Broker to Trading

The statement that a currency pair is undervalued means something different whether one is talking about a technical reference or a fundamental one. A technical undervaluation means that there is something for traders, systems and programs to try and move the currency (assuming those signals are not reflecting something intrinsic to the way the market is computing value).

Technical indicators will tend to show you spaces in between surges of money flow which as a retail trader you cannot be a part of. Attempts to do so, are a basis of the loss of money which is the reality for retail traders.

A money flow indicator will show you what somebody is doing and that somebody is not the retail trader. What I mean by this, is that there is a huge difference between retail and other traders simply from their capitalization and their capacity to risk. Risk in forex is the ability to push the market.

Risk for a retail trader is the chance of getting in on somebody else’s move. By the time the indicator shows this move then it is usually too late.

A fundamental valuation means that there are other forces which will move that currency. But the point is those forces are forces of optimization, setting valuation ranges. And it true the Fed and ECB found a way to do this this in such a way as to bring a kind of economic growth, but one which engendered asset inflation. There is an alternative it is one based on company growth. As this blog has said, this does not result in huge re-valuations.

The desire to escape from business cycles results in something far more profoundly damaging to the US and world economy. Real growth whether in market or is nature is a movement which results in steps backwards, as new direction are searched for within the constraints of the design program. But money flow is something which fades as an effective approach, and this gets the big money as much as anybody else.

If the currency pair is not optimizable then it may not move, valued or undervalued. A fundamental valuation is more effective, but it takes time to work out. Another reason for the intense difficulty in market predictability.

Fundamental valuations are more solid, probably because they key into that chaos structure, which has structural predictability as it comes from a hidden determinism. Optimizations are not really predictable, they change dynamically over time. The very fact the Fed can change valuations attests to this, they are powerful tools to direct valuations to new ranges.

But the dollar is a tool of the attempt to shore up the way the economy was before it collapsed in 2008. Now that it seems to me is against what the US economy maybe will and certainly should do. The promise of Obama is to restore that engine of fractal growth, which will support dollar valuations, literally in the market, in accordance with the model this blog is proposing.

This kind of support does not need rate differentials, carefully scheduled news events and so on (with the result of a huge revaluation to the true state of the economy in 08). It is a computational supportive infusion into the forex mix via equities. For this to happen just needs that economy to restart, assuming the equity market still functions as as source of fractal growth. Then it's jobs, it's growth, it's the glittering future, it's that promise of hope fulfilled.

It might as well be a forex market more like an investing market, and tradable by the people. Technically it would be a situation where the optimization is more internal to the market itself and thus something traders can key into, in the way they can key into equity valuations, assuming a working market.

All this means is that predictability is a function of the extent to which causality is from structures, not from money flow phenomenon, i.e. purposeful attempts to move the market. In an antagonistic market those forces are not friendly ones to you.

Those moves you are trying to get onto with indicators are exactly moves to take that money from you, see why it is so easy to lose ? The COT reports do not report necessarily that retail traders do not know what they are doing, they report that they are in a different part of the market, they are a target for the big money.

Those moves from growth structures are ones which are friendly to you, but they come and go in forex. To predict equity generated moves in forex requires the ability to predict day trade equity moves and if you had that ability, well, you probably would be on your island. Day trade equity moves are a function of money flow as well and have the same predictability issues. The trend in forex and similar markets is not really your friend, structure is.

© 2010 Guy Barry - All Rights Reserved.

How does one invest in a forex pair ? One can lower the leverage and buy a currency pair you think will grow and take the profits from that growth. One would need a lot of money to do this. One could increase the leverage but then one exposes oneself to volatility.

One could treat the instrument like some treat equities and sell on local highs and buy back on dips, but that is a dangerous proposition in forex. The forex market is designed to punish that kind of activity (assumptions of regularities).

The presupposition is one is investing on 1 month over the long term, a matter of years. Firstly one needs a currency which will grow like this. EUR/USD did so from 01 - 08 and that fact is what has been pulling EUR up from the depths of its valuations in the wake of the crisis. EUR/USD was itself inflated, deflated and then reflated though.

