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Forex Market Deciphered: The Equilibrium Cross
Part one <<The Market Force: Building of Theoretical Framework>>
(a)
Initially when I started trading equities few years ago, I traded it in a way which majority of traders would consider as very primitive. Due to some bad broker selection decisions, I ended up with a broker with virtually no usable charting tools, the only thing that consistently works is the order book(Level 2 Data) function which displays live buy/sell orders at what different price level with what volume behind it etc, and the worst part is that I have to update them manually every few seconds in order to see the what's going on. Forget about your typical candle charts, fancy moving averages, pretty MACD and stochastic, even people back in the 30's had professional chartists drawing charts for them by tape reading, I had nothing really......Well every penny is worth it with this broker when you had such a low brokerage fees. Yet it's a blessing in disguise that will later shape my way of thinking when it comes to Forex trading.
So without good facilitating visual references, staring at the order book and trying to figure out how stock prices go from one level to another and trade according to these information solely became my trading tool, or rather the logical deductions out of the price action, and at a later stage combined with skills of fundamental analysis of individual stocks that I've been slowly picking up over time. It's not long for an ambitious rookie like me to discover something very intriguing: in the order book, the fierce battle of buy and sell orders takes place constantly and would sometimes converge onto a particular range of price levels, all with very heavy volumes behind each levels and seesaw movement would occur, as one force(buy or sell) is trying to consume the other and move up and down in the rank of the order book; eventually one force will win the battle at what I call it an “equilibrium point”(proof of its absolute existence in Forex later, yet it takes on a new meaning) where the opposite orders have been fully absorbed and balanced out, thus the price action will go in direction of that particular force and a strong trend occurs as a result, until it reaches a new price levels or a range where the whole battle would start again; alternatively an equilibrium point can be generated without the precursor of distinctive battle on the book, thus making it an abrupt progression or reversal of direction, naturally it was as a result of a very swift battle in which one force had the overwhelming order size to consume the other force in rapid succession(or simply one force can opt to dropped out of the order book voluntarily and let the other force takes position...infinite possibilities in the market). Let's revise some old and most useful knowledge here and see what order books look like:
Generally speaking the battle is called “Rangebound”(however prolonged or swift, depend on your trading time frame for visual reference) which leads to its product called an "Equilibrium Point", and the subsequent directional movement away from equilibrium point is known as a breakout, and the rest of it you know it as a “Distinctive Trends”. The term “Rangebound” differs from its traditional meaning because I view all price actions that produces no net effect of distinctive trend as being confined in price boundaries, no matter what's going on in between price boundaries. These are the basic building blocks of any markets, but with different manifestations due to their unique characteristics(will be demonstrated in Part 2: Equilibrium Cross). Instinctively for equity trading, assuming you can only have long positions, one would deploy such strategies(quantitatively optimized or not) so that a position is entered at the equilibrium point (usually at finishing stage of rangebound or closely following a distinctive downward trend)and ride the breakout to the end of a rising trend, then exit the position at the start of next equilibrium point where downward trend would occur etc...... So I traded equities this way for almost 9 months and eventually provided with a simple charting tool with limited functions for my visual pleasure, but the reality is that after this 9 months ordeal, I've become a habitual "order book hardcore" where my entire trading principle is based on identifying the relationship between these two forces, and there is no turning back ever since.
(b)
The first time I was introduced to the Forex world and started looking for ways to trade it efficiently and effectively, my natural instinct is to deploy this idea about equilibrium point straightaway, bypassing the use of all other indicators and any other junks that you would pick up from Forex books, mentoring programs and online courses etc, since none of these help you gaining understandings the basic market force in a clear and comprehensive fashion. The fact that you can both long and short in Forex trading makes my strategy using equilibrium point much more relevant, because the fundamentals of demand/supply relationship is somewhat different and more intricate.
The absolute existence of the equilibrium point can be logically derived from examining the basic structure and characteristics of the Forex market, and can be implemented in trading by appropriate quantitative algorithms. The first question is: how is the exchange rate between two countries are determined? I'd like to make an easy to understand analogy by using a popular computer game: If you ever played the game “Sid Meyer's Civilization”, in order to determine a winner, the strongness of two different countries are determined by a series of statistics that are accumulated by themselves, statistics such as total amount of money and resources, number of military personnel, growth rate, meters for technological advance etc. Naturally the country with highest aggregated numbers of these statistics is the winner. The analogy is exactly the same in currency trading: since currencies are always traded in pairs, the strongness of a country is determined by an aggregation of factors such as GDP, CPI, interest rate, employment levels, trade balance, fiscal and monetary policies, various business and consumer sentiment gauges and activity levels, different markets correlations, currency characteristics(carry trade currency, commodity currency, safe haven currency etc that create unique demand/supply) etc...... These statistics are the key building blocks of exchange rate determinants. If the favorable aggregated statistics mentioned above for Country X(Y) is larger than Country Y(X), then the currency of country X(Y) is in higher demand, the exchange rate Country X/Country Y will go up and down accordingly. Of course in reality it's far more complicated than this as different determinants cannot be conveniently grouped together in homogenous statistical category, but for a sake of simplicity let's do so for now and call it “aggregated statistics”.
However there is a critical element that dictates what fashion the exchange rate changes: TIME. As we know, all of those aggregated statistics for a country are published in fixed time intervals, usually on daily basis with different levels of impact on the market(see ForexFactory's economic calendar, all statistics are grouped into “Actual”, “Forecast”, “Previous”), which means a "snapshot" of economic situation of a country is sampled at these intervals, then different countries can compare those statistics against each other to match demand/supply and move exchange rates. Since these statistics have accumulative effect and are dependent of previous samples, the exchange rate will be traded according to them strictly in the most trade-relevant time interval. The Hypothesis of Rational Expectation is deemed to be the most relevant theoretical support in currency trading: the exchange rate will only go to price levels where people expect them to be(the “Forecast” category in economic calender)based on the expected valuation of the next “snapshot” within the most relevant time interval. See the following chart:
(Also keep in mind that the distribution of relevant time intervals are asymmetrical, yet they have positive correlations with market price reaction in terms changes(increment/decrement) in aggregated statistics and can be quantitatively expressed accordingly, but for easy readership I won't go into the actual technical details about time-frequency representation modeling in this thread.)
What happens if people don't trade according to expectations or trade regardless of relevant time interval? Keep in mind that the currency market is a fundamentally transparent environment where all exchange rate determinants are hyper sensitive to subtle changes, which leads to very elastic demand/supply relationship that has absolute positive correlation with economy. Essentially all expectations are economic targets that need to be realized through progression of time, any attempt to violate them could create mismatched exchange rates at the wrong time, which will unavoidably result in exploitable arbitrage opportunities or unfavorable trading terms that translate into respective economies later on. Therefore in reality this is rarely allowed to happen because it could lead to very big problems. We cannot trade ahead of time and valuation or expect the market to behave in the same way, because all current aggregated statistics are lagging indicators for the economy, it's simply not logical to express current economic condition in terms of irrelevant distant future expectation. Have you really wondered why your positions always go against you? Most retail traders are not aware of the TIME factor as being ultimately decisive in trading sequence.
