DeepChill's thread

Introduction

Hello Forex Factory.

I’m going to begin learning the foreign exchange market and how it works, and would like to include other people in it. The main reason I am posting this here is to involve more people with me, which is for my own benefit, as it seems like an exciting prospect to have some input in my learning, to keep me motivated/disciplined enough to keep learning, and to maybe help any of you. I will try to update this thread as often as I have a certain amount of new substantial information(New things I have learned, updates on trades, etc.) to post. I think we should expect a new post every other day or so, but don’t call me out on it if I don’t post so.

So a little bit about me to give you a background:

I am an early 20’s student at a state university in the US studying physics. I have been meddling with Forex trading on and off since I was 15 when I blew my first $500 account. Have had a few hundred dollar accounts since then, they didn’t blow out but I usually ended up withdrawing the money for one reason or another. I don’t have much “real” knowledge of the currency market, which is something I want to fix. I believe I have the necessary philosophy for trading, I just don’t have the knowledge/information to make informed trades, which is mainly what I plan to change.
A couple of days ago I transferred $237 into my Pepperstone account, and this is what I will begin trading with. My goal is to learn before I earn, so I am not afraid of blowing out this account. Of course, I will do my best to not allow that to happen, as I prefer to build this account into my future “real” account.

Macro Goals

Develop self discipline/Mastery of the self. This is my biggest goal out of all this. I want to change my future and not be stuck/constant in one mental state, as that is stagnant.

Learn how the foreign exchange and other markets function. I put in other markets because if I see another interesting opportunity to make money, I will try my best to understand it. However, for now, my focus remains mostly on the foreign exchange market.

Make money. Be financially independent. I don’t have/want to set a time frame for this to happen because that will skew how I am supposed to trade to meet my arbitrary time expectations.

Micro goals:

2 hrs/day active Forex learning/trading.
Trade my $237 account.
Daily 10 minute meditation. Helps concentrate/think clearly. So does not using your smartphone, which I do not.

And there’s a ton of other stuff that would bore you guys so I will leave it out for now.

Philosophy

My forex philosophy is simple: trade when you completely understand why you are doing what you are doing. I do not accept “technical” analysis and will not use it at all in my trades/learning. I don’t find it useful at all, as I believe it’s just many different ways of following the short term trends, and that actual Forex movements do not “depend” on these technical analyses to occur, nor are they reflected by them. I prefer to trade on the reason they actually move, which we can find by fundamental analysis. Which is why most of the trades you will see me make will be dependent on strong fundamental reasoning I can back up with historical data and other facts that make a strong case for why a certain movement should be expected. I believe there are no “secrets” other than just having a common sense philosophy. My money is a way to show confidence in my predictions.

Just because it works doesn’t mean it’s right. I prefer to know the reason I expect a certain trade to act a certain way, rather than hope for it. I believe internal influences are vastly more important than external ones. Self-mastery and being honest with yourself are more important than just making money. I realize the markets are not what I want them to be, I don’t exist to the markets. Therefore, the market doesn’t care about me, nor do I care about it. Being stressed over trades does not change/alter reality in any way whatsoever, so just relax and work on what I can actually control. I know these are basic ideas, but I’m just putting it out there as it’s part of my philosophy.

Trade without any expectations. I believe arbitrary limitations(eg. You should only expect to consistently make ~1-2% of your capital annually, 300 runs are a high/rare score in ODI cricket, you can only run so fast, etc., all such arbitrary limitations were different in different eras, which is why I believe they were only the effect of mental limitations put on for no reason) affect us more than any external influences, so I’m going to go for whatever risk/trade I deem reasonable with complete disregard for such limits. When there is a will, there is a way. Which is another reason why I will not go with expectations/hope into a trade, but with investments that after thorough analysis I have determined to act in a certain way. If what is supposed to happen happen does not, I will look at the fundamental reasoning behind why and go back to the drawing board. Not to “make x amount of pips,” but rather to correctly predict market movement. I don’t need to make money, I’m happy living on basically pennies/day, I have a very frugal lifestyle anyway. Which is why I’m not emotionally invested/will try not to be(eg. checking trades nervously every 5 minutes to see what happened, etc.) and won’t get excited/dejected over it.

