency pair is trading with very high volatility due to some event like terrorist attacks, in that situation it is always better to exit and book some loss. However, in normal market conditions, even if pairs start to trend, then there is a slight chance that trade setup would incur significant losses. On the contrary, if the strike price is in the money, the premiums would have decayed to a reasonable value. And you may be allowed to keep most of the premium.

But in my experience, since the day I have started trading in currency options, I have rarely found the markets trending for very longer period of time. At some point of time banks would be intervening or would be constantly intervening to cool off the trend and thus currency markets would be range bound most of the time with smaller smaller trends. You can read more about banks acting as market operators in my post. At the same time, it cannot be denied that in future we may not experience strong trends continuing for months. It is quite possible that currency pairs could move more than 20% in a single trading session as explained in the post here. So in these types of situations one’s own judgement and experience comes to rescue.

In the end I would say always protect your capital and don’t be too much greedy.

Don’t worry this article will try to put everything in layman language and will keep the core workings and other technicalities for some other article.

What is a Forex reserve?

As a common man, here is my understanding of the term Forex reserve. Well obviously, at this moment it won’t be right to dive directly into core workings or deep technicalities of Forex reserve. So, Forex reserve is like a safe deposit or a safe locker where common man puts his gold, diamonds, property papers, insurance papers, financial deeds and business deeds papers, valuable products and some currencies (though this is hardly done these days, except by crooked guys as shown in movies), etc. In case of emergency this safety deposit can be broken and valuables can be redeemed to alleviate the crisis or problem.

From a country’s perspective, Forex reserve could anything from Foreign currencies, gold, foreign Government treasury bonds, foreign institutional bonds, special drawing rights (SDRs), Reserve Tranche positions, etc. In short, any asset(both movable and immovable) recognized by the central bank, which can be easily used for payment to foreign parties can be considered as Forex reserve. At the moment India’s Forex reserve comprises of four types of assets:-

Foreign Currency Assets or FCAs

Gold

Special Drawing Rights (SDRs)

Reserve Tranche Positions (RTPs)

We all know what is Foreign Currency Assets. If you are not much aware of FCAs, then this is nothing but foreign currencies held with the central and other banks within the boundary of the country and also in the foreign countries where the banks are operational.

Well Gold is something that can be used in lieu of money or the Fiat currency. Even after abandonment of Gold standard, gold continues to impact the currency markets and majority of the countries across the globe keep a reserve of gold to fight inflation and depreciating currency.

SDRs were introduced by IMF in 1969, when it felt that crisis could arise due to the limitation in usage of gold and dollar to settle the trade and business. It is a kind of artificial currency that is used within the working of IMF. It is used for internal auditing and misc other operations carried out between IMF and member countries.

RTPs is a quota of currency that every member must provide to IMF for countries’ utilization without having to pay service fee to IMF.

As of week ending 17 July 2020, India’s forex reserve stood at $517.63 billion, a rise by $1.275 billion.

What role does Forex reserve plays in the economy of a country?

Forex reserve plays a lot of important role in the economy of a country. Here are some of the important roles:

It acts a collateral or safety deposit against the economic slowdown or recession. It can also be called as insurance against economic crisis.

Trade balances are settled using Forex reserves.

Debts could be cleared/acquired by use of the same.

Helps to pay the import bills.

Helps to stabilize the currency and thus the economy.

Helps the economy at the time of varying interest rates across the globe.

Debts can be given to another country.

Adds to additional returns in terms of interest earnings, provided interest rates are high across the globe.

Provides Liquidity to the market from time to time.

Does Forex gives any return to the country?

Already interest rates in the USA and Europe are very much low as compared to BRICS nation (Russia and India). Only Gold gives some returns on the total Forex reserves comprising of Gold. Baring Gold, due to low interest rates, earnings through interest is very negligible. On contrary some developed countries have negative interest rates, which means that country like India which has acquired vast Forex reserves would be paying the cost to maintain such a huge Forex reserves.

