Is price direction predictable? | Forex Factory

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Is price direction predictable?

  • #1
  • First Post: Jun 6, 2015 6:33am Jun 6, 2015 6:33am
Reading many posts on here, I'm beginning to believe that price direction is not predictable. I've seen so many "profitable" systems that seem to have no logic behind them, such as people claiming that they can predict where prices will go by finding the square root of the last few periods; people drawing shapes; using 'magic' formulas and levels. There is no rationality behind this.
I may not know much about markets, but I do know that the only thing moving prices is supply and demand. No formula, number, square root, etc, is going to tell you whether bulls or bears are going to have the upper hand next. There is no link between these methods, and changes in supply/demand.
If people claim that methods such as these are consistently profitable, then that can only imply that price is not predictable. You may as well toss a coin to decide where price will go next...?

I'm not saying that (consistent) profitability comes down to luck, but perhaps the only thing that matters is money management?

What do you think? Is it possible to tell where price is more likely to go next, or should we stop trying to guess and focus more on MM?
  • #2
  • Jun 6, 2015 7:09am Jun 6, 2015 7:09am
Hi Ponzi,

I think its good to have the best MM that suits ourselves, our goals and ideas because it's something we can do like we want and something over what we have 100% control.

Then, about the prices, well, we have just to do as best as we can with the tools we have.
Simplicity is the Ultimate Sophistication.
  • #3
  • Jun 6, 2015 7:37am Jun 6, 2015 7:37am
Hello all,

maybe, the answer is behind this question:'is there anything that can not be predicted?'

Thanks,
  • #4
  • Jun 6, 2015 7:51am Jun 6, 2015 7:51am
Price direction is very predictable. In fact, it's real simple. The reason why so many people say it can't be done is because they don't actually know why the market is moving in the direction it is. Most people focus on technical analysis and this doesn't give you the reasons.

Let's take a couple of examples:

1) EUR/USD - We all know the huge sell off here from the middle of 2014 to the beginning of 2015. To most people it was simply a trending market. But actually, if you knew the fundamentals, you knew it was going down. The Federal Reserve mentioned a rate hike, and there was talk of QE from the Eurozone. With a rate hike, money flows into the U.S. Dollar, with the possibility of QE, money flows out of the Euro.

2) NZD/USD - Around the same time as above. The same story for the U.S. Dollar as above. The NZD devalued because the RBNZ started selling New Zealand Dollars as the value of the NZD was too high.

These moves are actually obvious if you know what you're looking for.
  • #5
  • Jun 6, 2015 8:09am Jun 6, 2015 8:09am
I believe Jake is right, fundamentals set trends a one currency strengthens and one weakens. Some market sentiment can be read by technical analysis to increase your wining percentage. That being said I believe the only way to become a winning trader is thru money management.
THE IMPORTANCE OF MONEY MANAGEMENT

I just did two back tests of the last 90 days, EUR/USD, and USD/JPY. The E/U has been in trending market with a range of over 1000 pips and two trends each 1000 pips. The U/J is choppy with only a 379 pip range. Many systems have trouble in those sideways markets. This is a test of money management not a system test.
THE RANDOM FIB SYSTEM .
I used fib numbers because, well, they are there. A trade would be made at the open of day 3, 5, 8, repeat, so 11, 13, 16, ect. Trades would alternate buy, then sell starting with a buy on Feb 19th. A stop is set 50 pips from entry and profits are taken in thirds at 89 pips 144 pips and the last third let run until the 5EMA turns against the trend and is sold at next days open. The stop is moved to break even when the first price target is hit. Intentionally a random dumb entry system with sound risk reward levels. If the trade makes the second profit level we are over to 1:4.
RESULTS
The E/U had 11 wins and 12 losses, almost 50/50. The total win was 957 pips. Allow 7 pips per trade for spread and slippage and you still have a 796 pip gain.
The U/J had 10 wins and 13 losses. The total pip win was 85. Allow 7 pips per trade for spread and slippage and you have a 76 pip loss.
I am sure a lot of you are thinking not so great, and my hat is off to many of you that make 10 or 20% a month, but the point is this is a winning system, with terrible entries, at least with my limited testing. If you are not profitable stop looking for a better indicator, stop looking for the Holy grail system. Instead follow any successful system and concentrate on your exit. Don't let losses get above 2 to 3% of your account and let your wins run. Take some profit off the table early and move your stop to break even and you wont worry about the share that is running, the trade can,t be a loser at that point. I personally am turning that corner now. I am profitable now but I look back the last month and what stands between me and 10 or 20% gains is two stops I did not set. Ouch!
  • #6
  • Jun 6, 2015 8:18am Jun 6, 2015 8:18am
First of all, I'm a very short term trader so I do not care for where the price could be tomorrow or just in 2 hours, that is the same as next year to me. So, while I do believe that fundamentals are interesting, they are not to me.

