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Thinking Outside the Box!?!

  • #381
  • May 28, 2011 9:01am May 28, 2011 9:01am
Quoting Custos
Technical analysis can definitely indicate the sentiments in the market. But I agree that a fundamental understanding is also not too bad to have a higher win-rate.
Hmmm. Let me see if I can put it this way.

Attached Image


If I presented this chart to you without without indicating what instrument it was, nor the price scale, can you tell me what the sentiment is? Furthermore can you isolate based on this chart, changes in sentiment? I won't even bother asking if you can do the above in real time as the bars unfold tick by tick, because given a strong upmove, by relying on the chart alone, you have no idea whether it's due to strength of the quote currency, weakness of the base currency, or even none of the above.

Now if I told you on the spot, without looking at a chart, what the sentiment of EUR/USD was over the same time period, would it be possible to do that? Is it farfetched to posit that one could possibly make a rough mental map of the above chart if they were aware of the instances where sentiment changed? But that would assume you have a knowledge of how to guage sentiment. Nobody's going to code you an EA, indicator, or write a book to provide you with that knowledge. It has to be personally developed, but when it is, it becomes a powerful tool.

I dislike making analogies, but here goes nothing.

My Physics is really rusty, but in signal processing, when a signal is being transferred, it goes from Digital to Analogue, and when transferred, the Analogue is converted back to Digital to recover it. This is done so that information can be transferred compactly and efficiently.

However, the nuances and particular subtle characteristics of the Digital data - its quality - is compromised, as it's slight deviations are made to rigidly conform to a bit code such as 1s and 0s even if the values are things like 1.63, 1.45 etc. When Digital is converted to Analogue, information is lost.

Converting the Analgoue back to Digital reprodues the original signal, but instead of it being smooth, it is jagged as information has been lost in the conversion process. Below the digital signal is the smoother, grey curve, while the reproduced result of transferring it from digital to analogue and back is the jagged, red curve.

Attached Image


The point I'm driving at here, is in the above example, if we model the human expectations and sentiments as the smooth grey curve, and try to transfer this information to a chart, we can get something similar to the red curve. Also note how it's possible for price and sentiment to diverge from each other. If I were to use any indicator at all in my trading for Overbought/Oversold, it would not be Stochastic 8,3,3, it would be this discretionary concept.

Going from the sentiment and expectations, we can roughly generate the chart. But going from the chart the other way, the precious, previous sentimal and expectational information is lost. In the extreme case, one can exclusively use a chart, and be oblivious of what's happening in the EuroZone, but by being cogniscant of what's happening, you'd be hardpressed to not have an idea of what price is doing. When you realize that the relationship is like a one-way valve, it becomes immediately clear which form of information has more utility compared to the other. Digital trumps analogue for most things.

Pains must be taken to express that I don't want it to come across as me saying that charts and Technical Analysis are useless. For some things, they are. Furthermore, a common point of misconception is that I'm talking about Fundamental Analysis. I'm not. I'm circumventing all that and going straight to what motivates others to take the trades that produce the resulting Price Action on your screen before the fact. For me, this embodies thinking out of the box.

I realize trying to convey points of view across a forum is not only time-consuming, but ultimately frustrating for both parties involved. It is challenging to reconcile information from points of view which differ from your philosophies - even I am a victim to it as well. Maybe I should just spend more time in my Journal...

Regards,
xXTrizzleXx
  • #382
  • May 28, 2011 9:24am May 28, 2011 9:24am
you and jettrader are fascinating.
Congratulations ScalaFX for coming out of the closet!
  • #383
  • May 28, 2011 9:29am May 28, 2011 9:29am
Quoting xXTrizzleXx
My Physics is really rusty, but in signal processing, when a signal is being transferred, it goes from Digital to Analogue, and when transferred, the Analogue is converted back to Digital to recover it. This is done so that information can be transferred compactly and efficiently.

