Episode 1

Should the market move “as theory expects”? ─ The small distortions born every day

In this series, from the perspective ofTriParity (Three-Currency Parity)we will read the market’s “distortions”in a somewhat nerdy wayusing plain language and illustrative images.First, let’s define what the “market distortions” are that we face daily.What exactly are these distortionsand how about we sort it out together.

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

In textbooks, exchange rates embed factors such as

• differences in interest rates between countries

• fundamentals like growth, inflation, and employment

• market participants’ expectations

and are said to move around a theoretical value with some margin.

However, if you follow actual charts every day, don’t you notice this?

• Immediately after a data release, “the dollar alone” jumps briefly and then snaps back

• Only around the Tokyo fix, movement drifts in one direction and ends

• In thin London order books, the cross-yen pair runs and gets stopped out.

• On commodity headlines, gold (XAUUSD) stands out, then it stays flat

These kinds of“temporarily misaligned moves”do not only occur during historical shocks.
Rather,“every day, every hour, somewhere a phenomenon occurs.”.

This kind of misaligned shift is exactly what we call in this series the market’s distortions.

2. A trend and a distortion are completely different things

Let’s take a moment to separate “trend” from “distortion.”

• Trend
  A directional movement formed over a relatively long period due to widening interest-rate differentials, business cycle, monetary policy direction, etc.

• Distortion
  Caused by the way news comes out, order-flow bias, algorithm speed differences, etc.,“a state where, temporarily, one currency (or pair) gets disproportionately strong.”

  
  

Trading opportunities indeed arise from trends, butmost short-term pullbacks, dips-buying, and range-reversion tradesseek to capture the resolution of distortionsthat is, the act.

• After the dollar run-ups right after a data release,“it’s overdone, so look for a pullback”

• During Asian time, only cross-yen pairs react sensitively,aiming to be evened out by the involvement of the London players

• After commodities move first,seeking others to follow

Intuitively, many of you are already performing a form of “distortion trading.” .

3. So, how do you find these distortions?

The problem starts here.

Many traders

• USDJPY

• EURUSD

• GBPJPY

look at only one thing—“one pair equals two currencies” and make judgments.

Tools used to hunt distortions include,

• Bollinger Bands (±2σ)

• RSI / Stochastic / MACD

• moving-average crosses

• support-resistance channels

these are mainly the “single-pair technicals.”

Of course, that doesn’t mean these tools are useless.

However, if you want to seriously capture market distortions,looking at only one pair makes certain things unseen.

4. What you miss when you only watch one currency pair

As an example, imagine a scene like this:

• NZDUSD plunges

• NZDJPY also falls at the same time

• EURUSD is slightly soft

When you line up the charts and look at them,

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

you might get that kind of impression.

However,“which currency is really leading?” often remains ambiguous to the end.

• Is NZD being sold?

• Is USD being bought?

• Or is there a flow involving EUR?

With the main actor unclear,

• which pair should you trade?

• where does the distortion end and a new trend begin?

becomes the critical judgment you must make.

Even chasing multiple pairs with the eyes, you end up deciding at best

“This one looks weaker for now”
“Shall I sell its bounce?”

and that is the limit of decision-making—

this is the limit of the world of only two currencies.

The next chapter is“5. How to turn distortions from enemies into allies”but if you don’t mind,Please request access to viewa video summarizing the content in about 10 minutes.Videois also prepared for you.