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  • #21
  • Aug 26, 2005 1:37am Aug 26, 2005 1:37am
Hi fijitrader, thanks for that very rich reply.

I do admit that I still have a very long way to go (and maybe you're right, it may be farther than what I realize), but as long as there are guys like you who are willing to spend a little of their time and knowledge to teach guys like me, then somehow, the road to travel will be on the right direction.

As for the fundamental analysis and technical analysis, thank your for explaining them to me. I'll be coming back here to re-read what you posted for guidance.

Then, as for Merlin's list, is there any order as to which books I should read first?

Again, hoping for your kind replies..
  • #22
  • Aug 26, 2005 3:58am Aug 26, 2005 3:58am
Quoting eastmaels
Hi fijitrader, thanks for that very rich reply.


Then, as for Merlin's list, is there any order as to which books I should read first?

Again, hoping for your kind replies..
Market Wizards and The New Market Wizards by Schwager give you a good sense of the mentality of a variety of pros. Everyone takes something different from these two books. It is a good way to get a sense of the kind of trader you may be. It is loaded with various and sometimes contradictory ideas and philosophies of trading. I think they help build a context from which you can begin to relate to the trading world and the various kinds of systems you'll encounter. Mostly the traders in these two books trade futures contracts which is similar to forex trading in terms of leverage and risk. Also forex trading is covered somewhat in the new market wizards.

FT
  • #23
  • Aug 27, 2005 6:18am Aug 27, 2005 6:18am
some excellent posts by fijitrader!
but what drives supply and demand? it would have to be perception of value!
and perception of value can differ drastically across different time frames.
which to a certain extent, explains why the market often moves in such an erratic manner... also, if a particular perception of value is strong enough, the market can keep moving in a particular direction regardless of fundamentals for a while.

keeping the basics in mind makes things much less confusing i believe. it's so easy to get really caught up in the complexities of systems/theories and forget what it's all about.
  • #24
  • Sep 10, 2005 3:33am Sep 10, 2005 3:33am
Eastmaels:

What moves the markets is far too complex to explain for this type of forum. Furthermore, what moves the markets truly is not a concern of mine.

What is a concern of mine is "when", "how much", "in what direction", and "how frequently" will I be able to capture that move.

I call it simply: Timing, Direction, Magnitude and Probability.

What moves the markets is far too complex for any human being to both store and process in their head under real-time market conditions. To attempt to code such a system with a computer is possible, but it would take years of research, development, testing, analysis, and tweaking. However, it could be done to a fairly precise degree of acuity.

But, this is not what most people want to hear. Most people want to hear about the silver bullet theory. The fact of the matter is this: no human being alive on planet earth can trade the market consistently and accurately without a CLEAR understanding of Timing, Direction, Magnitude and Probability.

Trading without this understanding is nothing more than guessing. And, you don't want to guess with your hard capital.

So, start with "Magnitude", and that will open the door to Timing and Direction which will then allow you to calculate Probabilities. Magnitude is nothing more than Delta over Time. (^/t)

You will need to pick a time-frame (a bar of data) and then determine the price delta between two (2) clearly identifiable points within that bar of data. Then measure the average delta between those two points over X number of bars. Use that as your baseline. Study that baseline until you know when the delta is expanding, or contracting.

Then you will be ready to tackle the next big one which will be Direction. Direction is a derivative of Magnitude and Timing is a derivative of Direction.

People don't do well in this business only because they don't yet understand the baseline principles of what constitutes "price".

Price is not what you think it is. The eurusd for example is not $1.2405 at the close of 9/10/05. Price is multi-dimensional and in reality is does not have a point of singularity. True "price" is diffused through both space and time. You cannot actually “see” price with your naked eye because “price” as you think of it simply does not exist. Price is definitely non-linear and very abstract. It has no “place of being”, no “where”, no “there” by itself.

When I trade, I don’t trade where the market is right now. I trade where the market is going to be at some point in time in the future. Price has a built-in multi-dimensional structure that spans an endless number of interlaced bars of time. Price is more like a piece of fabric than a definite “value”. People get hung up on “value” and “valuations” when trying to trade and that’s non-sense. For the trader, the concept of “value” does not apply. We move in and out of the market too fast for “value” to have any grip on what we do. So, dispense with “value” language – it won’t fly here.

When you think about “price” you will have to start thinking about “structures” with multiple dimensions across multiple time-frames moving at different rates of speed simultaneously, yet having a definite “pattern” and “form” or “geometry”.

When you can learn to see price as a “structure” having length, width, height and a time dimension, then you will be ready to enter the next phase which is Probability. The Probability merely determines the likelihood that the structure of price will be maintained over X bars. Once you are confident that the structure of price will be maintained over X bars, then you will be able to enter orders with a higher sense of purpose, seeing what most others in the market don’t, won’t, or can’t.

Of course, all it takes is one good news flash to come across the wires to blow the structure into bits – but, that’s the risk we all take and that is why we use Stops and Recovery trade strategies.

I would not worry too much about what “moves” the market – a super computer would have difficulty with that question in real-time. Instead, I would focus first on what constitutes the “Magnitude” of the currency pair that I was interested in trading for the time-frame that I was interested in trading it. You could make a living just on Magnitude alone without getting anymore sophisticated or complex.

Forget conventional TA, everybody and their dog uses it. You are going to have to build your own TA from raw data. So, start with raw Forex data and begin the process of studying it and analyzing its behavior over whatever time period is of interest to you. Get very familiar with the deltas within the raw data points of a single currency pair until you begin to see the “fabric” of the price within the pair itself unfolding before it happens. Then you can worry about creating the trade logic, rules and protocols – but you can’t have any of that until you first understand how the data likes to “flow”.

Rule number 1: Price is composed of data points.

Rule number 2: All data flows.

Rule number 3: Data has structure.

Rule number 4: The law of Inertia applies to market data structures.

Figure out the structure of the data (price) and you will be much better at projecting the “next” move.
  • #25
  • Sep 10, 2005 9:26am Sep 10, 2005 9:26am
TradeVector,

Good answer!

I would stop worrying about what caused the move and worrying more about how your system did or didn't put you in a position to make some pips. Wondering what caused a move will not reset time and give you a second chance at missed opportunity. Be greatful that there was some catalyst that caused movement.