However, the nuances and particular subtle characteristics of the Digital data - its quality - is compromised, as it's slight deviations are made to rigidly conform to a bit code such as 1s and 0s even if the values are things like 1.63, 1.45 etc. [u]When Digital is converted...
It doesn't work quite like that. Yes, information is lost, but only information BELOW your required precision (number of bits). And the "jagged" signal is identical to the original "smooth" signal from a mathematical point of view ABOVE the required precision. So the only loss is of the information you don't really care about (in audio for example, the loss is at levels you couldn't possible hear for 24 bit audio).

BTW, when you transfer a signal form one point to another, if the signal is already digital, there is no need to convert it to analog and back. Just transfer it in the digital realm. The fact that transmission could eventually make it to a analog domain (physical Ethernet line) doesn't matter. That line is error-corrected and all analog domain errors are recovered.
  • #384
  • May 28, 2011 9:35am May 28, 2011 9:35am
Quoting xXTrizzleXx
Hmmm. Let me see if I can put it this way.

Attachment

If I presented this chart to you without without indicating what instrument it was, nor the price scale, can you tell me what the sentiment is? Furthermore can you isolate based on this chart, changes in sentiment? I won't even bother asking if you can do the above in real time as the bars unfold tick by tick, because given a strong upmove, by relying on the chart alone, you have no idea whether it's due to strength of the quote currency, weakness of the base currency, or even...
unfortunately I recognize that chart as being the eur/usd h4 chart. But I personally still think changes in sentiment can be seen from price alone. You obviously cannot always locate changes in sentiment, but some of the time it is possible.
Now if the change in sentiment is just a trap or a real change in sentiment is the hard thing to do using a price chart alone. That is also why I use fundamentals, to determine if the change in sentiment is justified.
I personally can't understand your argument of sentiment deviating from price at times. Price right now shows the sentiment of traders right now.
Interesting how you say that you use something else than fundamental analysis for seeing sentiment. Do you mind going into detail with that, like an example? I understand if you wanna keep it private.
  • #385
  • Edited 10:20am May 28, 2011 9:54am | Edited 10:20am
Utilitarian money doesn't care about sentiment. If utilitarian money is pushing the market at a given time price is NOT informative.

Here's an example of uninformed prices and informed prices.

A couple days ago in the EUR/USD some irrelevant Chinese news came out and the news was used as an excuse for dealers to push price into some stops. The move was faded once the market realized it had no reason to be where it was.

The same stop gunning occurred in the AUD/USD. BUT excellent capex data came out after the gunning so support held. The stop gunning by dealers wasn't informative trading. They just needed to knock some stops out.
Cautiously optimistic. . .
  • #386
  • May 28, 2011 9:59am May 28, 2011 9:59am
Quoting Tact1cal
Utilitarian money doesn't care about sentiment. If utilitarian money is pushing the market at a given time price is NOT informative.
never heard the expression utilitarian money. Would you care to explain what you mean by that?
  • #387
  • May 28, 2011 10:03am May 28, 2011 10:03am
Quoting Adal
It doesn't work quite like that. Yes, information is lost, but only information BELOW your required precision (number of bits). And the "jagged" signal is identical to the original "smooth" signal from a mathematical point of view ABOVE the required precision. So the only loss is of the information you don't really care about (in audio for example, the loss is at levels you couldn't possible hear for 24 bit audio).
Like I said, my Physics is very rusty! Sure the jagged signal is identical to the smooth signal mathematically based on your precision requirements. But in all practicality, information is lost.

The point I was getting at here is that this lost information sometimes actually has value, and in the process of mapping expectations/sentiment to price movements, some of it is lost. Unlike sub-auditory frequencies, this information does have its merits.

Quote
BTW, when you transfer a signal form one point to another, if the signal is already digital, there is no need to convert it to analog and back. Just transfer it in the digital realm. The fact that transmission could eventually make it to a analog domain (physical Ethernet line) doesn't matter. That line is error-corrected and all analog domain errors are recovered.
In the case of remaining in the digital realm, sure this is a possibility, but there would be very minimal loss of information; near-perfect replication both mathematically and practically. The point I was making with the analogy was that the charts are incomplete in that information is lost, and crossing the digital/analogue domains seemed like a good analogy to demonstrate this. Now I'm wondering whether the analogy as I wrote it is unclear...oh analogies...

