Myth busted: FOREX doesn't have directional bias | Forex Factory

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Myth busted: FOREX doesn't have directional bias

  • #1
  • First Post: Edited 11:11pm May 31, 2011 10:51pm | Edited 11:11pm
One experienced and successful trader told me that FOREX market is inherently downward biased, in other words “price can fall much quicker and stronger than rise because fear is stronger than greed”. Is it really so?

Question of bias is practical one since if bias does exists then good trading strategy should have different rules for going short and going long.

In the attached paper I use tick data on USD/CAD (01/2004-12/2010) to prove that FOREX doesn’t have any directional bias, at least on the micro level.
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File Type: doc FOREX_is_NOT_biased.doc   195 KB | 992 downloads
  • #2
  • May 31, 2011 11:37pm May 31, 2011 11:37pm
I would say bias is subjective perception of any given value & market is full of it. The problem is we just need to figure out which point "gather" most market participant interest. In that case we need to look outside the chart & outside of statistical mind and start to understands that market is inefficient, driven with any different expectation. For example with eur/usd, one side will see US debt crisis is worst so they decide to have bullish bias, in the other side there will be people seeing eurozone crisis is worst so they will have bearish bias.
  • #3
  • May 31, 2011 11:57pm May 31, 2011 11:57pm
Quoting cash_machine
One experienced and successful trader told me that FOREX market is inherently downward biased, in other words “price can fall much quicker and stronger than rise because fear is stronger than greed”. Is it really so?.
Maybe your friend isn't as experienced as he claims, or maybe you misunderstood him. While this may be true for stock and commodity markets, in Forex you are dealing with pairs of currencies. One pair's down is another pair's up. Now, if you look at individual currencies, such as CAD isolated (via basket of currencies) it may fall faster than rise, but USD/CAD will have no such effect because when it's going down it means the CAD is going up.

Great research in the attachment, nice to see a serious empirical approach.
  • #4
  • Jun 2, 2011 12:01am Jun 2, 2011 12:01am
Quoting Assassin
For example with eur/usd, one side will see US debt crisis is worst so they decide to have bullish bias, in the other side there will be people seeing eurozone crisis is worst so they will have bearish bias.
You are talking about different "bias". When people "see US debt crisis is worst so they decide to have bullish bias" this is temporary bias. It is essentially same as temporary "crowd mood". I am talking about different "bias", fundamental and inherent.
  • #5
  • Jun 2, 2011 5:29am Jun 2, 2011 5:29am
Quoting cash_machine
One experienced and successful trader told me that FOREX market is inherently downward biased, in other words “price can fall much quicker and stronger than rise because fear is stronger than greed”. Is it really so?

Question of bias is practical one since if bias does exists then good trading strategy should have different rules for going short and going long.

[font=Times New Roman][font=Times New Roman][size=3]In the...
Why don't you try AUDJPY?
  • #6
  • Jun 2, 2011 5:58am Jun 2, 2011 5:58am
Cash,

Very interesting article

Could you give your exact definition of what you call a trend?
  • #7
  • Jun 2, 2011 1:03pm Jun 2, 2011 1:03pm
Quoting seagreen
Why don't you try AUDJPY?
Because this is an exercise in futility. The AUDJPY over any specific time period may well have had more and stronger downward moves than upward, but seeing as these are currency pairs as Goat pointed out, the JPYAUD has the same exact inverse moves. Or, in other words, would be rising faster than falling.

That being said, this is definitely not the first time I've seen this quote, "price can fall much quicker and stronger than rise because fear is stronger than greed". It seems to be one of those vague market adages that gets tossed about. I could definitely see it being true for stocks, it does kind of make sense intuitively. I haven't seen any research proving it true or false either way, though.
  • #8
  • Jun 2, 2011 3:07pm Jun 2, 2011 3:07pm
Quoting cash_machine
One experienced and successful trader told me that FOREX market is inherently downward biased, in other words “price can fall much quicker and stronger than rise because fear is stronger than greed”. Is it really so?
You are confusing bias with structure.