I am going to trade my account as if it were a percentage. I wish I could completely remove the dollar value, but alas I can not. I will only make trades that after creating, I can peacefully sleep at night. I once read money making should be a boring activity, as the most interesting way is most likely not the most efficient way to make money. I will bring that philosophy and try to keep my personal biases out of the way. Make small profit trades I am completely confident of rather than a large profit ones I’m not confident in. Do not be “stressed” in the slightest.

Stay the hell away from fads, but know when a good business opportunity shows itself. I’m usually quite good at spotting fads and bullshit, which is why I expect to be investing in fundamentally strong investments only.

I will prefer if the posters replying to my thread do not respond to any piece of information I have posted with their “opinion” if they believe I am wrong. I have an impressionable personality, and would prefer to keep my own mental frame in dealing with things. However, if there is a certain objective piece of information that I have posted, which is blatantly false, please feel free to correct me. I think everyone is just as clueless as the next person and most people are just pretending to know, so I’d prefer to be wrong on my own shoulders than on someone else’s. There is no room for self-doubt.

I’m a nihilist anyway, nothing matters. The reason of posting this above is so you know what type of a trader you're dealing with, and to help you make a decision whether or not you're interested to continue reading my posts.

Learning objective/What to expect for the future

I’m going to hit the library tomorrow and have a look at some financial documents/books. For starters I am going to study solely USD/JPY(I am not a fan of the EUR/USD because the Euro constitutes of way too many countries which would make getting a good picture unnecessarily harder) in order to gain an understanding of the factors that affect currencies. So I will begin by comparing different economic indicators(GDP, growth rate, population, exports, interest rates, etc.) at various times and see how they correspond to the currency values in order to try to see which factors affect it the most. I think a good timeframe to compare them will be 1996, 2003, and current date as these are not abnormal periods of economic collapse.. I will also read up on central banks, their functions, and the importance of the interest rate. I will note down my observations and post them here in the next post and hope they will interest whoever is going to follow me.

I want to follow that up later on with:

What are currency values based upon? What are they "pegged" to? How often is currency printed? Total value of the USD/JPY in circulation?
The central banks' interest rates make it easier for private individuals to take loans, but do they actually promote economic growth so much so that currency rates would be affected compared to another country's? What other factors promote/obstruct economic growth? Quantify the economic growth made/created after certain interest rate changes.
Who are the biggest currency traders? When/why do they trade? What are the effects of these trades?
Compare the trade between the US and Japan and try to see if there is a trend. To which country is there a net outflow? What effect does this have on USD/JPY?[Will probably use Wikipedia for this]
Do businesses that are originally German, but have offices in Japan, trade in JPY or EUR when dealing with the USA? [Not sure where to find an answer for this]
Reading/understanding central bank reports, [I can get these from the banks’ websites]
Create a sheet of data comparing the currency rates and various economic indicators of Japan and the USA at different times, and to try to weigh what value each indicator has.[I plan on using TradingEconomics for this]
Create a market freedom report which measures the free market-ness/heavy regulation-ness of the Japanese and American markets, and the effects of government policies on both.[Not yet sure how to achieve this]
I have read somewhere in the past that the Japanese government invests internationally in certain specific time periods. I want to read more about this and try to figure out if there is a maturation date for their bonds/upcoming investments. Find more details on Japanese public investments. What do the US and Japan trade/invest in mostly?
Compare USD and the JPY with respect to other currencies in different time periods. Figure out which country had the effect on the USD/JPY pair at a certain time. Figure out why.


Basically, I want to know what moves currencies and how much it moves them. I hate uncertainty, I don’t gamble. I want to invest.

If you have any reading recommendations related to the material/questions above, please feel free to post them. I will try to follow up this post with answers to the questions above and more questions that I have thought of. Hopefully this will help you guys as well.

I will also post any trades I decide to make and the reasoning behind them.