Stepping out of the definitions, can you at least see what I'm getting at? Thanks for the clarification though. :nerd:I wonder what your profession is...

Quoting Custos
unfortunately I recognize that chart as being the eur/usd h4 chart. But I personally still think changes in sentiment can be seen from price alone. You obviously cannot always locate changes in sentiment, but some of the time it is possible.
Now if the change in sentiment is just a trap or a real change in sentiment is the hard thing to do using a price chart alone. That is also why I use fundamentals, to determine if the change in sentiment is justified.
If you can see them from price alone and it works for you, don't fix it (seriously). I just found it to be an inaccurate way of determining them, because my logic was that changes in sentiment would motivate participants to trade, and this would produce a change in price, and not the other way around. Speculative participants that command size on the markets won't buy just because price moved up, or moved down. With a fundamental (not as in Fundamental Analysis) reason as to why the instrument should be valued higher or lower, they then go on to trade their expectations of the market, which produces the price movement.

In doing so, their collective buying or selling will produce the sustained movements for a given period of time, gradually bringing the instrument to what consensus thinks is a fair value. I was of the opinion that because I don't know where this fair value is, only that it becomes more apparent as time progresses and things play out, then the lowest risk place to enter, would be at the start of the move. This is why I find instances where there is a change in sentiment/expectation to be so critical. Sure it won't happen every day, but when they do, as a fellow trader told me, the trade is won before it is placed. That expression was a very pivotal one for me.

Quote
I personally can't understand your argument of sentiment deviating from price at times. Price right now shows the sentiment of traders right now.
Interesting how you say that you use something else than fundamental analysis for seeing sentiment. Do you mind going into detail with that, like an example? I understand if you wanna keep it private.
I'd like to elaborate but my exam committments don't make that possible..I've spent three hours already trying to put my thoughts here, and this has eaten greatly into my day. Perhaps we can continue when they're done? Or you can ask Tact1cal, I think he has a fair idea of what I'm trying to get at.

Regards,
xXTrizzleXx
  • #388
  • May 28, 2011 10:11am May 28, 2011 10:11am
Quoting nubcake
you and jettrader are fascinating.
I agree with half of your statement. The guy is definitely an interesting character. I'll pick his brain for all its worth.
  • #389
  • May 28, 2011 10:20am May 28, 2011 10:20am
Quoting xXTrizzleXx
Like I said, my Physics is very rusty! Sure the jagged signal is identical to the smooth signal mathematically based on your precision requirements. But in all practicality, information is lost.

The point I was getting at here is that this lost information sometimes actually has value, and in the process of mapping expectations/sentiment to price movements, some of it is lost. Unlike sub-auditory frequencies, this information does have its merits.

In the case of remaining in the digital realm, sure this is a possibility,...
Well, I'm a computer programmer which actually worked on audio software . So I have a good understanding of this whole analog->digital->analog thingy.

I was just pointing out that you only lose what you don't really care about. If you would care, you would just increase the number of bits until what you lose is below your threshold of interest. To put this into charting terms, is as if you lost one 10th of a pixel of the height of each candle on the chart representation. Do you really care? You can't even see that change.

I understand what you are trying to say. I also believe it's not possible to judge sentiment strictly by looking at a chart. And I also go the great trouble to collect and analyze sentiment data, as I believe there is a true edge here.

