Trends are the way forward

While 2004 started off with higher volatility, meaning trend strategies did not perform well, after a transition period in the third quarter the longer-term regime has reasserted itself, she said.

"The idea of a trend is intimately connected with that of momentum – if a currency moves in one direction during a particular period, it is likely to continue in that direction in the next," she said.

"For example, if you take into consideration the recent US elections, there was nervousness in the market as to whether Bush or Kerry would win. This is not new – there is always a lull whenever there is an election pending. It has happened before the last three US elections."

James compared two different currency pairs to see how trends work – the best and worst: "Dollar/yen always makes money and has a positive IR [information ratio – a measure of how smooth returns are] for almost any length of moving average. But dollar/Canada stubbornly refuses to rise above zero under any circumstances. In this instance, it is not difficult to draw the conclusion that dollar/yen trends and dollar/Canada does not."

James concluded that out of the two market regimes of long-term trend and high volatility, she has more faith in the former. "Now that the longer-term regime is showing more stability, I would expect it to continue through the end of this year and into 2005."