Theoretically any free-floating currency is relatively free from market manipulation because their exchange rates are tentatively in sync with economic condition and reflect demand/supply, even the occasional central bank interventions were “expected event”, only “information shocks” such as 9/11 attack or North Korean shelling could jolt the rational game very briefly. See how the Chinese Yuan as a non free-floating currency became the culprit of importing QE2 inflation and cause havoc around the country recently? This is a perfect example of not respecting expected valuation in due time, and it's not merely causing domestic problems but also creating international trade imbalance. So in essence all exchange rate trading actions can only take place in their closest and most relevant time interval toward their rational expectations, any attempts to push the market beyond current valuation level ahead of its time will result in all sorts of problems and imbalances, unfortunately this is taking place every minute the market is live, but sooner or later will be corrected by rational market force.
(c)
Now that we've identified the game rules of the Forex market, it's time to examine how all the market participants implement their trades and what implications do they have. If the exchange rate is ultimately determined by “net expectations” in the most trade-relevant time interval, then the theme of the all trades are evolved around how the long and short positions would tackle each other in order to realize their own market expectation. Let's quantify the two outcomes of expectations and their underlying all possible price actions, and call them E(long) and E(short) respectively: Under fundamentally biased market situation, E(long/short) will always have the overwhelming quantity to consume the other and push the market towards expected valuation in the form of Distinction Trend, until it reaches a price level where its aggregated statistical favor is lost and E(short/long) will set new market direction; Under normal market situation one particular force can only have possible overwhelming effect on a particular segment of time interval to form distinctive trend, and for the rest, E(long) and E(short) are roughly identical in size, then the so called Rangebound would occur; Under mixed market condition infinite possibilities could be oscillating between these two basic forms. For all that, it's logically sound to derive: there must exist such a price level where E(long) or E(short) are at their maximum during the positively-correlated time interval and set up market direction, so that the opposite force is fully absorbed or “netted out”(net expectation). This particular price level is called “Equilibrium Point” that serves as the price boundary and as the initiator/terminator of demand/supply relationship.
Since currency market is in continuous operation and current market conditions are dependent of historic data, an Equilibrium Point is defined as the following:
1.It's the price level where the previous valuation has completely reached its price target because the previous net expectations have been completely consumed in trade-relevant time interval.
2.Which means new net expectation is formed at its maximum.
3.Thus the new opposite direction of valuation based on new net expectations will begin, until it's completely consumed and the next Equilibrium Point is reached. And it loops on in this fashion forever as two different directions of net expectations waxing and waning from one time interval to another.
I'd like to propose that all price actions can be simplified and categorized in the following Perpetual Loop Model by using Equilibrium Point. It should be the most profitable and efficient Forex trading strategy because the number of trades and cost of trade are minimum, and the profit is maximized by taking full trend cycles. See the following chart:
All the things above made up the theoretical framework about the equilibrium point, and it's time to quantitatively express this function of net expectation with respect to time and devise trading algorithms.
(a)
Initially when I started trading equities few years ago, I traded it in a way which majority of traders would consider as very primitive. Due to some bad broker selection decisions, I ended up with a broker with virtually no usable charting tools, the only thing that consistently works is the order book(Level 2 Data) function which displays live buy/sell orders at what different price level with what volume behind it etc, and the worst part is that I have to update them manually every few seconds in order to see the what's going on. Forget about your typical candle charts, fancy moving averages, pretty MACD and stochastic, even people back in the 30's had professional chartists drawing charts for them by tape reading, I had nothing really......Well every penny is worth it with this broker when you had such a low brokerage fees. Yet it's a blessing in disguise that will later shape my way of thinking when it comes to Forex trading.
So without good facilitating visual references, staring at the order book and trying to figure out how stock prices go from one level to another and trade according to these information solely became my trading tool, or rather the logical deductions out of the price action, and at a later stage combined with skills of fundamental analysis of individual stocks that I've been slowly picking up over time. It's not long for an ambitious rookie like me to discover something very intriguing: in the order book, the fierce battle of buy and sell orders takes place constantly and would sometimes converge onto a particular range of price levels, all with very heavy volumes behind each levels and seesaw movement would occur, as one force(buy or sell) is trying to consume the other and move up and down in the rank of the order book; eventually one force will win the battle at what I call it an “equilibrium point”(proof of its absolute existence in Forex later, yet it takes on a new meaning) where the opposite orders have been fully absorbed and balanced out, thus the price action will go in direction of that particular force and a strong trend occurs as a result, until it reaches a new price levels or a range where the whole battle would start again; alternatively an equilibrium point can be generated without the precursor of distinctive battle on the book, thus making it an abrupt progression or reversal of direction, naturally it was as a result of a very swift battle in which one force had the overwhelming order size to consume the other force in rapid succession(or simply one force can opt to dropped out of the order book voluntarily and let the other force takes position...infinite possibilities in the market). Let's revise some old and most useful knowledge here and see what order books look like:
Generally speaking the battle is called “Rangebound”(however prolonged or swift, depend on your trading time frame for visual reference) which leads to its product called an "Equilibrium Point", and the subsequent directional movement away from equilibrium point is known as a breakout, and the rest of it you know it as a “Distinctive Trends”. The term “Rangebound” differs from its traditional meaning because I view all price actions that produces no net effect of distinctive trend as being confined in price boundaries, no matter what's going on in between price boundaries. These are the basic building blocks of any markets, but with different manifestations due to their unique characteristics(will be demonstrated in Part 2: Equilibrium Cross). Instinctively for equity trading, assuming you can only have long positions, one would deploy such strategies(quantitatively optimized or not) so that a position is entered at the equilibrium point (usually at finishing stage of rangebound or closely following a distinctive downward trend)and ride the breakout to the end of a rising trend, then exit the position at the start of next equilibrium point where downward trend would occur etc...... So I traded equities this way for almost 9 months and eventually provided with a simple charting tool with limited functions for my visual pleasure, but the reality is that after this 9 months ordeal, I've become a habitual "order book hardcore" where my entire trading principle is based on identifying the relationship between these two forces, and there is no turning back ever since.
(b)
The first time I was introduced to the Forex world and started looking for ways to trade it efficiently and effectively, my natural instinct is to deploy this idea about equilibrium point straightaway, bypassing the use of all other indicators and any other junks that you would pick up from Forex books, mentoring programs and online courses etc, since none of these help you gaining understandings the basic market force in a clear and comprehensive fashion. The fact that you can both long and short in Forex trading makes my strategy using equilibrium point much more relevant, because the fundamentals of demand/supply relationship is somewhat different and more intricate.
