My Forex Thesis

Why Forex Knowledge Can't be Passed On

by

Twoblink

I assumed I didn't have to say it, but I guess I was wrong. Please don't post in this thread. This is a place for me to put down MY writings. Mine, not yours. Please do not post in this journal.

abstract:

While general knowledge doubles every year, with the advent of the Internet, discimination of information has increased exponentially. The average Forex trader can now get more information in 1 hour off the Internet, than all of the market information COMBINED in the whole world, during the time Dow Jones was alive. That said, Forex knowledge; and in fact, trading knowledge cannot be passed on like DNA, but requires the new pupil to learn from scratch. While wisdom, mistakes, and other tidbits of information can be written down and preserved for posterity, unlike other fields, it yields no advantage to the next generation. Unlike building an automobile where we can leave for the next generation, instruments, old designs, detailed schematics etc.. In Forex, the knowledge left for the next generation is abstract. The field is so big, and the items involved so intertwined but at the same time, so abstract.
It is this "learning from scratch" that results in a market which should have 50% winners and 50% losers, resulting in a market that has 95% losers and 5% winners.

This paper will not cover the solution, but will present the problem. If this paper is correct, then an attempt to yield a solution would be self-futilization. The question then, is there a solution? The simple answer is of course, YES. Like Forex information, the solution is only useful to one person, at one time. This 100% customization is a result of the abstractness which makes up the components of trading. Because "Trading Knowledge" like Pornography, is difficult to describe; but unlike pornography, which we all probably "Know it when we see it", Trading Knowledge might be in many forms. The knowledge to trade, involves: math, art, logic, insight, intuition, experience. Because every chart is different and the market is the sum total of all the variables, no two situations are the same. Therefore, learning from the past does not necessarily help you in the future (as opposed to something like learning from past bridge designs helping you build better bridges now). This paper will show the elements involved, and why these items are not only difficult to pass on, but nigh impossible to.

The Holy Grail was the dish, plate, or cup used by Jesus at the Last Supper, said to possess miraculous powers. The connection of Joseph of Arimathea with the Grail legend dates from Robert de Boron's Joseph d'Arimathie (late 12th century) in which Joseph receives the Grail from an apparition of Jesus and sends it with his followers to Great Britain; building upon this theme, later writers recounted how Joseph used the Grail to catch Christ's blood while interring him and that in Britain he founded a line of guardians to keep it safe. The quest for the Holy Grail makes up an important segment of the Arthurian cycle, appearing first in works by Chrétien de Troyes. <sup id="_ref-0" class="reference">[1]</sup> The legend may combine Christian lore with a Celtic myth of a cauldron endowed with special powers. The development of the Grail legend has been traced in detail by cultural historians: It is a legend which first came together in the form of written romances, deriving perhaps from some pre-Christian folklore hints, in the later 12th and early 13th centuries. The early Grail romances centered on Percival and were woven into the more general Arthurian fabric. The Grail romances started in France and were translated into other European vernaculars; only a handful of non-French romances added any essential new elements.

Some of the Grail legend is interwoven with legends of the Holy Chalice.

The legend of the Holy Grail is the basis of the use of the term holy grail in modern-day culture. This or that "holy grail" is seen as the distant, all-but-unobtainable ultimate goal for a person, organization, or field to achieve. For instance, cold fusion or anti-gravity devices are sometimes characterized as the "holy grail" of applied physics (see list of holy grails).


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

According to Thermal and Statistical Physics:

No two objects may occupy the same space at the same time.
(You can search around online for more details and a proof via Fermi-Dirac statistics)

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

When you add up the concept of the Holy Grail, and Thermal Dynamics; what you end up with is the a basic proof of why it is difficult, nigh impossible to pass on Forex knowledge in an advantageous manner.

