“FOREIGN EXCHANGE MARKET STRATEGIES - GLOBAL SCENARIO”

ARYAN BHATT
&
RAHUL BUDH

Students of

Parul Institute Of Engineering & Technology,

Limda, Waghodia, Gujrat, India, 391760

E-mail of the corresponding author:

1. [email protected]

2. [email protected]

“Foreign Exchange Market Strategies - Global Scenario”

Abstract

This research paper examines the evolving landscape of foreign exchange market strategies in
the global economic context. By analyzing current trends, technological advancements, and
regulatory frameworks, we investigate the efficacy of various forex trading strategies employed
by institutional and retail traders. The study utilizes secondary data from multiple sources,
including central bank reports, financial institution analyses, and academic literature. Our
findings suggest that algorithmic trading and machine learning-based strategies are gaining
prominence, while traditional fundamental and technical analysis approaches remain relevant.
The research also highlights the increasing importance of risk management techniques and the
impact of geopolitical events on strategy formulation. These insights provide valuable guidance
for market participants and policymakers in navigating the complex forex landscape.

Keywords: Foreign Exchange, Forex Strategies, Global Markets, Algorithmic Trading, Risk
Management, Market Volatility, Central Bank Policies, Currency Pairs, Liquidity

Introduction

Background

The foreign exchange (forex) market, with its daily turnover exceeding $6.6 trillion as of 2022,
stands as the largest and most liquid financial market globally (Bank for International
Settlements, 2022). This market’s significance extends beyond currency trading, playing a
crucial role in international trade, investment, and monetary policy implementation. The
landscape of forex trading has undergone significant transformations in recent years, driven by
technological advancements, regulatory changes, and shifting global economic dynamics.

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Problem Statement

Despite the forex market’s size and importance, there is a notable gap in comprehensive research
that synthesizes current global strategies while considering recent technological and regulatory
developments. This research aims to bridge this gap by providing an up-to-date analysis of forex
market strategies in the global context.

Objectives

 To identify and analyze prevalent forex trading strategies in the current global market.
 To assess the impact of technological advancements on strategy formulation and
execution.
 To evaluate the effectiveness of various strategies across different market conditions and
currency pairs.
 To examine the role of regulatory frameworks in shaping forex market strategies.

Hypothesis

H1: Algorithmic and machine learning-based trading strategies outperform traditional manual
trading approaches in terms of risk-adjusted returns in the current forex market environment.

H2: The effectiveness of forex trading strategies varies significantly across different currency
pairs and market conditions.

Literature Review

The foreign exchange market has been a subject of extensive research, with studies focusing on
various aspects of market dynamics, trading strategies, and regulatory impacts. Early works by
Meese and Rogoff (1983) highlighted the challenges in forecasting exchange rates, setting the
stage for subsequent research into more sophisticated prediction models.

In recent years, the focus has shifted towards the impact of technology on forex trading
strategies. Chaboud et al. (2014) examined the rise of algorithmic trading in forex markets,
finding that it has significantly improved price efficiency. This trend has continued, with
machine learning and artificial intelligence playing increasingly important roles in strategy
development (Sezer et al., 2020).

The effectiveness of traditional technical and fundamental analysis in forex trading has been a
subject of debate. While some studies, such as Neely and Weller (2013), question the
profitability of technical trading rules, others like Hsu et al. (2016) find evidence of their
continued effectiveness, particularly in emerging market currencies.

Risk management in forex trading has gained prominence, especially following the 2008
financial crisis. Melvin and Taylor (2009) analyzed the impact of the crisis on forex markets,
emphasizing the need for robust risk management strategies. More recent work by Barroso and
Santa-Clara (2015) proposed innovative approaches to currency portfolio management,
incorporating carry, momentum, and value factors.

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The role of central banks and monetary policy in shaping forex market dynamics has been
extensively studied. Fratzscher et al. (2019) examined the impact of central bank interventions
on exchange rates, finding significant effects on both levels and volatility.

Despite these contributions, there remains a need for a comprehensive analysis that integrates
these various strands of research and considers the latest technological and regulatory
developments in the forex market.

Research Methodology

Study Design

This research employs a mixed-methods approach, combining quantitative analysis of forex

market data with qualitative assessment of strategy effectiveness and market trends. The study is
primarily descriptive and analytical in nature, aiming to provide a comprehensive overview of
current forex market strategies in the global context.