The absolute existence of the equilibrium point can be logically derived from examining the basic structure and characteristics of the Forex market, and can be implemented in trading by appropriate quantitative algorithms. The first question is: how is the exchange rate between two countries are determined? I'd like to make an easy to understand analogy by using a popular computer game: If you ever played the game “Sid Meyer's Civilization”, in order to determine a winner, the strongness of two different countries are determined by a series of statistics that are accumulated by themselves, statistics such as total amount of money and resources, number of military personnel, growth rate, meters for technological advance etc. Naturally the country with highest aggregated numbers of these statistics is the winner. The analogy is exactly the same in currency trading: since currencies are always traded in pairs, the strongness of a country is determined by an aggregation of factors such as GDP, CPI, interest rate, employment levels, trade balance, fiscal and monetary policies, various business and consumer sentiment gauges and activity levels, different markets correlations, currency characteristics(carry trade currency, commodity currency, safe haven currency etc that create unique demand/supply) etc...... These statistics are the key building blocks of exchange rate determinants. If the favorable aggregated statistics mentioned above for Country X(Y) is larger than Country Y(X), then the currency of country X(Y) is in higher demand, the exchange rate Country X/Country Y will go up and down accordingly. Of course in reality it's far more complicated than this as different determinants cannot be conveniently grouped together in homogenous statistical category, but for a sake of simplicity let's do so for now and call it “aggregated statistics”.
However there is a critical element that dictates what fashion the exchange rate changes: TIME. As we know, all of those aggregated statistics for a country are published in fixed time intervals, usually on daily basis with different levels of impact on the market(see ForexFactory's economic calendar, all statistics are grouped into “Actual”, “Forecast”, “Previous”), which means a "snapshot" of economic situation of a country is sampled at these intervals, then different countries can compare those statistics against each other to match demand/supply and move exchange rates. Since these statistics have accumulative effect and are dependent of previous samples, the exchange rate will be traded according to them strictly in the most trade-relevant time interval. The Hypothesis of Rational Expectation is deemed to be the most relevant theoretical support in currency trading: the exchange rate will only go to price levels where people expect them to be(the “Forecast” category in economic calender)based on the expected valuation of the next “snapshot” within the most relevant time interval. See the following chart:
(Also keep in mind that the distribution of relevant time intervals are asymmetrical, yet they have positive correlations with market price reaction in terms changes(increment/decrement) in aggregated statistics and can be quantitatively expressed accordingly, but for easy readership I won't go into the actual technical details about time-frequency representation modeling in this thread.)
What happens if people don't trade according to expectations or trade regardless of relevant time interval? Keep in mind that the currency market is a fundamentally transparent environment where all exchange rate determinants are hyper sensitive to subtle changes, which leads to very elastic demand/supply relationship that has absolute positive correlation with economy. Essentially all expectations are economic targets that need to be realized through progression of time, any attempt to violate them could create mismatched exchange rates at the wrong time, which will unavoidably result in exploitable arbitrage opportunities or unfavorable trading terms that translate into respective economies later on. Therefore in reality this is rarely allowed to happen because it could lead to very big problems. We cannot trade ahead of time and valuation or expect the market to behave in the same way, because all current aggregated statistics are lagging indicators for the economy, it's simply not logical to express current economic condition in terms of irrelevant distant future expectation. Have you really wondered why your positions always go against you? Most retail traders are not aware of the TIME factor as being ultimately decisive in trading sequence.
Theoretically any free-floating currency is relatively free from market manipulation because their exchange rates are tentatively in sync with economic condition and reflect demand/supply, even the occasional central bank interventions were “expected event”, only “information shocks” such as 9/11 attack or North Korean shelling could jolt the rational game very briefly. See how the Chinese Yuan as a non free-floating currency became the culprit of importing QE2 inflation and cause havoc around the country recently? This is a perfect example of not respecting expected valuation in due time, and it's not merely causing domestic problems but also creating international trade imbalance. So in essence all exchange rate trading actions can only take place in their closest and most relevant time interval toward their rational expectations, any attempts to push the market beyond current valuation level ahead of its time will result in all sorts of problems and imbalances, unfortunately this is taking place every minute the market is live, but sooner or later will be corrected by rational market force.
(c)
Now that we've identified the game rules of the Forex market, it's time to examine how all the market participants implement their trades and what implications do they have. If the exchange rate is ultimately determined by “net expectations” in the most trade-relevant time interval, then the theme of the all trades are evolved around how the long and short positions would tackle each other in order to realize their own market expectation. Let's quantify the two outcomes of expectations and their underlying all possible price actions, and call them E(long) and E(short) respectively: Under fundamentally biased market situation, E(long/short) will always have the overwhelming quantity to consume the other and push the market towards expected valuation in the form of Distinction Trend, until it reaches a price level where its aggregated statistical favor is lost and E(short/long) will set new market direction; Under normal market situation one particular force can only have possible overwhelming effect on a particular segment of time interval to form distinctive trend, and for the rest, E(long) and E(short) are roughly identical in size, then the so called Rangebound would occur; Under mixed market condition infinite possibilities could be oscillating between these two basic forms. For all that, it's logically sound to derive: there must exist such a price level where E(long) or E(short) are at their maximum during the positively-correlated time interval and set up market direction, so that the opposite force is fully absorbed or “netted out”(net expectation). This particular price level is called “Equilibrium Point” that serves as the price boundary and as the initiator/terminator of demand/supply relationship.
Since currency market is in continuous operation and current market conditions are dependent of historic data, an Equilibrium Point is defined as the following:
1.It's the price level where the previous valuation has completely reached its price target because the previous net expectations have been completely consumed in trade-relevant time interval.
2.Which means new net expectation is formed at its maximum.
3.Thus the new opposite direction of valuation based on new net expectations will begin, until it's completely consumed and the next Equilibrium Point is reached. And it loops on in this fashion forever as two different directions of net expectations waxing and waning from one time interval to another.
I'd like to propose that all price actions can be simplified and categorized in the following Perpetual Loop Model by using Equilibrium Point. It should be the most profitable and efficient Forex trading strategy because the number of trades and cost of trade are minimum, and the profit is maximized by taking full trend cycles. See the following chart:
All the things above made up the theoretical framework about the equilibrium point, and it's time to quantitatively express this function of net expectation with respect to time and devise trading algorithms.
- #3
- Edited 11:47pm Jan 3, 2011 11:32pm | Edited 11:47pm
Part Two <<The Equilibrium Cross: Coupling of Practice and Theory>>
(a)
Now that the theoretical framework has been established and hypothesis has been put forward in Part One, it's time to utilize them in live trading condition and see whether they are actually correct in any sense. The “Equilibrium Cross” is an algorithm derived from the framework, it calculates the market equilibrium point and can be displayed on the charting software as a cross(thus the name Equilibrium Cross) with either upward or downward directions, so the subsequent trades could be executed based on what market direction is the equilibrium point pointing to. The algorithm will draw a cross around equilibrium point level using extending trend lines based on candle High/Low. The trend lines I opt to use are temporary adoptions and purely for visual assistance, they have no practical use in actual trading, and I've used the convention of using thick trend lines and dotted line ½ of High/Low line.
If you fully understand the time-dependent and time-critical nature of Forex market by now, you will immediate realize that the trading algorithm will only work based on higher time frames since economic data are published on daily basis and trend cycles are usually longer than that. After almost a year of live trading, it turns out that the 4 hours time frame is tested to be the most optimum in capturing every single trend cycles. As a result the cost of holding long term position by solely tracking equilibrium points is the rollover rate you pay, and the possibility of forfeiting the chances of short term swing trade(but is it really cost effective to have quick swing trade?)
