Broker to Trading

One of the first things one sees about the forex market is that it is said to be particularly good for technical analysis. The assumption here is that it is better than the equity market. One thing I would say is that RSI works better here than in equities, up to a point.

That point is predicting moves which move enough to make it worthwhile to trade. It does though seem to useful at indicating the depth of that dynamic market maker order book I discussed yesterday as well as money flows (i.e. structure of money flows).

One needs to have a way to use of RSI, to beef it up with some kind of market related information. Can chaos based indicators help in this ? For those who are into chaos theory, technical indicators tend to be criticized as being wedded to linear mathematics, and the evidence does seem to suggest that the equity market is to an extent powered by chaos.

That means there are fractal growth processes at work, complex programs which link today's action with years or decades past. But anything that references structure will have some utility, indicators are useful in the equity market. At the very least they are good for showing money flow in action.

Money flow is a reasonably linear event, but it tends to happen at seemingly random in forex, because it happens so fast and so leveraged and so sensitive to news. But these indicators may in a crude way refer to chaos structure as well, perhaps in the way they have been derived from the equity market (the periods used for example, which may reference growth cycles of some kind).

Fibonacci works well as an indicator of structure in forex and this is presumably something to do with growth processes (through there are arguments that it is simply to do with order flow). It does seem to be the way that the economy itself is referenced by forex valuations (note how accurate forex spikes can be in terms of Fibonacci numbers).

One could make an argument that until the crisis EUR/USD was growing in some way, like the Dow, but of course that may simply be because of its intense interrelationship with the Dow.

The blog does believe, in general, chaos from equities is interlaced into the forex market, usually when major equity markets are open, especially the big cauldron of chaos, the US market. It probably quickly gets re-written: a long term example was the effect of the crisis on EUR/USD which effectively shut off the Dow as anything other than money flow. During these market hours the market does seem to behave differently from other times. It seems dampened in some respects.

The exception was in the crisis when the market open would presage the most amazing volatile action. Divergences on RSI worked liked a dream then, but that is a sign of the rule of money flow. Then the equity market was made like the forex market in some respects (chaotically structured near-linearity) by the enormous money flows from liquidation sales and short selling.

But in more normal times (which the recovering economy is making the equity market despite money flows) one tends to see nice trends, usually characterized by Elliott Waves during the US market open.

So a trend is about chaos ? Well one sees trends outside of US market hours. The difference is perhaps that trends outside of these hours are those little nudges and big nudges coming together (traders, but usually started by some news event), but in the US hours the equity market is usually determining matters (note the nice nudge trends that happen between 7 and 8 am).

Here it seems chaos is at work. It is perhaps that piece of predictability which has given some vast fortunes in equities, that capacity to grow the equity of a company to the potential of its balance sheet over time, (producing fractal images of the Dow itself). But is action during these hours itself determined by money flow, i.e. is chaos something which is subtle and more in evidence over time.

Perhaps, evidence does suggest it, but there is some kind of determinism which is nudging those trends into action. If there was not then equities would be more apparently predictable than they are, they would be more like forex.

That is, since you cannot get at that determinism and it comes from non-linear complex processes, it can add a lack of clarity to equity behavior. Except forex is not actually predictable, because that chaos structuring is not native to it, it is coming from another (but related) system.

The argument here is that the importation of chaos into the forex market adds an apparent order to its volatility, that helps create an impression of predictability (pattern formation and so on), along with its linear properties (which may be less a factor in equities, normally).

That difference is possibly why the forex market can absorb enormous distortions introduced into the equity markets in recent times (illogical statements such as assets = debt, computed eventually into that epic logical revaluation in 2008). But that relation of chaos to both markets is something intuition may still see (or feel in some sense) and expert intuition may see and act on effectively.

But what some forex traders prefer is those sudden trends which appear as if from nowhere (but can be retro-analyzed from patterns, giving joy or agony). They are usually triggered by a news event, a technical level, like a major Fibonacci level on the 1 month chart being effectively breached, with the result the computer programs activate.

Those are different, they are great to be with, but happen relatively fast such that one tends to enter near the end. They are about linear momentum, hence the importance of CCI in these forex trends (sharp deviations from the mean). It is that linear momentum which causes such problems as they reach the point where they retrace quickly and suddenly and sharply (the money flow effect).

It is not so much one gets caught at the top, as the retracement is sharp and volatile. This applies to trends during US equity markets, it is still forex computation, but it seems to be of lesser severity.

(edit 8/31/11, updating comments about chaos and indicators)->
So what about chaos based indicators ? They seem to work well in equities, it is just day trading has very low leverage and needs a considerable amount of capital. One wants them to work well in forex, (with adjustable leverage and lower capital requirements).

But they seem to work less well, if one uses them in the same way one uses them in equities. But one would expect this, the appearance of chaos into the forex market is essentially random as it happens from the computational actions of the equity markets and inputs from the economy and so on. But as this blog believes it is not entirely random as there is a global optimization process at work throughout all markets.

However it is possible that chaos based indicators may be of particular use in forex if one has a way of stabilizing the indication of the appearance of chaos. This issue is being explored in the rest of the site.
<-(8/31/11 edit ends)

Even if forex and equities are computationally different, then they both reference the economy as inputs and outputs, and each other as valuing sources and processes of money flow. Again, it is that global optimization along with such things as order flow that enables that feel for the market experienced traders have.

As I suggested Raghee Horner's 34 EMA seems to get at some kind of structural regularity native to forex and can be used to filter trades based on indicators developed in other markets (basically the US equity markets).

Thus there is a need to have a proper foundation for indicator use in forex. But in a way it already is here, it needs something to capture money flow, something to capture chaos, something to structure this, by reflecting forex market structure (order flow, time frames, news) and its relation to other markets. The problem is those elements which intuition can only really get at, the point is it needs an expert and intuitive mind at the helm.

That is very hard to get, learning yourself in the forex market, with all those disadvantages this blog has enumerated can be harsh and expensive. A solution is to leverage the expertise of others with your own learning curve. Push yourself up with the help of other traders.

This blog does not believe systems are a real solution, although I am searching for a formalism myself. The problem is exactly that need for a dynamic real time adjustment of an ill understood market, an expert mind.

From my AI background I know exactly how impossible that is. The problem is an enormous explosion in complexity, when real time is needed. Arguably the market does have some kind of template, in terms of patterns, but the formation of those patterns is itself a huge problem in complexity. Plus a black box system won't help you learn.

© 2010 Guy Barry - All Rights Reserved.

Forex is the perhaps the punisher of intuition, yet intuition is one of the few weapons one has in the market, like everything in forex, there is a little space to slip through.

In a formalism for search in computer science, one maps a search as a series of interconnected points from a start point, called the start node. The start node itself will tend to have a number of possible moves from it, and this is the case for each child node.

