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New Frontiers in FOREX Market Analysis


The sort of article is among the most enjoyable for me to write down as a result of it is actually only a romp by way of the creativeness. For the reason that 1990’s, I’ve made a passion out of exploring new and diversified concepts for analyzing the markets, and this can be a nice alternative to mud off a few of my outdated notes, publish a few of these concepts and maybe get some suggestions on them. I am additionally wanting ahead to utilizing a number of the following ideas in my ongoing analysis work on FOREX worth conduct. So put in your “what if…” hats and let’s get began!

Market Fashions – Previous & New

Most merchants are conversant in the 2 primary colleges of market evaluation that we name Elementary Evaluation and Technical Evaluation. Within the 1970’s, members of the educational group proposed a brand new mannequin of the market often called the “Environment friendly Market Speculation”. That is extra generally often called the “Random Stroll Principle” and mainly stated that the primary two colleges of thought have been each losing their time. In response to the Random Stroll Mannequin, different teachers put forth a fair newer concept of how markets work known as “Behavioral Finance”. These are all examples of complete explanations of what components drive market costs. This is a short abstract of market fashions, a few of that are solely of their infancy:

Elementary: Market costs are pushed by tangible occasions and situations in the true world, reminiscent of earnings, gross sales, administration, pure disasters, climate, financial situations, geopolitical tensions and so forth.

Technical: Market costs are pushed by what costs have executed previously. As merchants observe these previous and current worth actions, their expectations about future costs result in emotions of greed and worry which in flip create shopping for and promoting pressures.

Random Stroll: Present market costs are environment friendly reflections of all identified basic and technical info, so we are able to discern nothing about future worth actions. The components that trigger future worth motion shall be so diversified that such actions can solely be random in nature.

Behavioral Finance: Costs are pushed by human psychology which isn’t at all times rational. Merchants could base expectations about worth actions, threat and reward on inaccurate reasoning, thus inflicting costs to behave in non-random methods. Bubbles and crashes are traditional examples of this.

Chaos Principle: Market costs are a part of a non-linear dynamic system wherein outputs are re-introduced again into the system as inputs, inflicting complicated behavioral loops and really delicate dependence on slight variations in situations.

Fractal Geometry: Worth patterns are recursively nested, which means that a big sample could also be composed of a number of smaller comparable and even an identical patterns and so forth by way of all time scales. Elliot Wave Principle is a traditional instance of this concept.

Scott’s Emergent Property Mannequin: I’ve mentioned this one in additional element in different articles, however the concept is mainly that identifiable properties of worth conduct emerge from the mixture of distinctive particular person buying and selling types of the present market members. An analogy could be how an individual’s persona emerges from the mixture of particular person neurons of their mind. This worth conduct adjustments progressively over time in an evolutionary manner in the identical manner that the conduct of an organism adjustments over time on account of each inner adjustments in its make-up and exterior pressures from its atmosphere.

My apologies if I’ve uncared for or grossly mis-represented any of the varied methods of explaining what makes the market tick.

Mechanical Buying and selling Techniques

One other topic that always grabs my curiosity is the design of mechanical buying and selling methods based mostly on cash administration guidelines. Some examples of such methods are “purchase and maintain”, “greenback value averaging”, Robert Lichello’s “Automated Funding Administration” (AIM) and another methods that attempt to take the emotion out of buying and selling by way of the applying of a rule-based system for getting and promoting. Techniques like this differ from different mechanical methods in that the foundations are based mostly totally on cash administration variables reminiscent of money available, common value per unit, complete portfolio worth and present place worth.

These sorts of mechanical methods have been typically designed for the securities markets nevertheless, not for the futures or FOREX markets the place the money administration scenario is way totally different. In FOREX, not like the securities markets, we aren’t taking some forex out of an account that we personal and exchanging that forex for some safety (i.e. {dollars} for shares). FOREX includes merely placing down a margin deposit after which utilizing that as the idea for borrowing some bigger quantity of a forex and exchanging it for one more forex, making us lengthy one forex and quick one other always. This totally totally different construction of the FOREX market presents a brand new problem to the design, use and understanding of the traditional money-management based mostly mechanical methods.

Synthetic Intelligence & Synthetic Life

What if we may design a neural web which may study over time the right way to make constant worthwhile purchase and promote choices based mostly on FOREX chart information? Or for those who choose mobile automata (CA) we may create a kind of in a multi-dimensional format wherein symbols “swirl round”, colliding and mixing in new methods creating emergent behaviors. If we rewarded worthwhile behaviors and punished unprofitable behaviors would this CA ultimately study to behave like a brilliant FOREX dealer? What’s that you simply say? Why not harness the ability of evolution by utilizing Genetic Programming? Okay, let’s create an atmosphere stuffed with buying and selling applications that should compete with one another to outlive and reproduce offspring applications. After many generations of “nature – pink in tooth and claw” we could find yourself with a bunch of very sturdy FOREX buying and selling applications. They are going to have earned their place on this digital world the place the prime legislation is “survival of the fittest.”

