My theory about forex market

Good discussion on this thread.

Let me post one question to OP.

you say markets move randomly.

Now assume for a minute that you are one of those institutional trader. you have a GAZZILION amount of money to move the market. Now tell me how you will make profits. what strategy will you use to move the market to make a profit?

you must be loaded dice action

but seriously, every roll of the dice gives you a 1 in 6 chance of rolling a certain number! it is random which number it will be But in the long run, maybe 1000 dice rolls, the number 1/2/3/4/5/or 6 will show up closer to 1 in 6 times.

this is why, when you play roulette, the casinos like to show which numbers have shown up (and show them as red or black). When a player decides to bet according to what has happened in the past, Oh, red showed up 4 times in a row so the next spin must be black. Or, Oh, red showed up 4 times in a row so the next spin must be red. NO.

For the next spin, red will still have a 50% chance of showing up (not counting 0 and 00)

as for the FX market, the market moves in a way, that using a trading system, maybe you are right 8 out of 10 times. Which 8 times out of 10 trades will you be right? The first 8 or the last 8? That is what is random!

Be the first to buy or sell when a new releases and hope that the rest of institutional traders do the same but AFTER of me.

That, or having privileged information

The forex market, as with all markets, is not random. It is extremely unpredictable, but that is only because you are not controlling it. Random would suggest that there are not forces out there that do control where the price goes. If you knew ahead of time that the Australian central bank was going to intervene, as they did a few years ago, sending the market wild for a while, or that the BoJ was going to intervene, you would place a trade and know very well where the market was going... at least for a short period of time. It is not random.

The markets are interrelated, and there is a reason why when the housing market collapsed in the USA, then elsewhere, the currencies behaved how they did. There is a reason why currencies are either correlated with the movement of commodities and the stock market, or not. It is not random motion, it is simply chaotic and unpredictable when you look at it. This is especially true the lower the time frame you trade.

Just take solace in knowing that YOU know a pair will go up or go down, it is just a matter of when and how much.... If totally random, something may never go back down, or back up. We know this is not true. Just as we know that if something does go down and never return it is due to something ceasing to exist, which is also not random.

If you think it's random see below.

Currencies are affected greatly by interest rates.countries with higher interest rates have stronger currencies and countries with lower interest rates have weaker currencies.

Now take Aussie dollar(Strong) and Yen(Weak).

Look at the interest rate for Aussie dollar from 2000-2008

http://i.imgur.com/OUbjn.png

Now, look at interest rate for Japanese Yen from 2000-2008

http://i.imgur.com/5KZTy.png

Now, what do you expect to the AUDJPY pair to do from 2000-2008, see the magic..

http://i.imgur.com/dGUVl.gif

Now , are you telling me that , that big uptrend is random?...

If it has trend, it isn't random. After reading Turtles System I'm beginning to think that maybe I was wrong, but in the case of EURUSD I only see definited trend on monthy charts, below that it's hard to predict the trend, and maybe in the intra-day the price yes it is random most of time:

Finally I get it: Forex is a combination of trends on larger timeframes and randomness on lower timeframes, so we all have the reason! Do you agree?

Jambo, my understanding is that when you are trading short timeframes, they are also affected by economic factors.

Now the price moves are made generally by the smart money, But what is this smart money? This is the money that comes in from institutions. Now the institutional trades have to make their money. On what basis do they trade? technical , fundamental or both. My guess is that they tend to base their decisions more on fundamentals and this is when your technical analysis is blown out of the water, not that technical analysis was wrong. It was just that the big guys decided to move the price as per their views of the currencies and technicals in no way can shape the movement of currencies.

Hence the conclusion is that we must use both technical and fundamental analysis to base our trades. Most people use ONLY technicals and this is why they get in trouble. Do technical analysis after understanding the fundamentals.

Hope the more experienced trades can share their views on this.

1 guy, or 1 institution moving the market ???

are you sure ???

do you know the size of the market ???

takes way more than that...

Depending on the market, a single person or institution can indeed move the market price.

There's this guy in Europe nicknamed 'The Flipper', he got that nickname because he scalped the Euro markets with very large positions flipping direction, short then long then short then...so on, apparently his work colleges found it irritating as he literally was affecting market prices. In stocks if a single trading institution decides to offload risk and drops a large supply of a certain stock off it's books, everyone will see it and the price will drop both because a larger supply of stock has appeared and that the extra supply would be seen as a negative hint on that stock.

personally here is what I think regarding the randomness of higher and lower time frames as they are so called around FF.