(b)
Basic set-up:
Trading algorithms: other programming tools(discussion beyond the scope of this thread)
Charting software and data source: Metatrader(MQL language) and Dealbook(CTL language). All data is obtained from these charting software and feed into trading algorithms for calculation, and trade signal is then feed back to charting software. None of my brokers use Metatrader and I generally don't recommend live trading with this problematic platform, but it's mighty good for charting and data source.
Currency pairs: All majors and their cross rates, 27 pairs(AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, AUD/USD, CAD/CHF, CAD/JPY, CHF/JPY, EUR/AUD, EUR/CAD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/NZD, EUR/USD, GBP/AUD, GBP/CAD, GBP/CHF, GBP/JPY, GBP/USD, NZD/CAD, NZD/CHF, NZD/JPY, NZD/USD, USD/CAD, USD/CHF, USD/JPY)
Time frame: 4Hr only(all time references are in Australian Eastern Standard Time GMT+10:00)
Others: Candle timer and Secondary Confirmation(see Part Four)
Basic trading strategy:
Implementation of the Perpetual Loop Model
Step 1: When an Equilibrium Cross appears, if it crosses upward, then a long position is entered on the candle closest to the cross;if it crosses downward, then a short position is entered on the candle closest to the cross.
Step 2: Hold current position until the next Equilibrium Cross appears.
Step 3: When the next Equilibrium Cross appears, close the previous position and enter an new opposite position immediately on the candle closest to the cross. Theoretically the next Equilibrium Cross always points to the opposite direction, however there are extremely rare cases where it points to the same direction as the previous one, but it does not affect the trade because you are already holding a position going that direction.
Step 4: repeat Step 2 and it loops on forever.
(c)
I will be presenting five recent examples here, all within the past few weeks and hopefully most of situation groups are represented here. I've traded very single one of them and there is no any chart-historian nonsense on these charts as all screen shots were made under live trading condition.
Example 1: CAD/JPY
Comment: The most ideal trading situation where the Perpetual Loop Model is beautifully manifested!
Example 2: CHF/JPY
Comment: Everything could happen within a week!
Example 3: GBP/USD
Comment: Example of Mechanical-Wave-Like patter, also long term rangebound that put a trade's patience into test. Worrying trading mentality is on the horizon.
(a)
Now that the theoretical framework has been established and hypothesis has been put forward in Part One, it's time to utilize them in live trading condition and see whether they are actually correct in any sense. The “Equilibrium Cross” is an algorithm derived from the framework, it calculates the market equilibrium point and can be displayed on the charting software as a cross(thus the name Equilibrium Cross) with either upward or downward directions, so the subsequent trades could be executed based on what market direction is the equilibrium point pointing to. The algorithm will draw a cross around equilibrium point level using extending trend lines based on candle High/Low. The trend lines I opt to use are temporary adoptions and purely for visual assistance, they have no practical use in actual trading, and I've used the convention of using thick trend lines and dotted line ½ of High/Low line.
If you fully understand the time-dependent and time-critical nature of Forex market by now, you will immediate realize that the trading algorithm will only work based on higher time frames since economic data are published on daily basis and trend cycles are usually longer than that. After almost a year of live trading, it turns out that the 4 hours time frame is tested to be the most optimum in capturing every single trend cycles. As a result the cost of holding long term position by solely tracking equilibrium points is the rollover rate you pay, and the possibility of forfeiting the chances of short term swing trade(but is it really cost effective to have quick swing trade?)
(b)
Basic set-up:
Trading algorithms: other programming tools(discussion beyond the scope of this thread)
Charting software and data source: Metatrader(MQL language) and Dealbook(CTL language). All data is obtained from these charting software and feed into trading algorithms for calculation, and trade signal is then feed back to charting software. None of my brokers use Metatrader and I generally don't recommend live trading with this problematic platform, but it's mighty good for charting and data source.
Currency pairs: All majors and their cross rates, 27 pairs(AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, AUD/USD, CAD/CHF, CAD/JPY, CHF/JPY, EUR/AUD, EUR/CAD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/NZD, EUR/USD, GBP/AUD, GBP/CAD, GBP/CHF, GBP/JPY, GBP/USD, NZD/CAD, NZD/CHF, NZD/JPY, NZD/USD, USD/CAD, USD/CHF, USD/JPY)
Time frame: 4Hr only(all time references are in Australian Eastern Standard Time GMT+10:00)
Others: Candle timer and Secondary Confirmation(see Part Four)
Basic trading strategy:
Implementation of the Perpetual Loop Model
Step 1: When an Equilibrium Cross appears, if it crosses upward, then a long position is entered on the candle closest to the cross;if it crosses downward, then a short position is entered on the candle closest to the cross.
Step 2: Hold current position until the next Equilibrium Cross appears.
Step 3: When the next Equilibrium Cross appears, close the previous position and enter an new opposite position immediately on the candle closest to the cross. Theoretically the next Equilibrium Cross always points to the opposite direction, however there are extremely rare cases where it points to the same direction as the previous one, but it does not affect the trade because you are already holding a position going that direction.
Step 4: repeat Step 2 and it loops on forever.
(c)
I will be presenting five recent examples here, all within the past few weeks and hopefully most of situation groups are represented here. I've traded very single one of them and there is no any chart-historian nonsense on these charts as all screen shots were made under live trading condition.
Example 1: CAD/JPY
Comment: The most ideal trading situation where the Perpetual Loop Model is beautifully manifested!
Example 2: CHF/JPY
Comment: Everything could happen within a week!
Example 3: GBP/USD
Comment: Example of Mechanical-Wave-Like patter, also long term rangebound that put a trade's patience into test. Worrying trading mentality is on the horizon.
- #4
- Edited 11:47pm Jan 3, 2011 11:35pm | Edited 11:47pm
Part Two Continued
Example 4: EUR/JPY
Comment: I finally lost my patience and violated basic strategy.
Example 5: USD/CHF
Comment: The worst situation a trader will ever face, it's game of patience and a lesson is learned on the cost of opportunity and time. It's also the only situation I've encountered where two adjacent Equilibrium Crosses are in the same direction.
As we can see in those examples, the time-dependent equilibrium points do exist in reality and the Perpetual Loop Model can actually be realized in live Forex trading environment! Remember postulated previously, any party that trade against the equilibrium point will ultimately be unsuccessful and be corrected by market force sooner or later, it's obvious in those examples that any attempts at pushing the price actions the opposite way from the equilibrium cross are futile, because they are in violation of market demand/supply during the most relevant time interval. At this juncture the worst situation for a single trade is to get stuck in prolonged rangbound movement while missing out potential quick profitable distinctive trend in other pairs, wasting precious time and costing more rollovers to be paid. However during any given week not all 27 pairs will go into rangebound simultaneously, and there is no way to calculate which pair will have a imminent distinctive trend, it's solely a matter of deploying proper fundamental analysis to identify what kind of demand/supply relationship could cause rangebound movement hence avoidance could be made.
If you study these charts carefully, you will easily come to the conclusion that as a retail trader, it's simply unwise to "swing trade" in between two equilibrium points, like the mechanical wave patter we've encountered, because you don't have enough resources to predict and trade those movements, unless you have superior fundamental/technical analysis skill on such "micro" level, and of course you need a gigantic computer with brilliant trading algorithms to back you up, and lot of luck of course. Everything is one-way-traffic and your destination is where the everyone expects the price level to be based on timely demand/supply.
