Forex Trading Philosophy

Forecasting the markets is like forecasting the weather. Both are complex, dynamic and chaotic systems. And in both it's impossible to make 100% accurate forecast. Too many "random" variables and unknowns. However you can make some approximate forecasts within short time frame. For example no one knows what exactly will be the weather next month, but we are pretty good at guessing for the next few days. Same thing in the markets. The more you stretch the time frame - the more random variables you add..... so long term it's reduced to randomness, and even to make rough forecast becomes impossible.

In the markets the most important thing is the fundamental context. Fundamentals(news, numbers, rumors ......) are the seeds of all price movements. But they have limited impact. As soon as new information comes out, the initial reactions are usually the strongest, then the impact decreases exponentially. Just like in weather! When the hurricane hits the ground - strong initial impact, and after that things slowly go back to normal. Only the damage remains.

What about financial hurricanes? (flash crashes) What are they? What's causing them?
The biggest price movements are caused by risk events. Usually unexpected bad news.
But not all unexpected bad news lead to crash. The news have to come at the right time, in the right technical context!(perfect storm)

From a pure technical perspective, the perfect condition for a flash crash is when significant part of the market participants are holding positions in the same direction.(This usually happens due to some fundamental expectations on a large scale.) We call this group "trapped traders". As soon as the market start to go against the trapped traders, the normal chaotic market structure turns into order.(self organization) The reason is because all traders have the same position, they all lose money at the same time, and they all start running for the exit together and this creates temporary market panic.. This causes large demand for instant liquidity in short window of time and creates very risky situation for the market makers. So they start to pull and reduce their orders(liquidity) and this accelerates the price move even more.

The biggest flash crashes happen when there is lots of trapped traders (large volume) in combination with unexpected bad news.
The flash crash is the strongest possible signal in the markets and represents the biggest opportunity to make huge amount of money with minimal risk. But also represents the biggest danger (if you are trapped on the wrong side).

Flash crashes are not something rare today. Not at all! Actually they happen almost daily on the micro time frames. And there are only 2 ways to trade them.
1. Fade them in ranging context (go against the trend).
2. Trade with the crash in trending context.(fade the people who fade the crash)
But you NEVER go against flash crash on a large scale.

Nice contribution AO and thanks for the heads up :-) I have a different approach to trading but recognise where you are coming from in relation to better forecasting (through reduced uncertainty) for the short term so I can see where your trading opportunity lies in terms of your philosophy. Interestingly we are looking at flash crashes from two different exploitative perspectives. You are looking from a flash crash perspective from a shorter term viewpoint than me but I can see where both of our styles harvest the opportunities that sporadic crisis events cause.

One of the things I closely look at with systems is how market crisis events tend to reflect temporary but dramatic system phase changes. For example we probably all are familiar with complex (chaotic systems) that when drilling down to the minute level of detail displays unpredictable movement (Brownian movement) yet on a gross behaviour scale, there is an evident bias that displays despite the unpredictability of the small scale interrogation. For example when you interrogate a 'normal' cloud it exhibits gross features but at the individual molecule level it appears non-predictable. However in certain extreme conditions eg. a hurricane, the random micro characteristics actually change behaviour to a more predictable form and we see evidence of micro structure actually driving macro structure. My trading style therefore differs to yours where I wait for the hurricane where the individual molecules that comprise the cloud on drilling down adopt laminar flow features (on the macro and macro scale)

I therefore set trade conditions that limit my chances of being active during normal market conditions by setting predictive entries that lie well outside normal volatility and trade only during the extreme event. This therefore makes my trading style much longer term in nature than normal traders. Price has to significantly strech in a uni-directional way for me to get triggerred and more often than not it reverts but I am after those exceptional movements and can handle the associated drawdowns through diversification measures.

What I am specifically looking for is when apparently complex chaotic systems suddenly transform in nature from traditional stochastic form to laminar flow form during 'crisis events'. You see this exhibited as laminar flow in complex systems that reach certain threshold conditions where structural fabric is disrupted. When reaching a particular threshold, a chain reaction occurs in the system itself where causative links, relationships and constraining structures are temporarily disrupted leading to an avalanche of change and an almost immediate change of state. These features are typically uni-directional, non-random and exhibit temporary extreme momentum. They therefore represent rare 'arbitrage opportunities' for those with systems designed to simply jump on board and ride this temporary feature. In market terms, these distruptive events are referred to as 'alpha crisis events' for some trend traders amongst us. They can't be predicted but as you suggested they are more frequent than we assume and lead to the typical fat tails of gaussian distributions.

Within ordered market structure (traditional normal day to day markets) the market structure is exceedingly well developed and efficient in nature making arbitrage opportunities extremely difficult to exploit. However when the avalanche comes, the efficient nature of markets quickly unravels leading to occassional magnificent dissipative structures. The principle is based on a system evolutionary view of 'punctuated equilibrium' as opposed to a slow and steady perspective of an evolving market. It is during crisis events that participants that are used to trading in accordance with more predictable but complex market structures come undone. Their systems get quickly out of control and 'panic' reigns supreme leading to 'flight or fight' collective behaviour.