Daily music

All of these posts will come with an accompanying music video which reflects my mood. Here is the one for today by one of my favorite singers. Fear of Fear - Passenger:

Inserted Video

Music theme for the day:



Shalom.

So as I said I was going to start from the complete basics of the Forex market, so I did. I will write down below what I learned recently and what I plan to learn soon. I will follow the post with a few questions I had, any answers are appreciated.

Currencies and their values

In order to understand the currency market, I needed to understand what currencies/currency pairs are.

Let's say I have x amount of a currency called A. I am following another country's currency, B, and expect its value to fall relative to A soon. I use my x*A to purchase y*B. Now I only have a y amount of B, which I hold until the value of B changes in such a way that I can get more than x amount of A. When I deem the amount of A I purchase now to be convenient/higher than x, I trade it out. And that is how I make money on the Forex market.

How are currencies valued?
After understanding the basic question of how trading currencies makes money, I wanted to know what currencies are. Yes, they are a tool used to trade goods and services, but what gives them their inherent value? Why is it that $1 buys an x amount of eggs and not a y amount?

One could probably guess that the government has an X amount of commodity(gold?) in store, on whose back they print currency. Meaning, they take gold from people, and from their own gold, and in return provide Dollars to be used which are set at a predetermined exchange rate, eg. $1 = 1 gram of gold. In fact, this was the system used until 1971, known as the gold standard. The reason it was abolished was that in order to keep producing currency in large amounts, you had to have large amounts gold in your reserves to be able to back it, and there is only a finite amount of gold one can have access to.

The current system is called the fiat system. It was what replaced the gold standard in 1971. The way this works is that instead of having your money supply backed by a certain commodity, we let the economy determine the value of currencies. Currencies are valued based on what holders of different currencies are willing to pay for them. So currencies are no longer "pegged" to anything, instead, we just accept their value to be what is considered acceptable by society to pay for it.

There are various factors that affect this, including the total supply of a currency in the world. If we decrease the supply of the currency, its value will naturally rise, and vice versa. In my opinion, this should be one of the largest determinants of currency value, but I have not yet done much research on it to figure out its "weight." Here is an interesting chart:

While searching for more information on money supply, I came across how money supply is measured in the US. Apparently, it is measured using values which we call M0, M1, M2, M3, M4, & M5

Where:
M0 is just the total physical currency in circulation.
M1 is M0 + money in checkings accounts.
M2 is M1 accounts + money in savings accounts + money market mutual funds + small denomination time deposits (certificates of deposit of under $100,000)- basically quick money. M2 is considered the best metric for measuring money supply.
M3 is M2 + all other CD's.
M4 is M3 + commercial paper[I don't understand fully what commercial paper means]
M5 is M4 + T-bills.

Another interesting chart showing M2 money supply:

However, when measuring money supply, I will use only M2 as it seems to be the most accurate measure. If we keep constantly increasing the money supply, as the US and most other countries have been doing, there is a gradual inflation at all times. This is the reason why the USD today is worth 25 times less what it was worth in 1913.

An example I read was that in order to try to increase the value of the Mexican Peso, the Mexican Central Bank sold $200 million for Pesos each day for 3 months in early 2015 in order to remove Pesos from the supply, and in turn increase their value. The value of USD/MXN did go down from ~15.5 to ~14.5 during this time period, but apparently other market forces were too strong and USD/MXN is now valued at 19. I will try to figure out an explanation for this, but on first glance it seems like the Mexican government made a futile attempt to try to artificially salvage their currency's value, which was not enough to do so, and the will of the rest of the market prevailed, who didn't want to pay more for a MXN. Also, if we keep artificially increasing/decreasing the money supply, it causes inflation/deflation.

Another idea I thought of is that if the total amount of USD in foreign countries' reserves keeps increasing, it increases the value of the USD, as the supply of USD in the world decreases.

Other possible reasons that change currency values are export/import. This is, in my opinion, actually the predominant reason why currency rates exist. So you can trade between two countries. So if a country's economy/imports/exports are based mainly around one single commodity/service, a fluctuation in the price/demand/supply of that commodity/service will invariably cause a change in the exchange rate of the currency of the country.