The overall number of branches from each node in the search tree, the enumeration of possibilities, is called the branching factor.

One can simply search each branch until one finds the best solution, or a solution if that is all you want. When one tries to enumerate a future for a currency pair, one is trying to say this is the path through from the start node, its valuation now, to an optimal solution, or at least a range for an optimal solution. That is the target one sets for the pair, one's expectation of how the market will move.

For a typical AI search one has a very simple function to test each node for the desired solution, they have to be simple or else the search becomes beyond the computational capacities of any computer very quickly. But in forex one most certainly does not have such a function, but by using technical analysis one tends to assume one has.

There are so many factors that it becomes impossible to make a prediction on this kind of function. Try predicting a move based on fundamental analysis of an economy, no matter how real time it is, how deep it is and how focused it is in the market (e.g. news).

The problem is those factors are so loosely deterministic on the pair (in the case of news for example, the market may react based on its capacity to react). Technical analysis in essence tries to do the same thing. All those loose factors are still factors, look at it like a series of billiard balls coming at all directions on one billiard ball.

It is like a bias in a coin toss, and like the momentum in the billiard ball from something which gets it eventually in its direction. Except what that direction is, is hard to predict, it is the way patterns can take a number of forms at a given point.

More properly it is like somebody coming in and nudging it. Those nudges are from many small traders and big traders, yet other nudges can overpower that momentum (like EUR/USD at 1.5). That nudge was presumably the disapproval of governments to that valuation, which keyed into computational functions in this market which need trends.

A primary optimization function is to make a trend, that is what all those computer programs are searching for and will give the market at any chance, it's just there is antagonism in those directions.

Its just that kind of primary nudge is rare, it happens in news trading but only for a short while. Technical analysis is in essence all the many nudges one cannot really identify (fundamental analysis is the hope that one can collate all those identifiable little nudges to big manageable nudges, like chunking).

Yet there is something more, because there is sometimes in technical analysis signs of the direction of a  pair (or even a primary nudge) before it happens.

That is probably that global optimization, the force towards the best solution, that seems to drive this market and to an extent the equity market. And that is what programs and many traders converge on, except of course until they get knocked off by another nudge or many nudges, which can be themselves, or events in news, economy etc.

All this is why one can have an intuitive feel for the market yet get crushed by it. But order flow is another great weapon, because it is a set of cyclically repeated nudges. That is, the same kind of behavior tends to happen within the range of each major valuation. This is not unexpected as one expects there is a optimization process working exactly on that range.

I am suggesting again that technical analysis in equities and technical analysis in forex are different. One is partly written, one is more dynamic. There is a static structure to equities from the investors, which does not really exist in forex.

What I mean is, there is an order book, with depth, in equities, in forex there is an ever changing stop hunting target zone added to the optimization mix, but the market makers may structure it, and thus you get repeated patterns (the point of my 1 min trading activities). Bear in mind this is forex: the vast majority lose money and even the big money, which is used to ride through retracements, can get crushed.

But feeling that ebb and flow of structured optimization is the best hope.

With technical analysis in forex what is being analyzed changes, there is no static book. That is partly why depending on technical analysis without intense money management (that is to say handling losses, the acceptance of the changing structure of the market on your relatively static interpretation of that structure, your trading method) can be a disaster, there is a fundamental reason why forex trading carries that very daunting warning.

Without deep pockets, and deep experience the moment one enters the market one has taken away the primary pillars of support that others have.

(updated 7/16/15, 9:17am UTC+1)

© 2010 Guy Barry - All Rights Reserved.

As this blog enumerated, evidence and research suggests that if markets are chaotic it is possible to make very short run predictions but not long term predictions, but has this predictability changed over time.

It is postulated that in Wave 1 of an Elliott Wave strange attractors start appearing, these give rise to the non-periodic cycles, they essentially restrict movement in a chaotic system, they add structure, that is predictability which can be observed.

As the cycles are non-periodic, it is impossible to make clear predictions from the observations of them. One would need to get at the equations which give rise to them, which one cannot. What one tends to be left with is that impression of persistence, which is but a shadow of the real thing.

This blog has postulated that Elliott Waves in forex are the result of interactions between equities and forex, as the processes which give rise to chaos may not be in forex. Thus we can look at Elliott Waves in forex and equities as contextually different, yet the same thing.

In the context of forex they have little meaning, which means their appearance seems random. One would need to get at the causality producing the interaction between the markets. That was what I spent the crisis trying to do, at least intuitively. This blog is partly a continued examination of this hard problem.

BTW if intuitive trading is you, then you need early on to delineate times not to trade, but whatever your intuition is tracking can be waylaid by other causal factors in the markets. Again I find Raghee Horner's 34 EMA useful for delineating times not to trade.

But in the context of equities Elliott Waves do have meaning, they are probably part of that fractal growth mechanism, which is possibly the source of company share growth, the core program underlying this.

So what do they functionally do in forex, well perhaps they direct the reference of forex into the economy, in essence they provide a kind of long memory process. Perhaps the forex market needs a functioning equity market, not one drenched by money ebbs and flows.

Perhaps more importantly traders need this, to have any chance at predictability in forex and perhaps thus the formation of coherent trends. Traders themselves add structure to the market and provide long memory processes, but the antagonistic nature of trading works against this. Is there any evidence the forex market became less predictable in the wake of the crisis.

I might tentatively suggest this may be the case, that shock to the system a few months ago, what was mistakenly called the fat finger issue, as I said at the time, was what the market was like during the crisis.

Is it becoming more predictable now ? The ideas in this blog suggest it is but it is being masked by reliance on money flow, contingent on artificially low interest rates.

© 2010 Guy Barry - All Rights Reserved.

I did say I would continue my list of crash stocks I made before the crash. The list of moderate risk/return for an investment of moderate size included JOSB, BKE, GYMB, SAI and EME and I discussed this list in detail. The next list was less risk/less return. Let's start with the last on this list, ACM (remember I ordered them in terms of highest expected return first).

Remember I am not giving a financial analysis, or investing advice, consult an analyst, broker etc. for this. This is simply data for the ideas in this blog. Without data, it is very difficult to draw coherent conclusions, it is part of the problem in forex the data is there, but how it affects the market is unclear.

At least in equities one has something to hold onto, the market tends to bring companies with strong financial statements up to their market valuation, or beyond (the point where one usually sells). ACM is most interesting. Look at its lifetime chart data, candlesticks preferably (OHLC are good for indicating reversals, but candlesticks carry a lot of structural data).

Note the spike in early 2008, a probe of a valuation which only the depths of the crisis could breach, when there were vast liquidation sales from margin calls, the family silver being sold off in a forced sale.

