The Research HUB: FX Primer, Pt 1

The primer for understanding and trading FX

Hey everyone,

This article will serve as Part 1 of a 5-part series, acting as an FX primer. For those interested, I've previously written primers on both the S&P500 (link) and the bond market (link).

If you have spent any time at all in FX markets, you know that sometimes a move makes total sense, and then the next move makes zero sense. On top of that, FX isn’t like equities where it just always (theoretically ;) ) goes up and to the right!

FX is very complicated, and this is typically why it attracts those who are intellectually curious. It attracts those who thrive in complexity, chaos, and change. This is why I am breaking the primer into 5 parts!

There is so much to wrap your mind around that it can’t be distilled into a single article. There are so many unique idiosyncrasies in situations that have discontinuity with historical parallels, which requires significant a priori thinking. This is part of the reason I really like FX markets; they are a true challenge.

Here is where we will start: when I think about global macro trading, I think about the bond market and FX. Rates and FX are the purest forms of global macro trading. What you will see is that trading FX requires a lot more than just knowing the data releases for the week ahead or the momentum score of a currency pair. It requires understanding the underlying mechanics of the system, which always seems to elude people.

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5-Part FX Primer Breakdown:

• Part 1: FX - Resources, The Big Picture, Variables, Aggregating Knowledge, and Essential Tools.

• Part 2: FX - Synthesizing Information from Part 1: Theory, Practice, Causal Mechanics vs. Regression Analysis.

• Part 3: Delving into Historical Case Studies: The Importance of Studying History, Continuity vs. Discontinuity, and the Challenges of Backtesting in FX.

• Part 4: Examining the Current Environment.

• Part 5: Integrating Knowledge: Top-Down and Bottom-Up Analysis, Attribution Analysis, the Expectations vs. Actual Matrix, and Quantitative Models.

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In this first article, I am going to focus on the knowledge bases you need to acquire and the variables you need to know before we go into actually using those knowledge bases and interpreting those variables.

Let me start with a basic premise:

To truly understand FX, you basically need to understand everything else. FX is kind of like the meta asset because it’s connected to every other asset.