Who is the custodian of Forex reserves and what laws govern Forex reserves in India?

RBI is the custodian of Forex reserves in India and all the major central banks of other nations are major custodian of Forex reserves in respective countries. RBI act along with FEMA Act of 1999, provides the provisions to govern the Forex reserves.

Where is the Forex reserve kept?

Forex reserves are kept across the globe. It is just like an asset which just changes the name of the owner. While some of the Forex Reserves are kept within the boundary of the country, rest are kept in the form of gold, Foreign currency assets, bonds etc. with other major central banks, Bank of international settlements, IMF, loan funding to other nations, investment in properties and assets (movable and immovable) across the globe. Indian banks operating overseas also maintain the Forex reserves under the guidance of the central bank. For example, India keeps the gold with Bank of England as a reserve currency.

How Forex Reserves is built or how Forex reserves is formed?

There are several ways through which Forex reserve is built or formed or acquired whatever you want to call it. Here are some of the ways:

FDI inflows — Foreign Direct Investment brings Forex currency assets, along with other foreign assets within the country.

FPI inflows — Foreign Portfolio investors invest their money in the Indian markets in the form of stocks, bonds, etc.

Interbank trading- RBI along with other Indian banks carry out operations across the globe where they trade foreign currencies especially dollar through the Interbank network.

Acquisition through forex dealers — RBI from time to time buys and sells foreign currencies through Overseas Forex dealers.

Other activities such as investment in real estate, bonds, share markets, etc are also performed by central bank, other banks and government functionaries, which help in building up the Forex reserves.

Less imports also helps in building up the large Forex reserves

Decline in crude oil means less payment in dollar terms which ultimately leads to massive build up in Forex reserves.

Interest payments received for the loans given to other nations also form the Forex reserves.

Gold imports also form the Forex reserves.

It was designed for technical analysis of stocks. Many traders also call it a trend reversal indicator. It is measured in the scale of 0–100 and provides the average value of 14 periods. Its value can vary between 0 and 100. Any value above 70 indicates the overbought condition for the asset, and traders expect trend reversal or a pullback in the price of the asset. Any value below 30 is considered as an oversold condition for the asset and traders expect trend reversal or a small short-covering rally to happen.

This indicator was primarily designed for the stocks, but soon traders started using it for predicting the price movement of various other assets. Many pro traders combine this indicator along with other indicators, to create a trading strategy. At the same time, price-action traders use it for predicting a breakout or breakdown of major resistance or support. They also use for predicting false breakout or breakdown.

Spot Forex trading was launched somewhere around 1996. Currency Derivatives were launched in 2008 in India. Does this indicator work well with Forex trading?

The price action, trend reversal, support and resistance do not work in most of the currency pairs. The traders coming with trading experience in other financial assets try to figure out overbought and oversold zones even for the currencies. Let me tell you the basic fact; we are trading between two currencies, where one currency will appreciate, while others will depreciate and that is the principle. There are no overbought or oversold zones in currency trading. Banks are the real operator in Forex Market. In one of my article, I have explained how the banks are the main operator in the currency market.

Perhaps you will also like to read about the possibility of a currency depreciating against the other currency more than 20% in a single day.

In another article, I have explained why exchanges do not put circuit breakers in the currency futures.

Based on these three articles, you would be able to understand that there is no bottom or top in the Forex Market. Bottom and Tops are decided only by Banks. So how to determine oversold and overbought conditions in these situations? So how will this indicator tell us when the currency pairs are trading in overbought or oversold zones?

Though USDINR has been in a long trend since 2008, it has been trending in a pattern where it moves in an uptrend, then pull back happens followed by consolidation and again the uptrend starts. But still in this case, from time to time RBI intervenes to ease down the volatility and provides liquidity, in such situations again the RSI has failed most of the times. When I began my Forex trading career, like others, I started with this indicator only with 15 min TF. I used to trade in all the Four INR based pairs. I must admit that I failed every time whenever I relied on this indicator.