Some terms I learned today:
Velocity of money: How fast money is passed from one holder to the next. Now sure how this is calculated, but this is an interesting idea. I think we could potentially use it to measure the health/activity of an economy.
Minimum reserve percentage: If $900 is deposited in a bank by a person, and the minimum reserve percentage(set by the central banks) is 10%, this means that the bank only has to keep $90 on hand, while it can use the rest $810 to either loan out or invest.

I have not read too much into these subjects, just glanced over them, so if there is something you think I should know/don't understand correctly, please feel free to post it.

Speaking of Inflation, I realize that inflation is mainly measured by using CPI. I was wondering how accurate is the CPI? How good of a measure of inflation is it?

To do:

I will try to use money supplies of Japan and USA at different points in time and try to compare their currency values to see how much of an impact money supply has. I will also try to insert GDP figures and other economic figures to understand their value relative to money supply.

Read up more on the CPI and understand exactly how it is calculated.

Graph total supply of USD as a ratio of the amount of USD in foreign exchange reserves at different times vs the value of USD at those times.

Other than that, I will try to use money supplies of Japan and USA at different points in time and try to compare their currency values to see how much of an impact money supply has. I will also try to insert GDP and other economic figures to understand their value with respect to money supply and currency values.

Use import/export data and compare it to currency values.

Questions:

What is the inflation/deflation considered relative to? I mean at a certain time if $1 buys 10 chicken nuggets, but at another time the same $1 buys 12 chicken nuggets, and we try to calculate in/deflation, why should we calculate in/deflation compared to the time when $1 bought 10 chicken nuggets? What makes that time period the one we measure our current in/deflation against even though the value of the USD at that time is something we just agreed to. I hope someone understood what I meant by the question above.

What other factors affect currency trading?

Update on trading account:

I purchased the S&P 500. I was up $10 last night, with a trailing stop loss. It rebounded, and I made almost $2. The reason I purchased S&P is not because of any thorough analysis, but because based on the recent trend, I felt people would try to purchase the index before Trump announces a new fed chairperson, which is when I predict it to lose some of its value, because of uncertainty surrounding the new fed chair. However, I'm unsure as to how much such an "uncertainty" would actually affect the index.

Account is now up to $238.78. Almost 0.75% increase.

I decided to change my strategy and have a look at technical charts. So I went through more than a few, and tried to make some averages/numbers on how charts behave with 4H candles.

Here is what I found:

For every H4 candle that was a swing candle(meaning opposite in direction to the previous candle), it meant there were ON AVERAGE by 4.3 candles in the opposite direction. Since we need at least 1 candle in an opposite direction to know if the candle is in the opposite direction or not, I subtracted 1 from total "following candles" and reached an AVERAGE of 3.32 candles following in the same direction of the first swing candle.


However, I tried to make it more accurate, and tried to test it for candles that were in the opposite direction to the previous candle AND was larger than the previous one when measuring the total distance between the open/close. I came to an average of 6 CANDLES/SWING. And taking the first candle out, we reached 5 candles/swing, which means after you see the first candle move in the opposite direction of the previous candle, and IF AND ONLY IF this candle has a larger distance between open/close than the previous candle as well, it was usually followed by 5 more candles in the same direction.

These, to me, seem very interesting findings. If you buy/sell any swing candle, that was larger in size than its previous candle, ON AVERAGE you will have 5 more candles in the same direction. You could buy every single swing, and simply close out the trades 20 hours(5*H4) later, and you will be guaranteed to be in profit after a number of trades. I am interested to test my hypothesis and also use different parameters as well to figure out the optimum way of determining entry into a candle, but to be honest, the idea of entering a swing candle larger than its previous one is not bad considering the returns.

Question:

Does anyone have a way to measure "candles following a swing" in MT4? Currently I did it with a calculator by hand, but it was hectic work. Would prefer to test this on many different charts across various dates, so how should I go about programming such a thing? Thanks

Note to self: MA, EMA, TMS, PA, and every single other indicator in existence is useless. The reason I think so is because the only input in these indicators is the data from the chart, nothing else. You can get the same information from only looking at a chart.