I think that your analogy went wrong because from many points of view (especially theoretical) there is no difference between an analog signal and a digitization of that signal, but there is a world of difference between a price chart and a sentiment chart.
  • #390
  • May 28, 2011 10:21am May 28, 2011 10:21am
Quoting xXTrizzleXx
If you can see them from price alone and it works for you, don't fix it...
Exactly, professionals don't buy because price is moving up or down. Totally agree with that. They have definitely other reasons to do that, like unexpected news or whatever.
That is why I think sentiment changes based on price is far from enough. It is also important to find a reason for that sentiment change, which I get from my fundamental analysis.
  • #391
  • May 28, 2011 10:24am May 28, 2011 10:24am
of course in the digital realm all transfer of information stays as digital. an audio file, however, when listened to is then an analogue signal. down sampling obviously occurs anytime you try to map an analogue signal. even an analogue signal like noise mapped to what is considered an analogue destination such as a LP record clearly loses precision... just listen to the playback to know it's obvious.

that's not even taking into consideration further compression in media such as mp3's which are compressing audio into mathematically descriptive samples instead of a stepping sampling period. the same with a jpg versus looking at something with your own eyes.

the outputs are under normal circumstances acceptable. unless sampled or converted poorly, of course.

but take this as food for thought... if sampling a noisy environment and a faint voice is in the background, and then this entire sound is digitized and then further compressed descriptively into an mp3 format the chances of recreating that faint background voice is diminished depending on the original digital source and then the specific format the sample is compressed to.

look at a bmp versus a lossy jpeg. it's easy to have some minor aspect in the already digital bmp get lost when converted to lossy jpeg.

just on a sidenote : i once wrote a program that embeds data into a bmp image, that is, the image data itself. very amateur cryptography type of deal. very basic and was just an experiment of mine. what appears as 'noise' in the bmp image is in fact small deviations on a key image, and this noise can be reconstituted into a separate file. e.g. you could embed a txt or zip file into a bmp image and without knowing that this has been done you would never ever know that the slightly grainy image you are looking at is in fact a picture with data embedded into the colours.

i thought this might be kind of relevant to the discussion. anyways.
Congratulations ScalaFX for coming out of the closet!
  • #392
  • Edited 11:21am May 28, 2011 10:37am | Edited 11:21am
Quote
never heard the expression utilitarian money. Would you care to explain what you mean by that?
The example I gave in my previous post I can't call pure utilitarian trading. I don't know what the dealers intentions were when they ran price up. Dealers engage in utilitarian and speculative trading. An example of pure utilitarian trading would be GE needing to exchange 500mln US Dollars for Chinese yuan to pay some factory workers. Or a global investment portfolio that needs to be reallocated to foreign assets. They need to exchange currencies.

In a nutshell it is trading when the primary goal isn't to make money but to use the exchange simply as a TOOL to get what they need done. They can have a significant impact on price.

http://en.wikipedia.org/wiki/Foreign...t_participants
It's easy to see from that list that not everyone is here to speculate.
Cautiously optimistic. . .
  • #393
  • May 28, 2011 10:47am May 28, 2011 10:47am
Before I go, I find there's some good information contained in this clip of Million Dollar Traders. Just for what its worth.

Inserted Video


Regards,
xXTrizzleXx
  • #394
  • May 28, 2011 11:20am May 28, 2011 11:20am
Quoting Tact1cal
The example I gave in my previous post isn't pure utilitarian trading. An example of pure utilitarian trading would be GE needing to exchange 500mln US Dollars for Chinese yuan to pay some factory workers. Or a global investment portfolio that needs to be reallocated to foreign assets. They need to exchange currencies.

In a nutshell it is trading when the primary goal isn't to make money but to use the exchange simply as a TOOL to get what they need done. They can have a significant impact on price

http://en.wikipedia.org/wiki/Foreign...t_participants
It's...
But less than 2% of volume is for commercial purposes like in your GE example (Oanda source). That's even less than the retail volume.

If I remember correctly they are one source of the fundamental trends (import-export trade flows).

I don't find this useful from a retail point of view. You don't have access to these flows, and in the short term the 98% which is speculative is more important.
  • #395
  • May 28, 2011 11:34am May 28, 2011 11:34am
Adal you have to remember that the reason dealers and hedge funds make up such a significant amount of turnover is because of LEVERAGE.

If a 500 mln order dollar needs to go through the exchange it IS going to have an impact of price. How do you think the dealer for that order is going to fill it cheaply?

When a surprise lopsided market fix hits the market and the interbank is about to be caught on the other side of a 5 billion dollar order what do you think they do?

