Looking at Exchange Rates in a Scientific way

yeah I have that problem I have enable it but still doesnt work......that is why I have m email there.

Hey RedLion,

I've been thinking about PPP and how it relates to actual exchange rates. I looked for material that talks about correlation between PPP and the exchange rates, and found one that basically said:

The Purchasing Power Parity Debate

Are you aware of any studies that have linked historical exchange rates with projected rates based on PPP. A chart or measure such as historical correlation would be interesting.

Big Mac Index

hi redlion
wow, this is quite a read. I also like the top down approach to trading - learn all you can about macroeconomics, then gradually reduce and condense your knowledge into a simple, targetted trading plan. Most people get it backwards - they start watching a pair then add all sorts of crap trying to build up a system. They end up analysing a pair to death without realising what they are in fact looking at is a very small piece of a very large puzzle. Since you clearly have a great thirst for knowledge, don't be afraid to cast your net as far and wide as possible. The more knowledge you accumulate now, the more accurate and emphatic your reduction process will be later.

Perhaps you could find a more appropriate forum for this stuff. What you are doing in this thread is pushing walls of information in front of people who have little hope of deciphering it, let alone giving anything worthwhile back. It's like explaining the economics of the pet food industry to your dog - you can try all you like, it won't give you anything in return. Unless you ask very specific questions relating to market volatility which could potentially be answered with the word "rough". You should look for a dedicated economics forum or something where the people will push back at you and challenge you.

If you want another good source of educational material, Yale University uploads free videos of all lectures for many of its courses. I highly recommend watching all of Robert Shillers lectures.
http://oyc.yale.edu/courses

If you haven't already, I also suggest you read Trading and Exchanges by Larry Harris. I wouldn't even bother recommending most traders to read this, but I think you would benefit greatly from it.

Edit: Sorry, I notice you already included prof. Shillers lectures. Don't know how I missed that

yeah thanks for your post....I have noticed that people don't really care to actually do in depth study about the market.....they are content with lines, and patterns.

I do accept though that the way I presented my ideas where very brain stormy like and might be to unorganized for people to follow, I encourage questions and people to go through the material....it won't hurt to know a bit more about what they are really trading.

I did a ctrl + f for "wave" and wanted to see if you've talked about waves, but nothing came up, so I'll start it up.

What is a wave in the trading world? Where does one start/end, or is there a definable start/end, or does one even have a start/end? (Then I can't really say "...does one even..." as something that is undefinable can't be singular.) If they do have a start/end, is it at the top/bottom or in between them? Is it top/top or bottom/bottom? There's a lot of questions that come to mind.

Then, even if we define the shape of a wave, we have to define what's really going on behind the charts. What's actually causing a wave formation? Is it market makers having an imbalance of toxic inventory and need to rebalance? Or is it a surge of trader buying/selling rapidly? (This would be like hearing a roar at the pit, I'd guess. (Never been to one, only have seen in videos and TV.)) Where are the areas of profit/loss taking and areas of entry?

I don't know if one of the latest videos posted in this thread cover anything about this, but I thought I'd bump the thread anyhow.

That is a very good point you raise there.....I have just took the notion of wave and not really question it.



visually it looks like a wave but it doesn't fulfill the mathematical requirement of a wave, even if we concede that price is in fact a wave. Here is an exert from wikipedia that is akin to what i am trying to say "A single, all-encompassing definition for the term wave is not straightforward. A vibration can be defined as a back-and-forth motion around a reference value. However, a vibration is not necessarily a wave. An attempt to define the necessary and sufficient characteristics that qualify a phenomenon to be called a wave results in a fuzzy border line.
The term wave is often intuitively understood as referring to a transport of spatial disturbances that are generally not accompanied by a motion of the medium occupying this space as a whole. In a wave, the energy of a vibration is moving away from the source in the form of a disturbance within the surrounding medium (Hall 1980, p. 8). However, this notion is problematic for a standing wave (for example, a wave on a string), where energy is moving in both directions equally, or for electromagnetic (e.g., light) waves in a vacuum, where the concept of medium does not apply and interaction with a target is the key to wave detection and practical applications. There are water waves on the ocean surface; gamma waves and light waves emitted by the Sun; microwaves used in microwave ovens and in radar equipment; radio waves broadcast by radio stations; and sound waves generated by radio receivers, telephone handsets and living creatures (as voices), to mention only a few wave phenomena.
It may appear that the description of waves is closely related to their physical origin for each specific instance of a wave process. For example, acoustics is distinguished from optics in that sound waves are related to a mechanical rather than an electromagnetic wave transfer caused by vibration. Concepts such as mass, momentum, inertia, or elasticity, become therefore crucial in describing acoustic (as distinct from optic) wave processes. This difference in origin introduces certain wave characteristics particular to the properties of the medium involved. For example, in the case of air: vortices, radiation pressure, shock waves etc.; in the case of solids: Rayleigh waves, dispersion; and so on."


the point you raised about the unequal magnitude, amplitude and even inflection point being unclear is exactly right.

but a wave as I understand it to be in trading consists of 4 phases

1- point of inflection (the exact point is unclear so price area of inflection is more accurate)

2- acceleration

3- loss of momentum

4- correction


but even here it is very subjective......for example if the current correction posts a bullish day candle .....does it stop being corrective phase at this point?

it is easy to see waves in retrospect it is hard to see them while you are in a particular phase.......a lot of speculating and trusting, or hoping comes into play when trading.