Quoting Ponzi Jr
Is it possible to tell where price is more likely to go next
Yes it is, but not all the time. In fact I'm not involved in the market most of my trading time because I can't predict good enough most of that time. I choose my trades, sometimes I wait 2 hours. Personally I say markets have 2 modes: they are either friendly to my trading (my method to capture parts of the movements) or they are not. I could think that most very mechanical systems fail because they do not have a mechanism to tell if the market is behaving friendly to their system or not. That is especially true for fully automated systems (or traders whose primary reason to sit at the computer is to wait for some magic indicator telling them buy now, sell now, close now, drink coke now, go and take a piss now they'll be no good setups in the next 5 minutes).
  • #7
  • Jun 6, 2015 8:22am Jun 6, 2015 8:22am
Quoting JensG
First of all, I'm a very short term trader so I do not care for where the price could be tomorrow or just in 2 hours, that is the same as next year to me. So, while I do believe that fundamentals are interesting, they are not to me. {quote} Yes it is, but not all the time. In fact I'm not involved in the market most of my trading time because I can't predict good enough most of that time. I choose my trades, sometimes I wait 2 hours. Personally I say markets have 2 modes: they are either friendly to my trading (my method to capture parts of the...
Agree with you on that. It is much harder to predict price movements intra-day.
  • #8
  • Jun 6, 2015 8:26am Jun 6, 2015 8:26am
Quoting Ponzi Jr
...I may not know much about markets, but I do know that the only thing moving prices is supply and demand. No formula, number, square root, etc, is going to tell you whether bulls or bears are going to have the upper hand next...
Actually you have just described in a small sentence how the market really does work. People place their orders into a machine called, "the market". Those orders are matched with opposite orders at a mutually agreed upon price. When all the orders from onside are satisfied, but other remain from the opposing side...viola! PRICE MOVES. You are absolutely correct in that no mathematical formula can EVER predict which way price will move with any accuracy greater than chance.

Quoting Ponzi Jr
... I'm beginning to believe that price direction is not predictable. I've seen so many "profitable" systems that seem to have no logic behind them, such as people claiming that they can predict where prices will go by finding the square root of the last few periods; people drawing shapes; using 'magic' formulas and levels. There is no rationality behind this...
This is also correct. Those that claim they can "predict" with any accuracy greater than 50/50 are either fools or liars...if they want to sell you something they are liars, if they are trying to convince you it will work...they are fools.

Think of it this way. There are trillions of dollars traded every day in the FX market...TRILLIONS. (that is a HUGE number). With each one of those trillions of dollars there is someone or some computer algo making decisions that each has his own "secret" weapon that they are deploying to make money...think of the variables needed to calculate any kind of math formula to predict what TRILLIONS of people will do every day...you are right! It is NOT logical.

Quoting Ponzi Jr
... I'm not saying that (consistent) profitability comes down to luck...
Profitability comes not in predicting what will happen next, but in going with what is happening NOW. If price is rising NOW...don't fight it. Likewise if price is falling now...don't buy. Look for areas where order flow seems to balance or (reset) and then allow the participants to UNbalance the order flow...when that happens, go with the flow and hold until the next time the order flow balances again...then get out. This is not predicting but rather REACTING to the market flow, in a continuous stream of "now" moments, that leads you inexorably into the future.