About 2 months ago, I stopped looking at the economic calendar altogether. My results have consistently improved since I stopped worrying about potential market movements and more about how my system is positioned to catch those moves.

Apparently when you type the word calendr (deliberately misspelled) it provides a link the the forexfactory calendr. Very clever!

Best wishes,
Phil
  • #26
  • Sep 10, 2005 12:45pm Sep 10, 2005 12:45pm
Quoting eastmaels
Hi everyone,

This is my very first post in this forum but have been reading other's posts for some time now.

I do agree with the other people's post that this may be the best forex forum. I said "may be" because I haven't searched for other forums ever since I came across forex factory. I just want to say thank you and hope you keep up the good work. I also would like to be one of the contributors here in the future.

Anyway, I've just become involved with the markets recently (about two months ago). with 0% knowledge of the markets, or how it works. Trading in forex was my very first experience in trading and somehow I'm very much enthusiastic to learn about trading. (Maybe because of the probability of high earnings).

Anyway, I opened a mini-account (about $500 dollar account) and lost it about 60% of it in two weeks.. After that, I figured that I should study it first.. which should have been my first step, but there was a reason behind it.. But anyway, I won't talk about it here.. Anyway, after those two weeks, I read Van Tharp's "Trade your way.." and somehow, what was written there actually hit the spot, like the emotions you'll encounter when trading, etc. etc..

Well, just to make the long story short, I failed and learned from experience (though still not enough), and I'm currently reading Diallist's list of books.

I guess you're probably asking, that this is not related with the subject of this thread.. which really is not, I just wanted to share my story.. But anyway, here's my question..

Since I'm really a newbie in the market and I'm currently reading books, I just have a question.. Maybe I'll get the answer after all my reading is done, but I'll ask anyway..

Could you please tell me the reason behind the change in currency prices in forex? Or what causes such change? Could you please give me an example or a story that triggers a price change?

Hoping for your very kind replies..

Athan

I think that many people replied to your main question in this thread. Although what I am going to say here is almost the same concept, but I think it will be said in a different way.

3 months ago, I read a book called "All about Technical Analysis", by Constance Brown and that's my second book about Technical Analysis I read for her.

What I really like about her is that she never talks about charts and indicators only. She always mix charts with a fundamental point of view to support what is seen on charts, and that's what FijiTrader was talking about, the successful 1% of traders that use the fundamentals as well as the technicals, anyway, that's not the point.

Chapter 7 of the book is called "Why the US Dollar dictates the longevity of an American Equity Bull Market." Note that the book was written, or at least this chapter was written after 2001 and apparently during 2002. Anyway, let's get to the point.

I am quoting some paragraphs from this chapter hoping that this will help figure out what fuels supply & demand for currencies.

Brown says:

"To understand what fueled the bull market of the 1990s and what lies ahead, it is necessary to think like a global chess player. The international game is called collecting basis points, and the world is your chessboard. This does not imply that you to invest globally in order to win the game, but it means that you do have to think like a global player to do well."

"Because the game board involves different markets, such as currencies, bonds and stocks, across all continents and cultures, the global player has to find a common denominator or similar means of comparison for all these different markets. Every professional defines the potential of any given market, derivative or specialized custom investment by its' potential to make basis points."

"So here is why the currency markets dictate the direction of all the other markets in the world." Let's say you are a very rich investor in Japan. Your wealth would naturally be tied up in the currency of your homeland. All your wealth and bills and bank accounts are denominated in Yen. The problem in the 1990s was that the Yen was losing buying power, as it was becoming weaker against other nations' currencies. Your homeland currency becomes weak when your economy and confidence in the government backing your currency falters. The Japanese economy was in a tailspin, and confidence in the banking system was declining as well."

"If you are this Japanese investor, you are losing the basis points game if you simply sit there and do nothing. Everything you need to buy is becoming more expensive because it takes more yen to purchase all the products you depend on that have to be brought into Japan and paid for in a foreign country's currency."

"You also have another problem: The yen savings that you have sitting in the bank are not earning any interest. The Japanese government had tried so hard to stimulate the Japanese economy by reducing interest rates that rates are nearly at zero. So banks are paying you almost nothing on your cash. On the other hand, it does not cost you much to borrow cash. As the problems in Japan become worse and the Japanese government continued to lower the prime lending rate, you could have borrowed yen for less than 2% or 200 basis points. With borrowed yen in hand that cost very little to obtain, you and other Japanese investors only had to find something with a higher return than 200 basis points to win the basis points game."

"On the other side of the world, the American government was raising interest rates because the American economy was overheating, leading to inflation. In the US there was an employment boom, as there was a shortage of people who could fill the open jobs. People are getting the pay they asked for, and everything else costs a little more as a result. That is, normally it costs more. In the 1990s, however, the rising costs of labor were offset by declining energy costs. So companies found that they could handle extra labor cost without passing it on to their products and services. On the surface it looked as if the Federal Reserve was crying wolf. Inflation? Where? But the Federal Reserve knew that the American economy was overheating, so it continued to raise short-term rates. While it cost American businesses more to borrow money, they earned more on their existing cash."

"Let's return to the Japanese investor with cash yen on hand. You look over at America, and you see 3 things. The strongest currency in the world at the time is the American Dollar. That means that if you switch your yen for US Dollars, you have just solved the problem of your buying power declining on a daily basis. If you just put your US Dollars into an American Bank, you make basis points with your borrowed yen, since the interest rates on short-term deposits in the US are higher than those in Japan. The banks in the 1990s will pay you about 3 percent for doing nothing. That means it pays you 300 basis points on money that cost you 200 basis points, for a net gain of 100 basis points."

"It gets even better. The game is to accumulate as many basis points as possible over the year. So you look at the American stock market. If you buy a stock and its' price doesn't change, you will still earn more than you would if you just left the cash in the bank if the stock pays dividends. The catch here is that US stocks pay dividends in US Dollars. Excellent. The dividends are potentially higher than what the bank pays for just a simple deposit. So suddenly a lot of people in Japan want large-cap US stocks, as these are the ones that highest dividends. The DJIA starts to rise."

"Now, not only are you making money on borrowed money, but your underlying principle is beginning to increase in value, as the market is beginning to advance. Your dividends start to decline, but the number of basis points you can gain from the increase in your principle as the stock marches up is much greater. This is getting so good that you want to borrow more yen back in Japan so that you can put more money to work and increase your leverage in the United States."

