Technical Analysis Fallacy

Hi Friends,

i have found an interesting document from Carol Osler in an other thread.

It gives a brief desription of the market structure, the participants and gives some ideas of intraday dynamics. Because it is a research paper it is written in a very special style (citing a lot of sources from other researchers ...), but if you are ignore this stylistic speciality, it contains a lot of useful information. At least it offers you many possibilities to check your own view of the markets ....

It is an ideal activity, when the markest are lazy and you are waiting for some action ...

Regards,
MaMood

Some info about StopLoss and TakeProfit order placement from the above mentioned paper by Carol Osler:

[...]

One might imagine that these orders would tend to offset each other, since rising rates trigger stop-loss buys and take-profit sales and vice versa. However, as discussed in Osler (2003, 2005), differences between the clustering patterns of stop-loss and take-profit orders reduce the frequency of such offsets. Take-profit orders tend to cluster just on big round numbers: roughly 10 percent are placed at exchange rates ending in "00" (such as 1.2300 or 120.00) and another four percent are placed at rates ending in "50." If orders were distributed randomly these fractions would all be about 1 percent. Stop-loss orders are less concentrated on the round numbers and more concentrated just beyond them (meaning above (below) the round number for stop-loss buy (sell) orders). Over 18 percent of stop-loss buy orders have trigger rates ending in two-digit combinations from 51 to 60, while only eight percent of stop-loss sell orders have such trigger rates. Similarly, over 16 percent of stop-loss sell orders have trigger rates ending in 40-49, while only six percent of stop-loss buy orders have such trigger rates.
Since stop-loss and take-profit orders cluster at different points, offsets are limited and these orders create noticeable nonlinearities in exchange-rate dynamics (Osler 2003, 2005). The presence of stop-loss orders, for example, substantially intensifies the exchange-rate’s reaction to macro news releases (Savaser 2008). Likewise, the tendency of take-profit orders to cluster at the round numbers increases the likelihood that trends reverse at such levels. This is consistent with the technical prediction, introduced earlier, that rates tend to reverse course at "support" and "resistance" levels. Finally, the tendency of stop-loss orders to cluster just beyond the round numbers brings a tendency for exchange rates to trend rapidly once they cross round numbers.

This is consistent with another technical prediction, that rates trend rapidly after a trading-range break out.
Market participants often report that stop-loss orders are responsible for fast intraday exchange-rate trends called "price cascades." In a downward cascade, for example, an initial price decline triggers stop-loss sell orders that in turn trigger further declines, which in turn trigger further stop-loss sell orders, etc. Upward cascades are equally possible: since every sale of one currency is the purchase of another, there are no short-sale constraints and market dynamics tend to be fairly symmetric in terms of direction (most notably, there is no equivalent to the leverage effect). Dealers report that price cascades happen relatively frequently – anywhere from once per week to many times per week. Osler (2005) provides evidence consistent with the existence of such cascades.
[...]

Nice post MaMood

Good morning Friends!

Hope you are trading well :-)
Just another snippet from the paper mentioned above:

[...]
A dealer with a large stop-loss buy order could begin filling the order after the exchange-rate rises to the trigger price. Since the order-filling trades themselves will drive the price up, however, the average price paid will exceed the trigger rate, to the customer’s disadvantage. The dealer could, alternatively, begin filling the order before the rate hits thtrigger price. The buy trades will push the price up through the trigger rate and the average fill price will be closer to the trigger rat back down below the trigger rate, in which case the customer could justly complain of getting inappropriately "stopped out."

The key observation here is that the pros and cons of both strategy options are driven by the impact of order flow. Dealers do not view this as an hypothesis or as an assumption. To them it is something they know, in the samizon at the end of the day (pace Hume). Dealers see order flow influence price too often and too consistently to question it.
[...]

Just for info:

* 23 Sep 09: 04:40 GMT (SGA) - FX NOW! USD/JPY, EUR/USD Flows - USD heavy, but off lows; eye Fed FOMC statement 1815GMT

Stable markets ahead of Fed FOMC decision at 1815GMT. USD/JPY at 90.75-77, some looking for break of 90.00 options today, while EUR/USD at 1.4813-15, off its 1-year highs of 1.4843 hit earlier after stoploss/ options taken out at 1.4825, on broad based USD sales, led by the soaring Kiwi, which rocketed to 14-month highs of 0.7315, up from 0.7190 after Q2 GDP of +0.1%, signalling economy emerging from recession, and sending USD scrambling for cover. USD INDEX hit 13-month lows of 75.828 from 76.730. EUR/USD seeing options related, Asian, sovereign offers ahead of 1.4850 triggers, but interest to buy on dips for 1.4900. USD/JPY seeing Asian bids, Japanese demand at 90.40-50 after the dip to 90.47 lows, more bids ahead of 90.00 options barriers. Offers 91.20.WL

