Forex Market Deciphered: The Equilibrium Cross

The math behind this sounds like very cool stuff. I've always been shy about it, assuming I didn't have enough time to study it in detail, but I look forward to everyone talking about it. Bring on the book recommendations (thanks for the ones so far!)

Cosgrove,
taking incremental steps is the key. Not only to knowledge but to account balance growth as well. If you speak at least one foreign language then you will surely understand what I mean by that. This should hold true for math as well. So don't be shy about it. Chop your goal into manageable pieces and start taking those incremental steps. After all, the top notch scientists of the world started from scratch just like the rest of us - they wore diapers, learned to walk, talk and read; went to school and then some day started reading up on stuff and doing tests which after hours and hours of hard labour produced something of value. But the key here is starting from somewhere. Anyway, good luck with learning new things.

Education without enlightenment is dangerous!


Yesterday I went to pick up my monthly aviation magazines in the newsagency as usual, I happened to pick up this trading magazine(successful trader or trader's magazine or whatever) and actually took few minutes to flip through some pages which I almost never did. And there it was on a main featuring story about a supposedly successful retail forex trader who's keen to initiate people into the business of trading currency for a living, the whole story baffled me in a profound way that prompted me to let out a conscientious rant. When asked about what kind of trading techniques that trader's been using, he responded something like this: "oh that's easy, I buy when XXXX and YYYY are crossing each other, I sell when ZZZZ closes below this and that, follow this plan you will no doubt be profitable!"....... Obviously he's referring the use of various indicators and different combination of them as scenarios, in order to trigger a trader signal. I wonder what would happen when he was ask about trading philosophy instead of trading techniques, imagine answers like this: "oh that's easy, my only trading philosophy is that I firmly believe the trading techniques I mentioned above would actually work!"


Apparently there has been this disturbing trend ever since the introduction of retail trading, whether it's deliberate misinformation and miseducation campaign or people just fall into the trap of their own greediness for a rapid windfall gain and couldn't care less, most part of the education efforts have been spent on the utilization of indicators, the old and useless criterion selection/conditional order processing gags. Almost every new traders to the market have this belief that there must be some kind of magical combination out of those indicators to generate 100% profitability, a system that never fails. Pick a random forex education book and you will definitely see most pages are spent on using indicators or the leading up to it, people are so obsessed with all kinds of systems that they want to get their hands on every single one of them, regardless of whether you have to pay big money for it or just simply hunted it down for free, like how people would swarm the "trading system" section here and hope for a jackpot. For better or for worse, the handy invention of "Demo Trading" and free charting software fueled this unhealthy trend with ferocity, because people finally get a chance for themselves to play with their own combination. It reminds me of people who sell their Roulette betting systems for a big change over the internet, playing around with different indicators is just like this, you will go completely broke if you follow a specific betting arrangement, when number zero occurred 23 times in a row or the second dozen doesn't occur 44 time in a row, that's means you are in deep trouble.


From time to time they have been new systems coming on the stage with various slogans, some of them did dazzle everyone for a while due to their alleged accuracy and seemingly impressive live trading result. They've been running so good consistently for a while until suddenly collapsed one day in spectacular fashion, and to console the lost and the broke, the "system designer" would tell you that the system just needs one extra indicator to get patched for the "confirmation issue" or whatever, and then two months later it needs another indicator to pile on top, and another soon after, so on and so forth. Eventually all systems are evolved into this fat blobby freak sitting in your computer, motionless and incompetent, because they all become morbid obese filled with useless indicators; You too, are going nowhere because you put your own money at stake and choose to ignore the obvious. Is this a social skill problem or intrinsic human learning problem? Is cause and causation really that hard to recognize? I am truly bewildered......


All of those forex book, tutorials, mentoring program, trading systems are basically you-know-what, they strip-dance around the real problem to capitalise on your eyeballs, but very few of them actually tackle the real problem in depth, "yeah just look, Sir, don't touch". They all have an "education" tag them, but do they really teach you anything useful??? How many of them offer you enlightenment and insight to everything??? When was the last time you picked up a forex book and all 471 pages of it is entirely contributed to things like market structure, fundamental force and what I think the most important element: quantitative method???