"While the market expands and your principle grows, there is a third factor to consider: The US Dollar itself is strengthening against other world currencies. This means that anytime you bring your original investment home with all those new basis points you gained, you get another basis point bonus from the exchange rate when you sell US Dollars to buy back yen. In essence, the 1990s provided a Japanese version of financial Camelot if you had money to invest overseas."
"When does Camelot implode? Assuming that Japan does not enter a depression because there is no cash left in Japan to re-build from the devastating collapse, it will be when the yen begins to strengthen. When the yen starts to strengthen, Japanese investors caught in overseas markets will be losing basis points on all three fronts. The leverage that compounded their borrowed funds so well will turn very sour because the losses will be compounded incredibly fast. Because the 1990s experienced a scramble of Asian investors into the US stock market, it is paramount to monitor when a mass exit away from the American markets could occur. We have not seen this yet as of April 2002."

"The crash in the Nasdaq did not truly have an impact in the DJIA, as Japanese investors rotated out of Technology stocks and purchased large-cap basic industry stocks on the NYSE. During the 2000 and 2001 Nasdaq implosion, the underlying relationship between currencies did not change. In fact, the US Dollar continued to strengthen rapidly against a weakening yen."

From what you have read, I think you can now have a better view of why demand vs supply change. It's a game of basis points as Brown said, and the key factor here for long term trends in currencies demand and supply is the interest rates.

Investors look first at the risk-free investments and their returns for a given currency compared to risk-free investments and their returns for another currency. The currency with high interest or with advancing interest always wins. As an example right now is the US Dollar for the past 9 months.

Then they look at the low risk investments after they have transferred their money to the higher interest rate currency. Usually these are corporate bonds.

Then they look at the medium risk investments. This is represented in Stocks.

They usually don't think of high risk investments like options and futures because they know that they are already on a high degree of leverage and their main aim is preservation of capital and it's purchasing power and collecting some basis points is not bad but with the least possible risk.

All other fundamental factors only help to shape the decisions to be made regarding the interest rates. Are economic indicators leading to inflation, deflation or stand still? That's the question that the Feds keep asking themselves all the time to get out with their interest rate decision every time.

Consider Katrina for example. Many economists predicted that the Feds are going to pause hiking the rates for a while. I don't agree. Because as soon as those people get money as insurances, jobless claims benefits, they are actually getting money, so they are getting purchasing power, a huge one. They need not save because they already have nothing to save for. You can't think of saving while you live on the street. So most of this money will be injected back in the economy directly and on the spot buying thousands of products that these people need right now. So actually the risk of inflation is higher now and not lower. Katrina is actually a bless for many companies. They are going to sell products to those people as they have never sold before. Watch discount retailers for the coming months and you will know what I mean.
Not only they are going to spend the benefits they get, but you will see many of them pulling out their saving accounts and buying things that already gone with Katrina.

So this leads that the interest rate is getting a raise next time with a 90% probability. If the feds are conservative, they will raise it by 25 basis points, and if they are aggressive, they will go for a 50 basis points.

So this says that other investors with homeland currencies with lower interest rates are getting more interested in US Dollar. That's the long term trend of the US Dollar, and that's what moves the currency markets in the long term, INTEREST RATES, everything else are effects or signs and not causes. INTEREST RATES are the main cause.

Now what moves the market in the short to medium term, that's a different story. The very short term moves are mainly because of speculation. The medium term moves have many reasons, but they are always revolving around interest rates and speculation as well. Hedge funds are one reason for medium term market moves. Central Banks are another reason for medium term market moves. The Japanese government can't leave the Yen to fall like a rock in front of the US Dollar or else they will wake up one morning and find they have no Yens left in the Japanese banks. They have to support the currency because they lowered lending rates to stimulate the Japanese Economy, not the American one, so they need to put confidence in the currency from time to another by pushing their currency higher. They need this borrowed money at low rates to be invested in the Japanese economy, and not overseas.

My opinion, don't get caught with small moves, just understand the big picture and trade accordingly. If your trading strategy goes against the big picture, you are in serious trouble, because if you are telling yourself that I am long the Euro till I see 1.35, you will be violating the big picture. The interest difference between the US Dollar and the Euro is 150 basis points for the sake of US Dollar. The probability that the Euro will appreciate against the US Dollar to this level is very low and becomes lower every time the feds increase US Dollar interest rate. So why do you want to tie yourself in a low probability trade that is even getting lower in probability with time?? If you are going to trade a long Euro position, catch the rally and then get out and be very cautious when your system tells you something against the big picture.

It took me almost an hour to write this post do please give me any feedback, good or bad, whatever.

Hope that I have been helpful.

Thanks,

Nader
  • #27
  • Sep 10, 2005 1:05pm Sep 10, 2005 1:05pm
Another thing that I forgot to mention regarding tying technicals with fundamentals.

Today on Bloomberg, I watched a Technical Analyst who was analysing the recent Bear move of the Dollar against all other currencies. He was also giving his own opinion and forecasts for the Euro/USD and the S&P 500 Index.

Here is a plain simple example of ignoring the fundamentals.

The guy says that the chart of the Euro made an inverted head and shoulders pattern during the last 4 months, which you can really see on the chart. He also said that the run of the Euro was just after Katrina and he is expecting the Euro to go up to the 1.2650 level.

He seemed to be bullish on the Euro and the GBP in general.

But when he came to analyze the S&P 500 chart, I knew that this is a pure technical guy who look only at charts. When he was analyzing the Euro chart, he was pulling a medium term chart. While analyzing the S&P 500, he was looking at a very long term chart, probably the weekly. It expanded since 1995 as far as I could see.

He monitored an inverted head and shoulders pattern in the S&P 500 as well, and indicated that the S&P 500 is going up in the long term to the 1750 levels.

Now, he was not comparing apples to apples, that's first of all.

He was talking about a bull stock market, and talking about a bear US Dollar market, which doesn't give much sense.

He never mentioned interest rates at all, he just mentioned Katrina. The fact is that Katrina is a one time event, but interest rates are there and will always be there.

Look at the US Dollar and see what actually happens to see if the interest rates are the main driver or not.