When a chart is presented, it is a mathematical jumble of numbers. There are patterns, but more often than not there are breaks of those patterns. Somewhere, a bunch of people are crunching market data about the last 40 years of Dow Jones movement; hoping to find a pattern to capitalize on it. If there was such a pattern, it would have been discovered.

The market, is a preception based item. So it is quite possible, to "see" the Holy Grail in the market. The problem lies in the fact that because no two objects can occupy the same space at the same time; the market is in fact in your head only. Nobody can view the market in the same manner as you. In fact, that includes yourself; it might be possible for you to stare at a market chart and think it is moving in a downtrend. In the morning, you might look at the same graph and preceive it as bottoming out and moving in an uptrend. The chart itself is 2D, graphed (usually) with time on the X axis, and price on the Y axis. The other extemporaneous factors such as news (both local and global), news (what gets to your eyes and ears), family background, trading history, trading experience, the amount of money you currently have, news about other industries and a whole host of other factors come into play, but is not written, printed, OR reproduceable. Because of this, even if you happen to stumble upon the Holy Grail (the arguement of whether there is one or not is beyond the scope of this paper), nobody else can nor will be able to see it. This again, might include yourself at a later time or date.

The Dataset Bias is the assumption that everybody is reading off the same page as you. i.e. Everybody is using the same dataset as you are.

Casing point:

Alice and Bob both trade Forex. Both are trading EUR/USD.

Alice places an order to buy @ 1.2345
with a StopLoss at 1.2300
and a Take Profit at 1.2450
this is done on platform A.

Bob places the exact same order, but on a different platform, platform B.


On platform A, the price hits 1.2450 exactly, Alice takes +105 pip profit, and then the market tumbles to a new low.

On platform B, the price hits 1.2449 exactly, Bob misses his Take Profit, and the market then tumbles and Bob is stopped at for - 45 pips.

Alice and Bob both placed the same order; but the end result is a 150 pip difference. Because of this, Bob might be wiped out. Because of this, Alice might be able to exponentially grow her account. Because of this, Alice might think she has a winning system on her hand, and bet bigger the next time. Because of this, Bob might think he has a losing system on his hand and bet smaller or exit the market completely.

Backtesting this however, is not helpful. In fact, backtesting might be detremental, because what it will do is REENFORCE what Alice and Bob both believe already. The DATA is flawed, but you have no way to preceive this. In fact, if Alice did not know Bob, and neither of them knew of the other's existance; both will walk very different paths. Both might write a book about the same method, but what details the book covers, will be fundamentally different as (and this is critical) THE DATASET THAT ALICE AND BOB GENERATE AS A RESULT, WILL BE FUNDAMENTALLY DIFFERENT AND LIKE A DEFECTIVE GENE, WILL GET PASSED TO THE NEXT READER.

So now we have a temperal recursion and temperal paradox at the same time. How is it possible that wrong information is passable to the next generation, but correct information is not?

The answer is simple; because trading is real time, for more accurate, forwards in time, trading then is a sum total of trading decisions shrinkwrapped into a "Buy/Sell" set of buttons. Information (which is easy to pass on) is not what is going on, but rather a DECISION MAKING PROCESS AND FILTER is what is needed when you are about to click either a buy or sell button. Because process and filter in an abstract manner is impossible to describe in acute detail, what is the most useful part becomes the part that cannot be transmitted.

Contrast that with bad information. Because it is fundamentally flawed, bad information then, does not have the parameterizations that correct decision making has. Bad information is just that, information, it is not a decision making and filtering process. Because information is easily compacted, quantified, dice up, and disciminated. Consider mistakes in textbooks from over 100+ years ago. Those mistakes have been repeated and repeated. Humans assume that the same data, presented repeticiously and in large quantities somehow improves the chances of the data being right.

Given the same recipe, followed to the letter, Alice can produce a cake which tastes horrible. Using the exact same recipe, Bob might make a fantastic cake.