Pfff.....I am off to play the Aussie Millions for two weeks, starting from tonight. I am sure I can learn more about trading on poker tables, period.


To be continued......

Hi Sophos,

Very interesting thread and way of thinking about the market. Sounds like you have developed a very sound understanding of the primary market drivers. I have been trying to do that for the last year but am still having trouble gauging the change in market perceptions/expectations in time. I like your examination of the market structure and I understand the concepts but I have a couple of questions in regard to your algorithm (which I am trying to replicate but I think it will take a while..!):

1. You said that all data comes from MetaTrader and Dealbook but you imply that the algorithm uses predominantly fundamental market data in the calculations. I thought you could only access technical data (price action) through these platforms so is there a lot of manual input into the model?
2. You mention the candle timer but don't explain it in detail. Is this the time to the next significant event or the time since the last equilibrium point?
3. How do you identify the start and end of the 'trade-relevant' time interval? Since there are important data releases nearly every day, and often more than 1 per day, how do you define an event, or combination of events, that is significant enough to start a new time interval?
4. How do you incorporate events that are not in the form of data releases like the european bond auctions this week? The expectations of successful auctions at lower yields clearly drove the EUR up this week but there is no quantative data to use as an input in this case (unless you have devised a way to model that)?
5. You mention that you have applied a nash equilibrium type model. How did you decide on the number of strategies for each player and the correct payoffs for each strategy?

Thanks in advance for your answers and for starting this thread, it is definately the most interesting on FF and I look forward to seeing it evolve and learning more.

For those of you who's been holding EUR/JPY or other EUR crosses since here: http://www.forexfactory.com/showpost...2&postcount=81

Beware! It seems like the bond auction in Europe is doing very well right now, but we have to take into account the fact that many of them are internal bank purchases, the Chinese and Japanese purchases are most likely short-term focused like 5-years, we havn't seen any evidences that they bought much 10-year + maturity. These peripherals' ability to pay coupons in due time is still in doubt. So in short the debt crisis is pretty much full on, it all depends on when and how these peripherals bring them debt/GDP ratio to the ECB requirement, otherwise EUR is still under tremendous pressure.

I can almost smell the next equilibrium point near by......Don't smoke, drink less, regular exercise, keep a sensitive nose.

Hello Sophos,

i am also trying to build a quant system similar to yours. I also have the same questions regarding how to plug in the fundamentals.
can you show us an example of one trade?
I follow mainly macro news from CAD,AUD,USA,NZD,GER,UK
Can you tell me where I can read about how to build a system similar to yours?
My skype id is juangecko
Best regards

Juan

Many basic things that a lot of forgotten people who pursue this business, ie trading system based on the law of demand and supply.
If someone has decided to choose a career as a trader he should know, that he had chosen a very challenging job but it gives great rewards. And should begin to realize that he was competing not only with fellow retail trader. But more competent is against the Biggest, Brightest, most greedy minds in the world. They are (investment bank / corporate banking / Hedge Fund), we call it big boys have the ability / resources to always be in the market where traders are not powerless aka out of the game.

Basics for beginners is knowing how and why prices are moving. It is therefore important to understand that prices move not only because of other functions as well as a result of the Law of Supply and Demand, not because of anything else. Prices move only and only if this simple calculation becomes unbalanced.


There is an anecdote trader: "I have a bag of stones and that my opponent is that they are who have nuclear weapons in its hands."

BTW I got + 250 pips on EURJPY.
Your method is very accurate,
keep sharing my friend .

Well a new week is about to kick off, but I'd still like to catch up to do a weekend review and show something very interesting to all of you.