Take the USD/CAD for example. The USD has been declining infront of the CAD lately, because the rates for the CAD have been increasing along with the increase of the USD rates, although they are still lower at 2.75%. But the Canadian economy has been strong and this is backing up the currency. People don't want to pull money out because they are still winning the basis point game with their original currency.

Same applies to the Australian economy and the AUD. GBP and the Euro rallied against the USD and then faltered a little bit giving out gains, but the AUD pushed higher while others were drifting lower. Why?? Because the interest of the AUD is still higher than the USD and the economy is still showing strength.

The GBP has a higher interest rate, so why isn't it going up like the AUD and the CAD ?

Simply because many investors feel that the UK economy is topping, and signs of declining interest rates have been shown from the BOE a month ago. There will be always questions about the future of the GBP against the USD everytime the BOE meets.

The guy in Bloomberg never talked about the big picture, he was tied in the Euro and the S&P 500 only, that's why I couldn't justify his opinions as an analyst.

Thanks,

Nader
  • #28
  • Sep 10, 2005 2:53pm Sep 10, 2005 2:53pm
In Van Tharps's book "Trade Your Way to Financial Freedom", he includes a chapter that discusses many of the naturally wired psychological biases we as humans possess. It is important to know what these biases are because they are what steers us to failure.

One of these biases is called the "Need-to-Understand" bias. He basically says who cares what moves the markets. Since most successful traders out there are using systems that give them probabilities not much above chance, they probably don't "understand" what's moving the markets either. Sometimes the unexpected happens and you can't really explain why. That's the name of the game. If you get too caught up in understanding what moves markets, then you are likely doing so at the expense of clearly defined exit strategies.

The emphasis has to be on establishing a proven system that dictates when to get in, when to get out, position sizing and risk management. The profits will come without needing to understand every single move the market makes.

I am no guru here and this is straight out of Van Tharp's work. It truly is an eye opener. It brought to the forefront mistakes i make that i was not even aware of. I think Phil is dead on to close his economic calendar. The legendary traders of this world (Seykota, Dunn, Henry, etc...) are mechanical and have no need to understand much more than their own systems and how they interact with the market. The market itself will do what it will do
  • #29
  • Sep 10, 2005 3:19pm Sep 10, 2005 3:19pm
"To understand what fueled the bull market of the 1990s and what lies ahead, it is necessary to think like a global chess player. The international game is called collecting basis points, and the world is your chessboard. This does not imply that you to invest globally in order to win the game, but it means that you do have to think like a global player to do well."
-----------------


What moved the bull market of the post secondary phase of the 20th century, was the Global High Tech Economy. Period.


Enterprise Technology Companies here in the U.S. selling at multiples of a zillion, is what caused the stock market boom of the 1990’s and the subsequent high-tech bubble. Enterprise software companies (as just one example of enterprise technology) were launching IPO’s with nothing more than 700 square feet of office space, if that much, for $14 and by the end of the day they had pocketed a cool $62, even though they basically had no brick and mortar to speak of.

The entire world wanted in on that action, and they did, in droves around the globe. In came money from bizarre places like Egypt as just one weird example. Certainly, money flowed in from Japan and Europe as well, giving support for the continued 300 point per day rising of the Dow to the eventual Greenspan Irrational Exuberance levels that were ignored by much of the market at the time.

Specifically, it was the explosion of next generation ERP, CRM, SFA, DM, ECM, and of course the then new kid on the block called Enterprise Web Services that basically bootstrapped the lagging chip, component cards/boards, and the failing enterprise RDBMS sector. I worked in the industry during this boom, so I saw it from the inside out. I saw how industry was spending billions of dollars on this next generation technology that they believed would give them a competitive advantage in their niche.

This high industrial spending era on new technology pumped more money on the street in more ways than one. It required the hiring of technologists to build, operate and maintain newly empowered IT divisions that in many cases were totally transformed as a direct result of this surge of new technology.

All those new highly paid and highly skilled employees began relocating around the country trying to position themselves to be in the best location for the best and most highest paying jobs. Eventually they settled down and began to further boost other sectors of the economy like Home Building, Auto Manufacturing, Sports Apparel, Health a Nutrition, and Recreation sectors across the board just to name a few.

People were seeing their salaries double, triple, even quadruple in less than 1 year in many cases. My personal income increased a whopping 617% in under 2 years. The airline industry was at per seat capacity – I flew to customer sights around North America and spent lots of cash in Hotels around the continent as well as on Rental Cars and Restaurants.

Wealth was being spread around the continent as a direct result of the High Tech Boom. Absolutely, no doubt.

Too wit: just take a close look at what happened when the bottom fell out of the EPS on those companies who had stock prices that were inflate far beyond their ability to generate revenue. Once people “sobered up” and got off the Irrational Exuberance Juice they had been drinking for about 12 years and realized that their stock price was far in excess of “fair value”, some began selling, but for many it was too late. Many held on too long only to see their house of inflated cards come tumbling down faster than meteor from outer space.

Bond prices went up, stock prices came down and guess what folks, interest rates had very little if anything at all to do with it. Money was no longer flowing into the corporate coffers and an enormous wave of lay-offs commences, starting with the sector that started it all – High Tech.

The coat-tail effect that many industries enjoyed while their stock price was climbing, was gone and the “guilt by association” effect of merely being a member of the Dow, NASDAQ, or S&P was enough to see your stock price tumble down hill for a period.

Capital was flying out of the U.S. and all the while between 1989 and 2002 the EUR was ranging against the USD between [eur] $0.9948 in late 1989, to [eur] $1.4535 in early 1995, to [eur] $0.8447 in late 2000. Today, some 5 years later the EUR against the USD sits at $1.2405.

In other words, when the American Economy was strong and interest rates were at all times lows, the USD was the strongest, not the weakest. Now, that interest rates have edged up against the past 12 years, the USD is once again entering a period of weakness against the European currencies – namely the EUR.

In the big picture, over the past 21 months, the EUR and USD have swapped dominant positions two times and is about to swap positions a third time with the EUR taking the stronger side of the equation. Over the same period (21 months) the delta between the EUR and the USD has been a lousy 221 pips! That’s two years of basic flatness in the EUR/USD. Yet, during this same 2 year period, economist on both sides were screaming at the top of their lungs that either the EUR was going to high, or the USD was going to low. Result? 221 pip differential with the EUR loosing a little ground to the USD over an almost 2 year period.