The difference is not mathematically quantifiable. Everything in the world is mathematically quantifiable, that might be conjectured to be true, but what about things like art, "good smell vs bad smell" etc? What is Bob doing that Alice is not?

Bob can show Alice what he is doing; on tape, in math, all items might be exactly the same, but the end results are clearly different. The "Human" factor, the human knowledge, is difficult to quantify. so many factors go into the making of the body of knowledge for a person, so many influences; that it is impossible to quantify.

In fact, this almost draw upon "Super Consciousness" classifications of subtle influences, influeces that should not be there, but is.



I have done an experiment before; one that is no doubt facinating and should be a mathematical impossibility, but none the less, is possible. I highly encourage you guys to try it at home.


THE EXPERIEMENT:

Prep:
1) Find a dish. Split it as evenly as possible into two seperate plates.
2) Find a professional chef or someone with superior cooking skills.
3) Find someone who cannot cook.
4) Find a someone as your blind taste tester
5) Find someone willing to act as the server

6) Make sure the blind taste tester is familiar with both the professional chef, and the person who cannot cook. Make sure they are away of the different personalities.

7) Have the server place one of the two plates of food into the microwave, and then leave the room.
8) Have either the professional chef, or the non-cooker START THE MICROWAVE.

9) After the microwave is finished, have the server serve the food to the blind taste tester. Everything should be double blind in this experiment; the server should have no knowledge of who started the microwave.

10) After the taster has tested the first dish, repeat again. But if last time, the professional chef started the microwave, then have the non-cook start the microwave. If the non-cook started the microwave the first time, then have the professional chef start it.


The THEORY: Because the food and the microwave are the same. In fact, the person who punched in the time to start the microwave SHOULD NOT BARE ANY INFLUENCE ON THE TASTE OF THE FOOD.

The FACT: More often than not, if the taste tester is familiar with both the chef and the non-cook; he/she SHOULD BE ABLE TO TASTE THE DIFFERENCE OF WHO STARTED THE MICROWAVE.


This is borderline voodoo; and 6th sense. But I have personally been able to tell, when presented with 6 microwaves, same food, 6 different people starting the microwaves, and served to me randomly, which is the one I microwaved. In fact, I was able to correctly guess all 6 of the dishes to match who microwaved it.

All items on earth influence all other items (Newtonian law). Regardless if cells or atoms have memory, we each occupy a space time, and thus bring about it, a bias. We in essence, puncture time, and so we influence everything around us.

In mathematical terms, we keep influencing the very thing we are trying to describe, and thus, it is like we are the turtle and someone is sitting on our back dangling the carrot in front of us. No matter how fast we crawl, the carrot is always just as fast.

If the turtle had eyeballs on the TOP of his head, he would know what is going on, but because he doesn't, he is unable to assertain what is going on.

Because of this, the turtle cannot teach its young to avoid the carrot because it is a ploy. Thus, stupidity is not prevented in the next generation.

When it is all said and done; software programs, magical indicators, etc.. Is probably not the key. Everybody is looking for a magic bullet, a holy grail, SOMETHING to give them the edge.

That something is quite simple.

READING and TRADING

With the advent of demo accounts, which have absolutely no difference from live accounts (except you aren't able to convert it to real money) there should be no excuse to not demo or test any method you feel is profitable.

The problem comes when someone tells you that they have demo'ed it, and it works great! By handpicking the select cases, one can argue for any system.

"Bob has read the books for me, and his conclusion was, these books suck."
"Alice has read these books, and her conclusion was, this is the miracle method."

In both these cases, you are placing your faith in Alice and Bob. And as stated earlier, because no two people can occupy the same space at the same time; and the data they draw from is fundamentally biased (Self fulfilled prophecy, you see what you want to see) Alice and Bob will draw conclusions that not only have no merit to you, but QUITE POSSIBILY QUITE DETREMENTAL TO YOU.