On 6th of Jan around 10:50am AEST, the calculation had indicated that an upward equilibrium cross was formed at 0.999 for AUD/USD, thus a long position should be entered at 0.999. This is the original post on that day: (http://www.forexfactory.com/showpost...0&postcount=49)

This is what had happened since the 6th of Jan:



It didn't go up as the upward equilibrium cross would suggest, quite contrarily it went down the opposite way for 4 more days from the equilibrium point. The reason for this is that the market had experienced an "information shock": when the land area the size of Germany and France combined and the third largest city of a major country went under flood water, the market would go into a temporary shock and overreact for a short period of time to reflect national disaster like this. However as I suggested in the Part Two in the framework that all "information shock" events on such a scale are temporary in nature and incapable of deterring the market in the long run, the market must respect the previous equilibrium point at 0.999 because a definitive demand/supply relationship was formed at the price, any subsequent adverse price movement away from it will cause immediate imbalance, and the collective market force will attempt to correct this problem in due time. As we can see on the chart, till the 13th of Jan, the natural market force has corrected this "information shock" over a week's time and closed back again at exactly 0.999 where a downward equilibrium point was formed, hence the previous long position was closed and resulted a break even, which is a very rare event that I only encountered twice before.

Make a note of this level 0.999, pull out your monthly AUD/USD chart and have a good look at how 0.999 was reached for the first time last year, and think very hard about why the market was determined to reach back to 0.999 from the adverse price movement against the equilibrium point...... For traders who don't possess tools for quantitative analysis, it's vital to record and remember these pivotal levels by hand and by heart, because it holds important clues to future market event. Logically when AUD/USD is closed above 0.999 again next time, it will be a very comfortable level to build long positions.

God bless those flood victims

I just read your thread and wanted to thank you for the valueable information. I have search for over a year trying to find information relating to Shi Channels. Your thread provided valueable information.

I use the 240 min(4 hour) crossed with a 60 min , 1440 min (daily) and 10080 min for weekly and you provided the info to explain the crosses so please continue with your good work.
Thanks again

Hi there! Do you have a particular framework in mind that you want to work on, what is your approach to the price action quantification?

Great thanks to one of the most knowledgeable and experienced trader on the forum, Mr. ezcurrency: http://www.forexfactory.com/ezcurrency. He's done a wonderful analysis job on the Secondary Confirmation view for this week and nice fundamental ideas, I want to share his view with all of you.

Thanks Sophos ... I'll continue to post (daily if I can) market analysis and if I see any strong trade signals.

As for the USD, I forgot to mention this also came out last Friday:

Moody’s says the U.S. could be placed on negative outlook if a plan to stabilize the debt doesn’t materialize. "We have become increasingly clear about the fact that if there are not off-setting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase, “

I think between this and the President of China's comments ... severely will inhibit any USD bulls. If I was holding USD long, I would sell ... if neutral, I'd short the USD.

I was neutral (acutally slightly bearish) on the USD before this came out, now I'm a raging bear! Over the past 24 hrs, I've been shorting the USD against many pairs, and have multiple positions open against the USD on many pairs (long EURUSD, GBPUSD, AUDUSD, NZDUSD, short USDCAD, USDCHF). Those positions alone are about 20% of my margin (100:1 at my broker) ... if the USDX decisively breaks 79, I'll double all positions. Some SL are at b/e already on many positions. Nice profits so far ... but I think the USD will be taken out to the shed this week.

Also, AUDNZD heading up ... a few longs in that as well.

Regards,
EZCurrency

Hey Sophos and Mr. ezcurrency,
great work you guys!

I took a look at possible divergences (for confirmation purposes) on AUDUSD, AUDNZD, USDX, EURJPY and EURCAD. The only pair with notable divergence was AUDNZD with a visible divergence on H4 and D1. The tool used to detect divergence is CI (Composite Index) from the medici thread; the tool used is very similar to Bollinger % Indicator. It seems like AUDNZD divergence is beginning to take off on the H4. There was a small divergence on USDX, but that has already manifested itself in a move and the price is now hanging around the upper Bollinger band. Charts for AUDNZD included below.

Hello Sophos,

My framework will be divided in three sections 1)fundamentals 2)sentiment 3) technicals.

1) Fundamentals: I would focus in higher or lower than expected economic indicators for each country. For example today market was expecting a 3.4% YoY CPI from the UK and came at 3.7% YoY. Now traders will give more chances for a rate hike during this year. Just to remind you the UK government target is 2% YoY. Some might say" Unemployment hurts much more than inflation" and others "Fuelling inflation with a VAT hike will hit workers in their wage packets and shoppin receipts". With this in mind I think the BOE will have to show that they can control inflation and analysts will start to discount a possible rate hike after this report and this will get the pound stronger. Why? a. carry trading GY b. Interest rate differential between USD/EUR/CHF etc. Bottom line this effect is what drives short term movements (inflows and outflows). Longer mid term: trade balance and capital inflows/ouflows (for example Intel buying Vodaphone if in cash demand for GBP will go up ) as well.