Once again, what moves the markets strategically is far less important for a daily trader of the Forex, than having a solid understanding of the tactical Timing, Direction, Magnitude and Probability of the “next” daily move.

Economies don’t boom or bust by themselves. There must be a driver, or catalyst to initiate the masses into either a buying mode, or a selling mode. Sure, capital might flow from Japan into the U.S., but not because a private rich dude is managing basis point calculus of their Yen.

However, show them a U.S. sector where stock prices are moving from $11 to $55 dollars virtually over night, I you might attract the attention of a Yen holder who is losing value due to poor economic conditions at home.

The high tech sector of the 1990’s provided that “catalyst” for investors around the world.

Heck, we even and investors from places like Dubai dumping their bucks in here – it was a crazy period in American history. I doubt we will ever see anything approximating that ever again in my lifetime. Today’s American economy simply has no catalyst for such a boom.

High tech was like that really sexy woman you see at the grocery store for a fleeting moment. On the one hand, you knew she was good for you, but on the other hand you just knew that it would end in divorce with all your cash flowing out the window with it.

Right now, America has no “sexy” product or service to sell the world, and our $11 trillion economy and second largest GDP in the world is being eaten alive by a $700 billion world wide debt obligation, most of it owing to Japan and China. Not to mention the fact that we are continuing to borrow 80% of the worlds supply of lending capital. We are running out of money to borrow and we lack the spending discipline to reduce the debt – not a very good combination for future generations of American children yet unborn.

If our GDP and PPI continue to strategically drop and Japan and China begin to call in their debts for fear that they might not be able to collect long-term, then we are in for a crash that will make the Great Depression seem mild by comparison.


But, I digress - as usual.
  • #30
  • Sep 11, 2005 3:47pm Sep 11, 2005 3:47pm
Quoting philmcgrew
About 2 months ago, I stopped looking at the economic calendar altogether. My results have consistently improved since I stopped worrying about potential market movements and more about how my system is positioned to catch those moves.
Yes I find that slowly but surely I'm heading the same way. I don't bother with reports in the European session anymore, and I only look for the big US numbers as possible days to avoid entering a trade or perhaps closing a dollar position early if it is within range of being knocked out by the report.

I find the fundies a bit of a drag on the techies when trading!
  • #31
  • Sep 11, 2005 5:17pm Sep 11, 2005 5:17pm
Quoting Isotonic
I find the fundies a bit of a drag on the techies when trading!
i hear ya on this. i will trade the fundies, and i will trade the techies, but i cant seem to use both for any single trade. i had a discussion with fiji some time ago about this very subject. for a few weeks i tried to develop a system where i would give a fundamental outlook on the market, and then apply the appropriate technical strategy. for instance, if i fundamentally expected the EURUSD to go south, i would employ a strategy that sells the low breakout, or sells a rally. i never got very far with this.
Relax and be happy.
  • #32
  • Sep 11, 2005 11:32pm Sep 11, 2005 11:32pm
i split this thread, the off topic discussion is now it's own thread > http://www.forexfactory.com/forexfor...ead.php?t=2804.

lets keep this thread on "what moves the market", we had a great discussion going....
Relax and be happy.
  • #33
  • Sep 12, 2005 4:06am Sep 12, 2005 4:06am
Well done Merlin. I think this is better to help remove confusion that any newbie might encounter if this is a forex forum or one of the UN forums

Thanks,

Nader
  • #34
  • Sep 12, 2005 4:14am Sep 12, 2005 4:14am
Quoting merlin
i hear ya on this. i will trade the fundies, and i will trade the techies, but i cant seem to use both for any single trade. i had a discussion with fiji some time ago about this very subject. for a few weeks i tried to develop a system where i would give a fundamental outlook on the market, and then apply the appropriate technical strategy. for instance, if i fundamentally expected the EURUSD to go south, i would employ a strategy that sells the low breakout, or sells a rally. i never got very far with this.
yes i find that it can be too much information so it can also be distracting. however you can't ignore them altogether even if only to know which days to avoid opening a position!

chewing the fat over fundies out-of-hours is however another matter!
  • #35
  • Sep 12, 2005 6:44am Sep 12, 2005 6:44am
TradeVector,

When you read the article on what moved the market in the '90s, was it written before, during, or after the 90s?

Phil
  • #36
  • Sep 12, 2005 6:46am Sep 12, 2005 6:46am
Here's is an excerpt taken from a free weekly newsletter by John Mauldin concerning analysts:


The Problem With Forecasting
Let's start with forecasting. Every few weeks I get a wonderful letter from good friend James Montier, who is the global equity strategist of Dresdner Kleinwort Wasserstein. James is an expert on behavioral psychology and investing. This week's letter is lamenting the rather poor track record of forecasting by economists and analysts.

Let me give you a summary of the paper and a few of his graphs.

"Both an enormous amount of evidence and anecdotal experience suggests that people are very bad at forecasting. This is often because we all tend to be massively overconfident. This begs two questions, firstly why do we persist in forecasting despite the appalling track record? And, more importantly, why do investors put forecasts at the heart of the investment process?

--- "Lao Tzu, a 6th century BC poet observed, "Those who have knowledge don't predict. Those who predict don't have knowledge". Despite these age-old words of wisdom our industry seems to persist in producing and using forecasts. This is all the more puzzling given the easily available data on the appalling nature of track records in forecasting. Economists, strategists and analysts are all guilty. In general, forecasts seem to be a lagged function of actual outcomes - adaptive expectations dominate forecasts.

--- "The two most common biases are over-optimism and overconfidence. Overconfidence refers to a situation whereby people are surprised more often than they expect to be. Effectively people are generally much too sure about their ability to predict. This tendency is particularly pronounced amongst experts. That is to say, experts are more overconfident than lay people. This is consistent with the illusion of knowledge driving overconfidence.

--- "Several studies confirm professional investors to be particularly overconfident. For instance, one recent study found that 68% of analysts thought they were above average at forecasting earnings! I've found that 75% of fund managers think they are above average at their jobs.

--- "Why do we persist in forecasting given such appalling track records? There are two avenues to explore - simply put, ignorance and arrogance. Dunning and colleagues have documented that the worst performers are generally the most overconfident. They argue that such individuals suffer a double curse of being unskilled and unaware of it. Dunning et al argue that the skills needed to produce correct responses are virtually identical to those needed to self-evaluate the potential accuracy of responses. Hence the problem.