Well, so far I have not traded in cross-currency pairs, but based on the global trader’s experience, the most manipulated currency pair is the EURUSD followed by EURCHF and USDJPY. All the major currency pairs where USD is involved manipulation is done to some extent by almost every bank. This strengthens my opinion against the use of RSI technical indicator in Forex. I must say that, if you are using RSI in the Forex markets, then you are relying on an indicator which will deceive you every time. In the Forex markets, whenever a pair starts to trend it will trend even beyond the concept of overbought or oversold zones, the reason is simple, there is something called Interbank where banks trade on these currency pairs. Almost every bank in the world does trade via Interbank link.

In my next article, I will share some examples, where RSI fails in Forex market.

Likewise we have currency pairs falling into above three categories. These categorization have been done on the basis of certain factors such as liquidity, volumes, commodity pegging (pegged and unpegged) etc. Without diving deeper into the various factors( will be discussed in another post). Here are the list of currency pairs categorized on the basis of above mentioned categories:

Major Currency Pairs — There are seven major currency pairs and they are:

EUR/USD

USD/JPY

GBP/USD

USD/CHF

USD/CAD

AUD/USD

NZD/USD

Note: All the major currency pairs involve USD paired with other major currencies.

Exotic Currency Pairs — These are the the currency pairs which involve pairing of currency of a developing nation with the currency of a developed nation. Here are some of the currency pairs which fall into this category:

USD/INR

GBP/INR

EUR/INR

JPY/INR

USD/HKD

JPY/NOK

NZD/SGD, etc.

Minor pairs — These are the currency pairs where pairing is done with two currencies of developed nation other than USD. Here is the list of currency pairs falling under this category:

EUR/GBP

EUR/AUD

EUR/CAD

EUR/NZD

EUR/CHF

EUR/JPY

CAD/JPY

GBP/JPY

CHF/JPY

NZD/JPY

GBP/CAD

GBP/CHF

AUD/JPY

In a sense, if all the conditions are perfectly normal in one nation that doesn’t mean global cues are not playing a pivotal role in deciding the nation’s currency rate. While the situation in another country might be disturbing, resulting in fluctuation of its currency. So when we consider any pair such as JPYINR, the condition might be stable in Japan but conditions might be different in India resulting in the pairs decisive movement (with added global cues as well). Let us try to understand with a case study in this regard,

EUR-CHF flash crash of Jan 2015

As of June 2011, Swiss exports were standing at 70% of the GDP. It is quite a satisfactory situation when considering exports data and comparing with the economy of Switzerland. On Sept 6 2011, SNB (Swiss National Bank) pegged the EURCHF at 1.2 so that exports are cheaper. But inflation was rising and demand to remove the peg was also growing. To add to the chaos, SNB printed millions of new francs to balance the euro exchange rate. As a result, SNB had forex reserves with a valuation worth $ 480 billion (the equivalent of 70% of GDP of Switzerland). But at the same time, Euro started depreciating against major pairs resulting in depreciation of CHF against the dollar. It depreciated 12% against USD during 2014. By the End of 2014 demand had risen to remove the peg amidst serious allegations against SNB that they have amassed substantial forex reserves because of inflation. From 2011 till the Jan 2015 beginning SNB maintained that peg wouldn’t be removed and EurCHF would trade at 1.2 exchange rate. Here comes the tricky part; nearly 70% of the traders believed what SNB said and were long on the pair. You can read my article on currency market operator. This article explains who decide the pricing in the Forex market.

Now the Bank can easily have the data and see who are long and who are short on EURCHF. Honestly, the Bank doesn’t care, about the depreciation or appreciation; to them, it is a pile of cash ready to be taken back from the traders. 70% of the trader’s money is within the Bank’s reach.