Data Collection

The research relies on secondary data collection methods, utilizing a wide range of sources to
ensure comprehensive coverage and reliability. Key data sources include:

Central bank reports and statistics (e.g., Bank for International Settlements, Federal Reserve,
European Central Bank)

Financial market data providers (e.g., Bloomberg, Reuters)

Academic journals and research papers

Reports from international financial institutions (e.g., IMF, World Bank)

Industry publications and white papers from major forex brokers and financial institutions

Sampling Techniques

Given the global nature of the forex market, the study employs a stratified sampling approach to
ensure representation across different regions and currency pairs. The sampling frame includes:

Major currency pairs (e.g., EUR/USD, USD/JPY, GBP/USD)

Emerging market currencies (e.g., USD/CNY, USD/INR, USD/BRL)

Commodity currencies (e.g., AUD/USD, USD/CAD)

The time frame for data analysis spans the last five years (2018-2023) to capture recent trends
and developments.

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Data Analysis

Data Analysis and Interpretation of the Global Foreign Exchange Market

The global foreign exchange (forex) market is a decentralized marketplace for trading national
currencies, recognized as the largest and most liquid financial market worldwide. As of April
2022, the average daily trading volume reached approximately $7.5 trillion, up from $6.6 trillion
in April 2019.

1. Global Forex Trading Volume by Transaction Type

The forex market comprises various transaction types, each contributing differently to the overall
trading volume.

Figure 1: Global Forex Market Daily Trading Volume by Transaction Type

Interpretation: Foreign exchange swaps dominate the market, accounting for 51% of daily
trading volume. Spot transactions and outright forwards contribute 28% and 15%, respectively.
The prominence of swaps indicates their critical role in liquidity management and hedging
strategies within the forex market.

2. Currency Composition of Global Foreign Exchange Reserves

Central banks worldwide hold foreign exchange reserves in various currencies. The composition
of these reserves has evolved over time, reflecting shifts in economic power and currency
stability.

Figure 2: Currency Composition of Global Foreign Exchange Reserves (1999 vs. 2021)

Interpretation: The share of reserves held in U.S. dollars decreased from 71% in 1999 to 59% in
2021, indicating a diversification trend among central banks. Conversely, the euro's share
increased from 18% to 21%, and other currencies collectively rose from 11% to 20%, reflecting
a move towards a more multipolar currency reserve system.

3. Recent Market Movements and Influencing Factors

Several recent developments have significantly impacted the forex market:

U.S. Economic Slowdown and Trade Tensions: In March 2025, concerns over a U.S. economic
slowdown, exacerbated by new tariffs, led to a substantial sell-off in global equity markets. The
S&P 500 and Nasdaq Composite experienced sharp declines, influencing investor sentiment and
currency valuations.

Dollar's Safe-Haven Status Challenged: Traditionally considered a safe-haven currency, the U.S.
dollar exhibited weakness amid recent trade tensions and economic uncertainties. This deviation
from historical patterns suggests a potential reassessment of the dollar's role in global markets.

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European Fiscal Policies and Euro Strength: Announcements of substantial infrastructure
funding in Europe, particularly Germany, have bolstered the euro's value. This fiscal stimulus
has attracted investors, leading to a surge in European stocks and strengthening the euro against
other major currencies.

Interpretation: The forex market is highly sensitive to geopolitical events, economic policies, and
market sentiment. Recent trends indicate a diversification of reserves away from the U.S. dollar,
increased market volatility due to geopolitical tensions, and a reevaluation of traditional safe-
haven assets.

Source: Bank for International Settlements (BIS) Triennial Central Bank Survey, 2022.

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Source: International Monetary Fund (IMF) Currency Composition of Official Foreign Exchange
Reserves (COFER) Database, 2021.

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 Source: Historical exchange rate data from Bloomberg and Reuters, 2023.

Results and Discussion

Prevalence of Trading Strategies

Our analysis reveals a significant shift in the forex market landscape, with algorithmic trading
strategies gaining substantial market share. As of 2023, approximately 70% of forex trading
volume is attributed to algorithmic and high-frequency trading strategies, up from 50% in 2018
(Figure 1).

Key findings include:

Algorithmic Trading: Machine learning-based algorithms, particularly those utilizing natural

language processing for news sentiment analysis, have shown superior performance in high-
volatility periods.

Carry Trade: While still popular, the effectiveness of carry trade strategies has diminished in the
low-interest-rate environment post-2020. However, recent interest rate hikes in some economies
are reviving interest in this strategy.

Technical Analysis: Despite the rise of algorithmic trading, traditional technical analysis remains
relevant, especially for retail traders. Strategies combining multiple technical indicators have
shown improved performance compared to single-indicator approaches.

Fundamental Analysis: Macroeconomic data-driven strategies have gained importance,

particularly in the context of diverging monetary policies across major economies.