This pretty much sums up my opinions about predictions and those who make them.

Phil
  • #37
  • Sep 12, 2005 12:07pm Sep 12, 2005 12:07pm
Quoting TradeVector
Eastmaels:

What moves the markets is far too complex to explain for this type of forum. Furthermore, what moves the markets truly is not a concern of mine.

What is a concern of mine is "when", "how much", "in what direction", and "how frequently" will I be able to capture that move.

I call it simply: Timing, Direction, Magnitude and Probability.

What moves the markets is far too complex for any human being to both store and process in their head under real-time market conditions. To attempt to code such a system with a computer is possible, but it would take years of research, development, testing, analysis, and tweaking. However, it could be done to a fairly precise degree of acuity.

But, this is not what most people want to hear. Most people want to hear about the silver bullet theory. The fact of the matter is this: no human being alive on planet earth can trade the market consistently and accurately without a CLEAR understanding of Timing, Direction, Magnitude and Probability.

Trading without this understanding is nothing more than guessing. And, you don't want to guess with your hard capital.

So, start with "Magnitude", and that will open the door to Timing and Direction which will then allow you to calculate Probabilities. Magnitude is nothing more than Delta over Time. (^/t)

You will need to pick a time-frame (a bar of data) and then determine the price delta between two (2) clearly identifiable points within that bar of data. Then measure the average delta between those two points over X number of bars. Use that as your baseline. Study that baseline until you know when the delta is expanding, or contracting.

Then you will be ready to tackle the next big one which will be Direction. Direction is a derivative of Magnitude and Timing is a derivative of Direction.

People don't do well in this business only because they don't yet understand the baseline principles of what constitutes "price".

Price is not what you think it is. The eurusd for example is not $1.2405 at the close of 9/10/05. Price is multi-dimensional and in reality is does not have a point of singularity. True "price" is diffused through both space and time. You cannot actually “see” price with your naked eye because “price” as you think of it simply does not exist. Price is definitely non-linear and very abstract. It has no “place of being”, no “where”, no “there” by itself.

When I trade, I don’t trade where the market is right now. I trade where the market is going to be at some point in time in the future. Price has a built-in multi-dimensional structure that spans an endless number of interlaced bars of time. Price is more like a piece of fabric than a definite “value”. People get hung up on “value” and “valuations” when trying to trade and that’s non-sense. For the trader, the concept of “value” does not apply. We move in and out of the market too fast for “value” to have any grip on what we do. So, dispense with “value” language – it won’t fly here.

When you think about “price” you will have to start thinking about “structures” with multiple dimensions across multiple time-frames moving at different rates of speed simultaneously, yet having a definite “pattern” and “form” or “geometry”.

When you can learn to see price as a “structure” having length, width, height and a time dimension, then you will be ready to enter the next phase which is Probability. The Probability merely determines the likelihood that the structure of price will be maintained over X bars. Once you are confident that the structure of price will be maintained over X bars, then you will be able to enter orders with a higher sense of purpose, seeing what most others in the market don’t, won’t, or can’t.

Of course, all it takes is one good news flash to come across the wires to blow the structure into bits – but, that’s the risk we all take and that is why we use Stops and Recovery trade strategies.

I would not worry too much about what “moves” the market – a super computer would have difficulty with that question in real-time. Instead, I would focus first on what constitutes the “Magnitude” of the currency pair that I was interested in trading for the time-frame that I was interested in trading it. You could make a living just on Magnitude alone without getting anymore sophisticated or complex.

Forget conventional TA, everybody and their dog uses it. You are going to have to build your own TA from raw data. So, start with raw Forex data and begin the process of studying it and analyzing its behavior over whatever time period is of interest to you. Get very familiar with the deltas within the raw data points of a single currency pair until you begin to see the “fabric” of the price within the pair itself unfolding before it happens. Then you can worry about creating the trade logic, rules and protocols – but you can’t have any of that until you first understand how the data likes to “flow”.

Rule number 1: Price is composed of data points.

Rule number 2: All data flows.

Rule number 3: Data has structure.

Rule number 4: The law of Inertia applies to market data structures.

Figure out the structure of the data (price) and you will be much better at projecting the “next” move.
TradeVector, you offer an interesting perspective. However, I'm interested in why you're basically saying that the concept of value is worthless in currencies. i mean, how could perception of value within the different timeframes not be important? don't people make a transaction because they see value in doing so?

also, did you imply that it's possible to write a computer program that predicts price movements??? maybe i misinterpreted. there are certainly programs which can, over the long term, win more then they loose... maybe this is what you meant?

and i can't see why people would say that understanding what moves the market is pointless. if you can at least foresee what will most likely move the markets, you can get your timing right, in some cases even magnitude. A common mistake which i see is people taking news out of context, losing sight of the big picture, and not being clear about time frames.
  • #38
  • Sep 12, 2005 1:05pm Sep 12, 2005 1:05pm
Quoting narafa
Another thing that I forgot to mention regarding tying technicals with fundamentals.

Today on Bloomberg, I watched a Technical Analyst who was analysing the recent Bear move of the Dollar against all other currencies. He was also giving his own opinion and forecasts for the Euro/USD and the S&P 500 Index.

Here is a plain simple example of ignoring the fundamentals.

The guy says that the chart of the Euro made an inverted head and shoulders pattern during the last 4 months, which you can really see on the chart. He also said that the run of the Euro was just after Katrina and he is expecting the Euro to go up to the 1.2650 level.

He seemed to be bullish on the Euro and the GBP in general.

But when he came to analyze the S&P 500 chart, I knew that this is a pure technical guy who look only at charts. When he was analyzing the Euro chart, he was pulling a medium term chart. While analyzing the S&P 500, he was looking at a very long term chart, probably the weekly. It expanded since 1995 as far as I could see.

He monitored an inverted head and shoulders pattern in the S&P 500 as well, and indicated that the S&P 500 is going up in the long term to the 1750 levels.

Now, he was not comparing apples to apples, that's first of all.

He was talking about a bull stock market, and talking about a bear US Dollar market, which doesn't give much sense.

He never mentioned interest rates at all, he just mentioned Katrina. The fact is that Katrina is a one time event, but interest rates are there and will always be there.