More up-to-date trade examples will be posted as time goes by.
Example 4: EUR/JPY
Comment: I finally lost my patience and violated basic strategy.
Example 5: USD/CHF
Comment: The worst situation a trader will ever face, it's game of patience and a lesson is learned on the cost of opportunity and time. It's also the only situation I've encountered where two adjacent Equilibrium Crosses are in the same direction.
As we can see in those examples, the time-dependent equilibrium points do exist in reality and the Perpetual Loop Model can actually be realized in live Forex trading environment! Remember postulated previously, any party that trade against the equilibrium point will ultimately be unsuccessful and be corrected by market force sooner or later, it's obvious in those examples that any attempts at pushing the price actions the opposite way from the equilibrium cross are futile, because they are in violation of market demand/supply during the most relevant time interval. At this juncture the worst situation for a single trade is to get stuck in prolonged rangbound movement while missing out potential quick profitable distinctive trend in other pairs, wasting precious time and costing more rollovers to be paid. However during any given week not all 27 pairs will go into rangebound simultaneously, and there is no way to calculate which pair will have a imminent distinctive trend, it's solely a matter of deploying proper fundamental analysis to identify what kind of demand/supply relationship could cause rangebound movement hence avoidance could be made.
If you study these charts carefully, you will easily come to the conclusion that as a retail trader, it's simply unwise to "swing trade" in between two equilibrium points, like the mechanical wave patter we've encountered, because you don't have enough resources to predict and trade those movements, unless you have superior fundamental/technical analysis skill on such "micro" level, and of course you need a gigantic computer with brilliant trading algorithms to back you up, and lot of luck of course. Everything is one-way-traffic and your destination is where the everyone expects the price level to be based on timely demand/supply.
More up-to-date trade examples will be posted as time goes by.
Part Three <<The M.A.Y.T Method: Fundamental analysis is the only Holy Grail>>
(a)
As shown in Part One where the ultimate Forex market movements under Rational Expectation Hypothesis have been properly established, and Part Two clearly demonstrated when trades are settled on higher time frames(4hr+), the possible path of price action reflects perfectly the movement of Perpetual Loop Model in which the degree of trading complexity is greatly reduced, thus more purposeful and directional trading strategy can be devised by catching the equilibrium points. As market flows from one equilibrium point to the next, things matter the most for traders are the underlying fundamentals that dictate the price action, not the "technical details" on the charts because there is little room for such redundancies to be played out, as the equilibrium points give all directions and set boundaries for all succinct price actions.
Even though more substantial researches on equilibrium points are needed, it's reasonably confident to claim that a typical trade can go anywhere from 2,3 days up to 2,3 weeks, right now for a retail trader, these are the time frame that you should be focusing on in order to obtain market situational awareness. Forget about much longer term picture because even the top-notch forecasters couldn't predict with absolute confidence, remember that all price actions are tentative where supply and demand of a currency are only trade-relevant in short terms, and it's the series of short terms that make up the long term picture as it progresses, like puzzle pieces that need to be put together one by one. Recall the Hypothesis of Rational Expectation where the price must approach its expected value within specific time frame, you job is to gather fundamental information which are the market driving force within this specific time frame, extract essential arguments in them and weigh into trading for the confirmation of price action. It sounds terribly difficult but there is no better way to defeat it, and if there is anything that helps to make it easier, well, there are only two possible arguments on price action you need to worry about: go up or down; if there's any chance it could get worse, well, there are explicit and most of the time, implicit arguments that require more than just plain word-reading out of you. Things couldn't be further from the truth: for currency market, if one side the argument has overwhelming strength over the other side, the market direction is most likely to go with the winner of particular stronger argument, because they made up the ultimate net "rational expectation", even won by the smallest margin counts.
At this point some of the traders might ask: if the Equilibrium Cross is capable of pulling all the necessary tricks, why bother doing fundamental analysis? Well I think I should kick this question back to you to ponder upon, all I can say at this point is, trading spot currency is not like a hit-and-run casino strategy that could get you rich overnight, you simply cannot make money and disregard the knowledge of fundamental market force at the same time......
(b)
The M.A.Y.T Method(pronounced "Mate") stands for "Mark As You Trade Method". It's simply a fundamental information collector that I personally find it handy to use during trading days, and it closely resembles the functionality of a diary. Essentially you will be "marking"(recording) relevant fundamental information as you progress through your trade on a timely basis, hence making time-relevant information for judging market condition and direction. In any give week there are about 30 candles(depend on brokers) on 4Hr chart, the more different currency pairs you trade, the more materials you have to collect for countries on either sides. Below is an example:
See the amount of hard work you need to do in order to cruise the market? Do you still think Forex trading is for everyone? No wonder Forex trading is the crown jewel of all trades. If you still dream about piling up useless indicators so they could flash off profitable signals, it's time to wake up and face the real monster. Forgive me for reiterating it excessively, but you must realize that no indicators are capable of completely showing you price actions and fundamental force behind the move.
How do you collect fundamental information? Well there are three basic options laying for retail traders:
A: Get professional services such as Bloomberg Terminal or Reuters Eikon. They are mighty cheap(about $2000 a month) for a sea of detailed information and cutting-edge professional tools that keep you in the lead. They don't merely show you what is moving the market, more than often you get information even before the markets move. They provide premium timely and exclusive news and in-depth commentaries that you won't find anywhere else. If you really want to get serious about reading the fundamentals, get them right now.
B: Switch to brokers with decent news wire service. If you really want to become a good trader, you must have access to a good news source for market information. Staring at charts and indicators all day long will get you nowhere. Brokers who provide news wire service often prove to be very reliable, one of my broker goes as far as providing three different news sources for trader's amusement. Though not as comprehensive as those professional services like Bloomberg, it's still a good entry level tool and a must-have.
C: If you cannot afford the above, relying on variety of free business news websites might not be a bad idea. It's "poor man's news wire" that requires more physical work, not only do you need to access more than a dozen different sources more often, but also you need to sift through them for the actual useful one because most of them are not as premium as professional news wire service. It costs nothing and yet effective if you know how to get it right.
Apart from those three options, you are still required to do your everyday research the hard way on your own. Remember there are countless input variables into the Forex market, the bulk of information you need to get hands on are enormous, and you will quickly find yourself drowning in the sea of news, analysis, predictions, commentaries etc. General advice: Think twice before you open your account if intent to only become a small time trader dreaming about making a living out of Forex, if you cannot handle the work, you are destined to lose money.
(c)
Now comes ultimate question: How you perform proper fundamental analysis once useful information are gathered? Well you don't need a PHD in finance and economics to do that, but it would be much easier if you do, or at least get a bachelor degree like myself. You need to understand basic principles of economics before you do anything, at the stage you are solely relied on "media economics" and whatever approach you use for analysis, you need to at least understand the essential arguments behind each explanations, predictions and formulations on an undergraduate level. More advanced mathematical methods for economic modeling are possible if you know how to. I firmly believe that the currency market as a whole, is simply to big to be quantitatively formulated by any mathematical models, as for completely automated computer trading, even the most advanced trading algorithms used by big banks and funds are remotely manageable on a short term basis, which explains the signature of mechanical-wave-like patterns and many other familiar patterns. Ultimately market directions are set by human expectations and actions, not formulas. Even though the Equilibrium Cross is almost perfect at tracking trends from start to finish, it's still not overly reliable at actually predicting the exact price target during the trend.