I've been using an EMA & SMA cross over system to try to identify when the point of inflection occurs for certain waves. (or maybe certain parts of certain waves.) On the daily, I use the EMA of 20 and SMA of 40, which is one trading month and two. The 4h, I go 30/60, for one trading week and two. For 1h, I do 24/48 for one trading day.

The 4H chart below shows two cross over that have been marked with H-lines. The first one has been visited a few times. The first time not exactly to the pip, but near enough to the area. The second time, price bounces off for about 25 pips. (I went long for a scalp here, but I originally went long for a much longer target.) After the bounce, price breaks the level then uses the point as resistance instead of support. This observation is interesting, as it seems that the cross over could signal a switch from a bearish sentiment to a bullish sentiment, or the level at which price was just at moments before the cross over. (If this doesn't make sense, I can draw a few quick lines.)

I'm not looking for the cross over to happen, but looking at ones that have already happened and then using them as reference points in the future. I'm going with the idea that the fresher cross overs are more relevant, as well.

4H Aud/Usd

to add to what i noticed about a swing subtracted or added is a target you can try to add a fib sequenxe
on the time theta between swing infliction points and you will notice thingsg

To be honest, I can't make out what you're trying to say. Your grammar and syntax is all messed up.

here is an interesting study on EW, and Fibs



23.6%, 38.2%, 50%, 61.8% and 100%. retrace to me seems very ambiguous because not only do you have 5 different price levels but

14.6%, 11.8%, 11.8 %,38.2% difference from each other in that order . this means that is very subjective and for the purposes of trading 14.6% in the hole is not even good MM practice.

to add to this ambiguity and confusion, people also use different "time frames" to calculate their ratios, and retracements.

all in all I do not find it useful, only as expo facto explanation of what price did.

you are welcome to present your supporting evidence thought, and we can discuss it further.

do you find it efficient to look at so many things? I mean if you are already doing an hourly study .....then looking at a daily chart? wouldn't a 4hour chart be redundant I mean 4 1hr candles= 1 four hour candle.

What is the rational behind the EMA and SMA cross overs? why do you pick EMA and then SMA?

I wish the speaker would have mentioned at the beginning of the symposium he was referencing a book I had read "The Golden Ratio - The Story of Phi, The World's Most Astonishing Number" by Mario Livio.

It would have saved me a 1 1/2 of watching the vid.

As for me I have no stats to contribute. I boil the "science" down to what is the chart showing and go from there.

I view the EMA and SMA kind of like price sentiment. If price is way above both, and the EMA is above the SMA, then why would I be going long? It seems like price has already been going up so much already. I'm not wanting to go long, but I'm waiting until price has gone up to a point to go short from.

I use multiple TFs for different trade lengths. The hourly chart won't have a couple hundred pip moves like the daily, but you'll still be able to make 5-30 pips on a more frequent basis.

It's not many things to look at, really. I have two lines on each TF, and I'm looking for recent cross overs.

I think trying to approach the markets from a fundamental side is incredibly hard. I don't even know one economist who could accurately predict markets more than 50% of the time. In the world economy you have billions of participants that all weigh into the "monster" we call economy. The variables, their weightings and the actions of the participants are in a constant float making it impossible to predict economies (at least our models are too simplistic).

I personally threw fundamental analysis out of the window for my trading and investing. For investing I just look at the fundamentals of companies and for trading currencies / futures just at the charts. Actually my final decision for throwing fundamental analysis out of the window was an interview with warren buffett who himself said that predicting or modelling economy is a fool's play and can never be accomplished with any degree of certainty.

However, if you wanna approach this from a more scientific way, I would just freeze all variables and just look at one pattern at a time. E.g.: search out all events when the FED raised interest rates, how often did the market make a strong move after that and how far did the move on average go. In the end, such "statistical patterns" will get you further than trying to understand the whole world economy and how everything fits together and which role every participant plays.

Just my humble opinion.

Retail forex speculation only contributes about 10% of the world's total currency exchange - the bulk of currency movement is via trade flows and capital flows which follow fundamental factors, in particular risk appetite. Price charts are merely scorecards, they alone cannot tell you who is going to do what unless you understand who is in the game and how their previous actions affected price. As Custos points out, trying to sum up the entire planets financial systems into a future prediction is futile, but that isn't what fundamental analysis is really about. Fundamental analysis is about understanding why previous trade and capital flows unfolded the way they did, why they imprinted certain patterns on your chart, and in what circumstances those patterns are likely or unlikely to repeat themselves.

you mean like this study here?






the problem with studying price movement after the FED, and news event, how far it traveled or what pattern it formed is that .......not all participants will ever place the same orders the same way, the same time it happened in the past.

