When you’ve escaped from this mind-trap, then you see that what you have out there is no more than a series of price relationships – like commodity prices. If you have a forecasting system, as Currency Bulletin has, you will find it throws up a number of probabilities. The name of the game being performance, you want to bet on the best of these probabilities. Where do they lie?

Well, to start with, the US dollar is the currency against which all others are traded. Things are changing and may change

further. Banks are beginning to trade the non-dollar cross rates* directly: so is Chicago’s IMM* futures* market. And we may find over time that more good bets arise among the cross-rates* .Meanwhile the only hard data about currency dealings that exists, including some very valuable data, is to be found in the IMM, where the leading currencies are traded against the dollar.

On an average day, the IMM will turn over about $12bn; and the total of positions outstanding varies from around $15bn to $30bn+. These figures may seem small in relation to the global figure of $600bn a day quoted earlier, which is traded in the so-called “interbank*” market. But only a tiny proportion of the interbank business is ‘real’ risk business, generated by clients – as low as 5%, it has been suggested, i.e. maybe only $30bn. The rest is generated by banks trading among themselves in the act of “clearing” the exposures they have incurred. (Most banks have to end the day with their books substantially level; so most of their activity consists of laying off risks with each other in a cascade of transactions of diminishing size).

There is a broad preconception that the “forward*” interbank market is much more liquid, efficient and inexpensive than the IMM futures market. But that is by no means always so. If you deal in size (say $10m+ ) and have several banks and a Reuters screen, deal in forward currencies with a bank: if not, deal with a broker* in the IMM. The typical spread in the IMM is one point ($12.5) –meaning about 0.0125% (1 point in 8,000). Commissions vary from $12 to $120 or more. With care you should be able to deal well inside 0.1% or $1 per thousand. The IMM is a very efficient market.

Many of you, I know, would like more guidance on brokers. You know I can’t go around recommending brokers. But if you want help, look up “broker” in the glossary at the end of the book.

You’ll find more background on forward and futures markets in Chapter Nine, as well as some suggestions about what you should look for in a broker. Basically these markets allow you to take a bet on a currency rate at a future date, so you don’t need to pay for the currency you wish to buy: you just leave a margin of security for your bet. And you don’t have to bet your shirt: you just bet as much or as little as you like. Meanwhile, one more obstacle.

This mind-trap is a brute. With each issue of Currency Bulletin you receive, and from other publications no doubt, you expect answers. Every time a commercial wins an export order or places an import order, he feels he needs to make a currency forecast. With every business day that dawns,

active traders are asking questions and trying to predict the future. With every issue of CB I write, I am drawn into this trap and have to make a conscious effort to get out. For as we all know perfectly well, we can’t see into the future.

I’ve said the dollar can be forecast. So what are we to make of the fact that many of the most successful traders insist they do not attempt to “predict”, and regard those who do with scorn and derision?

The answer to the conundrum is quite simple –though it is elusive. If we feel we have to predict all the time we do indeed fall flat on our faces. Our results will not be a lot better than a pin. The way it works is that no matter what system we have, most of the time we cannot forecast. But at times we can forecast some parities, with a fair degree of reliability. This unsurprising conclusion is of the utmost importance.

Whatever system we have for analysing the currencies, the data we use will only be all present and correct occasionally. Most of the time we shall be unable to answer the question “where is this currency headed?”; and to attempt to do so is to fall into the trap. It’s only when the data are present and correct– when most if not all of the pieces fit –that we have a really good chance of beating a tossed coin. So it turns out that the technique of forecasting is mostly to do with being able to distinguish between those times when we have the right to forecast and those times when we don’t.

Let’s see how this happens in practice. In September 1990, the Yen had been tearing upwards. Currency Bulletin had forecast that it might do so in late August and early September – with some conviction: all the pieces were in place. By the issue of September 24, the Yen had moved from around

Y150 to Y137. But on little more than gut feeling, CB had earlier proposed a target of Y120 – which was nothing more or less than the previous dollar low. So one had to hang on. By the issue of Oct 8, the Yen was at Yl33. At this point CB could only fall back on conventional wisdoms – nothing wrong with that – like “let your profits run”. We shouldn’t blow it by “losing our position”. Note that the degree of certainty was much lower now. CB was in the area of guesswork. By the issue of October 22 the Yen had already touched its high for the year at 123.7– as near as damn it to the Y120 target. At this point CB actually admitted: “Now we don’t have much basis for forecasting any more.” In truth, it didn’t have any basis for forecasting. And so it was for much of the rest of that year.

So the answer to whether we can forecast the dollar is emphatically positive– so long as we admit that we can only do so occasionally, and fight the temptation to do so when we cannot. The point is that if you have a well– defined methodology for forecasting, you do have a good basis for knowing when you can forecast and when you cannot. Acknowledging the fact, when you can’t forecast, is not so easy.

But when it comes to actual trading, the ability to identify the action point is critical. In fact it’s what it’s all about. The only way you can win in the currency markets is to wait for the market to tell you when to act. And remember, the market knows nothing of our individual financial situations. The signal to act is not going to coincide with the moment we liquidate a bunch of securities, negotiate a new credit facility, win a big export order, or inherit money.

Currency Bulletin’s method of analysing the currencies is designed to identify the underlying trend and then to locate the extremes –the points at which corrections in the main trend begin and end, including the reversal of the main trend. We can’t predict those points, though we know what to look for in our four sentiment gauges (Chapter Five): we can only wait for them to identify themselves. When they do so, then we have to “go for it”.