There are many ways to perform fundamental analysis and no single method is superior than the other. After many years study of currency market, I've grounded myself relying on general semantics analysis: establish parameters and identify expectations of a particular present/ future event, select the most relevant fundamental information materials, break down the language of the market into most meaningful units, make relevant connections and link up common elements, utilize logical deduction to derive probable outcomes etc......I truly believe that the key to unlock future market sequence resides in the language structure of given fundamental information, which can be solved by using various semantics techniques and logical deduction. In the case of fundamental analysis for Forex market based on the Hypothesis of Rational Expectation and other aspects such as Efficient-Market Hypothesis and matching of demand/supply, it's utterly important to track all sorts of economic benchmarks to see what could tip the balance and put extra favor over one particular market view, and at the same time finely dissecting the language to identify this most logical "expectation" within. Furthermore you need to get intuitive and vigilant about any information that might make material impact on the market, even to a slight degree of paranoia which helps you to make the most latent connections between various events. And so on and so forth...... All above is just my personal approach to fundamental analysis, it might look complicated but it's doing me the world of it and people who share the same view. After all, who said we need anything on the chart at all to trade currency? If you fully understand market fundamentals and trade naked according, even the Equilibrium Cross becomes redundant. The "Holy Grail" was never on the charts and in those indicators from the beginning! Anyway, whatever floats your boat, just make sure you treat fundamental analysis as a main trading tool.
I will be doing some market and economics commentaries in the future and hopefully they could be put to good use.
(a)
As shown in Part One where the ultimate Forex market movements under Rational Expectation Hypothesis have been properly established, and Part Two clearly demonstrated when trades are settled on higher time frames(4hr+), the possible path of price action reflects perfectly the movement of Perpetual Loop Model in which the degree of trading complexity is greatly reduced, thus more purposeful and directional trading strategy can be devised by catching the equilibrium points. As market flows from one equilibrium point to the next, things matter the most for traders are the underlying fundamentals that dictate the price action, not the "technical details" on the charts because there is little room for such redundancies to be played out, as the equilibrium points give all directions and set boundaries for all succinct price actions.
Even though more substantial researches on equilibrium points are needed, it's reasonably confident to claim that a typical trade can go anywhere from 2,3 days up to 2,3 weeks, right now for a retail trader, these are the time frame that you should be focusing on in order to obtain market situational awareness. Forget about much longer term picture because even the top-notch forecasters couldn't predict with absolute confidence, remember that all price actions are tentative where supply and demand of a currency are only trade-relevant in short terms, and it's the series of short terms that make up the long term picture as it progresses, like puzzle pieces that need to be put together one by one. Recall the Hypothesis of Rational Expectation where the price must approach its expected value within specific time frame, you job is to gather fundamental information which are the market driving force within this specific time frame, extract essential arguments in them and weigh into trading for the confirmation of price action. It sounds terribly difficult but there is no better way to defeat it, and if there is anything that helps to make it easier, well, there are only two possible arguments on price action you need to worry about: go up or down; if there's any chance it could get worse, well, there are explicit and most of the time, implicit arguments that require more than just plain word-reading out of you. Things couldn't be further from the truth: for currency market, if one side the argument has overwhelming strength over the other side, the market direction is most likely to go with the winner of particular stronger argument, because they made up the ultimate net "rational expectation", even won by the smallest margin counts.
At this point some of the traders might ask: if the Equilibrium Cross is capable of pulling all the necessary tricks, why bother doing fundamental analysis? Well I think I should kick this question back to you to ponder upon, all I can say at this point is, trading spot currency is not like a hit-and-run casino strategy that could get you rich overnight, you simply cannot make money and disregard the knowledge of fundamental market force at the same time......
(b)
The M.A.Y.T Method(pronounced "Mate") stands for "Mark As You Trade Method". It's simply a fundamental information collector that I personally find it handy to use during trading days, and it closely resembles the functionality of a diary. Essentially you will be "marking"(recording) relevant fundamental information as you progress through your trade on a timely basis, hence making time-relevant information for judging market condition and direction. In any give week there are about 30 candles(depend on brokers) on 4Hr chart, the more different currency pairs you trade, the more materials you have to collect for countries on either sides. Below is an example:
See the amount of hard work you need to do in order to cruise the market? Do you still think Forex trading is for everyone? No wonder Forex trading is the crown jewel of all trades. If you still dream about piling up useless indicators so they could flash off profitable signals, it's time to wake up and face the real monster. Forgive me for reiterating it excessively, but you must realize that no indicators are capable of completely showing you price actions and fundamental force behind the move.
How do you collect fundamental information? Well there are three basic options laying for retail traders:
A: Get professional services such as Bloomberg Terminal or Reuters Eikon. They are mighty cheap(about $2000 a month) for a sea of detailed information and cutting-edge professional tools that keep you in the lead. They don't merely show you what is moving the market, more than often you get information even before the markets move. They provide premium timely and exclusive news and in-depth commentaries that you won't find anywhere else. If you really want to get serious about reading the fundamentals, get them right now.
B: Switch to brokers with decent news wire service. If you really want to become a good trader, you must have access to a good news source for market information. Staring at charts and indicators all day long will get you nowhere. Brokers who provide news wire service often prove to be very reliable, one of my broker goes as far as providing three different news sources for trader's amusement. Though not as comprehensive as those professional services like Bloomberg, it's still a good entry level tool and a must-have.
C: If you cannot afford the above, relying on variety of free business news websites might not be a bad idea. It's "poor man's news wire" that requires more physical work, not only do you need to access more than a dozen different sources more often, but also you need to sift through them for the actual useful one because most of them are not as premium as professional news wire service. It costs nothing and yet effective if you know how to get it right.
Apart from those three options, you are still required to do your everyday research the hard way on your own. Remember there are countless input variables into the Forex market, the bulk of information you need to get hands on are enormous, and you will quickly find yourself drowning in the sea of news, analysis, predictions, commentaries etc. General advice: Think twice before you open your account if intent to only become a small time trader dreaming about making a living out of Forex, if you cannot handle the work, you are destined to lose money.
(c)
Now comes ultimate question: How you perform proper fundamental analysis once useful information are gathered? Well you don't need a PHD in finance and economics to do that, but it would be much easier if you do, or at least get a bachelor degree like myself. You need to understand basic principles of economics before you do anything, at the stage you are solely relied on "media economics" and whatever approach you use for analysis, you need to at least understand the essential arguments behind each explanations, predictions and formulations on an undergraduate level. More advanced mathematical methods for economic modeling are possible if you know how to. I firmly believe that the currency market as a whole, is simply to big to be quantitatively formulated by any mathematical models, as for completely automated computer trading, even the most advanced trading algorithms used by big banks and funds are remotely manageable on a short term basis, which explains the signature of mechanical-wave-like patterns and many other familiar patterns. Ultimately market directions are set by human expectations and actions, not formulas. Even though the Equilibrium Cross is almost perfect at tracking trends from start to finish, it's still not overly reliable at actually predicting the exact price target during the trend.