The resistance it has found in recent months is near the important technical level of 25 (a bit like a super slow motion version of the phenomenon in in forex, at .25, in some cases), but it references precisely the body of the candle at that spike low in early 2008.

Candle bodies, especially on long term charts seem to carry a kind of reference to the entire structure of the market referenced to money flow. What I mean is they may contain data about the growth processes within the Dow as well.

That may be the source of the exact reference here. Remember this blog believes the processes in the Dow while drawing on optimization processes like and from forex are not optimization processes.

The processes of the Dow can be exact, they need to be. Think about Fibonacci growth processes, drawing from the constructive properties of fractal geometry, very much in the Dow.

They have exactness, that is the advantage of something constructing from itself from some kind of control program molded by evolution, it can only be exact (this blog believes remember these evolutionary processes are not in forex).

But this exactness is undeniably distorted by money flow, which is a random event, in essence. Money flow is determined by that risk on/risk off phenomenon which has characterized the markets since the crisis and before, when the market was shocked into being basically a money flow event.

It may be such a event has a deep structuring effect, those memory processes which are supposed to be about growth become hijacked by money flow.

This is another more profound reason why interest rates need to be raised to allow the crucial computational nature of the market to reassert itself, to bring equity to inherent value (usually expressed in financial statements) in an extraordinary post-fact deterministic calculation.

Of course the more company share values are a function of money flow in theory the easier it is to control those values. But of course this does not work, a classic example being the slide down from the flows consequent on very low dollar interest rates. The forex market is a pure example of this, and it notoriously does not work here, look at what happened at EUR/USD 1.5.

It may be that growth factor is exactly what brings the Dow its periodically corrected trendlines ever upwards. Interfering with this may stop the next surge, which fine grained fundamentals suggest is likely, for example the extraordinary creativity and strength of Internet technology companies.

All this suggests reasons why the economy may be fundamentally healthy, but the funding sources are still a mess.

© 2010 Guy Barry - All Rights Reserved.

As I said in an earlier post I do not believe that is a head and shoulders pattern being traced on the Dow, since 2000, as some believe. For starters, one needs to look at the long term view of the Dow in perspective and look at a log scale.

On that is it just a basing pattern along a huge technical level, such as happened at 1000. As I said though I believe that basing pattern should be shorter. Why - because the (corrected) trend lines have sped up the long term momentum of the Dow itself.

This is possibly a reflection of the way it grows, a greater precision in its overall functionality, growing companies and itself. But of course as this blog has been pointing out the Dow is about more than company growth, it is about money flow as well.

It does seem to be the case that the way money flow has been used to refloat asset values in the aftermath of the crash, is a more explicit use of this than has previously happened. Then it was part of the usual functionality of the Dow, with a certain ramping up from the early 1980s.

The problem is that those asset values, with some exceptions, are probably correct. That means the correct functionality of the Dow is being altered for the purposes of reflating correctly valued assets.

Those spikes down on the long term Dow since 2000 are probably a consequence of the huge asset inflation from the housing bubble and tech, plus vast financing money flows consequent on the US deficit.Think of it like an attempt to reach true valuations as the Dow has always done, reflated up.

Basically interest rates have been used as a tool to restart the Dow in the early 1980s. This was perhaps even correct (hey, it worked), but a dependance on this tool reached its nadir in the run up to the crisis. A new way of managing interest rates may need to be found.

So what does this means for the Dow, it means it is necessary as this blog has been suggesting for the computational health of the Dow (for the future health of the US economy) to raise interest rates and remove this inherent inflation from cheap dollars. The Dow does not need this kind of exercise. The health of the US economy is even stronger than it ever was (its creative companies, the source of that long term momentum), as this blog has elaborated.

The promise of the tech bubble is being fulfilled, but what promise exactly was there in the housing bubble ? Well the promise of a democratization of credit. But to afford this, the economy has to grow with its companies, which needs a working Dow. Basically not raising interest rates may prolong the interregnum before the basing pattern becomes another trend. All the US economy really needs is for that to happen, nothing else.

The failure of interest rates to lift the US economy up into a new uptrend (as it lifted it out of a basing pattern in the early 1980s), and in fact to cause spikes down which look like a head and shoulders pattern on a linear scale (like the misleading clarity in forex patterns, from a market made more like it from interest rate derived conduit driven money flows), suggest the usefulness of this tool may have ended.

Real company growth in an investing economy is a great replacement. A lot of factors make the time for this, now, but this is what President Obama seems to want, assuming he is allowed make it happen.

© 2010 Guy Barry - All Rights Reserved.

One thing I used to follow in forex was the length of a basing pattern before a move. Now, this was based on a range environment, but of course at some level of detail, there is always a range.

Can we ask if there is something qualitatively different from a movement that is a trend from a range at another level of detail. Yes, we can. This is from a lot of observation and trading of mine at 1 min to explore the behavior of the market at numerical levels of significance ('00', .20, .15). There are tighter levels of detail than 1 min (e.g. tick) but it is probably good enough.

This blog believes the forex market probably optimizes qualitatively essentially. This is because the computer programs do not write the programs. Now programs using techniques from advanced maths, models from AI, physics and so on may bypass this but they probably do not, these models themselves are not written by computers.

They are derived from formal systems, but the creation of the models themselves is at some level of detail a qualitative exercise of a creative mind. That is the problem with formal systems, they cannot self derive proofs which have a stable reference. That is why the fact a lot of models cannot be derived from experimental evidence is a huge problem in physics. Not to mention AI, where experiments have similar problems.

In all events 1 min is about as fast as the brain can deal with.
In a range the market is tied to such things as the length of a basing pattern. The chaos based Polarized Fractal Efficiency seemed good at referencing the transition to a trend (there tends to be input from an equity market in these cases, either Asia or NY), in conjunction with Ehler Fisher transform which seems to reference order flow.

In a trending environment, specifically in the beginning of one, order flow starts to predominate, in such things as the targeting on '00' and the way it will break the level, as this blog discussed. In is directional. It is possible to see signs of this as a kind of pressure build up in candles, but order flow is structuring it.

These all seem like elements of qualitative reasoning (one of my research areas), translated to forex, which suggests the transition to a trend may not be machine structured (though one would expect this from the observations above).

That is why the forex market can be precise but inexact (from yesterday's post), qualitative precision is like this. It is why there is room perhaps for the formation of structure which look random, but which one can feel intuitively what it is. It also indicates theoretical problems with systems.

© 2010 Guy Barry - All Rights Reserved.

The problem with the forex market is that the more specific your strategy, that is to say the less your risk, then correspondingly the less your reward. Remember any method in forex is based on this. One tries the method, if it fails one takes the loss, at your unmoved stop loss and repeat until it works then you let it run in some way which has matched past patterns.

