05 November 2011

Pricing Projections in Forex, Euro and Stocks

Can one genuinely stabilize an analytical view of the market. One may seek to freeze frame a market view in a trading stance on the market. By analyzing past data one may hope to have such a deep understanding of market activity that one can in effect project movements of prices into the future, or at least project a set of possible worlds and weigh each in terms of its probability.

Or one can prune the set of possible actions in the market, to get a better intuitive feel for the market, with the ideal aim of trading like a machine as a human. That is algorithmic, but using the far in advance capacity of the mind to see the structure in chaos as order over time.

That is assuming the complexity you are seeing has order in it, which may not be the case with forex or day trading time frames for any instrument.

It may be the order in forex is not such that the mind can perceive to trade on, that is machines may have the advantage, in that they can react and with no emotion take a loss and re-enter. But it may be the mind can be trained to see the order in such disorder. I suggest that that freezing approach may have a utility in forex.

In forex one may feel that even if it is possible to project or freeze in any way this is a very near future or it is a future indeterminate in terms of pricing ranges (to set and entry and find an exit). This is another way of expressing that there may not be tradable order, at least as it is known in other markets. That is the probability is stripped away before one begins, as a trading stance.

However it may still exist as a probability of the event occurring over time, that is the clarity of the outcome. That is a basis of trading decisions, to what extent does one expect the pattern to play out. The problem here is that time may be indeterminate and it is may be indeterminate whether the patterns will decay in random ways.

In effect a belief in persistence and a belief in visible process, is a belief in freezing a view. That is projection is simply a side effect of a reason to believe that the market will follow a pricing pattern determined by the past and present data.

Perhaps one can look to degrees of stabilization, predicated on relevant stabilizing factors being present, or going to be present. This gives a way of anchoring a future prediction.

This is a stabilization around expected ranges, that is a solution to the issue of random ordering through time. The market does display this kind of chunck-ing behavior.

It is just that leverage tends to require exits, or algo trading to chop it up. Else one is looking for something which may be alien to forex. I am suggesting that algo trading is something which may not be entirely alien to forex.

Process decay is a factor which could shorten stability of predictability, unless it provides market stability, but one would expect this is unlikely, given the sharp inputs from external sources.

One might suppose that such decay is hidden and that the results of it are unpredictable. This may be part of the dynamic of global long/short symmetry but local long/short asymmetry, on an unpredictable basis.

But why a tendency for apparent global long/short asymmetry. Perhaps a bias in process decay towards rising prices at a less rapid rate than reducing them. Each pair becomes a closed instrument, subject to this basis when traded.

This may be why rising prices tend to have structure and falling prices tend to have a cascading de-structured appearance with orderly spiking at the end, nonetheless. Essentially packets of equity behavior from bear to bull to bear.

Both are symmetries of a single process. But the process itself is not symmetric. But it has symmetrical order that is destablilized by the asymmetry. However perhaps that destabilization itself fades at the end. But this may mean that the process itself becomes increasingly disordered from penetration by external inputs

The reason I am looking at this, is to see if there is a way to determine whether there is a bias towards bounces or consolidation at the end of a movements.

What I am suggesting is that the more structure that exists, the more likely is consolidation, as a new set of valuations targets that the market requires, *can* be computed. But the less order the more likely that the market will move to a new random price level, supported by traders, with the caveats above of unpredictable effects from changes in function.

This is the assumption that the primary process to optimize in forex is dependent on the existence of order in the market. This is like the wall between markets, there is no translatability of the kind of order within each, except at unpredictable extremes, thus the capacity to form a porous wall around each pair within the same market.

That is the structure of the order is itself random, which may make its function random, as this is presumably dependent on its structure. And it certainly makes its behavior seem random, as behavior can be seen as noisy function.

But its structure can reform in such a way as there is a primary function, as the market itself is based around optimization. That is, there is a bias in its structure. Which is like the bias company statements give the equity market. But the problem is that optimization is not directional, except exactly as it is traded, with losses assumed.

So one looks for directional bias from other sources, and finds it at random times. Since the input is not coherent with the market's function, then it must be random. An exception may be new events in which case the function of the market is forced for a short time to be a response to an input.