Each time it looks like a new asset inflation measure is coming, which is what keeping Fed funds rates near zero is, EUR rises. It is like a memory in that system, but not really a memory, more like a computational sensitivity to money flow of a certain kind.

Now the nature of money flow phenomenon is they are not self supporting (fractal chaos growth structures are). Thus they actually need stimulus to get them up. Keeping them up is another matter and indeed the capacity of such boosts to work over time seems to decay, interestingly a feature of stimulus in natural systems as well.

The way the market has behaved in the past year is evidence of this. This blog has argued that EUR is itself a phenomenon of this. This blog has also questioned the economic plausibility of upward valuation of EUR and downward valuation of USD.

But the question is, is $ a good investment choice, whether one can actually do this or is simply interested in it as a paper trade.  It is a hugely important question, the value of $ has the most profound affects throughout the world economy. $ is the reference currency for the world still.

In investing one asks is an instrument undervalued or overvalued relative to other similar instruments and to something intrinsic to it. That is generally expressed as the structure of its financial data over time, is its equity valuation in coherence with what the data is saying.

The complication is that this is often a future potential the astute analyst is seeing in a company. One assumes though that the Dow will bring it up to this potential over time. But the forex market does not do this. It seems to value now, based on a number of things this blog has a called a matrix of valuation computations within an overall optimization.

What is the equivalent of a growing balance sheet in forex ? The nearest equivalent would seem to be technical indicators. Their signals are part of that matrix of computation. But more properly something like RSI catches the money flow element of forex and Polarized Fractal Efficiency the chaos element.

The forex market is money flow structured by chaos towards an optimization. To grow an instrument needs chaos in the mix. But to direct that growth needs optimization. In equities the balance sheet itself directs that growth, the optimization is up to the company itself. In forex that optimization is a result of such things as Fed Funds rates and economic performance.

But that optimization in forex takes place on technical indicators, because leverage makes it necessary to pinpoint entry and exit points. But use of Fed Funds or Fed Funds and ECB rate differentials (a differential means you do not need to raise interest rates at all, because you can direct money flow with a differential) has the same issue as money flow in assets in the equity market, they sharply correct or slide back.

Money flow is much stronger in forex than equity, hence the way the market apparently cycles back and forth in ranges. The exception seems to be those currencies mostly tied to the US equity market, $ and EUR. But those currencies are also part of that interest rate differential. Without growth they move up and down in ranges.

Very simply this blog believes that real economic growth is good for $, money flow asset inflation growth is good for EUR.  This blog has tracked the effect of this phenomenon, otherwise called risk on/risk off. But the reason why seems to be that the forex market does not compute that much on the kind of structure real economic growth provides and this itself is why asset inflation has been so attractive.

The great promise of Obama is that he will focus on real economic growth rather than the money flow related asset inflation. Real economic growth may bring recessions but it does not bring about depressions.

Asset inflation always does and arguably this is a deep depression we are in right now. But in deep depressions great things are born. Real economic growth would be expected to bring about recessions, look at how fractal phenomenon grow.

But the nature of Elliott Waves suggest that money flow is always a factor in markets, that is at some stage the fractal growth decays and money flow takes over resulting in something from a correction to a valuation slump. Then the computers surge up the instrument after a basing pattern and in this process chaos begins again.

Thus I am suggesting again that chaos in markets is not exactly like chaos in nature, it is highly linked to algorithmic processes rather than self growth from a program. The difference is one is dynamic one is static. Into this mix are human minds which seem to have an advance on algorithmic computation.

That may be a source of optimizations in forex as well. Money flow may be a super smart thing tied up with human minds.

Thus is $ undervalued ? The US economy is itself a victim of the money flow surge decay effect it has been happening for decades. Real growth will add that essential structure of chaos growth and superstructure for the alchemy of money flow valuations to work again.

It is the most liquid country, thus in a restored economy it is undervalued. In business as usual it is probably overvalued (technically it is undervalued, that is important for short term action). Thus the medium-long valuation of $ is highly dependent on the coming election in the US.