That itself is an algorithm, a program for trading and should have a structuring effect on the market over the actions of many traders or large sums of money. The first problem with this is that one needs freedom of movement to capture the profit, which gives scope in your strategy for losses as well. Also, the market will act against attempts to optimize this strategy (making it specific).


The next problem with this is the forex market will not remove patterns, but it will change the way they appear. That is the great attraction of forex, those crystal clear patterns (probably a function of the computer program and system trades).

But as you find out that optimization process of valuation and the fact it is more or less an antagonistic market, where you slip through the different objectives of different players causes an appearance of random formation. It isn't, it is just the fact that the computers can play on a variety of patterns at a given point (like degrees of freedom). There is something else which is the nature of that optimization process.

Remember in equities you have in theory these factors going for you:
a) the way the market computes companies up to their valuation potential
b) the way money flow can push shares up and down

Against you is the fact the market still is antagonistic and is causally ill understood thus attempts to push shares around tend to results in sharp corrections which hit, but do not destroy the valuation optimization process (which may itself link into forex). That may be a function of fractal growth, it may need to re-optimize the way money flow changes the market, to work.

For example, the tech bubble made no sense for the trend line of the market in 1999, but it did make sense for the market later, and the way the market has been supported now to an extent by the same kind of companies exploiting Internet technologies. In the long run, the correction of the crisis may only be a return of the future behavior of the market as a valuation optimizer. Such a process cannot work with unsustainable valuations.

As for forex, it may not have that long memory process to grow, but it has something more it has a precise valuation process (that gives it the appearance of cycles). It is a process because it is optimized. But optimization is not necessarily exact at all, and that again is why there is that appearance of precise patterns appearing in a way which is antagonistic.

So what is for you in forex ? The way the mind can feel structure, the intuitive feel for a direction of optimization plus expert knowledge, processed into your mind to structure these intuitive decisions (that is so important). That expert knowledge is things like order flow, the way the market behaves at '00', listening to other expert traders and so on.

With expert knowledge and processed expert knowledge you have a chance with one of each only you have problems. With a system you need neither, but the market takes apart systems.

© 2010 Guy Barry - All Rights Reserved.

A question I asked myself in 2007 was how do Elliott Wave structures in forex come from high, clean falls off RSI extremes. There is some evidence for this. To avoid selling at support, this is one good way not to do it. I look for the spurt as a functional indicator of such a wave. Why, because it is hard to see structure until it has formed, but a spurt is nice and clear.

There are usually two spurts at the end of one of these forex waves, depending on where one is on its time-line, one can maybe get a quick scalp, but with care. Remember this wave is essentially rescaling the market, thus one can get caught at the re-scaled bottom, if one wants to scalp a short on it (the third spurt tends to be the rescaled one, where many are still entering short).

There is an asymmetry between long and short in forex, though there should not be, in theory, but this blog has explored this concept to an extent. Remember the importance of texture in this market (like an imposition of a conceptual view of currencies on a highly liquid market). But these comments apply to moves down particularly for EUR/USD. Other pairs have different behavioral characteristics, which would not be unexpected.

Elliott Waves seem contingent on chaos, thus another suggestion might be that they are windows onto the infusion of the equity market into forex. One could even test to see if the equity market is returning to its core computational form this way, or perhaps get a feel for this.

Another filter I use it to see where the bounce in the 'Dave Wave' occurs if one is using the 'Trading Chaos' Alligator. If it does bounce it can still indicate a turn, depending on where it bounces. This filter is really a test to see if one is actually near resistance or support.

© 2010 Guy Barry - All Rights Reserved.

The market is designed to ensure that any working systemic method is taken apart and stops working. As well as this, any method, patterns, and so on is subject to the apparent random changes which make them unreliable, but there may be a sense where they become more reliable in certain circumstances, that major traders probably see.

One can hope for more than the fact that everybody else is aware of these patterns of course and this biases it for you, but if we assume the forex market is about optimization, the underlying computation may override this at any time.

The structure of an optimization search in computation is interesting. It involves a kind of journey in the darkness led by some function, though it can be a brute force search as well, where you simply enumerate and test every possibility.

It involves as well solutions which while locally optimal are not globally optimal. This may be the structure of support/resistance, the waves from local to global to local again, that traps the trader and fakes them out. It is why you get trapped at support and resistance, because it makes sense to be there.

It is only after the fact that is really does not make sense. But again you may have intuitively been right and been well placed, but exited and who could blame you.

So really what perhaps one should do, is look at what one can use forex for. Using it as an ATM, well yes if one has really deep pockets, but if one has pockets that deep to ride out local retracements and you still might get hit by a global market change, the kind of money you make is may not be that significant, relatively speaking.

So let's look at what this blog has commented on about the underlying computational state of the markets and see if this can be used in some way.

This blog believes the computational state of the forex and equity markets are different. The forex market is about optimization, the equity market is about money flow, the way stocks can be pushed up and down, assuming a flow of cash, from unfortunately asset inflation or cheap dollars in recent times.

But the equity market is thankfully about more than this, it is about that special computation evolved maybe with the help of forex in recent times, to evolve companies to the potential of their financial statements. It is a kind of dynamic optimization of growth.

The essential problem with forex is that even if one is realistic about the returns you can make, it may help to send them to a market where the magic of compounding works more securely, where there is less chance of that zero sum game over time the optimization process of forex creates.

Fortunately such a market exists. The idea is to use forex, if and only if you make a profit, to boost your money supply for companies above a certain price level, stable companies which might catch into that growth structure in the US stock market (if it is working). That though is a hard optimization problem in and of itself. The other thing to use is the fact that you can precisely and exactly limit your losses in forex.

The problem right now is the equity market is not entirely functional, but this blog believes in a future where it will be again. The other problem as well is defining what a profit means in forex.

© 2010 Guy Barry - All Rights Reserved.

What is the problem with high leverage. Look at a 5 minute chart of a major currency. A lot of people look at it and see they could make serious cash there, riding the waves. But as one quickly finds out that is not what actually happens. What you tend to do is buy at resistance and sell at support

Thus look again at the chart as a loss maker and think how much you could lose (the waves are going against you). High leverage and this tendency is problematic, because it allows you to have more taken by the waves. Even a stop loss won't help you if you keep going, it is just many small bites making a big meal of your cash, until you get a margin call.

Even if the resistance is a breakout, the tendency is to exit before than happens because of time or volatility, and anyway most breakouts retrace back significantly or even become serious reversals – or just volatility. Resistance is a dangerous place to be, there is a lot of positioning going on which moves price up and down. Part of the steepness of the learning curve of forex is not to do all this.

The point about a clear candle pattern (like an evening star) or a divergence on RSI and prices or a head and shoulders or any other move like this is you will get most of the move if it happens and you stay in, they are great things. But if it does not then you are in at resistance again (at a local level of support).