I'll admit the information isn't always clear but don't tell me you can't take advantage of them.
Cautiously optimistic. . .
  • #396
  • May 28, 2011 11:40am May 28, 2011 11:40am
Quoting Tact1cal
Adal you have to remember that the reason dealers and hedge funds make up such a significant amount of turnover is because of LEVERAGE.

If a 500 mln order dollar needs to go through the exchange it IS going to have an impact of price. How do you think the dealer for that order is going to fill it cheaply?

When a surprise lopsided market fix hits the market and the interbank is about to be caught on the other side of a 5 billion dollar order what do you think they do?

I'll admit the information isn't always clear but don't tell me you can't take...
But take advantage of what? When you see a move, how do you know if it's triggered by a large commercial order or a large speculative order? Besides, commercial aren't stupid. They won't dump a 500 mln order in one piece on the market (or theirs dealer). Maybe you could explain how as a retail you can take advantage of such an order and how you detect it.
  • #397
  • May 28, 2011 12:07pm May 28, 2011 12:07pm
Quoting xXTrizzleXx
Hmmm. Let me see if I can put it this way.

Attachment

If I presented this chart to you without without indicating what instrument it was, nor the price scale, can you tell me what the sentiment is? Furthermore can you isolate based on this chart, changes in sentiment? I won't even bother asking if you can do the above in real time as the bars unfold tick by tick, because given a strong upmove, by relying on the chart alone, you have no idea whether it's due to strength of the quote currency, weakness of the base currency, or even...
The fact remains if you can read pure naked charts across multiple time fames then you actually have very little to worry about.

If the weekly chart tells me it is going north and I am trading the daily or h4 I couldn't care less about most news items. Disasters are what we have emergency stops for, interest rates etc are generally priced in long before you or I hear about them anyway.

Keep it simple.
  • #398
  • Edited 12:38pm May 28, 2011 12:08pm | Edited 12:38pm
Quote
But take advantage of what? When you see a move, how do you know if it's triggered by a large commercial order or a large speculative order? Besides, commercial aren't stupid. They won't dump a 500 mln order in one piece on the market (or theirs dealer). Maybe you could explain how as a retail you can take advantage of such an order and how you detect it.
Here's a general example. A bank needs sell 2 billion on the london market fix. Market sentiment is flat. They they were not expecting the order. This does happen. I don't need to know why it's happening or the moment it happens. I do know it won't be a secret for long though. If the bank wants to get out of this without taking 2bln dollars of exposure they fill the order prior to the fix. Price shoots down. Open interest is obliterated. The order is completed at the fix. They made some money. Good job boys mission accomplished. Those in know coat tail their order and take profit at the fix. What is left after all this? Nothing! Banks and speculators just dumped all their money into the fix. Buy side interest was completely eaten by the bank.

The fix has played itself out. I don't care about the fix anymore. But I am a speculator and I do care about the news. It's due out in 1 hour. Price consolidates at it's new low. Lack of interest prior to the news means no one was placing limit orders. News comes out. Good news! Market participants start buying into absolutely no open interest. Price shoots up until it hits some limit orders to stop it.

Edit: Awesome video Trizzle. I need to watch that.
Cautiously optimistic. . .
  • #399
  • May 28, 2011 12:50pm May 28, 2011 12:50pm
Quoting Tact1cal
Here's a general example. A bank needs sell 2 billion on the london market fix. Market sentiment is flat. They they were not expecting the order. This does happen. I don't need to know why it's happening or the moment it happens. I do know it won't be a secret for long though. If the bank wants to get out of this without taking 2bln dollars of exposure they fill the order prior to the fix. Price shoots down. Open interest is obliterated. The order is completed at the fix. They made some money. Good job boys mission accomplished. Those in know coat...
nice outside the box thinking tact1cal... thats just one way to take advantage of it.

for further info on fixes, check out forexlive, here's one: a-quick-primer-on-fixings
  • #400
  • May 28, 2011 12:56pm May 28, 2011 12:56pm
Quote
thats just one way to take advantage of it.

Indeed
Cautiously optimistic. . .
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