Is “Forex” a “trendy” market?

Because identifying basic market characteristics lays the groundwork for developing a sound trading plan, determining a market’s tendency to trend should be one of the first steps a trader takes in deciding which assets to trade.

An endlessly repeated claim about the forex market is that currencies tend to trend more, or “better,” than other markets. The roots of this assertion go back to the 1970s and 1980s when currency futures trading enjoyed their first heyday and many currencies did, in fact, embark on significant trends. But is this really the case today?

To answer that question, let’s analyze weekly closing forex prices — the euro/U.S. dollar (EUR/USD), British pound/U.S. dollar (GBP/USD), and U.S. dollar/ Japanese yen (USD/JPY) pairs — and compare them to the S&P 500 index (SPX), the 10-year T-note yield (TY), and one NYSE listed stock, Boeing (BA). The goal will be to see which instruments show the highest degree of trend. The review period is January 1996 through September 2007.


To determine the degree a market trends, the analysis uses a 10- week rolling correlation coefficient of the weekly closes relative to time. Because time advances at a fixed rate, if the weekly closes are climbing or falling at a consistent rate relative to time, the correlation between the two series price and time — will be high (i.e., closer to +1.00 or -1.00).

A correlation coefficient of +1.00 represents perfect, positive correlation — the two series are moving in lock-step in the same direction. A correlation coefficient of -1.00 represents perfect negative correlation — the two series are moving in direct opposition to each other. (In this case the former represents the highest degree of uptrend and the latter represents the highest degree of downtrend.) If the weekly closing prices are persistently more random, the correlation reading will be closer to zero that is, little or no trend is exhibited. The second part of the analysis determines how often each instrument had especially strong correlation readings that is, greater than +0.70 or less than -0.70.