On the morning of Jan 15, 2015, at 04:30:56 CET, SNB removed the peg, resulting in a crash of 20% within 1 min (1.2 →1.0). All stop losses fail, and trader’s losses compound with slippages, this further pull down the pair to 25%. On the morning of Jan 16, 2015, global stock markets crashed. Traders losses were quite high, and several brokerages went bankrupt. Citi group reported a loss of $150 million. For further details, you can have a look at the infographic.

image source : investoo.com

The above case study highlights the need for the traders to keep a watch on Bank’s activity. It can’t be denied that such possibilities can occur with our pairs too. But RBI seems to have been transparent to some extent so far (for future same can’t be said). Unlike Western counterparts, it has at least maintained some transparency in carrying out such activities by limiting the movement within the range of 1–1.2%. RBI usually comes into action whenever Rupee appreciates or depreciates more than 1% in a day, and this is proper management I would say. India is still an emerging economy, and our GDP data is still skewed towards imports (as of 2019, 31.4% was our GDP ratio). In such scenarios, economic sentiments are hurt even with a movement of 1% in the USDINR or other INR pairs. Hence not only the government but all the financial regulators can’t afford a change of more than 3% in a single day, though it can’t be denied for future. Consider the situation of brokers and traders who are caught on the other side of the trade, there will be losses, and that would compound due to margin calls also. The only thing that can safeguard the traders is to trade in a small position.

On Jan 6 2020, RBI’s circular allowed all the banks to carry out offshore trading in INR pairs to stabilize the currency in this highly volatile global market which has been giving pain from 2018 onward in the INR valuations. This decision will change the Forex trading environment in the country. This decision will also make traders vulnerable with overnight open positions. Not only this, but banks can also play their monopoly further to control the pricing in various INR pairs in the near future. On Jul 2 2020, around 12:30 all the four pairs (USDINR, EURINR, JPYINR, GBPINR) crashed simultaneously. Can you think of any good reason why all the four pairs crashed? The answer will be given in another article. Stay tuned.

Price-Action Traders or Price-Volume Traders

These type of traders use the old technique of Price-Action to trade. It is also known as Price-Volume trading technique. This technique is still useful in the stock market. The method mainly focuses on the dirty money sitting up in the market upon which the operator would act. Basically, the Professional traders try to identify the action of the operator and figure out the price range where the action will happen. How they identify the action by the operator? They look for volume changes in the financial asset and its price movement. There is a supply-demand zone defined based on the operator action, or you can say where the operator will start selling is the supply zone and where the operator begins to buy is the demand zone. Such techniques are perfect for stocks, indices, including their FNO.

But does this type of Trading technique useful in Forex? In my opinion, it does not work in Forex, The operator here are the banks, and they decide where the price would move. At the beginning of my career, I tried to combine price-action with Donchian channels in an experimental setup which is still running. However, I have stopped relying on price-action, but it seems to have its applicability for the USDINR pair. I have covered my experimental setup in another article based on the use of Technical Indicator Donchian Channel.

The same cannot be said for INR based other pairs. EURUSD, USDJPY and GBPUSD are not suitable candidates for application of Price-action theory. Why did I stress this? The reason is simple if you read my article on the currency market operator and the article where I explain the possibility for a single currency to depreciate more than 20% then perhaps you will understand why I am making such a statement.

The traders those who are coming from the Stock market background and expert on Price-Action theory try to use this even in Forex markets and they miserably fail because of the reason explained earlier.