Quoting Ponzi Jr
... but perhaps the only thing that matters is money management? ...
Risk management plays a HUGE role in profitable trading. You will never be able to perceive price movement with 100% accuracy...don't worry no one can...not even those fancy HFT algos. BUT you can control how much you risk in trying to get on the right side of the flow. AND once you find it you can hold it for much longer than you think as long as the market flow stays on your side.
  • #9
  • Jun 6, 2015 9:38am Jun 6, 2015 9:38am
Quoting Ponzi Jr
Reading many posts on here, I'm beginning to believe that price direction is not predictable. I've seen so many "profitable" systems that seem to have no logic behind them, such as people claiming that they can predict where prices will go by finding the square root of the last few periods; people drawing shapes; using 'magic' formulas and levels. There is no rationality behind this. I may not know much about markets, but I do know that the only thing moving prices is supply and demand. No formula, number, square root, etc, is going to tell you...
Price directions are predictable, but knowing exact price level and time moving at particular direction are not so predictable.

Technical charts doesn't move the price, its order flow that move the market. While macro events cause the traders to have different sentiments and react in the market.

Below I quoted what some said are true, and indeed intraday are much harder to trade, but personally I like it.

Quoting jakeparkin
Price direction is very predictable. In fact, it's real simple. The reason why so many people say it can't be done is because they don't actually know why the market is moving in the direction it is. Most people focus on technical analysis and this doesn't give you the reasons.
Quoting gspajon
{quote Profitability comes not in predicting what will happen next, but in going with what is happening NOW. If price is rising NOW...don't fight it. Likewise if price is falling now...don't buy. Look for areas where order flow seems to balance or (reset) and then allow the participants to UNbalance the order flow...when that happens, go with the flow and hold until the next time the order flow balances again...then get out. This is not predicting but rather REACTING to the market flow, in a continuous stream of "now" moments, that leads you inexorably...
The only winner is the one who survive the longest...
  • #10
  • Edited 3:51am Jun 7, 2015 3:16am | Edited 3:51am
Works like this:

1) Some claim it's predictable when they win
2) Some claim it's unpredictable when they lose

more people lose than win, therefore price direction is unpredictable.

Same thing with money.

1) People claim to be "traders" when they win
2) People have to admit they are gamblers when they lose

Many more lose at forex than win, therefore retail forex is gambling.
  • #11
  • Jun 7, 2015 3:52am Jun 7, 2015 3:52am
The USD and EUR especially trend with some predictability, i.e. if either has been trending up or down over the past several weeks, it has had a propensity to continue in that direction for a while at least.

The other currencies and the crosses in particular tend to fall back after strong moves of a few days or a week.

Regarding trend, the momentum effect has been well documented and proven academically in a range of markets.

If you just check the few pairs that have moved the strongest over the past several weeks, and trade assuming those moves will continue, that produces a positive result as well, over time.
  • #12
  • Jun 7, 2015 4:34am Jun 7, 2015 4:34am
this is the first time ive pulled up this old gbp/jpy chart.

i was following a long term fundamental traders journal who was actively buying this pair at those lows with detailed fundamental reasons why ,the last time i checked he ws still buying at 15000 ,he has stopped posting but im sure he is still holding multiple buys price is now 19180 now.

he would certainly argue that long term fundamentals have suggestive predictable qualities .unless the governments longer term economic directive changes.

