Episode 1

Should the market move “as theory predicts”? — The daily small distortions that arise

In this series, from the perspective ofTriParity (three-currency parity)we will read the market “distortions”with a sense of the market’s ‘discrepancies’in as plain language and with diagram images as possible.For the first installment, let’s first sort out what we mean by the market’s “distortions” that we face daily.

1. There is no market that moves exactly as theory dictates

In textbook terms, the exchange rate is priced in by factors such as

the interest rate differentials between countries

fundamentals like economic activity, prices, and employment

market participants’ expectations

and tends to move around a certain vicinity of the theoretical value.

However, when you follow actual charts daily, don’t you feel this?

Immediately after a data releasethe dollar alonejumps briefly and then returns

only around Tokyo fix at timesand ends up biased in one direction

in thin London sessions,crosses of the yen pairmove sharply and get stopped out

in commodity headlines,gold (XAUUSD)stands out, then flatlines

These kinds of “temporarily misaligned movements” do not only occur during historical shocks.
Rather, they are a daily and hourly reality that occurs somewhere, every day.

This misaligned shift is what this series calls the “distortion in the market”.

2. “Trends” and “distortions” are entirely different things

Let’s take a moment here to separate “trends” from “distortions.”

Trend:
A relatively long-term directional movement formed by factors such as widening interest rate differentials, economic cycles, and the direction of monetary policy.

Distortion:
Effects of news flow, order flow biases, speed differences among algos, etc., causing“temporarily, a single currency (or pair) to be pushed too far in one direction.”

Trading opportunities arise, of course, from trends, butmany short-term pullbacks, buying on dips, and range-trade counter-trendsaim to “resolve the distortions”as an activity.

After a data release where the dollar surges,“too much, so expect a pullback”

In Asia hours, only the cross yen moves sensitively,aiming to be leveled by the London participants

When commodities currencies move first,watch for others to follow

Intuitively, many of you are already engaged in a “distortion trade.” .

3. So, how do we find these distortions?

That is the problem from here.

Many traders look at

USDJPY

EURUSD

GBPJPY

and judge based on a single “one-pair, two-currency” view. .

Tools used to seek distortions are

Bollinger Bands (±2σ)

RSI / Stochastic / MACD

Moving average crossovers

Support/Resistance channels

and such “single-pair, self-contained technical” approaches are central.

Of course, this doesn’t mean these tools are useless. In fact, I have relied on them for a long time.

However, to seriously go after “market distortions”, looking at only one currency pair can prevent you from seeing certain things.

4. What becomes invisible if you only watch one pair

As an example, imagine this scene.

NZDUSD plunges

At the same time, NZDJPY also falls

EURUSD softens a little

When you line up the charts and look at them,

“NZD looks weak”
“No, maybe the dollar is just strong?”

you might get such impressions.

However, who is actually leading? is often ambiguous to the end.

Is NZD being sold?

Is the USD being bought?

Or is there a flow involving EUR?

Without knowing the main driver, you are forced to decide at the level of

which pair to take long/short

where the boundary between “distortion” and “new trend” lies

This becomes the crucial decision.

Even if you desperately track multiple pairs, you end up deciding at best

“Seems weaker on this side”
“Maybe try selling the pullback here”

and that is the limit of the “two-currency world.”

The next chapter is“5. How to make distortions your ally, not your enemy”but from here, you will need to“sign up to view”to see. We have a video that summarizes the content in about 10 minutes.Videoalso prepared.