Why do indicators not work/work? Why is Forex not truly random?

Why do indicators not work / work in Forex? Why is Forex not truly random?

Indicators are probably the most used entry into the forex market by beginners. Whether you can make money with them or not has probably been the most discussed topic in forex overall.

I will go into details on why they do not work and at the same time work in forex. This is highly correlated to the fact that forex is a random market but with flaws.

Forex in general is a random market. The next outcome cannot be predicted / computed in any mathematical correct way. This does not mean we cannot make assumptions on what the next outcome / price will be with a percentage > 50%.

You can view the forex market as a random generator BUT with flaws. People sound in security related fields come over this situation a lot: encryption - your encryption is only as good as your random number generator.

And that is where all - no matter if quant/technical or chart based - strategies attack forex: we know the source of the random generator - the traders / algos. Traders are humans and humans are highly predictable. Humans are more highly flawed than even the most crap random number generator. While trading has shifted over to the algorithmic side those still rely on the same principles as the traders themselves did in the past.

That is how patterns, support / resistance etc form.

On the other side we got the MAs which simply form because of the most general and the most true thing in forex: it trends - which of course also is simply a consequence of the traders / alogs psychology along with factors like the cost of doing business (spread/commission), risk:reward etc.

Here is where indicators come into play: Almost all indicators work on the single fact that forex trends - thus they are based on the mother of all indicators: moving averages. No matter which indicator you choose, no matter how fancy it looks - chance is that at the core of it it is based on moving averages or applies them on top of other calculations which simply represent something about price.

So in theory we got something here... indicators show us if a currency cross (starts to) "trends" or not. So where did that margin call come from?!?

The magic keyword is currency _cross_. If you apply _any_ indicator(s) to a single currency cross you have one big flaw: A cross is moved by two currencies. No indicator(s) can reliably predict the movement of a single cross because of this since it is only fed the quotient of two currencies e.g. EUR/USD = all EURx divided by all USDx. Those both currencies in turn are made up of the result of its relation against many other currencies. So if your indicator predicts an upmove in EURUSD it can only do so by analyzing the past values of the quotient and apply (hello moving averages) some calculations on it. Your first signal might be correct because EUR might actually being bought across the board and USD actually being sold across the board. The next time however it could be that USD is being sold heavily in one other USD major and only there! This will move EUR/USD up too because of its USD side. To your indicator this looks exactly the same as the previous move but it is entirely different!!! As soon as that USD major hits resistance / profit taking (which of course will be the moment you enter the market) whatever chance is that you will get your rear-end handed over to the market. Your are especially in bad luck if EUR is actually bearish and now gets power to the downside because USD strength is coming back from those exits in the USD major.

So if you want to exploit the basic principles of forex you need to apply them to the overall market and not a single cross. No matter if you are talking about indicators, levels, whatever... it only works in case things are correlated. That is not always the case so none of those strategies will reliably work on a single cross. The days where things are correlated make people think they do though + correlations change and are a simple result of money flows which get you back to the fact that indicators only work in the moment the flow is actually happening in your cross.

Hope i could help a few people. Have fun n green pips to the ones that deserve it.

Oh, I surely deserve it, along with many others
Would you like to elaborate this correlation thing a bit more in detail? Like, should we be looking at all EUR pairs to increase the odds of winning or better a basket of different pairs?

Interesting.

How do we translate a USD/JPY Resistance/Support to a EURUSD Resistance/Support, though? Purely by looking at the chart or is there a way to calculate it?

There has not been a truly new indicator design concept introduced to the general public in eons. Thus, the over-use of the same mathematical concepts, tends to reduce the overall effectiveness of most TA. In addition, most TA is predicated on some mathematical average based upon linear OHLC calculations. So, those who use such indicators, can only see what that linear dimension shows them - which is the exact same thing that it shows everyone else.

A new indicator concept, would not be based on the same linear dimensions, but be based on something entirely different, and would thus show the trader what others simply cannot see. A genuine hidden edge.