But of course that response is unpredictable, but it seems more directionally predictable than other times. It seems functionally a different market. This may be the strength of forex, it has elasticity of function. This may be because of the fine granularity of its structure, unlike equities.

That is while equities may be like forex now, it is a malfunction of it, with all that implies for predictability - that is it creates non-ordered randomness, like information less disorder, analogous to white noise, in terms of the possible functionality of its structure. This is neither structural symmetry or asymmetry, it is an entirely discrete.

It is one definition of malfunction that it is like the decay of order over time, in pricing suggested above. But the difference is that reformation may need external engineering as there is no way to turn one into another, expect by some kind of spontaneous change, which may of course happen in markets.

How might this happen, it may happen with a symmetry induced from the well functioning and ordered forex market. The robustness of the forex market does not mean it cannot malfunction, but it would require something which is exceedingly unlikely, a breakdown of the exchange system.

Forex depends on a distributed valuation system, namely a robust network of foreign exchange dealing to establish pricing, in coherent and tight ways (the ways dealing happens is itself distributed, from tourists to market makers). It has a certain similarity to the robustness of the Internet, and it was and probably still is needed by other markets.

So are those forex-equities plungers we have investigated here induced symmetry, probably not, they may well reflect a move to malfunction, hence their lack of order. This may explain issues in trading them, that is one is not seeing a creation or imposition of order, one is seeing a breakdown of order.

That is we can expect in these cases for the forex market to behave even more like its internal actions decree. That is, it may be helpful in those cases to approach the market like a program, but using a sense of the order that may be in the market to structure this trading. This is assuming that the forex market is robust in cases where other markets are tanking.

But is a crashing equity market functioning. It may be if is it revaluing assets which are being shown to be mis-priced. But it may be that the process of collapsing valuation from the belief that were sustaining them, while functionally correct, if not desirable in most cases, causes malfunctions.

It may be the robustness of the forex market and its feature is that it can sustain such moves. Whilst the moves of a currency may seem relatively small, they are not because they have such amplification through the real economy, and indeed what may seem small fluctuations can create serious political incidents.

Thus the leveraged requirements of this market and the actual valuations referenced to the real economy, converge. Indeed one can see the trading process as a range for these convergences. Day trading equities has a similar effect, as those small fluctuations mean a lot to the big players.

But the equity market does not have the same capacity to have its valuations ranged, in a sense though it may seem like a controlled market it is not, it crashes with vast effects on the economy.

The question that remains is the market itself imposing ranges, as it seeks to find a way to revalue beyond its present state. This comes back to the question, would a more stable equity market not have the capacity to reach such heights and would this be a bad thing.

It as well touches on the question of what is EUR/USD going to do, will it behave like a crashed stock market and rise to new heights in the next equity rise or will it revert to forex ranging.

This of course depends to an extent on what USD does, as the imposition of ranges to an extent lies here, assuming the next economic rise is friendly to Europe and making certain assumptions about the status of EUR as a reserve currency.

It raises the question are certain rises more USD friendly, that is will a well founded rise, a more stable rise bring USD re-valuation. I ask this because the last one was EUR friendly and became intensely unstable.

In fact it seemed to have been inherently unstable. In this case what happens to EUR/USD depends presumably to an extent on what happens as well to growth in Europe.

But whether this contributes to a strong Euro is a different matter. That is one reason why I believe it is so important that smaller countries are kept on board, because real growth has come from here and will come from here.

Germany is always that incredibly dependable engine of real company driven growth, like the US, but the concept of thriving engines from the smaller countries, which they showed they could do in the previous rise, is enticing to say the least.

All of this could contribute to a more stable market and a correctly ranging forex market. But the capacity of market to compute on beliefs in future valuations is always that rabbit in the hat, from the perspective of those who want those sharp rises.

But what I am suggesting is it may bring those highs but well founded and with less need for retracing except as the internal valuation processes of the market may require.

However that freezing effect in forex in the midst of such stability may make for rises based on structure, that is the pairs converge to an instrument which grows, not to relative valuations. Here we are assuming disorder on equity day trading scales and on longer terms views disrupts such structure building in forex.

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