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New Perspective on FX Markets: Order‐Flow Analysis

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  • Richard K. Lyons

Abstract

Though fundamental and technical analysis are still widely used in foreign exchange markets, a new type of analysis has emerged: order‐flow analysis. Order‐flow analysis uses the flow of buy and sell orders to both explain exchange rates contemporaneously and forecast future movements. This article contrasts order‐flow analysis with the traditional approaches and reviews lessons learned. Most important among those lessons is order flow’s ability to account for the lion’s share of movements in the major floating rates. On the policy front, widespread availability of electronic order‐flow data brings many policy questions within reach for the first time. After reviewing these policy questions, the article closes with a discussion of how FX market institutions are evolving and how this evolution will affect application of order‐flow analysis in the future.

Suggested Citation

  • Richard K. Lyons, 2001. "New Perspective on FX Markets: Order‐Flow Analysis," International Finance, Wiley Blackwell, vol. 4(2), pages 303-320.
    • Handle: RePEc:bla:intfin:v:4:y:2001:i:2:p:303-320
    DOI: 10.1111/1468-2362.00075
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    Cited by:

    1. Alexander Mende & Lukas Menkhoff, 2003. "Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure," International Finance, Wiley Blackwell, vol. 6(2), pages 227-247, July.
    2. Hasselgren, Anton & Peltomäki, Jarkko & Graham, Michael, 2020. "Speculator activity and the cross-asset predictability of FX returns," International Review of Financial Analysis, Elsevier, vol. 72(C).
    3. Alexander Jakob Dautel & Wolfgang Karl Härdle & Stefan Lessmann & Hsin-Vonn Seow, 2020. "Forex exchange rate forecasting using deep recurrent neural networks," Digital Finance, Springer, vol. 2(1), pages 69-96, September.
    4. Abolaji Daniel Anifowose & Izlin Ismail & Mohd Edil Abd Sukor, 2018. "Currency Order Flow and Exchange Rate Determination: Empirical Evidence from the Malaysian Foreign Exchange Market," Global Business Review, International Management Institute, vol. 19(4), pages 902-920, August.

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