Look at the US Dollar and see what actually happens to see if the interest rates are the main driver or not.

Take the USD/CAD for example. The USD has been declining infront of the CAD lately, because the rates for the CAD have been increasing along with the increase of the USD rates, although they are still lower at 2.75%. But the Canadian economy has been strong and this is backing up the currency. People don't want to pull money out because they are still winning the basis point game with their original currency.

Same applies to the Australian economy and the AUD. GBP and the Euro rallied against the USD and then faltered a little bit giving out gains, but the AUD pushed higher while others were drifting lower. Why?? Because the interest of the AUD is still higher than the USD and the economy is still showing strength.

The GBP has a higher interest rate, so why isn't it going up like the AUD and the CAD ?

Simply because many investors feel that the UK economy is topping, and signs of declining interest rates have been shown from the BOE a month ago. There will be always questions about the future of the GBP against the USD everytime the BOE meets.

The guy in Bloomberg never talked about the big picture, he was tied in the Euro and the S&P 500 only, that's why I couldn't justify his opinions as an analyst.

Thanks,

Nader
Nader, great posts. Thanks for sharing that global chess player analogy, seems to be a good way of understanding the international flow of money.

I totally agree that it's important not to ignore fundamentals. I'm not saying that people should trade them, but at least be aware if/when there is a substantial shift in macroeconomic conditions.

I had my best results at trading when I combined fundamental and techincal analysis. Although, I found this to be the most challenging and time consuming manner in which to trade. It was not a simple case of drawing a few support and resistance levels and seeing whether NFP came out above or below expectations. Instead, I needed to keep a journal, which I had divided into different time frames, where I kept track of technicals, fundamentals, and current market focus. I also attempted to make forecasts based on my journal entries/analysis - not to trade but to get my mind working and so I could evaluate how well I was reading the markets later.

well, i'm half asleep, i hope this post makes sense.
  • #39
  • Sep 12, 2005 11:10pm Sep 12, 2005 11:10pm
“This pretty much sums up my opinions about predictions and those who make them.”
---------------

I personally think the biggest problem with people in this industry, is that they are overly reliant on what has already been done, and completely ignorant of what can be done.

In perspective, asking the question, “why do people still attempt to predict market behavior given the poor tracking record of analysts”, is a perfect example of why I trade at between 93 to 100% accuracy during any given 20 day trading segment – day in and day out, while others wonder why people are still trying to predict.

It is also a high level contradiction, to on the one hand actually be a trader, and on the other hand subscribe to the notion that “prediction” is inherently flawed and therefore, not part of actual trading. Show me anyone who enters the market using their real cash, who is not at the very same time making a statement about “prediction”.

You cannot be a “trader”, unless you are capable of making some degree of predictive analysis of what you are doing and what you expect the outcome of your trade to be. So, everybody calling themselves a “trader” is by definition also calling themselves a predictive market analyst of sorts. Otherwise, you are not a trader at all, rather, a guesser/gambler. If one has no idea where the “price” of the currency pair goes “next”, then why on earth would he/she be in the business of “trading” to begin with?

Thus, it would make very little sense to claim inherent flaws in prediction, while claiming to be a trader at the same time.

Secondly, the real arrogance and ignorance, in my person opinion, is not in making analytical decisions about what to trade and when to trade it, but in thinking that all technical analysis has been discovered and/or is the same, and therefore, no further attempts at technical analysis will ever lead to any new/different results.

Anyone knowing anything about mathematics and science and who has spent the requisite time, energy and effort studying market data, knows that there are an infinite number of possibilities for the creation of technical analysis tools for the purposes of better understanding price action. Typically, in my experience, the one’s who rail against technologists are the one’s who have done little to no research in the technical areas of data analysis themselves, and therefore, have very little to offer in the realm of technical solution possibilities.

They are typically only able to read what others have said, or done in the area, and then proceed in typical fashion to speak on the subject as though they have actually done the research themselves. What they fail to realize is that the world of technical analysis of market data has no boundaries of any kind whatsoever.

The lack of creative boundaries for technical analysis, is what enabled me to create a new branch of decision support trading tools and then synthesize them into a common platform for making tactical trading decisions on a daily basis to a level of accuracy rarely seen in the industry. This was possible because I used no conventional and/or traditional technical analysis tools currently in existence today. Everything I created was built from ground-up research and years of testing/proofing/tweaking.

So, because I used no conventional and/or traditional TA concepts in my work, the ultimate results I get from my trading system are likewise unconventional and untraditional across the board. So, while it might be true that the vast majority of “predictive experts” have difficulty maintaining consistency in their predictions, it is mostly due to the fact that they overwhelmingly are using the exact same set of technical tools.

On the other hands, there are very few people in the world (willing to talk about it) who have actually gone as far as I have and actually created a brand new language that describes market price action in a technical form.

And, that is exactly what a next generation decision supporting trading platform would require – a totally new way to look at the markets. I don’t use charts, other than for decorative and nostalgic purposes – I simply have no need to view charts other than to satisfy my need for old-time curiosity. My trade insight comes from a 100% Digital Dashboard with embedded text messages that show the current and projected trade condition – with all of it running in real-time. My entire trading day consists of entering two (2) entry orders with their associated stop and limit values.

I know before hand, my entry, exit, draw-down range, net profit, and mathematical probability for trade success. I apply this to a customized model for capital growth (a revenue model) and can therefore look down-range and see exactly what the account balance will be at any point in the future. This approach to revenue growth shifts the psychological focus from being a one-off trader trying to make a buck, to being a private strategic capital growth money manager.

In other words, I don’t even consider myself a “trader” anymore, although I am. I think of it more as being a strategic money manager. I let the system run in the background, while I manage capital levels. As long as those levels are increasing by X percent (based on the parameters set forth in the revenue model) per day, then I don’t even need to look at the actual trading system – what’s the point, as long as the capital is growing on schedule each day.

This is quite a different approach, to say the least, and I'm quite happy with it, to make the understatement of the millennium.
  • #40
  • Sep 13, 2005 12:16am Sep 13, 2005 12:16am
Mrcooldude:

“TradeVector, you offer an interesting perspective. However, I'm interested in why you're basically saying that the concept of value is worthless in currencies.”
-----------

If you trade the Forex, then you are trading currency pairs. And, the way I trade, currency pair valuations are so archaic and outmoded that they truly have no use in my system of trading. What I do is pre-packaged along two (2) different trade routes. In other words, my decision support engine outlines in plain English on a digital dashboard (Executive Information Panel) exactly what the trade parameters will be, before I enter the trade.