The Stock market is biased to the upside. Rules prohibit selling on a down-tick yet you can buy on an up-tick for example.

But it is true that "the market (any) takes the stairs up and the elevator down."

" A market moves up, not necessarily because there is more buying than selling, but because there are no substantial bouts of selling (profit-taking) to stop the up-move. Major buying (demand) has already taken place at a lower price during the accumulation phase. Until substantial selling starts to take place, the trend of the market will still be up.

A bear market takes place, not because there is necessarily more selling than buying, but because there is insufficient buying (support) from the major players to stop the down-move. Selling has already taken place during the distribution phase at a higher price level and until you see buying coming into the market, the market will remain bearish. There is little or no support in a bear market (buying), so prices fall. Herein lies the reason why markets fall much faster than they rise." Tom Williams, Master the Markets, p 72.
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #9
  • Jun 2, 2011 6:04pm Jun 2, 2011 6:04pm
Quoting smittens4212
Because this is an exercise in futility. The AUDJPY over any specific time period may well have had more and stronger downward moves than upward, but seeing as these are currency pairs as Goat pointed out, the JPYAUD has the same exact inverse moves. Or, in other words, would be rising faster than falling.

That being said, this is definitely not the first time I've seen this quote, "price can fall much quicker and stronger than rise because fear is stronger than greed". It seems to be one of those vague market adages that gets tossed about....
AUDJPY is a carry trade pair and it also correlates with stock market. Both carries and stocks tend to create bubbles that inflate gradually and burst quickly. With inverse pairs like JPYAUD it will be the opposite. So, there is such tendency but I'm not sure it is called directional bias.
  • #10
  • Jun 2, 2011 7:22pm Jun 2, 2011 7:22pm
Quoting Goat
While this may be true for stock and commodity markets, in Forex you are dealing with pairs of currencies. One pair's down is another pair's up. Now, if you look at individual currencies, such as CAD isolated (via basket of currencies) it may fall faster than rise, but USD/CAD will have no such effect because when it's going down it means the CAD is going up.
Well theoretically speaking bias could exist because major pairs are quoted against US dollar which is world reserve currency, and this "reserve currency" status potentially could warrant bias...

So, you are saying you beleive that bias can exist if value of currency measured against basket of other currencies? One way to check it is to perofrm similar analysis on the USD index. Does anybody have tick data on US dollar index?
  • #11
  • Jun 2, 2011 7:34pm Jun 2, 2011 7:34pm
This idea is very simple. Open interest will at times liquidate in large batches depending on what's going on in the market at any given time. When you have a floating profit on a trade and news comes out suggesting for example, a possible change in interest rates is to occur, lots of traders will leave that market all at once and price will fall much more quickly than it rose. Traders want to have as little market impact when they are initiating a position so as to keep their average price favorable to them, but because things can change so quickly they might not have time to average out slowly.

Look at what the silver market has done recently and you'll see this very principle and it's effect.
  • #12
  • Jun 4, 2011 4:23pm Jun 4, 2011 4:23pm
I haven't analysed your findings but I can say this, UC price was significantly lower at the end of 2010 than it was at the start of 2004. This means that there HAS to have been more downward price bias than upward.

That aside, a traders 'rules' for shorting and longing could easily be the same or different and be perfectly valid according to their own trading methodology. The fat that the market goes as much up as it does down is niether here nor there.

I like the effort you've put in to this. Even if I don't quite agree with your findings.
  • #13
  • Jun 4, 2011 6:32pm Jun 4, 2011 6:32pm
Quoting cash_machine
One experienced and successful trader told me that FOREX market is inherently downward biased, in other words “price can fall much quicker and stronger than rise because fear is stronger than greed”. Is it really so?