To be able to trade these anomalous market features you simply need to survive long enough to be able to jump on board. I therefore avoid the standard market behaviour and favour the anomaly and therefore preserve capital and diversify as much as possible across aset classes to participate in these events when they occur. It is not a way to achieve consistent cashflow, but is a way to harvest occassional market distruption when it occurs.

Thanks Copernicus, completely agree with you on this, many answers are found in nature. My view is that there is a lot of intelligence and design within nature that we can learn from. Really cool video on tensegrity.

Food for thought. Just wish I had more time to explore and marvel at nature and the universe myself. So much to learn from it.

Regards

Neio

Doing More with Less

There is no right and wrong approach or method, as long as it achieves the objective or goal.
The only difference is that each approach or method will differ in efficiency.

There is always room for improvement, to do more with less... to achieve more with less effort.

A Trader's journey is no different from any other journeys in life.
Despite this notion, it is good to be aware where you are at/in your journey.

Carrying a heavy rock for mile will get the job done.
Putting it on a 2 bamboo sticks and dragging it takes less work.
Placing the rock on a chariot takes even less work.
Heck, why not get an elephant/horse/buffalo to pull the chariot.
You want it faster, put it on the back of a truck.

The problem lies pondering beyond the truck. At this point the brain wants to conserve energy and don't want to think anymore for improvement... unless in a matter of a life and death situation... or deliberate thinking to improve the current technology.

All I am saying is that there are better ways to carry a rock.
And to think otherwise is insanely redundant.
To settle is a personal choice, and no-one has any weight of argument to that choice.





Peace,
CrucialPoint

Bag full of Goodies

Tim Ferris - A Better Life


Mark Devine - How to Manage your Mind


Mike Sandrock - Lessons from the World's Toughest Runners




Peace,
CrucialPoint

That's true, and if you can trade profitably intraday, and also attain a high frequency of trades, then it's mathematically possible to compound gains quickly and accelerate rate of return. It's the most efficient way to trade -- IF you can time your entries and exits accurately enough on the shorter timeframes to establish an edge, and make it work for you.

However, markets also differ from the weather analogy by way of factors like macroeconomics, flows and collective averaging, which are more applicable to longer term (swing and position) trading. The longer term trader pays less spread relative to the move sizes that he's capturing, and -- for better or worse -- in most cases spends less time in front of his computer screen.

How complex of a system is the market really?

- There are only two directions
- The longer things stay the same, the more they need to change (illustrated by AO's image pretty well...Increased buying pressure is followed by increased selling pressure which is followed by....refer to the previous fact...)

- The longer things do stay the same, the higher the probability becomes of a shift in direction, and, since there's only one other one...

- Over a number of years of research, my opinion has become that fundamental announcements are merely triggers for what needs to happen technically. Thus the never ending, "Shouldn't that result in (insert news announcement of choice here) be POSITIVE for the (insert currency of choice here)"?

- Each pair, currency, futures contract traded has it's own set of "rules" for what extended is. I notice and perceive over and over again these areas being areas of "uncertainty". Because of the fear of missing something, these areas are the recipe to trap traders in the wrong direction so that the true movers (whoever and wherever they may be) can win. This is "trading" after all, or, "trading" whether you're on the wrong side or the correct side in the "here and now" which constantly changes with every passing moment.

this whole thing is like bowling - if everyone scored a 300 every time it would be such a boring game that hardly anyone would want to play.

this whole thing is like bowling - if everyone won every trade every time it would be such a boring game that hardly anyone would want to play.

Yes, I'm a "reversalist".

Very interesting stuff contained in this thread - I've had it open in a separate window for the past few days picking my way through. Thanks to all for your contribution. It really is true - being here doesn't require any of us being crazy, it just helps.

In most cases the newcomers stay in the forex market, though in a light haze, thinking that the currency trading market - a simple tape measure. Many direct the emotions, many follow the principle of "the crowd", etc. But Forex has its own mechanism, the factors that influence the currency and change all kinds of courses. In fact - Forex - a crazy risk and pass it safely is simply not possible. Trades are kind of psychological stress, which can only sustain a strong and purposeful person. Understand this risk begins only when faced with the real numbers, currencies, and not earlier.
Forex speculating possible to carry out the operation, but their ability to rotate is not easy to deal with. You need to know all the analytical and statistical analyzes. But as they say, there is nothing impossible, the main thing that was the desire, enthusiasm and belief in the win.

although i am the thread starter i enjoy coming back here time by time and reread posts from some participants and every time i discover something new. especially the last debates have been eye opener and i must say i am still digesting the materials presented here and would like to thank everybody who are keeping this thread alive for the last 3 years

Quotes from "Star Wars" that I find very relevant to trading. Especially for discretionary traders.
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Use your feelings, Obi-Wan, and find him you will. Yoda