The point is that apparent growth in forex (e.g. EUR/USD) is a function of a kind of economy which may be disappearing. The suggestion is that the kind of economy that Obama wants to engender may produce forex pair behavior that is not conducive to investing even of the long term kind.

In theory those policies would be good for $, once Fed funds can be raised. But the problem is, its valuation is relative and ECB rates will be raised as well. A truly growing US economy will surge chaos into all markets, the source of Dow chaos is the US economy itself, that immensely complex powerful system.

The effect of that on EUR, which effectively has only Germany as a power source remains to be seen. The point is ranging as an expression of an optimization search may be more probable. A growing US economy will change the chaos structure within which that optimization seems to happen. Instead of Fed and ECB optimizing it, or setting optimization ranges, the economy itself will be doing this.

That means that the way to investing in forex is to link it with the hopefully resurgent Dow. That effectively turns the ranges into a growth trend.

UPDATE COMMENTARY 03/05/11: The performance of the equity market since this post does lend some support to these ideas. It did indeed resurrect itself after a time, perhaps enough for the market to compute on the effects of QE2. One notes the temporal delay in such processes even in forex.

However the market has since de-structured, with those vast drops one remembers from the crisis. But there is significant support there as well, from company growth, I suggest, because it acts like a support framework when the money flow cascades away.

© 2010 Guy Barry - All Rights Reserved.

Forex is like a sine wave of retracements and investing is like the slope of the Dow over its lifetime. By the time you get high on that slope though, in general it's too late to get in, but you can get in on forex at any time, but you can get on the wrong side.

What about money management. Well, if you keep getting in on the wrong side, all that happens is you get small bits making one big bite. But why not get in on the right side. Because you cannot, in the way you can be somewhat assured of getting in on a Dow component. That is why forex is like how it is, why it feels so hard.

There is nothing related to the topography of the real world you know to tell you when to get in on the right side, but you keep on trying to see it this way (with linear indicators, news events, and so on).

Why - because that sine wave is not a sine wave, it is a multi-dimensional shape, with an extremely complex topography, impossible to see. What my positivity about forex is, is based on this, the way the mind can feel structure. What that means, is the mind can sense that topography, and maybe not give you the correct entry point, but can bias it for you.

Even if you know the topography from study of the market, a new event can change it radically in a moment and put you on the wrong side of the market. And one cannot visualize that topography, one can only sense it.

From this one might even get the impression very few make money in this market let alone get rich. But it is also fascinating and remember you really need to study it and immerse yourself in it and listen to other traders to get that feel for structure.

Now, what about equities. That is not exactly a straightforward topography either, but is has a static element. Essentially, one needs to be able to see a financial statement in terms of its structural deviation from the range of other statements.

That is another inherent ability such as probably Graham had and other like him. That is why he says don't get too caught up in ratio analysis, that tells you nothing about that structural formalism. That is precisely what I do when I analyze companies (but I take note of ratios as well).

Think now how hard it is to combine forex with investing. One needs to optimize across a very complex topography. But does one, it may be the combination simplifies this topography to something which one can visualize. Remember once one visualizes, one solves, one has a path.

But it may be the case it only simplifies as it is solved. However those who have got immensely rich from forex and equities suggest otherwise. It may be that investing topography is linked to dynamic forex topographies. Together they simply make systemic sense, they clarify that topography with a result that one can see ($).

One needs that fractal growth embodied in Elliott Waves in forex, it is something static to hold onto, in a way patterns are not (as this blog has discussed). It is just as one find out, the severity of forex retracements means one has to get in early, and forex Elliott Waves are unstable.

If they have the backing of a chaos source like the Dow (US equity hours) then they are more stable. But otherwise they are prone to sharp changes. Why, well an Elliott Wave is basically a growth process. It is structured from the way market orders are made, but within this are strange attractors which are like a kind of dynamo, in complex topographies of functionality.

As I have said before I use Raghee Horner's 34 EMA to test the stability of these waves (e.g. on a valid Alligator signal, the Polarized Fractal Efficiency I use to tell me if a chaos trend is in progress). It is basically telling me how much chaos is in the market, how strong the growth processes are.