The point about forex is these patterns tend to work, because the trading programs and systems will activate and the market likes to move in a direction, but the question is always, is this just a program reaction and if it is when should you get out. One could ask as well is their clear appearance a program consequence.

There are many ways to deal with this (consult those expert in trading methodologies for trading advice, this blog has referred to a number of them), but this is the reality of forex, computer or system driven structural moves which may or may not be followed through.

But I will say look for clear well known reversal patterns, but if they are reactions you need to enter near the reversal point, which differs them from equity patterns where you tend to have more room.

The concept of confirmation is a tricky one, I would prefer myself a sense of coherence rather, if it is possible. Confirming patterns or indicators may simply be showing the same thing...but it may be expert traders can see when it is coherence with underlying structure, there may be a strong reason to follow them or keep on eye on their trades.

In all events the risk appears essentially because patterns are imposed on underlying structure which may not be or become coherent with that pattern (i.e. what this blog called following structure not patterns). Now working out more systematically if the structure coheres with that pattern is something else.

But that is where multiple time frames are useful, but as this blog has pointed out there are problem with this and it may well be the case this underlying structure is basically hidden, possibly because of the adversarial nature of this market.

Any clarity is bid and sold away quickly, as anybody who has tried to exploit structural regularity discovers (for example what happens when some liquidity disappears when a market closes). Past structure helps as well, it provides a reference which can direct coherence in some cases.

But the human brain is your greatest weapon, it is good at resonating with structure, that sense of: 'I know the market is turning', but take careful account at order flow structure to enter, that tends to fake out a lot of good intuitive trading decisions.

The money and the thrills is a motivation to learn and stay with forex. This blog does not give financial advice, you need to consult an advisor for this. But there are ways to use high leverage in ways which do not cause financial disaster as you learn. I find micro lots useful for example, but there is more in terms of management you need. Consult an expert.

When you are learning something and getting stuck it is a good idea to take breaks and let your mind process things. Things can be clearer when you go back in. The first programing language I ever learned was LISP, an AI language based on recursive list processing (as fiendish as it sounds). That was a steep learning curve, to put it mildly, but the way I got it was to take a break at my mother's house, then go back to it. Downhill all the way after that ;)

© 2010 Guy Barry - All Rights Reserved.

If one is comfortable being an investor, when one comes to forex one tends to try and think about forex, like an investor. Is this a viable approach ? If one invests in cheap stocks, one can deal with the fact a stock tends to fall after one invests, before rising if one made a good choice.

That is a slow motion form of the tendency to buy at local resistance in forex. But forex is a lot less forgiving of this than equities, hence the need for ascertaining support and resistance levels as precisely as possible usually with technical analysis.

If you have deep pockets or use micro lots then you can buy into that move against you, in a structured way as Schlossberg outlines. As long as you buy near support as local as possible (assuming you want to go long), then a reasonable stop loss will ensure you can financially withstand the drift downwards (you know what your loss will be in advance), since you have probably at some level of detail bought at local resistance.

How do you find support and resistance. Well you can look for past references to indicate support (or resistance), as this blog has outlined. But what about support and resistance coming up based on new information coming into the market, because that is the problem with locking into historical support and resistance.

Well, keep an eye on news, but in quieter conditions, that is where Raghee Horner's 34 EMA comes in handy, it gives you dynamic real time support/resistance indications (the 'Trading Chaos' Alligator tries to do a similar thing, but the 34 EMA seems optimized more for forex).

I find that a combination of this and historical references can be useful. The 34 EMA seems to get at some kind of computational structure inherent in forex calculations. It is perhaps that growth contingent to an extent on the processes underlying long memory processes from the equity market infused into forex.

Fibonacci levels (the possible source structure of the 'Dave Wave' according to Raghee Horner's book) are all about the ability of an entity in the natural world to self design by growth. Design here is the important element. It is about structured growth, not merely growth. The structuring may itself come from chaos, like a program.

That is what gives the apparent randomness to precise memory structure appearance, which can negate any support/resistance analysis, what I mean by the way a pattern could have been another pattern. It is also design that optimizes itself to the environment. That comes from evolution in nature, but is this in the forex market.

It may be the element which is unique to it. It is what I mean as the eternal search for a valuation in forex, which is an optimization process. This reminds me a bit of the parallel search algorithms I worked on in AI.

They were hard computational searches for the best solution, it is just in forex while there probably are parallel computations for value, and such structures as message passing from all the sources of forex valuations, what the best solution is, remains undefined.

The forex market is so far relatively unconstrained by constraints of the kind found in equities. This may give it greater freedom to seek accurate valuations. For example high margin enables one to try trades you simply would not in equities - this is important for valuation, but remember this is taking on a high risk, please see the disclaimer, to get a sense of that risk.

But I believe it is important to have a market like this which can absorb shocks from the equity and other markets.

Remember the forex market was the only market which functioned at the depths of the crisis and it functioned beautifully, it was free from conduits, I mean free from valuation constraint, from primary values imposed by central banks. I noted there seemed to be a sense in which divergences were working particularly well. The computation was more linear perhaps as equities were behaving more linearly.

The premise of the forex market was to value currencies fairly, this arguably was and is not the premise of equities. The equity market is more about providing liquidity to companies and returns to investors which are as safe and assured as possible. Its original premise was simply to provide a market, but the consequences of this forced constraints to ensure some level of fairness.

Forex traders are constantly applying logic to trades, they have to, logic aimed at valuing currencies fairly. Some investors do the same thing, anybody who analyzes a financial statement and thinks a company is undervalued is doing the same thing, though here you are saying this company will fulfill the potential one sees in it.

But these asset values once they come up are mostly then determined by money flow, that becomes like a marketing exercise. To an extent there has been a sense of the forex market being used in a similar way with interest rates via ECB and the Fed, but it seems to reject such things.

The problem is there is nothing to set a final value to range within, or set it up on a trajectory of growth, like equities, which is why one cannot invest in forex. It is at its computational heart a search for valuation.

© 2010 Guy Barry - All Rights Reserved.

When you make make a trade in the spot forex market you buy a relative valuation. That is, EUR/USD expresses a valuation of the euro to the dollar. But what on earth does this mean ? What are you valuing. That is what fundamental analysis seeks to elucidate. The way this blog looks at forex though, one is not looking at currency pairs per se one is looking at an economic reference from information contained in relative measurements.

This means that EUR/USD is a different instrument from GBP/USD, perhaps like stocks in a different sector ? No, more so, because this blog analyzes stocks regardless of what sectors they are in. There is nothing in forex that groups this asset class together, a fundamental by which you can analyze them. That is why technical analysis is so important in forex, but the problem is, what does technical analysis actually measure.