Question of bias is practical one since if bias does exists then good trading strategy should have different rules for going short and going long.

[font=Times New Roman][font=Times New Roman][size=3]In the...
What is "up" vs "down"? Or long or short? You have to decide for each currency.

In equities "up" is pro-risk and down is against-risk. Fear hits faster than greed, so down fluctuations are sharper.

If you have a pair which has one pro-risk (pro-economic growth) and one anti-risk (safety) currency, then probably "up" (in the direction of risk) is different then against the direction of risk.

Take, for instance, some emerging market vs CHF. This can be quoted as XXX/CHF or CHF/XXX. 'long' vs 'short' doesn't matter technically, what matters is if you are long risk (which usually means on the side of carry trade) or short risk.

Re-analyze currencies that way. So AUD/CHF is pro risk (AUD---commodity currency correlated with chinese economic growth) vs chf (stable reserve backed partially by gold). AUD/CAD probably won't show any bias, both are commodity currency.
  • #14
  • Jun 5, 2011 4:00am Jun 5, 2011 4:00am
Quoting mbkennel
chf (stable reserve backed partially by gold)
it's not backed by gold
  • #15
  • Jun 6, 2011 1:52am Jun 6, 2011 1:52am
Quoting HiddenGap
Herein lies the reason why markets fall much faster than they rise." Tom Williams, Master the Markets, p 72.
This is exactly the central point of this thread: markets DO NOT fall much faster than they rise. Speed of rise and fall is the same.
  • #16
  • Jun 6, 2011 2:23am Jun 6, 2011 2:23am
Quoting cash_machine
In the attached paper I use tick data on USD/CAD (01/2004-12/2010) to prove that FOREX doesn’t have any directional bias, at least on the micro level.
I doubt that this is a big enough sample. Just a glance at a few daily charts with the ATR(14) will show us how, often, prices for the majors fall faster than they rise.

Somebody mentioned JPY/AUD. Where do these people come from?
Gone to a better place
  • #17
  • Jun 6, 2011 2:36am Jun 6, 2011 2:36am
markets fall much faster than they rise - this is quite true for stock market. In forex, as of now, I don't see "markets fall much faster than they rise" or the opposite. i might be wrong.

Quoting HiddenGap
You are confusing bias with structure.

The Stock market is biased to the upside. Rules prohibit selling on a down-tick yet you can buy on an up-tick for example.

But it is true that "the market (any) takes the stairs up and the elevator down."

" A market moves up, not necessarily because there is more buying than selling, but because there are no substantial bouts of selling (profit-taking) to stop the up-move. Major buying (demand) has already taken place at a lower price during the accumulation phase. Until substantial selling...
  • #18
  • Jun 6, 2011 3:01am Jun 6, 2011 3:01am
I have not read through the entire amount of posts and therefore please accept my apologies if I duplicate any contribution here.

The only real 'bias' in FX stems from interest rate differentials. There are of course factors that may have an immediate influence (such as 'surprises' in news releases, especially in the context of prices deviating from their mean) and that have the potential to send one ccy 0.5 to 1% in any given direction.

Overall though, its the interest rates (the differentials) that have the main impact on long term trends, which could be seen as the 'bias'.

regards
daytrading
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  • #19
  • Jun 7, 2011 5:02am Jun 7, 2011 5:02am
Quoting seagreen
AUDJPY is a carry trade pair and it also correlates with stock market. Both carries and stocks tend to create bubbles that inflate gradually and burst quickly. With inverse pairs like JPYAUD it will be the opposite. So, there is such tendency but I'm not sure it is called directional bias.
Personally I don't think bias exists for AUD/JPY either. But I will check it if somebody will give me tick data for this pair.
  • #20
  • Last Post: Jun 10, 2011 1:54am Jun 10, 2011 1:54am
Quoting smikester
I doubt that this is a big enough sample.
I can assure you that 80K extracted microtrends is a statistically significant sample.
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