I mean how would I know if they were

open interests
negative feed back through take profit targets
random transactions being made by corps, institutions etc....
big money closing positions
big money opening positions
options
futures
or even masked interventions?

when I was more of a newbie at trading...I used to actually pay attention to the individual candles and / or formations.


I find myself more of using them as a momentum Gauge than anything. Nowadays it is the actual price that I pay attention to .



the question I suppose is......can they be predictive, or can a candle be predictive given the fact that different broker times are used to make them? the so called "time frames" which to me are an illusion...also disrupt the appearance of the candle sticks and formations.

I primarily look at 1.20,1.30 for example......1.40 and so on. I do other analysis not just charts, patterns and candle sticks....for example...I think of what possible scenario I am looking at mid/long term, and what possible short term impact will current important events have. I do accept as custos said earlier and take into account that either

1- price is moving randomly

2-I have no clue what's going on at the moment

3- there is information which I am not privy to,

4- possibly the information is having a different impact than I thought.


But i do find myself giving the market a lot more leeway within my calculations of volatility for random oscillations.

i look at the decreasing momentum (through candle sticks) of a bearish phase of a wave to go long , especially at what I consider to be cheaper than the price level it is oscillating around....for a long trade.....hopefully I can illustrate this and explain it better


to see what prices and frequencies of the price revisited during a year this is a good chart to use

DECIMAL is two digits to the left of the |


121 | 01266
122 | 0123345556788889999999
123 | 00111224444445678999
124 | 113444677789
125 | 00011222233334445555567777888888889 9
126 | 223344455677899
127 | 0001222222333344455567778888899
128 | 000011122446667777888999
129 | 11111222222333333444444444455555666 6667777778888888999
130 | 00000122222233333444444555555555556 6667778888889999
131 | 00000111112222333333333334445555566 6666666777778888999999
132 | 00000000111222223333334444444555566 667778999
133 | 0222333444555566688899999
134 | 0001333334666678
135 | 000111112334678
136 | 000356667799
137 | 12234456666789999
138 | 001112238999
139 | 012
140 | 12457
141 | 3557
142 | 114
143 | 2588
144 | 0011122337
145 | 001


this is called a stem plot http://en.wikipedia.org/wiki/Stemplot


another visually informative representation of quartiles and outliers is a boxplot chart

http://en.wikipedia.org/wiki/Boxplot




a time series plot gives me a zoom out visual representation



then smoothed with a 2 week lag (SMA 10)




but at the end of the day....as i keep repeating everywhere in my postings which some people find contradicting due to the fact that I use technical analysis and post that TA is not reliable.........these are all historical statistical data of what HAS HAPPENED.

over the next year short term we have the fiscal cliff.....and from what I gather, the more congress and the president continue to stall the more probabilities of a correction in the market. However from what I am seeing YIELDS are still the main driver behind the moves. The Federal reserve already gave us tangible targets regarding the duration of accommodating monetary policy....while the BOJ keeps firing on the liquidity flooding of capital markets.

I believe the EZ will possible suffer from the impact of contracting money supply, contracting GDP due to austerity and weak aggregate demand....so as the US rise rates...the EZ might be cutting them in the foreseeable future.....this will strengthen the dollar....the problem is when? and how long will this environment last? to that the only we can all agree to look at is price correct?

for now however I see that 1.30 is a good price and the market oscillates around it.......so opportunities to sell at a high price (above 1.30) and buy at a discount below (1.30) which by the way is not so far off from the purchasing power parity which i mentioned before in this thread (i think it was at 1.25 or so...i have to look back at my analysis)

sorry for the rambly stile to my postings here.....it is very hard to put my ideas together coherently and the fact that I am working at the moment is not helping either.


what I am trying to get at is that.....

candle sticks and patterns
indicators
other statistical analysis
fundamental analysis

do not seem to work reliably, or as reliably as we would like it to work due to the efficiency in the markets...the randomness in the data, however casinos make money off random transactions via their house edge.....to a trader that is the proverbial "make more than you lose" advise .........the problem is how?

tight stop= increased risk via volatility stopouts
loose stop= increased risk via direction error
martingaling and other averaging down techniques will eventually snowball

all kinds of analysis made still have to deal with, emotions, subjective errors, pattern seeking behavior, and randomness in the data.....

treating the money management as if the market was random....but doing our best to profit from inefficiencies in the market.......has consumed my time in countless hours of learning, thinking, strategizing, and observing.

How about this for a Quantitative approach to candlestick pattern recognition?

interesting stuff thanks for your contributions to this thread