It is an attempt to find memory in the market, but memory structures seem randomly to exist (the underlying computation may not be stochastic though). But why is there no paradigm of fundamentalist analysis ? Cannot one look at growth, relative value of goods, inflation. Well, it is partly the margin, it makes these factors less significant, even if you have the deepest pockets.

Know how you make a trade and it refuses to go your direction and you just wish it would, well that can happen to anybody (a reason to use a stop loss). It is one reason why those who can trade on low margin. But the lower the margin the lower your returns.

If you want high returns you have to trade on higher margin, because currencies do not move that much and they most certainly do move against you, big time. A stock is not eternally seeking a valuation (but it can get pulled along by a market which is to an extent), but a currency is, because it is referencing relative economic events.

The changes in an economy from day to day are tiny, but relative changes magnify this, as do those future projections which are in spot forex as well, both expressed in relative changes in economic policy.

That is another way of expressing what the Fed and ECB have been doing, they are creating that conduit, which expresses a dynamic change in future expectations. That texture is partly what a currency pair is and it comes into play during news, but in ways which are usually hard to predict, probably because of what technical analysis is trying to capture.

So why are GBP/USD and EUR/USD different. Well, they value in different ways. GBP/USD is partly a lingering historical valuation from when the UK was a mighty economy (not so long ago).

It still has enormous power, way beyond its economic prowess (strong though this still is, and it is powerful in important economic ways as well, for example financial services, it can be a great economy again though). But it seems to value a texture as the UK and the US are presently not comparable.

EUR/USD is closer to a comparison of economies, that is why it is so important, it is theoretically clean in its valuation of major structural components of economic dynamics. But right now it values a shifting belief in the value of the EU and the future economic state of the US...texture again. But the hard computational action is in company growth, a true revival of the US economy.

This would reveal the true worth of the US, the true worth of the dollar, not its use as a reserve currency and source and direction for money flow. Can we assume that technical analysis measures different things with different currency pairs. That is possible and it does seem intuitively like this.

Forex is deceptive it seems like you can use the market as an ATM, but you cannot over time. This is because those instruments are built on shifting sands. Equities are built on financial analysis, creative action, and chaotic dynamics to enable growth (in a working market).

There is nothing like this in forex, except at the edges as this blog has examined. But those edges are important for computational action through the market and forex and stocks can in theory be a positive combination, in a working equity market, because of it.

© 2010 Guy Barry - All Rights Reserved.

When you make a trade and it goes one way could it have gone the other way. Yes. But remember the way this blog has warned about turns in EUR/USD. There is a sense in which economic events override. Override what ? Well, the fact that stacking bid orders can make a currency pair rise.

But note that no matter what this kind of movement gets retracted and it seems like the more it happens the harder the retracement. Retracements can be ridden through with deep pockets, up to a point...therein lies the crashes.

In a way that is what happened to the equity markets in the run up to the crisis. They were fantastically bid up, partly with money from countries which made vast amounts of money by selling to the United States. That includes Europe which sold services, especially financial services.

But note the comment about the lessons from the crisis for the US. This was that banks should not have their own asset values predicated on assets which are in fact debts but Europe's wealth had strong derivations from exactly this, with the exception of Germany.

This happened at the level of banks and countries, in that counties borrowed to essentially add cheap cash to the flow of money, on loans backed by an economy itself. That was a bubble itself as it was based on a belief that countries could repay these loans (from that growth predicated on a US housing bubble) or that they would be backstopped by the EU. That seems to have happened, for now.

But remember what happens to complex systems, like economies or markets, when they are given an illogical statement. They re-write it until it is logical. There was nothing illogical about the crash. It is like one of those market moves which makes sense after the event, but one backed strongly by informational structure.

That is what I meant, currency moves are strongest when backed by the economy they reference, that deep logic. That is to say they become trends or reversals of other kinds of moves.

Money flow is good for order flow, but it engenders retracement. The fall after the the bubble returned the slope of the Dow to one which is consistent with realizable earnings. As probably did the crisis. The slope of the Dow up till tech, was predicated on the release of cheap cash from US government policy, from a housing bubble and the EU. Cheap cash for bidding up asset values, did not fall apart though until the crisis.

Even if there are attempt to let this happen again, it is probably not possible, but this bog has been watching for this. Asset values should rise resonant with economies. This is what shows in forex and is why EUR/USD tends to get revalued upwards when it seems like the money flow is being turned on again. What I have been saying is that certain currency pairs are sensitive indicators of an economy re-writing itself.

© 2010 Guy Barry - All Rights Reserved.

This is a very conjectural post for Labor Day. Instead of saying that forex is fractal, let us say that time frames are symmetrical or asymmetrical in terms of information. For a trader that is the point of interest, can one scale up or down one's information tests, such as indicators, pattern analysis and so on. That is, a 1 month chart can be analyzed in the same way one analyzes a 1 month chart.

More specifically, can one roll through chart time frames, like 1 min, 5 min, 30 min 4 hr a not unusual set. One can, but is there an inherent information degradation occurring by doing this or is it like focusing and context generation. One's feeling from doing this, is that there is, but why.

This blog has commented on differences between 1 month and 1 min and similarities. This comes partly from observation of an interesting indicator called the Polarized Fractal Efficiency and RSI as well as order flow. The reason I find PFE interesting is it seems to hook into something (the hook is part of its action, but I mean that sense of grabbing what is actually happening computationally in the market).

The RSI as I said does seem to reflect something real as well, but it is more like structure itself, like Raghee Horner's 'Dave Wave'. One could conjecture the 'Dave Wave' is itself a function of market structure while the RSI is more a simplification of market functionality.

A very tentative observation is that PFE seems to symmetrically link 1 min and 1 month. Given it models chaos and fractality might one expect that 1 min and 1 month are more resonant with this ? Remember this blog believes the chaos in forex comes from the equity market, it plunges determinism into the forex market.

Thus very tentatively one might see some support for the earlier observation this blog has made about symmetry between 1 min and 1 month, in certain circumstances. Would one expect a working equity market to bring increased symmetry between time frames ?

Without the input of the equity market one might expect less symmetry. By this I mean when the equity market is guided by money flow, like in the crisis or now to an extent, as this blog has been elaborating. One might expect money flow to simplify and thus remove symmetry, because it removes information.

A usual expression of this is volatility. Thus one would see scale up and down. But the equity market does still work in traditional terms as this blog has explored. But it is causing perhaps symmetry near the levels where order flow predominates and where long term strategies are formed.

© 2010 Guy Barry - All Rights Reserved.

The analysis I am suggesting in these blog posts would perhaps take issue with an analysis such that herd behavior is an issue in trading, particularly at shorter time frames. What tends to happen in forex day trading, is that one enters a trend long at the top or short at a bottom. BTW this is not necessarily disastrous if one exits with a small profit or loss.

