Musings on the Market

musing "absorbed in thought; meditative".

This is not a trading journal where I will log my trades but but a place where I will share MY thoughts which are subsequently forming my beliefs about the Forex market.

Despite recent events here on the forums, I still feel that FF is a great place for thinking and open-minded people to exchange ideas and learn. This in turn should spark your own thought processes lead to the development of your own trading.

There are a lot of very clever people here on FF and I believe that it is our job to evaluate their ideas for ourselves and come to our own conclusions based on our own experiences.

I believe in being open-minded and listening to what other people have to say and then determining for yourself what value they have. IF you see know value then agree to disagree and move on. What I cannot stand is people on these forums who or dismiss others and then proceed to troll others. Fact is we are not going to agree with everyone on this forum.

I am always willing and open to adjust my view or belief when presented with evidence that I have evaluated for myself and applied my own logic too. At the same time I don't want this thread to turn into a debate but rather an exchange of views by which we all can grow as people and as traders.

Personally I have not made it in trading consistently yet and have had a certain amount of success but I feel I am on the verge of a breakthrough in my understanding of the true nature of these unforgiving markets and developing my own trading system to reflect this. This may switch some of you off but I believe the thoughts I present here are worth taking the time to reflect on and coming to your own understanding or acceptance of what you believe to be true. IF this is what readers of this thread go off and do then I have achieved my goal.

So here are my musings/thoughts/beliefs take it or leave it...

Regards

Neio

Trading on Fundamentals/News is flawed

This is something I truly believe and something I came to the conclusion on quite early on in my trading hence it is something I wanted to cover off quite early on in this thread. I understand that this may upset some people but is what I believe based on my own experiences and I am yet to see anything to disprove otherwise.

My early experience in trading was with stocks/shares of companies based on fundamentals that had some great success initially but ultimately I came to the conclusion that regardless of fundamentals and perceived value the market will often go contrary to this belief.

Fundamentals are very subjective and hard to quantify. What some see as value others see as insignificant. Even if there is an agreement that fundamentals could have an impact on a stock or exchange rate how do you go about quantifying that against all other conflicting fundamentals for the stock and the macro environment? Also not everyone has the same information or insights and may get such at different times. How do you know what has already been priced in.

This is what eventually caused me to look into Forex trading as I was fed up on buying shares on what I perceived as good news for it to go opposite to my belief. I also got fed up of waiting for a bit of volatility and movement in my direction to see the level of gains that I wanted to see. Forex was appealing because of the daily volatility which one could take advantage of and removed some of the limitations of stock trading.

I came to this conclusion based on my own experience but have since built on this by reading views of others. Dow Theory fits with my view http://en.wikipedia.org/wiki/Dow_theory and also EMH http://en.wikipedia.org/wiki/Efficie...ket_hypothesis

I think it is telling, the fact that most of the systems or ideas shared here are founded on technicals and even those that profess to trade on the news are purely reactionary based on how price moves in the lead up or just picking a bias and sticking to it.

Unless anyone can show me a system where for each news item or information they can predict a quantifiable reaction or impact then I will stick firm to my belief.

So in conclusion I believe the market is efficient. That everything we need to know is already reflected in the price.

The markets do not follow normal distribution

Why should we care about this as traders?

To be continued....

The markets are mean reverting

How can this help to develop our trading strategies?

To be continued....

The markets follow natural laws

I believe it is possible to quantify and am starting to see in my own trading system development that certain things are measurable.

Part 1
http://www.forexfactory.com/showthre...35#post7964035

Above our some of the subjects I would like to express my beliefs on. I posted those headlines now so that people can get an idea of what I hope to elaborate on and discuss in this thread. As we all are I am limited by time so will do my best to expand on these once it permits. I will probably make new posts based on these ideas and edit these intro posts with the links.

In the meantime please feel free to drop in and add your own thoughts on my beliefs being raised here....

The markets are mean reverting

The markets do not move up and down in straight lines. The markets move in waves something I would like to expand on in my "market follows natural laws" belief. Even though there are trends the overall market can be viewed as a big range. In a range the mean would be quite obvious but when price trends the mean can be more difficult to identify.

I feel it is important to accept this belief personally because it means I have to be willing to accept that very often the market is not just going to keep on running in my direction. The market will eventually return to previous price levels. At what point in time is does that is the unknown and I don't believe it can be predicted.

This is a thread that helped to shape my current thinking. http://www.forexfactory.com/showthread.php?t=434603. Now that thread did not end well and a few people questioned the value of the ideas presented. My argument is that people see value in different things. One thing I learned from this thread is that markets are highly recurrent. By this I mean that price often revists the same price level again within a certain period of time. Very few prices on the chart are fully transient. I know this is not necessarily showing mean reversion but what it does show is that price very rarely just runs away and very often it will revist previous levels. All of which has developed my trading. Attached is a picture of GU on m5 time frame with an indicator that shows the level of recurrency within the market. It shows that within 30 bars (h=30) price more often than not will revist again within 30 bars. Visually it is similar across all time frames. Not a coder so I don't have all the stats to back it but visual is enough for me to see. This is not tradeable by itself so presenting it here just to show why my belief has developed.



I trade the lower time frames for reasons I would like to expand on another time but one of the great things is that it allows me to have a smaller stop loss. I also believe in momentum in the market and that when there is enough momentum it should carry my trade in the right direction. But as my believe is that markets are reverting in nature I have developed my trading in the following ways:

Move my stop to breakeven +1/2 once trade moves a certain distance (1:1) in my favour.

