FEATURE: The Battle for the Informational Edge

Thu, Dec 17 2009, 03:47 GMT
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Fxstreet.com (London) - In trading any asset class, stocks, commodities or currencies, an informational edge is always key to trading at a profit. In Forex markets in particular, trades are made on a zero-sum basis, that is to say, there is a winner and a loser. Market players with an informational edge, legal (perhaps faster live streaming of prices/technology) or illegal (insider information), will in the long run ‘beat’ those market players with less.

Major players practice this all the time; bank analysts with speak daily with press representatives for firms and hire Phd’s to come up with new cutting-edge modelling tools, and ‘black-box’ quantative trading hedge funds have even strategically located their offices next door to exchange servers, for a micro-second gain in the speed they receive prices!

Retail investors also need to consider capital. Major players have vast amounts of capital and can suffer huge down swings in variance. Given there is no informational edge between two market players, the first one to go bust betting on the markets will be the one with the least capital. Capital management is a crucial part of trading and things like stop-losses serve to aid this.

When currencies gap on big economic news being a few seconds behind can cost you serious profits.

EUR/USD has lost nearly 100 pips this session, market sentiment exacerbated by thin trading conditions and wide spreads. The pair currently trades 1.4416/20 after a small correction from day lows just minutes ago. The pair has been trading volatile in the last few weeks amid market concern over Eurozone debts.

EUR/USD

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