Already know you that which you need. Yoda

Adventure. Excitement. A Jedi craves not these things. Yoda

Through the Force, things you will see. Other places. The futurethe past. Old friends long gone. Yoda

The dark side clouds everything. Impossible to see the future is. Yoda

Size matters not. Look at me. Judge me by my size, do you? Hmm? Hmm. And well you should not. For my ally is the Force, and a powerful ally it is. Life creates it, makes it grow. Its energy surrounds us and binds us. Luminous beings are we, not this crude matter. You must feel the Force around you; here, between you, me, the tree, the rock, everywhere, yes. Even between the land and the ship. Yoda

Do. Or do not. There is no try. Yoda

Luke: Whats in there? Yoda: Only what you take with you. Yoda

Always pass on what you have learned. Yoda

Once you start down the dark path, forever will it dominate your destiny, consume you it will. Yoda

Yes, a Jedis strength flows from the Force. But beware of the dark side. Anger, fear, aggression; the dark side of the Force are they. Easily they flow, quick to join you in a fight. If once you start down the dark path, forever will it dominate your destiny, consume you it will, as it did Obi-Wans apprentice. Yoda

Do not assume anything. Clear your mind must be if you are to discover the real villains behind this plot. Yoda

Hmm. In the end, cowards are those who follow the dark side. Yoda

Difficult to see. Always in motion is the future.. Yoda

You will find only what you bring in. Yoda

Feel the force! Yoda

If no mistake have you made, yet losing you are a different game you should play Yoda

Many of the truths that we cling to depend on our point of view. Yoda

If you end your training now if you choose the quick and easy path as Vader did you will become an agent of evil. Yoda

Happens to every guy sometimes this does Yoda

You must unlearn what you have learned. Yoda

I cannot teach him. The boy has no patience. Yoda

You will know (the good from the bad) when you are calm, at peace. Passive. A Jedi uses the Force for knowledge and defense, never for attack. Yoda

When you look at the dark side, careful you must be. For the dark side looks back. Yoda

In a dark place we find ourselves, and a little more knowledge lights our way. Yoda

The fear of loss is a path to the Dark Side. Yoda

Judge me by my size, do you? Yoda

Train yourself to let go of everything you fear to lose. Yoda

May the Force be with you. Yoda

To be Jedi is to face the truth, and choose. Give off light, or darkness, Padawan. Be a candle, or the night. Yoda

Control, control, you must learn control! Yoda

On many long journeys have I gone. And waited, too, for others to return from journeys of their own. Some return; some are broken; some come back so different only their names remain. Yoda

Luke: I cant believe it. Yoda: That is why you fail.

Huddle Up: Listen and Pay Attention




Peace,
CrucialPoint

Tash

I thought this paper probably best sits in this thread of yours. It takes an interesting approach referred to as 'complexity economics' to attempt to make sense of the apparent chaos. :-)

looks promising. thank you, Sir!

"Doing more with less"- this is EXCELLENT point!
The concept of better efficiency is huge thing in trading like in any business!
I personally learned this lesson the hard way - by alot of trial and error.

From my perspective, I've noticed that usually I perform a lot better when I trade less.
The ideal scenario for me (my trading style) is to trade the market during the peak hours when the activity/volatility is the highest, to apply maximum focus and concentration for 2-3 hours, to wait only for the best opportunities, not to sacrifice quality for quantity, to make 1-5 trades (ideally all winners) to reach my daily goal, and to finish the day with profit. Then just leave the battlefield with no exposure to worry about! The next day - repeat the same. By doing this I exercise discipline and gain momentum with multiple profitable days in a row!
I have discovered a long time ago that to compound small consistent profits is a lot more powerful and efficient way to make money than to chase big irregular profits!
Also from a technical perspective, the proper organization and presentation of the available information is key.
We all have pretty much the same technical info available in our platforms, but the way we use the info determines wherever we make profit or not.
There is alot of "hidden" info inside the charts, and the traditional technical analysis fails to show it. (the info is not obvious and it takes ALOT of work to dig it manualy) That's why everything that can be effectively automated, should be automated.
Same thing with fundamentals, you have to read between the lines. Often times a very small detail ( only few words) can move the market by hundreds of pips. You just have to pay close attention.
There is no need to spend countless hours in fundamental analysis and projections of the future.

I think this is the most profound thing I've seen this week...and it might lead the list for a while...

My Philosophy




Peace,
CrucialPoint

This is the world of the "better mouse trap".
Do we really need another mouse trap ? Would you stand in line for several hours to pay good money for a new iPhone ?
This philosophy creates an endless rat race. In the end, even if we win; we are still rats.
The world does not need marginal improvements. It needs better resources management.
Luddites of the world, unite !
Turn on, Tune in, Drop out (:

📈 superb...

Always use Same lot size....
When you're account go big increase lot size.
For example if u trade 1 lot. On 500 acc then on 1000 acc u use 2.
The real edge....

My preference is to use the same risk size. Position size is computed from risk and stop loss.