Back to basics.

Music theme for the day:



I’ve recently been reading George Soros’ book The Alchemy of Finance. Most of this post will be me rehashing what I’ve read in it. In the book, he presents a concept he calls reflexivity. From my understanding, it seems his theory is that since the default human condition is that of an imperfect human, our understanding of financial markets has to have an element of imperfection. This means there is always a traders’ bias present in the market, which is in reality completely independent of market trends. And many times, this bias causes the markets to move where the traders want it to, resulting in a self-fulfilling/self-validating cycle, which usually ends when the “objective reality” of the market has been stretched too much.

In my opinion, it is an interesting theory, but it is quite abstract. I personally agree with the fact that in the markets the human condition is the imperfect condition, however, since the concept is so abstract, it seems difficult to apply to the markets without being completely immersed in/understanding them inside and out. I am nowhere near that level, I’m not in contact with any traders who know the ground realities, my only source of input are charts on my computer screen.

The model he suggests for computing currency movements is one dependent on 8 variables. 4 of these are rates, and 4 are quantities. These are as follows:

1. e = Exchange rate
2. i = Nominal interest rate
3. p = Domestic vs foreign prices
4. v = Level of economic activity
5. N = Non-speculative capital flow
6. S = Speculative capital flow
7. T = Trade balance
8. B = Government budget

Another point to note is that in his opinion, there are no one-way relationships between these variables. Everything is circular. The exchange rate can affect the rest of the variables, and the rest of the variables can affect the exchange rate.

A basic relationship is as follows:
(↓T + ↑N +↑S) → ↓e

I have been looking for a similar model, as is evident in my previous posts. So I will attempt to analyze the model he has presented and see what we can achieve. I think his model is not comprehensive enough, but it has the basic concepts down correctly. Off the top of my head, I would add currency in circulation, foreign domestic currency reserves, and a few other variables. However, I would like to personally analyze the role of participants’ bias in the currency markets with a model of my own.
An example I read in the book is that considering trade balance is one of the more important things to keep in mind in order to analyze currency rates, but the US/CHF strengthened from 1982-1985, even though the US trade balance was deteriorating, which is the opposite of what it should’ve done, from a completely theoretical point of view.

Anyway, since I said I will be trading only USD/JPY, here is a comparison I did using George Soros’ model of the two currencies.

In order to understand it better, I sorted the 4 different dates according to highest to lowest values for the USD to see if I could find a pattern(Currency index rates means Real Exchange Rates. More on this later in the post):


I believe markets may have priced in future exchange rates, which is why the obvious did not occur. I could not find any patterns that would follow common sense/prevailing beliefs.

Another thing Soros commented on was that there are a few basic tenets of the economy that are independent, and permanent. All of the following tenets are also self-validating/self-fulfilling:

1. The relative importance of S for an economy increases during the lifetime of a self-reinforcing trend. The longer the trend has been ongoing, the more important S is for it.
2. The prevailing bias is a trend following bias. A change in trend causes an increase in S.
3. Currencies move in large waves which last for years, as that is the time it takes for biases to break. When a long-term trend is disrupted, short-term volatility increases.

I realize this post is mostly based on someone else’s ideas of the economy. It is a person whose philosophy I respect, therefore I wanted to understand his take on it. I plan to post more of my own opinions/theories moving forward.

I will try to create my own model soon enough, which has different variables, as I mentioned before, and try to go into more details. I think 2009 is not the best example because of the recession, I will try to take data from 20 years and hopefully that will be more accurate.

In order to create my own model, I have to try to understand the perspective of the money movers. I have to see how much currency is moved by whom. I will try to include traders’ psychologies in order to see if I can create a much more realistic model of the currency markets, and not an idealistic one.

Things I learned:
Nominal exchange rates are the ratios of currency prices, for example all the forex rates provided are nominal rates.
Real exchange rates are calculated from the ratio of the price of goods in economies. I find this to be a much better measure, and would like to know how discrepancies in real exchange rates affect nominal exchange rates.