Are the markets random? Yes. However, the layperson stops there without exploring further. Inside the randomness, exists an entire universe of structure. In fact, multiple universes of structure contained by each time frame, can clearly be seen - when one applies the correct microscope to market data.

That which is seen -vs- That which is unseen.

Take the following example:

http://i45.tinypic.com/x3j1l.jpg

What does the average trader see?

- Two bars of data
- One up and one down
- One full candle and one partial candle
- An inside bar
- The outline of a triangle

The average trader notices all of the conventional standards, while the one able to see the "unseen" recognizes things that don't make themselves known, until one has a developed new concept for describing market data and market behavior.

Regardless of the time frame, this chart visually shows some probability for the next substantial move in the GBPUSD. The chart happens to be a Daily Chart, of the GBPUSD showing Bar[0] and Bar[1].

With just two bars and the correct framework for a different kind of technical analysis, one can see that the probability for netting at least 30 pips Long and 30 pips Short, from the current close price, is approximately 87% in both directions. [how that's possible, is not something that I'm going to get into]

Why - has to do with both the Location of price itself, within the larger universe of its Structure (as mentioned above). Of course, before any of this can be understood, one has to understand that Price (indeed) does have Structure. Without hat understanding, the unseen will remain exactly that, unseen.

Do indicators work? Yes.
Are markets random? Yes.
Is there structure within the randomness of the market? Yes?
Can that structure be mapped? Yes?
Can it be mapped with conventional TA tools? No.
Can "Price Action" help you see the unseen? No.
Can simple market retracement explain it? No.

Current Price = 61555.

So in theory we got something here... indicators show us if a currency cross (starts to) "trends" or not. So where did that margin call come from?!?

The magic keyword is currency _cross_. If you apply _any_ indicator(s) to a single currency cross you have one big flaw: A cross is moved by two currencies. No indicator(s) can reliably predict the movement of a single cross because of this since it is only fed the quotient of two currencies e.g. EUR/USD = all EURx divided by all USDx. Those both currencies in turn are made up of the result of its relation against many other currencies. So if your indicator predicts an upmove in EURUSD it can only do so by analyzing the past values of the quotient and apply (hello moving averages) some calculations on it. Your first signal might be correct because EUR might actually being bought across the board and USD actually being sold across the board. The next time however it could be that USD is being sold heavily in one other USD major and only there! This will move EUR/USD up too because of its USD side. To your indicator this looks exactly the same as the previous move but it is entirely different!!! As soon as that USD major hits resistance / profit taking (which of course will be the moment you enter the market) whatever chance is that you will get your rear-end handed over to the market. Your are especially in bad luck if EUR is actually bearish and now gets power to the downside because USD strength is coming back from those exits in the USD major.

So if you want to exploit the basic principles of forex you need to apply them to the overall market and not a single cross. No matter if you are talking about indicators, levels, whatever... it only works in case things are correlated. That is not always the case so none of those strategies will reliably work on a single cross. The days where things are correlated make people think they do though + correlations change and are a simple result of money flows which get you back to the fact that indicators only work in the moment the flow is actually happening in your cross.

Hope i could help a few people. Have fun n green pips to the ones that deserve it.[/quote]

couldnt agree more with this perception of trading this way,ive been trading this way for somtime now and its very rewarding,although it takes some time to understand how to use it.but you could trade from this information without ever looking at a chart,but ofcoarse why not use all available tools.

Considerations coming from different points of view, but appreciated.
Data with higher precision, certainly occur more frequently in a contextual analysis.
Possibly the only factor in forex reliable predictability is called: price. Higher esteem!

You can check my other post about money flows. But basically that goes into the right direction yes.

