Differences between crypto and forex markets
7-6-2021

In comparison to the crypto market, forex is completely different in its nature. It is the oldest and has the biggest volumes in the world. On the other hand, the crypto market is still very young and still trying to find its place among institutional investors and professional traders. The behavior of these two markets is also completely different stemming from how long they have been around.

There are three main differences that we are going to review.

Moves of crypto and forex markets

The first difference is the most obvious – the size of the moves of crypto and forex markets.

The crypto market can show one month’s worth of movement of 70% and the annual move can be 500%. Over a few years, it can reach 1000% and beyond. 

Can you imagine the fiat market behaving the same where the U.S. dollar moves 100% and doubles in value? – Of course not. 

The fiat currencies can move in value against each other at levels of low single-digit percentages. A rare example of a flash crash was a Swiss Franc drop of 20% in XXXX. That incident shook the industry by destroying several brokers’ risk control definitions and clients’ accounts.

Liquidity of the markets

The second difference is the liquidity of crypto and forex markets.

It is very important to know how much one can trade in the forex market till the price starts moving to avoid affecting the trading results. And it might be any number because the forex system is global and multiple brokers and banks are balancing the price. 

Instead, we can place orders of literally any size in the crypto market. Even if we trade the second biggest pair Euro/USD, most of the brokers are willing to accept as much as up to 3 million in one order. However, the spread on this level will be noticeable. Also, it is impossible to trade this 3 million over and over again throughout the day without paying significant execution costs. 

In this case, liquidity dictates the trading style. 

This is why EndoTech wisely chooses to trade Bitcoin and Ethereum using longer-term strategies. The crypto market moves last longer and there might be no trade within a single day. With such large volumes, a company that manages over 100 million dollars needs a way to trade based on our signals and trading systems.

Noise of crypto and forex markets

The graph of the crypto market looks smooth and predictable. First, the market moves one way and then another way, reproducing the classic head and shoulders pattern.

In the meantime, if you analyze the forex market graph a significant noise dilutes such patterns. The noise in fact can be much bigger than moves. There is often a conflict in the price movement itself. Like participants don’t know what to do.

It happens because the majority of the forex market participants are proprietary robots developed by professional traders and they do not let the system move the market. Rarely you will see the forex market moving in only one direction. This is why not only forex moves are preserved within the limit of a few percentages only – it is also very hard to predict. 

These are three main areas of differences between crypto and forex markets. 

Of course, there are many more differences that stem from these traits. In the next updates, we will focus on how these differences lay out the framework, how we create our modeling and trading strategies.

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