The problem is re-entering again, because the end of a trend tends to be characterized by volatility and consolidation before a new trend emerges. Otherwise one takes an approach which tends to be contrarian. If one want to enter an Elliott Wave at the beginning, one needs to go long near an apparent bottom (i.e. in the depths of a downtrend), for example.

But is that herd behavior that induces one to enter short at that bottom ? This is something I have been looking at because everybody does it. One could perhaps define herd behavior as a tendency to follow a leader blindly, but the leadership defined as a direction not a person. However I do not believe this is really a characteristic of humans, especially when one's own money is on the line.

I think this tendency to in essence go against the trend while trying to go with it, is not behavioral. It is to do partly with the way the eye computes shape. The trader does not really make decisions based on what others are doing, in day trading anyway. Assuming you are trading by yourself, if you are not then decisions are usually being taken for you by somebody else or by a computer program or system.

If you are doing that there is no decision making happening by you. If you are making decisions or partly using a system, or keeping an eye on a trade leader's trades, the pips are moving fast, it is that which commands attention. If you are following anything, you are following the pips. But more precisely you are following the patterns they will make. That is the problem.

As this blog has pointed out many times, pattern formation is deceptive, it is where the randomness comes in forex, because while what is happening may not be random at all, you are getting a shadow of it in pips in a nascent pattern. But the trader is aware of this, it is what makes for indecision, because truly there is no information to make a decision. How traders deal with this is another matter but is usually expressed as let your winners run and cut losses short.

Thus a move one way makes sense, but look carefully later and you will see how a totally opposite move would have made sense in terms of patterns as well. That is why you should not beat yourself up in forex at getting it wrong. Essentially you are not following anything if you project patterns, not even a direction. But that is not a full explanation of why you go short at the bottom.

One extends the pattern you have which indicates a trend, without considering the fact it can change to something opposite at any moment and make perfect sense (or more precisely trying not to consider this to make a decision). One also contracts the extension in the direction you want which has already happened and elongates the desired extension. Viola, enter short at a bottom.

It is this pair of factors which makes this a deadly game. This is why you should buy in dips on a trend, using something which filters a change of direction from a reversal. It is being partly contrarian without the sense of standing in front of an oncoming  train. I find Raghee Horner's 'Dave Wave' helpful, I also find divergences on RSI helpful. While patterns can change just like that, other traders are following structure and will in effect try and bias it for you.

This is ultimately why indicators are necessary in forex, they show where the preponderance of traders and perhaps even more significantly where the trading programs are going to bias a move. My belief is that RSI and the 'Dave Wave' are also getting at that which the pips are a shadow of. But that is not herd behavior, it is more like intelligent support for your own decisions linking into market structure.

But bear in mind the bias of the market is against the imposition of structure from traders. One should be following the formation of structure in the market, but what that is and how to truly represent it, is an open question. The heuristic methods I elaborated earlier are a practical attempt to do this.

© 2010 Guy Barry - All Rights Reserved.

The market reacted to NFP by boosting both EUR/USD and USD/JPY. In the end the decision through the session was to revalue USD/JPY back to its valuation before the release and to revalue EUR/USD upwards. I have noted the very initial reaction is important in a manner which may connect with the deep logic of the forex markets.

That was a hard boost for USD/JPY. That to me is perhaps the reference valuation for the recovery. This valuation is disturbed by the technical fact of what this valuation for Yen means for intervention, but that seemed to have been cleared by the events of last Sunday.

However I must add my analysis does not imply a bull market will happen now. I am just possibly seeing the computational beginnings of one. If we take the reference of an Elliott Wave as the beginnings of a new bull market, we can note that there is a lot of movement up and down before the great surge begins.

In fact if we note the assertion that the 'Trading Chaos' method is based on the beginnings of an Elliott wave then we note the market can tick down to a point near the reference low and in practice can exceed this.

One can ask what is the reference low ?  It is hard to say it is the low from the crisis as this is based on such events as margin calls on an epic scale. But if we say that market was made like a forex market then we can say that was a reference itself, but not to an economic state but to an economic structure, one which was cleared essentially of those elements which made the past expansion. There has been an attempt to bring this back, with what I termed the conduit, but that encountered problems.

What I am saying is that low is not a reference low for the Dow. The reference low for the Dow is possibly more in the 8,500 - 9,500 range. That low itself is distorted by the gravity well of 10,000, a technical level which would probably be exerting influence even if there had been no crisis. Indeed it may be that technical level has overwritten many other support and resistance structures.

I made the very tentative suggestion that from a very long term perspective, that the return to 10,000 from the highs of 2007 is not entirely unexpected. the range of this movement is a bit more than might be expected, but that is possibly from distortions of asset inflation/deflation. But this suggests to me that the crisis is not as bad as it seems, if we view the market as a computational device of somewhat unknown structure and function.

Could we conjecture that the market is in a process of evolving. If the market is truly to grow which is what an Elliott Wave is probably all about, then it needs growing companies at the heart of a growing economy not conduits of money, which ebb and flow and sometimes come on like a tidal wave, in and out. This means lots of jobs cascading through the economy, because it needs service industries.

But evolving suggests a structural change. It may be those technical levels like 1,000 and 10,000 are associated with such evolution. They probably do something structural (this is based on observation of the behavior of the market at these levels).

The effort required to get over them suggest, as a program of some kind, the market cannot compute these values. It may be the market could only compute to 14,000 as it stood in 2007 and a radical restructuring was in order for a continuation. Well, this is happening, but a true restructuring to an extent depends on medium - long term political decisions.

© 2010 Guy Barry - All Rights Reserved.

I have been saying a real recovery is happening. The economy recovers in a sense like a complex system. This means what you seeing as outputs of the system may look exactly like the opposite of what is happening.

This is why economic events or market events tend to suddenly happen and then suddenly unhappen, even when they are happening making it very hard to call an economic top or bottom. I was reading a report from before the crisis in 2007 and it said the markets (the equity markets) may head for a crash or it may continue upwards.

Then why have I been tracking a recovery in the markets for months and talking about it even in darker times. Because there is a deep logic to these kind of complex systems. Remember they are probably not chaotic systems precisely, in the sense of a natural chaotic systems. It is hard to see how they can be when they are so precisely determined by minds.

Human minds are probably not formal systems in the sense Godel's theorem limited. They are logical, even the most creative action tends to work in this world when it is logical. But they have this deep logic. This cascades through the markets.

It is the relentless logic great investors have applied to the analysis of financial statements, which reveals a functionality of the equity market. A great challenge is seeing if this deep logic exists in forex.

That deep logic was what was in the jobs reports just before this. Remember there was gloom and then despair. Well at the time I said there isn't and shouldn't be. Why - many reasons, including behavior of the forex markets and the nature of money flow structured created by intra-national target rates, essentially valuations placed on assets in a relative sense.

