Cross Rates, just a few for example, that can be traded with trend following methods include:
- Australian Dollar
- British Pound
- Canadian Dollar
- Euro
- Hong Kong Dollar
- Indonesian Rupiah
- Japanese Yen
- Mexican Peso
- New Zealand Dollar
- Singapore Dollar
- South African Rand
- Swiss Franc
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FX or Forex Trading
Whether you call it FX trading, forex trading, currency trading or interbank trading, it all means trading currencies without the use of a futures exchange. Trend followers can use either forex or futures markets to trade currencies with trend following, but to some people the operations of FX trading are new. If you need help selecting a broker for forex or currency trading, send email.
Why Currency Markets Are Ideal for Systematic Trend Following
Currency markets are the largest and most liquid financial markets in the world, with over $7 trillion in daily volume. This liquidity means that systematic trend following rules can be executed across multiple currency pairs simultaneously with minimal market impact, even at substantial position sizes. The transaction costs in liquid currency markets are among the lowest available in any financial instrument, which is structurally important for trend following because the approach generates many losing trades alongside the large winning ones. Lower transaction costs mean the losing trades cost less to execute.
The currencies listed above represent a range of market characteristics that are each suited to different elements of a diversified trend following portfolio. The major currency pairs, Euro, British Pound, Japanese Yen, and Swiss Franc, are driven primarily by monetary policy differentials and capital flows between developed economies. The commodity-linked currencies, Australian Dollar, Canadian Dollar, and New Zealand Dollar, track commodity price cycles and produce trends that are partially correlated with commodity futures markets. The emerging market currencies, Indonesian Rupiah, Mexican Peso, and South African Rand, are driven by a combination of commodity exposure, capital flow dynamics, and domestic political conditions that produce some of the most sustained directional trends available in global markets.
The forex versus futures choice for trend following currency trading involves specific tradeoffs. Forex markets are decentralized and traded over the counter through interbank networks and retail brokers. They offer 24-hour access, fractional position sizing, and access to a wider range of currency pairs including exotic emerging market crosses. Currency futures, traded on the CME and other exchanges, offer regulated exchange execution, standardized contract sizes, transparent pricing, and the same clearinghouse guarantees that commodity futures provide. For systematic trend following, either instrument works. The same entry and exit rules apply. The choice depends on the trader’s preferred broker relationship, account size, and required position granularity.
John W. Henry’s observation that you do not need a computer to trade currencies with trend following captures why currency markets are accessible to individual traders. The raise-raise-raise and lower-lower-lower pattern of Fed policy cycles that produces interest rate trends also produces currency trends. The major currency trends that developed systematically through the 1990s, 2000s, and 2010s were each driven by identifiable macro policy cycles that persisted for months to years. A systematic trader who followed price rather than predicting policy was positioned correctly for the full duration of those trends.
Frequently Asked Questions
What is the difference between forex trading and currency futures for trend following?
Forex is over-the-counter currency trading through interbank networks and retail brokers, offering 24-hour access, fractional sizing, and a wider range of currency pairs. Currency futures are exchange-traded standardized contracts on the CME and other exchanges, offering regulated execution, transparent pricing, and clearinghouse guarantees. Both can implement systematic trend following rules effectively. The choice depends on account size, position granularity requirements, and broker preference.
Why do currency markets produce strong trends for systematic trading?
Because monetary policy cycles, interest rate differentials, and capital flow dynamics all produce sustained directional movements that persist for months to years. A central bank that begins raising rates continues raising them through a cycle. A currency that begins strengthening on rate differentials continues strengthening until the differential changes. These policy-driven dynamics produce exactly the sustained directional moves that systematic trend following entry and exit rules are designed to capture.
Which currencies on the list are commodity-linked?
The Australian Dollar, Canadian Dollar, and New Zealand Dollar are the most directly commodity-linked major currencies. Australia’s economy is dominated by iron ore, coal, and agricultural exports. Canada’s by oil, gas, and metals. New Zealand’s by dairy and agricultural products. Each of these currencies tends to trend with the commodity cycles that drive their export economies, producing returns that are partially correlated with commodity futures and providing a natural bridge between currency and commodity trend following.
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