These are all examples of how the concepts popularly often called AI and A-Life is perhaps utilized to FOREX buying and selling. Utilizing programming languages reminiscent of LISP, I feel it could be attention-grabbing to make use of neural nets, mobile automata, genetic programming environments and different strategies to create rudimentary buying and selling applications. These applications could be uncovered to many units of market information (in all probability intraday charts) and over time would “study” or “evolve” into skilled buying and selling methods. This is not science fiction, nevertheless it’s on the frontiers of cognitive science.

Pc Modeling of Dynamic Techniques

What if the markets are deterministic in some methods? In different phrases, I am questioning if there’s a type of “physics” behind worth actions that’s in the end topic to complicated trigger and impact relationships. In any case, we all know that trigger and impact relationships actually exist. I resolve to purchase some FOREX forex pair, which causes me to put an order, which causes a number of gives to be hit as a way to fill my order, which causes the bid and ask of the FOREX pair to rise, which causes some cease orders to be triggered, which causes extra shopping for, which causes one other worth rise, which causes a number of information companies to take discover, which causes a number of different folks to purchase, which causes the value to grow to be so excessive that individuals begin to take earnings, which causes me to promote. Whew!

Preserving monitor of all these relationships the place every occasion could also be attributable to and in flip causes a number of different occasions is a job for pc modeling. In reality, pc modeling or simulation is what we use to attempt to perceive the conduct of any complicated system that we are able to describe by way of a number of easy guidelines.

We will use this system to attempt to perceive the dynamics of what goes on within the FOREX markets as described above. We will additionally use it to explain what is going on on within the economic system. We do not essentially have to make use of trigger and impact relationships both. We will mannequin things like the availability and demand ranges of cash, items and labor within the economic system in addition to the value ranges of these things. In a market, we may attempt to uncover what components result in the buildup of shopping for or promoting “pressures” and what components may act as a catalyst in releasing these pressures, inflicting catastrophic crashes or sudden bubbles out there.

I do numerous modeling on paper by merely drawing diagrams of how I feel sure methods may work. That is totally different from pc modeling in that I’m not attempting to simulate the conduct of the system. As an alternative, I’m usually attempting to scale back the complexities of a system right down to some quite simple ideas as a way to perceive what the primary driving forces are.

This is an instance of this. One in all my favourite methods to scale back the complexities of any economic system is to have a look at it as a easy set of components and behaviors reminiscent of: Individuals apply labor to pure assets, thus producing items which they’ll both eat or save, permitting them to lift their high quality of life and proceed the method. Imagine it or not, it really took numerous diagramming earlier than I discovered that an economic system actually will be boiled right down to:

1. Individuals who need to stay properly, and
2. Pure assets which permit them to take action.

Each different financial idea like labor, cash, wages and costs, and so on. are simply extensions of this primary mannequin.

One other manner that I prefer to attempt to mannequin the market is by way of the several types of members and their behaviors. For instance I’ll divide the market up into “contrarians” who promote when the value goes up and purchase when it goes down and “development followers” who purchase when the value rises and promote when it falls. How will totally different mixes of development followers and contrarians have an effect on the conduct of the general market? Conversely, is there a manner simply by observing market conduct that we are able to inform if the market is dominated by development followers or contrarians?

After all none of those fashions may very well describe actuality precisely. Now we have to keep in mind that fashions are actually instruments to assist us recommend numerous hypotheses about the way in which issues work. We will then take a look at these hypotheses scientifically.

Inventing New Indicators

One of the attention-grabbing coincidences (to me anyway) between the market and the bodily sciences is the usage of the variables “P”, “V” and “T”. In chemistry and thermodynamics these normally stand for the Strain, Quantity and Temperature of a fuel, and they’re associated to one another in a manner described by Boyle’s legislation. On a worth chart they stand for Worth, Quantity and Time. Are all of them associated? What if we had an indicator that stored monitor of how a lot time it takes on common for the value to maneuver by a certain quantity. Is it taking longer to maneuver up than to maneuver down? Is there extra quantity related to down strikes than up strikes? What about an indicator for that? Or an indicator that mixes all three variables?

I used to be studying one other dealer’s weblog a number of weeks in the past they usually talked about that they wish to arrange a shifting median indicator of the value as an alternative of the usual shifting common which makes use of the imply of the costs. The dialogue went on to invest about how an everyday shifting common and a shifting median plotted collectively would work together. Would a crossover of the median by the imply be vital? I believed it was a fairly attention-grabbing concept.

Arising with new indicators is a typical pastime for a lot of merchants, and I simply wished to provide you an instance of the thought course of that I’d undergo when inventing a brand new one. After all there are extra indicators on the market than anybody particular person may ever use, however who is aware of…perhaps the subsequent one will give us new perception into the motion of costs that we have by no means had earlier than. So let’s preserve inventing!


Nicely that is it for our flights of fancy and romps by way of the creativeness. Or is it solely the start….?

Scott Percival

October 2006


Source by Scott Percival

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