These ebbs and flow of asset valuations created by this process were masking a recovery taking place. This was shown in the jobs data then, jobs associated with money flow economics were ebbing as would be expected as money flow was ebbing. But jobs associated with company growth were starting to flow.

It might be said there was an attempt to linearize the economy in at least the past decade, make the output a non-complex effect of the input. The market would not allow this as a computational system which is not linear. But it can re-structure this as a deeply logical system. That creative logic which bubbles up through the system as a recovery takes hold.

It is possible that is the determinism conjectured at the heart of this system (and that is a determinism which is both local and global). The problem with forex is you are not really dealing with minds in this way, you are dealing with formal systems, computer programs expressed as trading programs or traders using trading systems. A possible exception is very short term trading which is controlled by market makers and long term trading where the big money can afford to be.

But in general, it is why it is hard to find determinism, long memory or logic in this system but it is in it from the input of the Dow into forex and its references to the economy. Specifically this is why it it hard to judge what a currency pair will actually do on  news announcement. Some have looked for logical structure in markets, as I discussed in earlier posts.

This is something I was looking for in 1 min behavior and I found its echo in long term charts, but again this may not be a fractal phenomenon, it may be the assertion of the mind. I believe there is a deep logic to forex though, that partly what this blog is exploring.

It is interesting to conjecture what the forex market would be like if it was solely based on buy or sell orders for currency pairs. I think that is what some believe it is, and what they mean when they talk about speculators pushing up and down currencies.

They essentially cannot do this, because it would involve the ability to control economies, which it seems is exactly what failed in the past few years. It might even be argued the way the forex market is behaving now is more functional than the way it behaved in the run up to housing crisis when FOMC and ECB was all.

© 2010 Guy Barry - All Rights Reserved.

As my earlier blog post noted a recovering economy should result in serious revaluations of highly revalued banks stocks. Would one expect they would be sunk for a long time, just the way some tech stocks were. That is a very difficult question to answer because it implies share prediction.

But we can move this onto the investing structure by which one can expect a company to rise to the potential financial analysis reveals for it. The hard point is that these companies were very good at generating revenue from assets which turned out to be inflated.

The problem is their asset value was itself predicated on these assets. That is something for financial regulation to avoid happening, and indeed that seems to be a direction of the new financial bill.

However that was a general feature of money flow economies. They are predicated on the fact that asset values rise when money flows into them. The cash replaces asset growth from traditional ways, the kind which show up in financial statements.

That is based essentially on a computational view of companies, it is focused on that happens in the space where money is inputted and where money is outputted. It requires that mix of factors, management, creativity, financial management and so on some investors look for.

It is my experience all this shows up precisely in the financial statements. A money flow economy does not care about this, they care about companies having visibility. Investing prefers a lack of visibility at the time of investing, in essence it is necessary to invest before money flow finds it.

Put simply, it is all about creative minds engaged in structured action in this world. Put simply again a money flow economy is not democratic. The housing bubble was an attempt to make it so, by giving the capacity the relatively few have to bootstrap their house on a long term loan, to the many.

My own sense of this as I argued is that this is the fair thing to do, but the economy collapsed because of this. Another way is to create sufficient asset value from financial structure that the economy can afford to do this. Another way for a country to generate asset value is to have commodity wealth.

The only solution for these countries, is to have an investing economy when that asset value disappears. When this happens assets get effectively revalued, as that source of money flow is extinguished. The lucky thing about the US is a reliance on money flow from asset inflation backstopped by the dollar itself, did not destroy its investing economy, centered in its companies.

But the government really should be doing that it can to regenerate this. The stimulus bill was a good idea, because it contained funds for real infrastructure building and science and engineering research. It was a move for a moment away from a focus on taxes.

But in general the government does not need to do much. For a money flow economy, well it has to do what has been done since the crisis. In the run up to the crisis it had to manage money flow with the conduits produced by interest rate differentials between economies. This is something the blog has discussed.

All an investing economy needs is the capacity of some to create in a purposeful and structured way and express this in companies. This the US has an unparalleled ability to do. When other countries talk about wanting their economy to be more like that of the US, this is what they mean.

So answering the big investing question about bank shares, well, those companies were really good at generating revenue, so give them a real recovery, businesses to lend to, Wall Street booming, they will probably do really well. What about those toxic assets.

Real asset growth will make them less and less a problem on the balance sheet. Those toxic assets have made the statements of financial companies hard to see structurally, but one can look at the results of  their structure, their behavior as revenue generators. Just give them something good to generate revenue on.

© 2010 Guy Barry - All Rights Reserved.

If the market is in the kind of shape yesterday's and earlier blog post thought, then today's rally is to be expected. But is today's rally because of greater clarity of the economic landscape or because of a belief the Fed will pump up money flow, by finding ways to lower interest rates (Kohn's comments this evening making this assumption from Friday's comments real).

If the market is in better shape than it might seem, then lowering interest rates would be counterproductive. The market needs to catch onto that core expression in the Fed's statement on Friday, that the economy will recover. The market computes on future beliefs in income streams but in a slump it tends to compute on the state of income streams now.

The financial crisis was possibly unique and its effects need to be seen in this light, not in the light of other market structural alterations. If the market believes in a recovery everything changes in terms if valuations. It might be asked if money flow economics have distorted views of what a recovery or a recession is.

They have certainly distorted attempts to define what this economic state now actually is. The question can be asked as well, is the US reliance on asset inflation a consequence of economic problems. I believe it is not, but is a consequence of the United State's role as the engine of economic growth, which it still very much is.

It could be conjectured previous deep recessions or depressions damaged companies in terms of their financial structure. I did some comparative studies on this myself. But the crisis did not seem to damage companies in the same way.

This may be because of government policy to alleviate the crisis or it could be because the growth of US companies has been occurring despite economic policy for years. In fact this blog has conjectured US companies thrive in hard economic times, thought whether this is because of forced adaptation is another matter.

The question which interest this blog is what would investing economic policies do for US companies, would it be neutral, harm them or be a rocket under them. It depends perhaps how intelligent the approach is, the market rewards intelligence as Ben Graham pointed out.

The question can be asked is USD/JPY rising with the market because of concerns about Yen valuation and responses to this or because of a belief in the recovery.

Answering the question in the first paragraph: the fall of EUR/USD against the market suggests the recovery is part of this. This suggests the perception of the economic landscape is changing.

But the rise in EUR/USD in the run up to the US equity markets open suggests money flow is still very much a part of the equation.  It is what this blog suggested in earlier posts the recovery is a subtle part of the market, it just seems to be not so subtle now.

© 2010 Guy Barry - All Rights Reserved.