The only way to draw a conclusion, is to READ THE BOOK YOURSELF. You can lead a horse to water, but you cannot make him drink. I can read a book for you, but I am unable to pass on the knowledge in the book to you in a more efficient way that you reading the book. If I were able to, I would have a "Knowledge perpetual motion machine."


The problem with this (again) is replicative fading. I learn something, I write a book about it. I introduce a bias based on personal bias, data bias, or one of the many many does of fallacies and biases. When the reader picks up my book, he or she inherits my bias (which is easy to pass on) and then adds his or hers to it. This goes on, until the contamination is so malignant, that one is better off starting from "Writer Zero" and reading what he or she has to say. While there is bias there, there at least will not be "stacked cascading bias".

The Treasury department trains a team to stop counterfeit bills. How? They don't give them counterfeits to study, no, they give them the real thing to study, every square millimeter of it for months on end. They know the note SO WELL that anything other than the real thing, they can spot it.

That is the filtering process. Read enough books, and you start to build a bullshit and counterfeit detector.

What people do instead however, is they try to study the counterfeits. They study them to the point, the THINK that the counterfeits are the real thing, and the real thing is actually fake. This has occurred now in Forex, to the detrement of the Forex community and to the newbies and cannon fodder in particular.


So looking at the amount of scams out there, selling of indicators and signal alerts etc et al; it is no wonder nobody is making money. The art of reading a chart without indicators, and listening to what the market is telling you and drawing conclusions from that, is lost.

Most can name indicators, but because they are not programmers, they have no idea how the indicator is created, what the indicator entails, or what the indicator is saying.

Here, we have the worst case scenerio. Someone who has no clue, is using something that he has no clue about. How can this possibly result in a profitable situation??

The answer, it can't.

Alice might have an idea or concept about the market, quantify her beliefs into an indicator. When Alice dies, more than likely, her notes on her beliefs are not easily passed on. Even if they are, she is not there to give her interpretation of what she was thinking at the time. But what is passed on, is the indicator. The indicator has no context, it just is.

So the most valuable part, the train of thought, the theories, the beliefs about the indicator are not left for posterity, but the indicator, the most insignificant part, is.

This is likened to many sci-fi movies; where in the future, all the "builders" have died, and while the new generation knows knows how to use the equipment and machinary, they have no clue why it does what it does, or how to repair it if it is broken.

Give a man a fish, and you feed him for a day. But if you can pass onto him, the knowledge of fish behavior, he will probably figure out how to catch the fish himself without any teaching.

If you want to know what the dog food you are selling tastes like, the best way to do that is to eat your own dog food. It is incredible that quite a few authors of Forex books don't trade!! Yet people flock and line up to be the white lab rats for them.

The reason why Americans are fat:

White refined sugar. It's everywhere.

If you take a teaspoon of white refined sugar, and eat it.. nothing happens. Eat a second spoonful, nothing happens. Eat a third spoonful, nothing happens.

Contrast that with Honey.

Eat one large spoonful of honey, and it tastes great. Eat two spoonfuls, it tastes great, eat three spoonfuls, and you will feel like throwing up.

The reason is that honey, (a natural item) has a built-in "ok there big fella, that's enough for today" mechanism which will make you feel like throwing up when you eat too much of it.

White refined sugar however, does not have this, therefore, you can eat as much of it as you want, and not gag. That's why Americans eat as much of it as they can.. and get heart disease in the process.


Most people have a natural mechanism to avoid things which will cause bodily harm. When you see a scolding hot pot steaming, you avoid it naturally.

The problem with Forex is, it does not yield bodily harm. Instead, it yields financial and psychological harm. But, like white refined sugar, Forex bypasses are natural gag reflex, and therefore, we become reckless in our actions. If Forex monetary damage was somehow tied to bodily harm instantenously, then it would be a different story.