To do:

1. Recreate the chart above with more variables. Use the preexisting ones with the new ones over a time frame with more data points and try to identify any trends.
2. Understand participants’ bias in the markets. Huge project.
3. Create my own economic understanding from the ground up. This is imperative if I’m to understand the market completely. Have it be realistic and much more grounded in reality than what is usually believed.
4. Work on my candle averaging theory. I have recently discovered rangebars, and they actually seem to be a much better idea to further work on this than normal candles. Hopefully soon enough I can post results on that here too.

I wish I had more time to complete everything in my to-do list right now. But oh well.

Notes:
My prediction on the S&P falling after Trump’s announcement was correct. I predicted about a week ago, on this thread, a drop in prices of the S&P on the day of the announcement, and the market dropped about 16 points. It has, however, recovered since then.

Updates on trading account:
The value of my account has fallen to $210. I have decided to completely cease trading until I have a plan. I will also be adding another $100 to my account in the upcoming week, its value will increase to $310+.

Confused as to why when the Nikkei 225 dropped, JPY gained value. S&P 500 also dropped in value, but the USD gained value.

One theory is traders wanted to sell off their foreign assets in exchange for cash. This could either be for future investment in the N225, since it just hit a decade-long high, or it could be for safety, expecting a decrease in the value of the USD due to the S&P falling down, therefore selling their foreign assets for JPY and increasing its value. They could also have wanted to purchase the N225 during this dip.

If soon the N225 goes even higher, I think that should be an indicator people have invested in it after taking money out of the US. And if USD/JPY increases in value(which means JPY falls) I will know people are back to buying American assets. If USD/JPY decreases in value(JPY increases) it will mean Japanese investors are growing skeptical and would much rather purchase the N225.

My $0.02.

Hey DeepChill ,

I see that you're more of a fundamental type of guy when I was just starting out (4 years ago) when I couldn't even properly draw S&R lines on a chart I had to resort to fundamental analysis just to get a better feel of the market.

But what I have realized through that process was, being a good economist doesn't make you a dime in the market. Yeah knowing the ins and outs of what drives the markets can be useful and come in really handy if you're investing. But with trading aka speculation I'd rather leave out fundamentals I wouldn't delve too deep, but spend more time just gazing at charts for hours a day (lower the better, like minute or 5M chart)

Heightened ability to feel your way through the market which will result after a long period of screen time + technical knowledge will get you much further than fundamental analysis will in trading. After all we're all here to make some money aren't we ? On correlation however I recommend you read John Murphy's Intermarket Analysis, yen and euro are safe heavens when stocks go low they jump higher, on the contrary commodity currencies will become weak. EURGBP cross also heavily influences EUR or GBP crosses I'm sure you already know all of that. But if you want to delve little deeper on correlation like I said I'd read Intermarket Analysis.

On central banks and their quarterly/monthly/annual announcements and economic indicators, what matters the most is reaction not the actual numbers after all we're playing speculation.

[quote=DeepChill;10446111]Introduction Hello Forex Factory. I’m going to begin learning the foreign exchange market and how it works, and would like to include other people in it...... Philosophy My forex philosophy is simple: trade when you completely understand why you are doing what you are doing. I do not accept “technical” analysis and will not use it at all in my trades/learning. I don’t find it useful at all....;.

If you're only just starting out, then how do you know whether you find TA useful or not seeing as you clearly haven't been in the business long enough to know what works and what doesn't.

We all come into this business imagining that we will be the ones with the magic solution, that we will find the way to success that others cannot see, but this illusion shatters very quickly. The key to success, and there is one, is to find that which the experienced eye sees, and then to apply a rigid system of money and personal management in order to minimize self-sabotage. Most cannot do this, but those who do, become consistently profitable traders.

You have far more to learn than you realize, but I wish you every success.

Just made a new EA.

I've attached it to this thread so anyone who's interested can see the results. Going to test for at least 1-2 months before moving my real money here.

My $10k account which was down to $4k last week is now back up to $10k with the new EA.

Good day.

Do you mind sharing your settings for the EA as well?