2) Sentiment: There are several events that affect sentiment. a) Politics b) natural disasters (as happened in Australia) c) Terrorism d) Subprime crisis, etc. This events effects can spread out or affect psychologically other economies. The sentiment has usually a macro effect that cannot be easy quantified and can affect the currency mid or longer term . For example a drought in the US can affect negatively GDP-> Lower interest rates -> less demand for dollars.

3)Technical analysis: As Sophos mentioned in this forum Technicals by it's own is like betting...it doesn't mean that you cannot make money but usually this systems are curve fitted and they blow up when market changes. Also Elliot wave and other astrological stuff is very subjective.
If fundamentals give the ok to go long probably an indicator might help you to fine tune the entry.

My summary is done but now, how do I plug in this thoughts into a trading algo system?
I am economist and I have access to bloomberg and other stuff that might help but I have never done a price action quantification or built a algo system.
If you can show me the way/ explain with examples we could discuss openly in the forum and any member could participate in this project.
Best regards

Juangecko

http://www.filefactory.com/file/b50g...n_18,_2011.pdf

Overall nice fall in the USD yesterday! A couple of nice trade setups that are low risk IMO. Also very low risk is to short the USD against other currencies.

Regards,
EZ

Edit: I just checked that link ... its a pain to download! I'll see if I can post text and .jpg next time ... much easier to read!

Hi there! I would like to point out the feasibility of your framework. Firstly, it's very difficult if not possible at all to model "sentiments"/"psychological effect" and incorporated them into algorithms, things like geopolitical event or natural disaster occur relatively infrequently and only have temporary effect on currency valuations, they are out of control and have no definitive time correlation. I can't think of a better way to quantify those factors into algorithms and operate on real-time calculation. Secondly, it's very difficult and less relevant(imo) to model mid term or long term economic expectations, e.g if you are building basic signal operation like I did, it's almost impossible to extrapolate long term out of tentative market input signal, also factor like CPI or interest differential are definitely constant perimeters in the algorithm, because they stay constant for a long time. Thirdly, it's very difficult to model cross market correlations and events, e.g. Intel buying Vodaphone if in cash demand for GBP will go up or exporters winding down their positions at month end. It's interesting that you raised this point, I might have to looking into the effect and see what I can come up with, but at the moment I don't have the slightest clue whatsoever.
Anyway feel free to PM me and I'll see if I can help anything with your own framework and math.


Thank ez, really appreciate your great work!!! You can just make a screenshot of you text like I did yesterday, then upload them in your post.

AUD/USD has finally breached its critical level:

http://forexmarketequilibriumreport....evel-0999.html


Posting live from Crown Casino Poker Room. Just saw this beautiful girl Lynn Gilmartin doing her reporting job behind me, wow.



http://i.ytimg.com/vi/hb2tVSvZUFw/0.jpg

I thought it would be nice to actually do some down to earth technical analysis once a while, so here is my take on the GBP crosses using Secondary Confirmation views:

http://forexmarketequilibriumreport....-views-on.html

Please use your own judgment and discretion for live trading.

GBP has good fundamental data ... I'd be wary of shorting here. Its due to consolidate or pullback slightly after this run. It is a bit overdone though ... but due for a pause or small pullback. I'd be wary of anticipating the signal from the secondary indicators ... best to wait till one forms.

Sophos: can you take a look at EURCAD 4 hr chart with the secondary indicators? I think a signal is forming for it to short. There was almost a signal a couple of days ago, but this one looks solid. Overall its in a downtrend on weekly ... so if retests lows can be good for a few hundred pips.

Regards,
EZ

Hi ez:

EUR/CAD: 8:50am, 20/01/2011, AEST(GMT10+)

Looking from the secondary confirmation view, TNS Fisher/AO are about to converge at their maximum indicating a reversal. Safely short when 1.336 is breached.