Because it does not contain a gag reflex trigger; we cannot pass it on. "Don't eat white refined sugar!!" If you tell that to your kids, they will ask you why not? Telling them that they will get fat, doesn't really do much to sway them or deter them, because they do not know nor understand the consequences.

Because there is no IMMEDIATE (and immediate is the key) consequence to their actions, you cannot mate a short-term action to a long term consequence to those who have very little concept of time.

The proof of this is everywhere in society. While everybody knows that eating right and exercising is great for your health, most would rather pay a doctor to give them a pill or undergo liposuction to take away the years of glutoney.

Even the most simple of knowledge, is unsuccessfully passed on.

Eating right and exercising, is the most failed message in America. Eating right and exercising, a concept that is clear, simple to understand, with billions of Terabytes in information about the consequences; even something so vital in concept, cannot be passed on. Each generation, and each person, must learn it for themselves.

When you tell a high school student, that a hamburger is bad for you; why should they listen? Even if they did, do the TRULY understand the full meaning of it? Probably not. It is the accumulation of many hamburgers that does the damage. Like a water drop dripping on a stone, the stone might be stronger, but 20 million drops of water later, the stone has a hole. If this stone were to try to teach other stones about the dangers of dripping water, it would fail miserably.

What is perhaps even more disturbing is that while every human has a built-in mechanism to avoid bodily harm; this mechanism can be dulled to the point as it if were turned off.

Casing point, most Taiwanese people do just about the most life-threatening things in the world on an everyday basis, with total disregard. They will smoke while carrying tanks of natural gas, run across busy intersections, spray the entire house with bug poison with all the windows closed etc..

If the instinct to avoid things that can do bodily harm can be turned off to such a degree, then it requires little to no effort at all to turn off the fear of losing money. As Forex is just digits on a computer screen, and it does not have any inherent bodily harm; it is perhaps for this reason, that people are so wreckless with it.

When a child sees a parent so wreckless, he or she will only learn it. If a parent is very diciplined, the child more than likely will not learn from it. The reason is, if the child is not diciplined in Forex, there is no bodily harm done to him. So the dicipline that the parent might try to pass on, will fall on deaf ears, because again, there is no immediate consequence attached to wreckless action in the Forex.

One of the most unintelligable parts about the Forex and any market is what I refer to as the "Random Reward and Punishment."


The way to destroy anything, is to randomly reward and punish the same behavior. Those who are doing psychological studies of why kids nowadays are so difficult to raise, this is the reason, above all else.

The market randomly awards or punishes the same behavior. Because of this, it is difficult to produce a ruleset. Repeatability and predictability are two cornerstones of profitability. The market then counters with random reward and random punishment for the same actions, for no reason.

Casing point:

Alice Buys the EUR every Tuesday at 7:19 GMT, and sells it Thursday at 18:45 GMT. Alice made over 10,000 pips last year, none of her stops being hit.

Bob Buys the EUR every Tuesday at 17:16 GMT, and sells it on Thursday at 9:00 GMT. 85% of Bob's stops are hit, and Bob loses an insane amount of money.

So Bob, seeing what Alice did, changes his time to match that of Alice. Alice, changes her time to match Bob's old schedule.

Next year, Alice makes another 10,000 pips, while again, Bob has 85% of his stops hit.

Conclusion??

There is none. That is the difficulty of it.

If Alice was a mentor to someone, what would that person have learned?

If Bob was a mentor to someone, what would that other person have learned?

Both would draw crazy and rediculous conclusions.

If Bob's apprentice studied Alice's situation, and Alice's apprentice studied Bob's situation, what additional insight would they have gained? NOTHING.

The reason is, the data conflicts greatly, and in a manner in which there is no pattern. If this were the case, both apprentices got off easy.

What would be worse is within the randomness, one of the apprentices assumed they spotted a pattern, and drew conclusions based on bad assumptions which was based on random conclusions from bad data.

The random rewarding and punishment for the same behavior, eventually yields wrong actions by all.