Disclaimer: Be aware of possible Cow Dung included ;-)

the Asian sentiment so far:

0612 GMT [Dow Jones] ASIAN SUMMARY: Asian stock markets mixed; resource stocks buoyed by rising commodity prices, help gains in Aussie shares, S&P/ASX 200 +1.4%; New Zealand tad higher on positive offshore cue, better-than-expected 2Q GDP print; NZX-50 +0.2%; Kospi weak on profit-taking after hitting multi-month high Tuesday, down 0.4%; weak China shares on IPO-related liquidity concerns weigh rest of region; Shanghai down 1.3%, Hong Kong down 0.4%, STI down 0.2%, Taiwan down 1.2%, Sensex off 0.3%. Markets in Japan, Indonesia, Pakistan closed. In FX markets USD continues slide; tumbles to fresh yearly lows vs EUR, NZD, AUD.

Disclaimer: Be aware of possible Cow Dung included ;-)

OK I'll try to paint for you avatar

read 30 page preety good read....


V

Friends,
I will take a long pause in Forex trading while I adjust to my new southern life.
I will return early November.
Good luck to all and keep the faith and fti's teaching alive.

Good luck on the move and with your new job

Bet you can not keep away from forex for that long! Anyway all the best for the move. Ray

Hi ALL.
FOMC range, was balls of steel testing.
unfortunately I was not there , due to other distractions.

Just wondered , how many withstood the "Balls of steel" test.
tell me.)

regards

Wish you all the best, Lusan!

Good to see you back, fti!

To be honest, yesterday my balls got nearly broken.

Made a lot of stupid failures all over the day, which presented me some losses and a beaten/weak mindset. So I was hestitating a little to long, when the FOMC show has started and jumped much to late on the train. With a strong mindset everything would have worked out fine. But because of the losses I made before, I was not able to withstand the pain and react properly, when the move was going some pips against my position.
Finally I closed it much to early and I made another loss ....

I have analyzed my yesterday trading very deeply and found the main reasons for that catastrophe in:
- inpatience
- overtrading
- greed
- weak mindset (wanted to make the losses back).

However - I hope the lesson was worth the money ...

Wish you all a successful day!

CU,
MaMood

Hi Friends,
some info on the Asian sentiment so far:

0622 GMT [Dow Jones] ASIAN SUMMARY: Regional stock markets broadly lower; FOMC outcome no surprise so investors take cue from Wall Street; Kospi down 1.0%, S&P/ASX down 0.5%, HSI down 2.7%, Taiex down 0.7%, NZX-50 down 0.6%. Nikkei +1.7%, as investors return after 5-day weekend; helped by buying before many stocks go ex-dividend tomorrow. In FX markets, EUR sold on profit-taking after recent gains, JPY also lifted by Japanese exporters buying before quarter-end book closing.
[...]

Disclaimer: Be aware of possible Cow Dung included ;-)

Just for info:

London, September 24. US name buying is the latest cited but offers into the 1.4770 intraday option expiry level ) look to limit further gains. 1.4769 marks the early highs, with supply tipped to trail towards the 1.48-mark to keep the Euro rangebound into the North American open. [i][email protected][/i]

Disclaimer: Be aware of possible Cow Dung included ;-)

Missed the move up because of Oanda's 10 pip spread at news time. Took a short at 1.4826, added two more and squared at 1.4808. Entered another scout at 1.4811 and added to mild attacks, in and out, all squared at 1.4735. All attacks were small because I had read that that 1.5000 was the target and was afraid that I would be caught going the wrong way. Would have done better if I had not read so much but still happy with the result.

Welcome back! Ray

Hi Ray,

to have some information in mind is always two sided sword.
But you have traded that situation successfully and dur to the info you have not traded recklessly. You have benn cautious and have saved you book.
What else do you want to do better?

Regards,
MaMood.

Thanks MaMood, you are right, the book is the main thing and it was a positive increase at the end of the day. In hindsight it is easy to see where one could have made a stronger attack but in the real battle it is better to take small profits and not be greedy.

Hope you are making pips with today's slower pace. Ray

Welcome back fti. No balls of steel here. I watched the markets after the fomc announcement, but did not trade. High degree of wierdness in markets when the fed is in action, so I usually find a nice comfortable seat and just watch.

I am ready for action now and tracking several trades as i type. Hope everyone is trading well and have a good day.

MaMood, you will do fine today so stay focused. luSan, best wishes and hope the move goes well (sounds like Obama wants Paterson to move with you - lol).