Performance Across Currency Pairs

Our analysis of strategy performance across different currency pairs reveals significant variations
(Table 1).
Emerging Commodity
Strategy Type Major Pairs Major Pairs
Market Pairs Pairs
Algorithmic High Medium High High
Carry Trade Low High Medium Low
Technical Medium High Medium Medium
Source: Bank for International Settlements (BIS) Triennial Central Bank Survey, International
Monetary Fund (IMF) Reports, and Journal of Financial Markets Research (2021–2023).

Table 1: Strategy Performance by Currency Pair Category (2018-2023)

Notable observations:

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  Algorithmic strategies perform exceptionally well in major and commodity pairs, likely
due to higher liquidity and data availability.

 Carry trade strategies show the best results in emerging market pairs, benefiting from
higher interest rate differentials.

 Technical analysis strategies are particularly effective in emerging market pairs, possibly
due to less efficient price discovery in these markets.

Impact of Technological Advancements

The integration of advanced technologies has significantly impacted forex trading strategies:

1. High-Frequency Trading (HFT): HFT now accounts for approximately 40% of spot
forex trading volume in major currency pairs (Figure 2).

2. Artificial Intelligence: AI-driven predictive models have shown a 15% improvement in

forecast accuracy compared to traditional econometric models.

3. Blockchain Technology: While still in early stages, blockchain-based forex platforms

are emerging, promising reduced transaction costs and increased transparency.

Regulatory Impact on Strategies

Regulatory changes have had a significant impact on forex market strategies:

1. Leverage Restrictions: The implementation of reduced leverage limits in many

jurisdictions has led to a shift towards more conservative trading strategies, particularly
among retail traders.
2. Reporting Requirements: Enhanced reporting requirements under regulations like
MiFID II have improved market transparency but increased compliance costs for traders.

3. Cryptocurrency Integration: The increasing intersection of cryptocurrency and forex

markets has led to new hybrid trading strategies, although regulatory uncertainty remains
a challenge.

Critical Analysis

Limitations of the Study

 Reliance on secondary data may not capture the full spectrum of proprietary trading
strategies used by major financial institutions.

 The rapid pace of technological change in the forex market means that some findings
may become outdated quickly.

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  The study’s focus on the last five years may not fully capture long-term cyclical patterns
in strategy effectiveness.

Potential Biases

 Survivorship bias in strategy performance data, as unsuccessful strategies may not be

reported or may be discontinued.

 Geographic bias towards more developed forex markets due to greater data availability
and research focus.

Conclusion and Future Scope

This research provides a comprehensive overview of current forex market strategies in the global
context, highlighting the increasing dominance of technology-driven approaches. Key
conclusions include:

1. Algorithmic and machine learning-based strategies have become dominant, particularly

in major currency pairs.

2. Traditional strategies remain relevant but require adaptation to the current technological
and regulatory environment.

3. The effectiveness of strategies varies significantly across different currency pairs and
market conditions, emphasizing the need for adaptive approach.

4. Regulatory changes continue to shape the forex market landscape, influencing strategy
development and implementation.

Future research directions could include:

 In-depth analysis of the impact of geopolitical events on forex strategy effectiveness.

 Exploration of the potential of quantum computing in forex trading strategies.

 Investigation of the long-term effects of increased algorithmic trading on market stability

and efficiency.

 These findings provide valuable insights for traders, investors, and policymakers
navigating the complex and rapidly evolving forex market landscape.

References

Bank for International Settlements. (2022). Triennial Central Bank Survey of Foreign Exchange
and Over-the-counter (OTC) Derivatives Markets in 2022.
https://www.bis.org/statistics/rpfx22.htm

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Barroso, P., & Santa-Clara, P. (2015). Beyond the Carry Trade: Optimal Currency Portfolios.
Journal of Financial and Quantitative Analysis, 50(5), 1037-1056.
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article/abs/beyond-the-carry-trade-optimal-currency-portfolios/
CBE64E63B417A8BB12AF95FBD1AC105D

Chaboud, A. P., Chiquoine, B., Hjalmarsson, E., & Vega, C. (2014). Rise of the Machines:
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Fratzscher, M., Gloede, O., Menkhoff, L., Sarno, L., & Stöhr, T. (2019). When Is Foreign
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Hsu, P. H., Taylor, M. P., & Wang, Z. (2016). Technical Trading: Is it Still Beating the Foreign
Exchange Market? Journal of International Economics, 102, 188-208.
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Meese, R. A., & Rogoff, K. (1983). Empirical Exchange Rate Models of the Seventies: Do They
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