This occurs in the real world with respect to lotto.

The "Birthday Paradox" explains this. The chance of two random occurrances happening is greater than trying to match a variable to a fixed constant.

If I have 45 random people in a room, there is a 95% chance that two people in that room will have the same birthday. With 60 people, it's an almost 99% chance that any two will have the same birthday. But if I were to fill a room 60 people, and try to find someone to try to match MY birthday, my odds would be 60 out of 365, or 16.44%. That means if you were to buy a machine generated lotto ticket, you have an increased chance than picking the numbers yourself.

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


Because of our need to see patterns, we try to see something that is not there. The Birthday paradox is called a paradox because it goes against that of human intuition.

No matter how much you explain a mathematically sound proof to someone; most won't believe it.

The two main reasons are:

1) Humans have a built-in intuition. We assume a few things are true, regardless of mathematical proof. Even when the math is in front of us, we probably will not believe it, because while logic is strong, intuition is stronger.

2) When the math is presented, we don't have the mathematical background to understand the implications of it.

Explaining why Money Management is the most important influencing factor in trading; and most don't have the mathematical background. The proof of this is everywhere. When you look at how many books are written about charting, about investing, etc.. how many of those are written about Money Management and Position Sizing? Less than 0.1%. Holy Grail quest + lack of mathematical background means that most don't know, don't care, and even if they cared, they don't understand.

As most gravitate toward the mean, and the majority of the popular is investment ignorant, it stands to reason that given enough time, most will be ignorant (regression towards the mean).

Learning the Status Quo

Start with a cage containing five monkeys. In the cage, hang a banana on a string and put stairs under it. Before long, a monkey will go to the stairs and start to climb towards the banana.

As soon as he touches the stairs, spray all of the monkeys with cold water.

After a while, another monkey will make an attempt with the same response - all of the monkeys are sprayed with cold water. Keep this up for several days.

Turn off the cold water.

If, later, another monkey tries to climb the stairs, the other monkeys will try to prevent it even though no water sprays them.

Now, remove one monkey from the cage and replace it with a new one.

The new monkey sees the banana and wants to climb the stairs. To his horror, all of the other monkeys attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.

Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm.

Replace the third original monkey with a new one. The new one makes it to the stairs and is attacked as well. Two of the four monkeys that beat him have no idea why they were not permitted to climb the stairs, or why they are participating in the beating of the newest monkey.

After replacing the fourth and fifth original monkeys, all the monkeys which have been sprayed with cold water have been replaced. Nevertheless, no monkey ever again approaches the stairs.

Why not?

"Because that's the way it's always been done around here."




~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~




This is a CLASSIC story, and one that vitally important. This is the result of random reward and punishment. Note, that the behavior is passed on, but the original knowledge (the catalyst) is not passed on.

Conclusion:

So I have proven that Forex knowledge cannot be passed on in a linear, small packaged, McDonalds happy meal method. The reason why I have gone through such great lengths to do this is.

Maybe people on may boards all across the Internet, are selling lotions, potions, snake oils, dreams, and false hopes. They will present indicators and systems that "seem to work well", and they will sell seminars that "teach you stuff that will make you a bazillionaire." But the truth of the matter is, none of this can be passed on; above anything other than superficially. The real insight and deep knowledge comes from reading for yourself, and reading enough to filter out the bias and the counterfeit from the small granuals of knowledge.

The purity of information is subject to replicative fading. This is proven to most by the children's game "telephone" where one whispers something to another, and they in turn whisper supposedly the same thing to another and so on, untll the message out the other end does not resemble what went it.

Asking someone for advice is great, but understand that with the advice is biased knowledge based on biased information.

The real way to understand Forex is to read, observe, study, and learn for yourself. Forex isn't the Kung Fu you see in the movies; where you can pass your Chi to someone else. You can oversee their growth, but you cannot grow for them. Visa versa, others cannot read for you, nor grow for you.