personally i don't have the personality or mindset to trade this way.if only.......................
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  • #13
  • Jun 7, 2015 5:35am Jun 7, 2015 5:35am
Quoting Ponzi Jr
... I may not know much about markets, but I do know that the only thing moving prices is supply and demand. ...
If so why don't you follow SD and wouldn't be need to predict?
The Market pays you to be disciplined
  • #14
  • Edited 6:21am Jun 7, 2015 5:54am | Edited 6:21am
Quoting gspajon
{quote} Actually you have just described in a small sentence how the market really does work. People place their orders into a machine called, "the market". Those orders are matched with opposite orders at a mutually agreed upon price. When all the orders from onside are satisfied, but other remain from the opposing side...viola! PRICE MOVES. You are absolutely correct in that no mathematical formula can EVER predict which way price will move with any accuracy greater than chance. {quote} This is also correct. Those that claim they can...
Order flow. How you are measuring this? Im only using currency indexes at this point.Looking at 21 pairs and sometimes the flow is really seen. i mean flow. Esp when new market comes in (ny,assia,europa).
  • #15
  • Jun 7, 2015 6:26am Jun 7, 2015 6:26am
Quoting 21vs7
{quote} Order flow. How you are measuring this? Im only using currency indexes at this point.Looking at 21 pairs and sometimes the flow is really seen. Esp when new market comes in (ny,assia,europa).
Order flow is what causes prices to move one way or the other. It can be seen in what many here refer to as "price action". In the interest of brevity I will simply say if you know how to recognize the two market "states" (balanced or unbalanced) you will soon see you need no other metric other than you personal trade data. If you would like to know more please pm me.
  • #16
  • Jun 8, 2015 2:50am Jun 8, 2015 2:50am
Whatever happenned because of the fundamentals factor, it will be reflected on the chart. If you are trading just for profit, no need too complicated.
1). FIND an entry system that suite you,
2). Find out how you exit that trade,
3). Do the above 2 plan consistently, dont care anything else.
It will be fine.

Note: They should be covered by MM.
  • #17
  • Jun 8, 2015 3:29am Jun 8, 2015 3:29am
Quoting gspajon
... If you would like to know more please pm me.
Why need to pm you?
The Market pays you to be disciplined
  • #18
  • Jun 8, 2015 6:35am Jun 8, 2015 6:35am
Quoting mima
{quote} Why need to pm you?
You don't have to pm me, I simply didn't want to distract others from the theme of this thread. Whenever I bring up the subject of order flow and "seeing" in the price action, there are people who are curious and want to know more. As an example, my last post generated several curious responses, wanting to know a little more. I don't feel it is fair to "change" the subject from the individual who started this thread and start a completely different discussion. Some of the people who contact me wish to explore the idea further and we find that pm's or emails are insufficient to completely explain the concept in a meaningful way. So I offer classes and/or coaching on this subject and trading in general.

Again, I did not wish to "hijack" this thread or appear that I was "trolling" for students. My reply was sincere and I hope you saw it that way. Again, The subject of THIS thread is price direction and can it be predicted. My firm belief is NO. At least not with any accuracy that is greater than chance. But that does not preclude you from being profitable.

Many think they must be able to accurately PREDICT where price will go next in order to be profitable. At the beginning this concept seems to make sense. I spent many years chasing this concept as well...like a thirsty man in the desert chasing a mirage. I have come to understand that you cannot accurately predict the next tick, much less the next hour or day...how then can one predict where price will be in several weeks? To my mind it is not possible.

Oh yes there are higher and lower probabilities, and fundamentals tend to point to a particular direction, but fundamental offer a possible reason WHY someone might chose one direction over another...but do NOT accurately predict price movements with any greater accuracy than a moving average (which we all know lags).

I have found that trading in the moment of "NOW" works best. The series of "now moments" that allow you to make decisions in real time as to what is happening NOW, will eventually put you on the right side of market...after that you must simply control yourself and therefore control your actions. THESE are the metrics you need to track, not some "gee whiz look at that" indicator.

Again, just my opinion...nothing more.
  • #19
  • Jun 8, 2015 6:38am Jun 8, 2015 6:38am
Quoting jakeparkin
Price direction is very predictable. In fact, it's real simple. The reason why so many people say it can't be done is because they don't actually know why the market is moving in the direction it is. Most people focus on technical analysis and this doesn't give you the reasons. Let's take a couple of examples: 1) EUR/USD - We all know the huge sell off here from the middle of 2014 to the beginning of 2015. To most people it was simply a trending market. But actually, if you knew the fundamentals, you knew it was going down. The Federal Reserve mentioned...
This
  • #20
  • Jun 11, 2015 7:42am Jun 11, 2015 7:42am
Quoting gspajon
{quote} You don't have to pm me, I simply didn't want to distract others from the theme of this thread. ...
I will be happy to learn more about order flow ....you could put all you want in one pdf file, post here, and that would not disturb this thread at all.....those who want more again can pm or e-mail you as you wish...After reading I could conclude that is not for me and wouldn't bother to take your valuable time corresponding with me by pm or e-mail...that was my point...
The Market pays you to be disciplined
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