Currency value is unimportant for me as I am a trader, not an investor of currencies. I don’t buy and hold for prolonged periods of time looking for distant appreciation in the pair’s value. What my decision support engine looks for is Magnitude that conforms to a certain protocol (which happens every day in the Forex). It then makes predetermination projection and then calculates the direction, timing and lastly the probability for trade success.

I know before I enter whether or not I can hold the trade for maximum pip gain, or whether or not the trade is only good for 15 or so pips. Because the system was designed as a predictive model, at trade execution time, no further valuation of the trade is necessary. My trades can run from 2 minutes in duration, to as much as 24 hours (rarely not more than 12 hours in duration). Only 1-3 times per month will I have to hold a trade for 24-36 hours and when that happens, it typically means that either the system got it wrong, or there was some kind of adverse news that entered the market and disrupted the normal price structure the system uses to make all of its calculations. News is the only wildcard that my system cannot see in advance, so I use recovery trades which are entered as Entry Orders along with the real-time Market Order generated by the system.




“i mean, how could perception of value within the different timeframes not be important? don't people make a transaction because they see value in doing so?”
--------------

People, might – I don’t. If a day-trader wants to spend his/her time doing manual valuations during a real-time fast-paced market like the Forex, they have my regards. Currency Pair valuations based on analytic precepts are simply unnecessary given the very protocol driven way that I enter and exit the market. Most people also make transactions without a clue as to where their exist will be, nor do many people know when their exit has come and gone.

This is mostly due to their lack of understanding with respect to Magnitude. If they understood the Magnitude of a currency pair for any given day and which dimensions of price movement Magnitude was applied to, then they would not sit and stare at their computer screen wondering whether or not they just missed their entry or exit. If they were able to calculate the probability for the entry and/or exit, then they would enter and exit with a higher degree of confidence.

Valuations, are for people looking for long-term appreciation of some sort, for whatever reason. As a hyper-short-term trader (relative to most longer term “investors”), pair valuations just don’t matter much at all to me.




“also, did you imply that it's possible to write a computer program that predicts price movements??? maybe i misinterpreted. there are certainly programs which can, over the long term, win more then they loose... maybe this is what you meant?
-----------------

I was referring to my next project (if I ever get around to it) that involves synergizing both Fundamental Data with Numeric/Empirical Data. Synergizing the two data types is possible inside an object oriented environment using multi-dimensional cube of relational data. Similar (but not exactly the same) to what a company would do when it uses Hyperion, or Cognos, or Business Objects type business intelligence software. The hard part will be in creating the correct weighting matrix for the various forms of “news” the comes out on any given day and then balancing that with the current real-time signal being generated by the current decision support engine.

But, I do think it can be done. However, quite frankly, I don’t need it – my current system keeps me on schedule for acceptable capital growth, so the only reason to tackle such a large project like that at this point would be for nostalgic and/or purely academic reasons.




“and i can't see why people would say that understanding what moves the market is pointless.”
----------------

True – especially when news comes out that disrupts the normal price distribution. I think it is far more important to someone who “invests” in the Forex, as opposed to someone who “trades” the Forex.




“if you can at least foresee what will most likely move the markets, you can get your timing right, in some cases even magnitude.”
--------------

Typically, news that is strong enough to move a market, will disrupt the normally distributed price structure. The question is, did the new restructure the old “price structure”. If so, then my system will need about 3 days to “warm up” to the new “price structure”, before I can begin to accept and use the trading signals that it generates.

Foreseeing news ahead of time, won’t help with understanding normal Magnitude. Magnitude is not a fixed constant. It is an ever changing variable. However, it is a “slowly changing dimension” within a larger picture of “price”. Magnitude is part of “price” – one component of the whole. Magnitude is a calculated/derived variable, not something that can be understood with news.

Now, the news might help you with the variable of Direction, but not necessarily Magnitude. In that case, I would strongly agree. Of course, in my system Direction can be wrong, or missed, and the system still goes on to generated the required net revenue for the day, because it understood Magnitude. Rarely, does the system get more than one of the big four (4) wrong.

Much the same way that a Boeing 747 can fly without declaring an emergency on three (3) engines, I have designed redundancies into the engine such that if it gets one of the four primary elements wrong, it will still maintain a high degree of probability for trade success according to the revenue model’s schedule.

The four “engines” (if you will) in my system are: Magnitude, Direction, Timing and Probability. If I lose two engines, I can still get the trade on the ground without a severe loss and most likely with a tiny profit. But, if I lose three engines, the trade will most likely be unrecoverable and go down quickly. I’ve never lost more than one engine in flight.

Human beings were not meant to fly, yet we do it because we design systems that are reliable. Why should trading be any different in terms of system reliability and redundancy.




“A common mistake which i see is people taking news out of context, losing sight of the big picture, and not being clear about time frames.”
-------------

Very common, yes. Which is why I allow my failed trades to run to the stop where the recovery trade takes over. My research shows that when my system gets it wrong (which it does occasionally), it will get it miserably wrong. In other words, when it fails, it fails very hard approximately 87% of the time. Meaning, 87% of the time, it fails at least 50 pips beyond my Stop point.

This enables me to allow the trade to run to the Stop triggering the recovery trade and then allowing that recovery trade to recover lost capital. Recovery trades are typically successful 87% of the time in this current version of the system. I could boost the Recovery Trade accuracy higher – to more than 95%, but I would then run into problems with original trade Stops being too narrow. So, I’ve found the optimum recovery level at 87%. This is why the systems overall accuracy is so high – because when it fails, it typically goes on to generate a small profit even though that profit won’t be large enough to keep the revenue model on schedule.

This is also why on a bad signal, I can typically get at least my cash back out of the market at a minimum. Again, redundancies built into the system make all this possible. Every once in a while, however, it will flat out get it wrong, or the news will whipsaw the price structure into strings of spaghetti which will choke off the Magnitude and not allow the recovery trade to breath.

When this happens, I jump right back into the market on the very next signal and treat this like the business that it is, and not like a hobby. Hobbyists, don’t typically last long in this arena.
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