There are many ways to perform fundamental analysis and no single method is superior than the other. After many years study of currency market, I've grounded myself relying on general semantics analysis: establish parameters and identify expectations of a particular present/ future event, select the most relevant fundamental information materials, break down the language of the market into most meaningful units, make relevant connections and link up common elements, utilize logical deduction to derive probable outcomes etc......I truly believe that the key to unlock future market sequence resides in the language structure of given fundamental information, which can be solved by using various semantics techniques and logical deduction. In the case of fundamental analysis for Forex market based on the Hypothesis of Rational Expectation and other aspects such as Efficient-Market Hypothesis and matching of demand/supply, it's utterly important to track all sorts of economic benchmarks to see what could tip the balance and put extra favor over one particular market view, and at the same time finely dissecting the language to identify this most logical "expectation" within. Furthermore you need to get intuitive and vigilant about any information that might make material impact on the market, even to a slight degree of paranoia which helps you to make the most latent connections between various events. And so on and so forth...... All above is just my personal approach to fundamental analysis, it might look complicated but it's doing me the world of it and people who share the same view. After all, who said we need anything on the chart at all to trade currency? If you fully understand market fundamentals and trade naked according, even the Equilibrium Cross becomes redundant. The "Holy Grail" was never on the charts and in those indicators from the beginning! Anyway, whatever floats your boat, just make sure you treat fundamental analysis as a main trading tool.
I will be doing some market and economics commentaries in the future and hopefully they could be put to good use.
- #6
- Edited Jan 4, 2011 9:38pm Jan 3, 2011 11:41pm | Edited Jan 4, 2011 9:38pm
Part Four <<Secondary Confirmations: Usefulness of the non-useful>>
Unfortunately this whole section falls back on the Linear/Non-Linear problem that has little to with understanding primary market force, but it's still an applicable part of Forex trading strategy with high accuracy. As mentioned previously, the last thing good traders need is going back to the old indicator-piling nonsense that fails to capture the essence of market force, but if options are limited and the use of indicators can not be avoided, you really need some of the most relevant and helpful indicators that display distinctive trend development and filter market noise simultaneously. The Secondary Confirmations is based on the common utilization of “cross-overs” and “turning points” of few selected indicators, and as the name suggests, it serves only as a secondary assistant in trading and should NEVER be used as the main trading tool.
There are several components make up of the Secondary Confirmation, and briefly they are:
1.The use of Tetrahedral Number Series (TNS)
2.Multiple Exponential Moving Average using TNS
3.Multiple Fisher Transform using TNS with AO indicator overlap
4.William % and Relative Strength Index overlap, Fractal and PSAR etc
Firstly, Tetrahedral Number Series are numbers 10, 20, 35, 56, 84, 120, 165, 220 and it goes on infinitely, I selected this particular segment of the series starting with 10 and ending with 220 for convenient charting purpose, and they will be corresponding to the number of days per sample for those selected indicators. Why use Tetrahedral Number Series but not other random numbers? Well that I don't really have no rational explanations just like most of people who use indicators without a reason, but subconsciously I feel that there is something suspiciously magical about it. You will be amazed by the way Occult Numerology is utilized in trading algorithms and manifested in trading psychology(discussion beyond the scope of this thread but I'd like to discuss privately with people who study them, things like why Fibonacci Retracement, Gann's Theory actually work sometime etc). A tetrahedron is essentially a pyramid shape structure, an examples of supreme stability and perfect symmetry, with distinctive cascading structure and self-dual. If these properties could be reflected on charts, not only is it pleasing to your eyes but also serve lots of purposes. This is a tedrahedron:
Secondly and perhaps the most important element to the secondary confirmation is the use of Fisher Transform. I am not going into the theoretical aspects of Fisher Transform because they are literally hundreds of papers on this subject online, most notably by John Ehlers, the pioneer who applied this method to practical trading. Study it for yourself and then get back to this section so that you get a much clearer picture, for professional traders you should understand this elegant trading tool from inside out by now( Link: http://www.tradingsystemlab.com/file...0Transform.pdf) As shown previously, the majority of my trades usually took from one day up to few days and possibly even few weeks, the only thing I care about is how I get from price level A to price level B without the hindrance of market noises affecting my judgment, also minimum trades and maximum efficiency principles are of paramount importance when putting Perpetual Loop Model into practice. Fisher Transform's almost sharp perpendicular turning point and parallel traveling channel have gained a superior directional advantage over all similar indicators, amusingly making all sorts of normal Stochastic indicators less appealing.
Even though the Equilibrium Cross serves as a mighty good filter for market noises, I still want some kind of assisting signal to confirm that everything is in line with expectation. This is where the Fisher Transform and the rest of the lots come in handy. With the use of TNS and overlapped on AO indicator, it is easy to identify the extrema of a trend from start to finish. Along with the Moving averages, William % and Relative Strength Index overlap and some of the usual staff, some distinctive patterns start to take shape. At this point everything is about pattern recognition, also to closely replicate the spirit Perpetual Loop Model we should be looking for those extrema exclusively, and for this reason it's expected that the trading time frame and average position holding period will be high, as Fisher Transform is best at showing long term trend. Here I shall represent few examples of Secondary Confirmation without the use of Equilibrium Cross, but please do refer to the charts in Equilibrium Cross section for comparisons.
Entry point/exit point selection criterion: All Fisher Transform samples have converged at maximum where a turning point appears, with AO indicator at its maximum simultaneously.
These secondary confirmations alone are good for generating profitable trades, but as you can see here, a definitive "turning point" takes some time to take shape and finish off, these so called "similar patterns" do not have over-the-top reliability, the recognition of extrema is also difficult as there is no uniform pattern to deal with. The long position holding period poses a great psychological challenge to traders and possible violation of money management rules. In reality all of them are lagging indicators that need our subjective and sometimes irrational judgments to weigh into trading. Prove me wrong but I am afraid all of the indicators based on parameter detection and criterion selection are useless when it comes to showing price action and prediction, which is almost the entire collections of indicators we see anywhere. But personally I want these ones to be there on the chart all the time as an assistant. You'd love to garnish your dish with various good-looking and tasteless stuffs but you rarely eat those garnishes, same spirit with Secondary Confirmation. More than twice a day and everyday I question myself why I should be bothered using these indicators at all, because none of them reflect price actions in a sensible fashion, but hey, most people started to learn trading by fondling with all sorts of indicators, right? Just leave them on the chart as a remnant of our irrational trading history!
(For retail traders, these source codes and templates should be enough for your decision making. I personally don't own these codes as they are readily available on the Internet. No copyright violation intended)
Here are the downloadable indicator and template
http://cdn.forexfactory.com/images/attach/zip.gif zip
Unfortunately this whole section falls back on the Linear/Non-Linear problem that has little to with understanding primary market force, but it's still an applicable part of Forex trading strategy with high accuracy. As mentioned previously, the last thing good traders need is going back to the old indicator-piling nonsense that fails to capture the essence of market force, but if options are limited and the use of indicators can not be avoided, you really need some of the most relevant and helpful indicators that display distinctive trend development and filter market noise simultaneously. The Secondary Confirmations is based on the common utilization of “cross-overs” and “turning points” of few selected indicators, and as the name suggests, it serves only as a secondary assistant in trading and should NEVER be used as the main trading tool.