I believe the safest place to enter trades is at the mean (or equilibrium point) in the direction of the prevailing momentum or wind. The tools I am developing or adjusting for my trading are based on this. The mean is dynamic and will change with new data especially when the price is trending. Being on the wrong side of a trend is not profitable. We want to catch trends. We don't need to try and catch tops and bottoms which is risky.

Prices can deviate very far from the mean more than the standard distribution when price is trending strongly.

So my trading has developed now to try and establish the best way to find and trade away from the current mean of the market

My post may not be completely accurate from a scientific/mathematical point of view but I am trying to convey my belief of how the markets really move. My trading is adapting to this belief.

This looks like an interesting thread, Neio. Thanks for starting it. Regarding the quoted text above, I'm in full agreement with it. My main trading setup is strong moves which are followed by relatively weak retracements. I enter in the the direction of the trend when the retracement reaches a certain level. This works very well in a trending market but obviously not so well in choppy conditions, and during high impact news, when the market disrespects my levels. Recently I've been using the Transient Zone concept to help refine my targets and entries. It's a work in progress, but so far so good.

I don't agree on your comments about fundamentals, though. I think that fundamentals are the main driving force in Forex. Other markets, maybe less so. But interest rates and other important economic factors should be forefront in your mind when developing a medium to long term view of a particular pair. Of course, when you move down to lower timeframes the long-term view becomes less important, so maybe that's what you mean? But even on lower timeframes you could increase your chances of success by only taking trades in the direction of the main underlying trend.

Leverage is the other big factor to success, in my opinion. The lower your leverage, the longer you'll survive. It's a simple as that. But so many people trade more than 4:1, not helped by their brokers who offer them crazy leverage. It's no wonder that many of them lose money, and motivation, before they become experienced.

Looking forward to more of your thoughts, Neio.

Many thanks NorthTrader and I really appreciate your comments and your insights.

Maybe I should clarify my views on fundamentals a bit. I do believe that fundamentals do have an affect on the market but don't believe you need to follow the fundamentals to be successful in trading because everything is in the price and the movement that you see. We simply react to any change in fundamentals by what we see in the price. The current price and its movement will tell us what we need to know. So I would not buy a currency just because of some fundamental news. I will buy because I see the movement of price. Fundamentals is only one factor driving the market. It is impossible to keep track of every force that drives the market unless we view price as the sum of all intentions. I view price and its current movement as an aggregated view of all the information that is know and unknown to us including fundamentals.

Just a side not as you mentioned choppy markets. I believe that any system that is developed needs to be able to work in both consolidating and trending markets. I have focused on trend following systems and been ripped to shreds in ranging or consolidating markets. I have also had systems that worked well in choppy markets only to be blown up by strong trending moves. My focus is on developing a trading system that can handle both. I believe it is possible and have been inspired to pursue this goal by some of the posters in FF and the developments that I have seen in my own trading system.

Hi Neio,

I agree with you, the question is just how deep the rabbit hole is.

Read Jim Hurst (there is a nice thread at SHF to find the approximate mean of the move), and Welles Wilder's (The Delta Phenomenon - for natural laws, The Adam Theory - for trend trading) work if you have not read them and need more ideas.

My next step is WD Gann. Still accumulating the courage.

Cheers,
k

Hey Kprsa,

Always appreciate your input and thoughts. I know what you mean about WD Gann...always avoided it as it looks complex and I like to keep things simple without over-simplifying if that makes sense.

I also need a method where I can easily look at a chart within a few seconds and determine what I need to do.

Will take a look at the links you posted and see what I can easily glean or if I need to come back at another time.

Regards

Neio

The markets follow natural laws (or laws of nature) Part 1

The market moves in waves. Waves or the affect of waves are all around us in nature (sea waves, sound waves, brain waves, light waves? etc). Questions I have sought to answer for myself, "Is there any correlation between market waves and waves in nature?" "What are the characteristics of waves?" "Is there anything I can use to from what we learned in nature to help me measure or model the market?" Most often our inventions and best ideas are copied from nature.

I don't have all the answers on this yet but I am starting to see how they do correlate. I have seen enough to start to believe this. Again this is based on visuals and scrolling back through the charts with my chosen indicators.This has become clearer since I have smoothed price to a certain degree to enable me to see the waves more clearly. Time-based charts often distort the picture.

(Excuse the crude drawing just trying to simplify the view)

Hi Neio,

Actually I think there's a subtle difference between consolidating markets and choppy markets. Consolidation is normal behaviour and can be traded once you know you're in it. I guess that's what you would call a ranging market. It's not difficult to sell at the top and buy at the bottom of these ranges with relatively small risk. Choppy markets, on the other hand, look like random noise to me. You don't know you're in them until you've lost two or three trades in a row... then you call it quits for the day. The movement is abnormal and unpredictable, like during a high impact news release... which is the main reason I don't trade the news.

In my opinion the secret to success in this game - apart from the "easy" things like sensible leverage, knowing the main underlying trend, and patience! - is knowing which kind of market you're in (trending, ranging or choppy), and trade accordingly with that in mind. But that doesn't come easy. In fact for most people, me included, it takes years of practice to hone this skill.

As for one system that works in all markets environments... I think that's a tall order. But it depends what you mean. You could have the same basic rules but adapt the targets, stops and the discretion on whether to take a trade (more conservative or more aggressive) depending on the mood of the market. I know that works for some people. Or you could simply use different systems for different conditions. That also works for some people

Thanks,
NT