Trend Reversal Traders

There is a class of traders who try to gauge the market thermometers. These class of traders are hunters of market tops and market bottoms. These traders rely heavily on the overbought and oversold situations to reach the conclusion that market has toppled or bottomed out. They use those technical indicators which offer to signal overbought and oversold conditions. These things mostly work in Stock Markets and certain commodity markets. Do they really make sense in currency markets? I don’t think so. Look at the charts of USDINR pair and compare with the charts of EURINR, GBPINR and JPYINR. USDINR over the long Time Frame has been appreciating and has moved 70% since 2008. While GBPINR has been moving within a large range. Same can also be said for EURINR and JPYINR. If banks decide that currencies should continue to fall it will fall and if they decide currencies should continue to appreciate, they will appreciate. In this regard, though RBI intervenes just to cool off the heat in the USDINR Pair and too some extent in other INR based pairs, but since EURUSD, GBPUSD and USDJPY are also available for trading, this article also explains in the perspective of 3 major currency pairs as well. Yes, If Banks in Europe or in fact in UK and US decide that the currency pair EURUSD has to appreciate/depreciate more than 5–10% in a single day, they will do it. Banks are always on lookout for bad money sitting on other side of the horizons. They will rejig the Forex market as per their own convenience. This news article must prove my point. Then in such situations, where will these traders find bottom or top in the currency markets? In such scenarios these traders fail miserably and provide liquidity to the markets.

Trend Followers

They were popularized by famous groups of traders who go by the name of turtle traders. Their philosophy is very simple, stick with the trend and when the trend reverses, get out. These class of traders will be on the lookout to check when the trend has started. They will watch closely when the operators have taken action and initiated the trend, and they will follow the trend, one of their favourite indicators is the Donchian channel. They will ignore the principles of Price-Action, Volume, bottom fishing, etc. and will focus only on on-trend. In Forex, only these traders survive because they have gained experience over the years. They take the trade when the confirmation has been achieved that trend is continuing. They will sell when the prices hit lower and will buy when the prices have hit higher. This type of trading is based on the fact that after the price has moved up, more people will join the band and will keep on pushing the price. They will then enter the trend and continue until the last when the trend starts to reverse. It so happens that trend might get paused and after consolidation again picks up. Now in this situation, the perfect trend follower will exit half of his position and will trail with the other half till the trend has reversed. The technique also works in the downtrend.

Social Traders

Let me explain with a simple chart of USDINR. You can use the charting tool provided by in.investing.com. For the selection of best charting tool, you can refer my article which explains the charting tools I use for trading INR pairs.

When I open the charts for USDINR pair with TF=Daily and select the ATR from the list of indicators, a graph will appear below the charts. The graph is not much of importance as compared to the figure. If you closely observe the ATR for USDINR is 0.3523. The value is more important compared to the graph. Most part of my trading career I have seen the value of ATR for USDINR hovering around 0.35, which means that the USDINR pair moves on average 35 paise either way.

I usually check the ATR before the Indian Currency Market Opening time. This helps me to figure out movement, I can expect in the pair on either side (up or down). This value gives me the idea to sell monthly options on the basis of this value. Well, off-course no indicator is 100% effective, and traders have to at times combine different indicators or use his judgement when things go wrong. Like any other indicator, this indicator too will work in normal times.

Case 1 : When there is a uptrend

In this case sell every put option just below 50 paise (margin of safety in case of knee jerk reaction 35+15) as the price moves up at the beginning of the month. After 15 days you can sell puts near to the strike price. For hedging I would buy/sell Future to counter balance any loss during the day due to adverse movement in the pair.

Case 2 : when there is a consolidation.

In this case sell both put and call option with a difference of min 1 Re on the either side (margin of safety for a sudden volatile and knee jerk reaction) at the beginning of the month. After half month has passed sell 50 paise to 35 paise up and down from the spot or ICE future price. Here there is no use to buy or sell Future lot and most of the time the trades get whipsawed. I tried experimenting but could not make much of the trade in Future rather option selling was more effective in such situations.

Case 3: When there is a downtrend In this case, sell every call option just above 50 paise to 1 Re(margin of safety 15 paise from the spot or ICE Future price) at the beginning of the month and then after half month sell near to the strike price calls. For hedging I would buy/sell Future to counter balance any loss during the day due to adverse movement in the pair.

Above strategies are not useful during the extreme volatile situations or event-based situations in such cases, I adopt a different approach or do not trade at all.