Fractally grown structures are stable, but as this blog has suggested many times and other evidence supports, the forex market is not primarily a chaotic system, it is an optimization system, and that optimization will override chaos growth at any time, that is also what the Dave Wave may be capturing, that interface between optimization and chaos structure.

It is hardest to override that growth process during US equity hours, except when the Dow is a money flow phenomenon (e.g. the crisis). Again the consequences of continuing to flood assets with cheap money may have continued effects on the way the Dow computes value, which may make investing itself problematic and forex less stable. That affects all investors and hence the economy itself.

© 2010 Guy Barry - All Rights Reserved.

Computational AI was hard. I spent a year programming a blue sky AI system in a language called object oriented Prolog with a massive deadline (3 years of work in 1 year), that was hard. But is forex hard. No, not really, would that it were, it would be soluble. That is one of the problems, when you enter forex you spend vast amounts of time trying to solve it, in essence.

The function to solve is: this is the valuation of this pair right now, what is its valuation in the future. That isn't a function though in this market. The real function is: this is your valuation, how do I make this incorrect - that's what the market says.

This market will not grow your valuation like the Dow should, except in artificial circumstances, like the run in EUR/USD up till the crisis. But those valuations get massively retraced. Why that is the case, this blog has explored.

It is thus not a matter of difficulty, it is simply not soluble. All of us would all be happy to spend 150 hour weeks, if it paid off, in the way 150 hour weeks pay off for programming (you make a great programs). This insolubility means you will lose money in it. And there is evidence it is a zero sum game. That means everybody will in theory average out to zero over time (or less).

So how do you do forex ? Find a method based on templates (patterns, regularities) and find a way of financing your trading when those signaled pattern become something else and spend or invest the wins when those patterns happen to appear and you happen to have got in on their appearance. Remember you need both a signal and a formation.

Expect the losses including maybe the cost to trade to cancel out the wins over time, even with money management at (near) best. That is the big mystery statement of forex, which cannot be proved one way or another. But it means you finance your losses from your wins over time, at best.

There is no method you can impose on forex, it will break all methods, that is why it is insoluble, it is not a function with a solution for you. It is a market designed to value against you, not with you. The only solution is to be with that market, unless you are big.

But it is a hard market to be with, it is designed not to be with you. A tiny percentage may well have an intuitive sense of market turns. That's how you may make money over time because you do not need an unreliable signal, so you remove the losses from those wrong signals.

This intuition is backed up by experience and the capacity to read the market with indicators, instead of imposing an indicator onto the market. That is the real number one reason you lose money, (mis)use of indicators, they indicate in indistinct and unclear ways, they do not direct and they do not really signal.

Entering the market because there is a trend happening (using the market as a signal), is usually a recipe for getting stuck near a top, if you enter long. This blog has explored reasons why this is the case.

But that intuitive process is like research programming, you put the function into the magic of the human mind, that creative marvel that can feel structure and find near impossible solutions, it is still worth spending a lot of time on it.

But that is a tiny percentage, because that percentage who make money is small. I am assuming here that ability overcomes the zero sum game. This still may not be the case over time.

I find it an intellectual challenge, like blue sky AI system programming it is partly why I am still here and I am interested in more efficient uses of indicators. But a major contributor to this as well is a sea change in forex beginning after the crisis. After the crisis it seemed like forex itself might disappear.

However that would be possible is unclear, but that does not stop political decisions after a crisis. But it did not, but a series of things sprang up and a series of developments happened which began to put principle into it. Forex becoming like equities (low leverage) is also forex disappearing, but it seems another way has been found for now.

It is to me, forex with principal, but still being about money in its purest sense, that is why it is even more exciting than AI. Put it this way, forex interested me when it was still somewhat wild west, but it interests me even more as it becomes more principled.

At the very least it helps removes some of those artificial biases against the trader, which made it very hard to deal with. It may be those biases were in the market structure itself and perhaps a new fairness will be beneficial for profits.

© 2010 Guy Barry - All Rights Reserved.