Originally Posted by spekitox http://www.forexfactory.com/images/buttons/viewpost.gif
Oh, I surely deserve it, along with many others
Would you like to elaborate this correlation thing a bit more in detail? Like, should we be looking at all EUR pairs to increase the odds of winning or better a basket of different pairs

this is how i use the money flow,as i said before it takes time to understand its multiple uses for trading.but i can tell you theres so much information from this perspective.

not intending to tread on the OP,S thread here,just showing the uses of watching money flow,or should i say my perspective of watching money flow

help / opinions are always welcome

Thanks I'm gonna have to delve into that thread then. Damn money flows, flowing in the wrong direction, all the time LOL

ill try to explain my way of making sense from this .although im lousy at taking thought to paper.

you mentioned in your first post about the ramdoness of fx and also underlying structer .this i agree totally.fx appears extremly ramdon ,especially when viewed from the various time frames,but i believe its this perspective which fools most traders.ive found time is is a problem.

forex has less randomness than most will believe especially when you eliminate time.PRICE MOVES FROM POINT TO POINT.these points are spread across the various time frames.

we dont need to be macro eco specialists,but if we have a basic understanding of the structure of this market thats sufficient.with the knowledge that this is a hugely complex market ,chaotic .we have to simplify it.

i do this through watching the money flow,when the market is in synce it has harmony,this can be seen in my pairs and indicies .when the market is in a chaotic,unstructered or appears to be random .this willl also show across the instruments im viewing.we dont need to understand all the reasons why.we only need to view as to wether it has structure at a given time or not.it also tells us what the overall market is doing.i could go on for pages and pages about this,if you study this prospective you will be amazed by the information it gives you.

pictures are better than words,heres todays cable short.

just a point on the time issue,most s/r traders cross reference time frames to ther sucsess,but heres a good example of what im trying to say.on the 2 min chart price remains in its channel ,but then price retraces ,random or whatever we want to call it,on the hour chart you can clearly see were its going .great entry point short,if you used the money flow ,this would give you the confidence to enter,look at the harmony,look at the value changes all in synce.
the problem comes when you are viewing 1 time frame and 1 pair,whatever the indicator or s/r it will fail,time is killing you.take all the information and you can put it together . ok thats my ramblings for the day

Thanks dice too, good to see you're not "square" when it comes to interpreting price movements. I'll have a look at your charts, am at a loose end this week, plenty time for reading.

update,switch times to 15 minute,previous diaganal,look for reaction across all instruments.notice all values have gone further negative,perfect harmony

Sounds like a good idea: Base a chart on informed points instead of regular time intervals.

"PRICE MOVES FROM POINT TO POINT." -- makes sense, especially when each point represents where correlation between pairs is at one.
"when the market is in synce it has harmony,this can be seen in my pairs and indicies" thus, points.
"when the market is in a chaotic,unstructered or appears to be random" thus, between points.
"eliminate time" -- or at least regularly-spaced time, as the factors that create the points may be time-based.
Possible sources to make those points:
"we dont need to be macro eco specialists" -- along my line of thinking, this is news.
"a basic understanding of the structure of this market" -- also along it: trading sessions.
"the money flow" -- order flow, which volume-based bars may replicate.

Anyway, you're likely thinking of something else.

Only from me: News and correlation sounds good, only MT4 already takes a lot of bandwidth. Price is always there, patterns make random not, and time frames are a cheap convenience.
But if such a thing could line up trades left and right with just a bit of technical drawing thrown in, which correlation with news can do at least at times, then of course, it's worth it.

this short on cable has completed its purpose,it has gone through all its stages and time has come back to one.price coresponds across all the time frames.now we wait for chaos to take controll and the whole process will begin again.it actually began from the 4 hour monday,but to day the money flow fell into harmonic sync.
i will post the fractal b/o,on all time frames for the scientific minds later

its prety much as you have pointed out,its just a matter of tying all those components together

Interesting ,I enjoyed reading your post.Can you specify little bit more?I mean which brunch of math or science(physics?) is involved with the new indicator concept and/or which brunch of math or science(physics?)is involved with structuring the mapping of the randomness of market?

notice how all the value changes have all shifted towards positive,cables time all came together as one and every instrument worked in harmony and turned .
first test now is the previous 1 hour diaganal,also note the close candle perfect sync in real time,the oclock,again indicating everything is together.the price between this 16130 1 hour chart and 16140 2 min channel and heading into twighlight zone should show more random behavour.

thought id share my prospective of todays market with you.

good futer trading