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New Perspective on FX Markets: Order-Flow Analysis

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  • Lyons, Richard K

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. Copyright 2001 by Blackwell Publishers Ltd.

Suggested Citation

  • Lyons, Richard K, 2001. "New Perspective on FX Markets: Order-Flow Analysis," International Finance, Wiley Blackwell, vol. 4(2), pages 303-320, Summer.
  • Handle: RePEc:bla:intfin:v:4:y:2001:i:2:p:303-20
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    Cited by:

    1. Konstantin Tyurin, 2004. "High-Frequency Principal Components and Evolution of Liquidity in a Limit Order Market," Econometric Society 2004 North American Summer Meetings 579, Econometric Society.
    2. Abdullah Gulcu & Dilem Yildirim, 2018. "Smooth Breaks And Nonlinear Mean Reversion In Real Interest Parity: Evidence From East Asian Countries," ERC Working Papers 1804, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    3. Zarrabi, Nima & Snaith, Stuart & Coakley, Jerry, 2017. "FX technical trading rules can be profitable sometimes!," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 113-127.
    4. Michael W. Brandt & Kenneth A. Kavajecz, 2003. "Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve," NBER Working Papers 9529, National Bureau of Economic Research, Inc.
    5. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    6. Katusiime, Lorna & Shamsuddin, Abul & Agbola, Frank W., 2015. "Macroeconomic and market microstructure modelling of Ugandan exchange rate," Economic Modelling, Elsevier, vol. 45(C), pages 175-186.

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