There are several components make up of the Secondary Confirmation, and briefly they are:
1.The use of Tetrahedral Number Series (TNS)
2.Multiple Exponential Moving Average using TNS
3.Multiple Fisher Transform using TNS with AO indicator overlap
4.William % and Relative Strength Index overlap, Fractal and PSAR etc
Firstly, Tetrahedral Number Series are numbers 10, 20, 35, 56, 84, 120, 165, 220 and it goes on infinitely, I selected this particular segment of the series starting with 10 and ending with 220 for convenient charting purpose, and they will be corresponding to the number of days per sample for those selected indicators. Why use Tetrahedral Number Series but not other random numbers? Well that I don't really have no rational explanations just like most of people who use indicators without a reason, but subconsciously I feel that there is something suspiciously magical about it. You will be amazed by the way Occult Numerology is utilized in trading algorithms and manifested in trading psychology(discussion beyond the scope of this thread but I'd like to discuss privately with people who study them, things like why Fibonacci Retracement, Gann's Theory actually work sometime etc). A tetrahedron is essentially a pyramid shape structure, an examples of supreme stability and perfect symmetry, with distinctive cascading structure and self-dual. If these properties could be reflected on charts, not only is it pleasing to your eyes but also serve lots of purposes. This is a tedrahedron:
Secondly and perhaps the most important element to the secondary confirmation is the use of Fisher Transform. I am not going into the theoretical aspects of Fisher Transform because they are literally hundreds of papers on this subject online, most notably by John Ehlers, the pioneer who applied this method to practical trading. Study it for yourself and then get back to this section so that you get a much clearer picture, for professional traders you should understand this elegant trading tool from inside out by now( Link: http://www.tradingsystemlab.com/file...0Transform.pdf) As shown previously, the majority of my trades usually took from one day up to few days and possibly even few weeks, the only thing I care about is how I get from price level A to price level B without the hindrance of market noises affecting my judgment, also minimum trades and maximum efficiency principles are of paramount importance when putting Perpetual Loop Model into practice. Fisher Transform's almost sharp perpendicular turning point and parallel traveling channel have gained a superior directional advantage over all similar indicators, amusingly making all sorts of normal Stochastic indicators less appealing.
Even though the Equilibrium Cross serves as a mighty good filter for market noises, I still want some kind of assisting signal to confirm that everything is in line with expectation. This is where the Fisher Transform and the rest of the lots come in handy. With the use of TNS and overlapped on AO indicator, it is easy to identify the extrema of a trend from start to finish. Along with the Moving averages, William % and Relative Strength Index overlap and some of the usual staff, some distinctive patterns start to take shape. At this point everything is about pattern recognition, also to closely replicate the spirit Perpetual Loop Model we should be looking for those extrema exclusively, and for this reason it's expected that the trading time frame and average position holding period will be high, as Fisher Transform is best at showing long term trend. Here I shall represent few examples of Secondary Confirmation without the use of Equilibrium Cross, but please do refer to the charts in Equilibrium Cross section for comparisons.
Entry point/exit point selection criterion: All Fisher Transform samples have converged at maximum where a turning point appears, with AO indicator at its maximum simultaneously.
These secondary confirmations alone are good for generating profitable trades, but as you can see here, a definitive "turning point" takes some time to take shape and finish off, these so called "similar patterns" do not have over-the-top reliability, the recognition of extrema is also difficult as there is no uniform pattern to deal with. The long position holding period poses a great psychological challenge to traders and possible violation of money management rules. In reality all of them are lagging indicators that need our subjective and sometimes irrational judgments to weigh into trading. Prove me wrong but I am afraid all of the indicators based on parameter detection and criterion selection are useless when it comes to showing price action and prediction, which is almost the entire collections of indicators we see anywhere. But personally I want these ones to be there on the chart all the time as an assistant. You'd love to garnish your dish with various good-looking and tasteless stuffs but you rarely eat those garnishes, same spirit with Secondary Confirmation. More than twice a day and everyday I question myself why I should be bothered using these indicators at all, because none of them reflect price actions in a sensible fashion, but hey, most people started to learn trading by fondling with all sorts of indicators, right? Just leave them on the chart as a remnant of our irrational trading history!
(For retail traders, these source codes and templates should be enough for your decision making. I personally don't own these codes as they are readily available on the Internet. No copyright violation intended)
Here are the downloadable indicator and template
http://cdn.forexfactory.com/images/attach/zip.gif zip
- #9
- Edited 1:26am Jan 4, 2011 1:24am | Edited 1:26am
- Joined Oct 2008 | Status: Just be the witness. | 1,089 Posts
What a great introduction.....it took me a few attempts to understand your posts but as a simple retail trader who is very cautious when it comes to short-term trading I see great merit in your approach.
My solid base is the understanding of your Loop theory coupled with the perpetual nature of Step 1 and 2, integrated in your most basic supply and demand framework.
So thank you very much, I`m subscribed and look forward to reading more and see actual examples in play during the next year.
And long-term trading is ideal for me......always good to have a secondary confirmation to spend more time with my family, or gardening or listening to Mozart.
It is distinctly obvious that you have put a lot of effort and energy in this, eventually it will manifest the way it has to, in a positive way.
A big thank you and I wish lots of success !
_______________
michael
My solid base is the understanding of your Loop theory coupled with the perpetual nature of Step 1 and 2, integrated in your most basic supply and demand framework.
So thank you very much, I`m subscribed and look forward to reading more and see actual examples in play during the next year.
And long-term trading is ideal for me......always good to have a secondary confirmation to spend more time with my family, or gardening or listening to Mozart.
It is distinctly obvious that you have put a lot of effort and energy in this, eventually it will manifest the way it has to, in a positive way.
A big thank you and I wish lots of success !
_______________
michael
Be like water.
- #16
- Edited 4:35am Jan 4, 2011 3:45am | Edited 4:35am
It was a bit hard to see them marked on your charts...I think they were the red vertical arrows?
Also, are you saying that you can predict when the markets will turn, or when they might turn?
Well I hate to use the word "predict", I'd rather call it "calculation based on the theoretical framework". It's actually not showing when the trend might turn or will turn, it's showing the relative end of the previous demand/supply relationship. If you study those charts in Part Two carefully, you will see that once an equilibrium cross is formed, a trend can go against the point for long time(thus not an immediate turning point), but eventually brought down by market demand/supply. The equilibrium point is rather like a boarder station for a man without a passport: sir, go no further beyond here because you don't have ID! You can run over the boarder for a while but you will be brought back by the boarder army...... I hope this analogy helps a little.
As for the actual algorithm, I drew many ideas from signal theories(fourier in particular), probability and statistics, bits and pieces in stochastics analysis and some philosophical approaches in economics......I will discuss the matter at a later time, for now let's keep things simple and focus on the implication of the theoretical framework.
My point is: it doesn't have to be the crossover of pseudo trend lines at all, I use it because just for the sake of convenience. I can also have a some kind of cross hand-draw once calculation is done, but it's much easier if the charting program does it for me.