In order to understand the "time frames" really understand how you are chopping them.

an hour candle has a usual range 29pips odds are that a normal hourly candle is from 16-37 ATR, a daily candle has an average daily range of 120 and can normally trade from 77-150 pips.

what we just did there is we ARBITRARILY cut the quotes bid/ask that continuously move up and down according to
1 liquidity
2 supply and demand
3 orders transacted due to various analysis

(I am getting tired of making the same points over and over, I might just re direct people to previous posts)

the reason we do that is to get a sense of range, speed, momentum, and outliers.

the shorter the time span we use to cut this into blocks the less range we see , the LESS WE SUMMARIZE the data. the more we zoom out the MORE SUMMARY AND MORE RANGE for the quotes to be plotted.

if you say smaller time frames are random and larger are not then you are assuming you are trading different markets. on the surface the benefits of trading higher time frames with less supposedly random movements far out weights the more volatile smaller time frames.

however this logic is specious.

the longer the time frame the MORE PREDICTING you are using.

so why not see the market for what it is.


MACRO economic environment will dictate the prevalence of transactions that will be made which in turn will be reflected statistically in your chart , now using "the larger time frames" to gauge direction and the "smaller time frames" to confirm and time your entries all according to the macro economic environment that is created by fundamental factors.

however with the large degree of unpredictability we could model our MONEY MANAGEMENT, AS IF the market was random.

Maybe that's due to not everyone accepting your point of view about the market.

that is up for debate, I am sure many benefit from my opinions, if you are not one of them you are welcome to stop reading them....or contribute something of value.

your choice

The FX market is a bit like the weather, it appears to be random but it is not. True random, like a roulette wheel will given time, produce even results - the ball will eventually land on each number an equal number of times. There is no guaratee that this will happen with 4X, that's why palying 4X is actually harder than playing a game of chance. In tems of purely numerical systems , it is easier to produce winning systems in a cashino than in 4X = unfortunatley if you do the management will beat you up.

This discussion is really interesting. It is like Efficient market hypothesis, or Keynes vs Hayek. Both sides have a point.

In the blue corner (Random market theory)

Well this could be true but you would have to provide scientific evidence to prove this, I have not seen any. Let's pretend that the narrative is true, that the market is random. Well, traders will still have to decide what value is. There is a good chance as long as the volume traded by participants had a direct impact on price, at some point the random market will stop being random. The point that the RMT's are trying to make is that the market is rigged in fact these currencies are moving randomly. Well, there is a problem, first off governments and central banks can't risk this as exports, imports and the countries very welfare is based on the currency. There is an argument that short-term market activity is random and can easily just be volatility, similar to turning a radio up and down before you finally turn it up as you intended. There is some anecdotal evidence to suggest this but nothing concrete.

In the red corner (Order in the chaos)

This is also an interest argument. This clearly suggests that if the market genuinely responds to supply and demand principles, then traders will eventually negotiate to determine value based on their own endowment and needs in the market. Everyone's equilibrium will be different based on several factors. This will naturally cause rapid perception shifts as equilibrium changes based on type of trader trading, e.g. long-term trader and short-term trader not being active at the same time. Central banks and other institutions are more likely to impact currency value through hedging activity and monetary policy activity, like interest rate rises. Trade is also likely to create some kind of long-term directional impact, take the Brazilian Real and Coffee... pretty strong correlation as Brazil is a major exporter Real exposure means Coffee exposure, higher Coffee prices means more demand for Real to buy the more expensive crop, as demand for the crop declines so does the real. So long-term value of the Real may be heavily influenced by Coffee as well as interest rates. So this would suggest it impossible for the market to be random. RMT's can always argue that the availability of ETF's and other vehicles are adding to the noise and short-term movements can no longer be computed to any degree of accuracy as the head winds are too much. It is more than likely that the market is probably made to a small group investors in terms similar to a basket, so rather than waste time and energy making every single market, why not just make the market as a basket for example, AUD, NZD, Coffee, Oil all can get bought and sold as one basket regardless of demand and supply in the short-term. This is the scary picture because this does not suggest randomness rather it suggests the market is for the minority that control the volume. It's all an inside job.

The Winner

In actual fact both theories have valid points. Random market theory claims the market has no order so can't be traded at all with long-term success. This is by definition untrue as there are living breathing rich bastards from it and I am one of them. So I can't support this theory. On the other hand order in the chaos guys have to realize that there is a strong possibility that short-term market movement is random noise and volatility designed to create short-term profits for intermediaries. At best the presence of ETF's and other correlated strategies may mean some assets are merely victims of other assets making their entire existence a fake. This has wider geopolitical considerations for example is the USD controlling all other currencies artificially? So it goes beyond randomness to ask bigger questions.

Now from a trading perspective, derivatives like Options could be your saviour. That way you can trade the short-term volatility to your advantage. This is a good resource page to learn Options (Vanilla). City monopolist trading it is called, they have a free Options school.

Forex is not Random.
No Forex systems are 100% accurate!
There are places you can make trades with high probability, with minimum risk..