Broker to Trading

I noted in a recent tweet that there is an interesting point in the causality of financial analysis whether pristine financial management makes for a moat. As I have noted in the past, one can look at financial statements without regard to anything else, this can be reasonably accurate in a market which grows, when performed in a comparative manner over many statements.

The usual explanation would be that the moat is or is not showing in the statements. However my interest is more with companies which have a less stable moat than for example a company making a product which makes it traditionally attractive to investors. These moats though while less stable seem to have more of a motive effect in terms of huge potential growth.

We can call these creative moats. They exist in tech and many other areas. But presently they exist in Internet tech. That is because the fractal elements of the economy are coming from a wave of innovation enabled by the development of Internet technology. That is where the real growth structures seem to be developing.

Moat instability may be why investors stay clear of these companies, but the elements of stability and their consequences are what attracts investors as well. The point is that forex is like this, computationally. Why ? Well let us ask what moat stability is. In terms of what a moat is supposed to do, to be a structure which remains upon which the market can compute value, they seem extremely effective.

I think it is that they are responsive, they are what a moat really is, before it hardens into something else. A moat should be a dynamic responsive structure, expressing the way a company fits functionally well into fractal growth processes. It is a kind of structural adaptiveness. That according to this blog, is what forex is all about. It seems to express this sense of a moat.

In that sense it is not necessary to note the fact forex does not give one details about companies, it does, it is that responsive moment which one looks to trade in. But this does not give one information about an individual company.

No, but it may tell you about a generalized moat in the economy and one may look for evidence of its strength in companies. This is a sense of optimization as a process of construction, it is when growth processes are highly enabled.

In this case one can expect creative moats to be in evidence and to be effective over time. This is the real structural power of a moat, and where it gets its sense of a future valuation even in a statement now. That is, it is most useful to be able to look at financial data over short time frames.

Creative moats are in evidence then but over longer time frames, like 5 - 10 years hardened moats are in evidence. As I suggest they are different and one does probably not become another. Those who make money investing in hard moats may have a point in avoiding these companies, but they to me are the most interesting.

One could perhaps say that a strong creative moat will produce pristine financial statements. The concept of a moat here is computational, it is the responsive financial inputs into the economy that reaps rewards. That is a very functional view of a statement, but my view of markets is precisely that.

© 2011 Guy Barry - All Rights Reserved.

As I note in the About This Site page, this blog emerged from my Twitter. That is in the tight character limit, I found certain precise causal descriptions of the foreign exchange markets. The blog then became the elaboration and development of this, which shows perhaps how Internet technologies are working as tools, in the sense that one uses a different tool in the stages of the renovation of a room.

As I note there is a revolution already happening which is the salvation of an economy ravaged by use of credit on an epic scale. It is a salvation because the economy is fractal in nature, it is the source of the fractal growth of the equity market.

Here is where the companies which grow to fulfillment of their financial structure exist and act. But it is the strength of the economy, it is the structure which creates all the good things.

Money flow is another part of the economy, but it is properly flow, it is meant to source power to the companies. There is no structure, an economy and a market which exists on money flow, is liable to collapse. What I mean there is support, but only as long as the flow can continue. The events leading up to the crisis were about bootstrapping money flow.

The ultimate support for it provided support only as long as it was not itself describable as a source of money. When this happened, total collapse happened. The forex market did not collapse because it is not about value it is about relative money flow being optimized, with structuring from chaos. What would stop forex is no transactions happening in the economy and no trading.

The collapse did result in the most enormous disappearance of asset wealth, but it did not wipe out bank accounts. See now why a collapse of the banking system would have been ruinous, and why the Fed did everything necessary to keep it alive.

But companies are more than a structure, they are the greatest source of money flow themselves, as the alchemy expressed in their financial statements inputs added value to the economy.

It is no accident the equity market is the creator of great fortunes in finance. By investing one is inputting into that alchemy, without having to work for the company. Day trading equities misses this, it catches more onto the input of vast sums of money and their effects.

These inputs are more like waves hitting a boat. They move it but then disappear. Investing is more like the addition of fuel to the motor, which is how it moves against the waves if those on board wish.

But forex is like inputting into this process, in a day trading time frame. Why, because you are entering minute processes, fine grained computations which make up that alchemy. Investing and the equity market is quite coarse grained, that is also its attraction, its causality is clearer.

Remember the units of forex are different from those of the equity market. These units are optimization of value differentials, that is the heart of the process which makes value in the economy. Without optimization, the boat is going nowhere. In the markets the crew cannot really guide the boat, as they do not know the direction, except in a very coarse grained kind of way.

So in the crisis, value remained ? Of course, that is exactly what is was the reassertion of the heart of the economy as assets were revalued to correct values, as the pressure from money flow collapsed.

In the moments before new events, one sometimes sees the market quite precisely indicate what happens next, that is the heart of the value computation, stripped of money flow.

To model a structure, one must mimic it in some sense. That suggest forex needs a distributed framework to work as an investment instrument. That is one is trying to input and ride the processes which compute value.

That is its attraction, one sees this, it is just they are so fine grained and so complex it is impossible to predict what happens next, one always tries to go with what the big money is trying to do, but as in equities that is not what the computation is about.

© 2011 Guy Barry - All Rights Reserved.

Is there a point to analysis in forex. Let's take the example of News Trading. News Trading usually comes down to making high speed decisions in front of a fast moving screen. Even if one predicts the correct jobs figure this is usually what one ends up doing. Why is this.

Firstly, one needs to ask exactly what is one doing. This is always helpful in financial markets. Let's take the example of financial analysis in equities. If one analyzes a financial statement what is one doing. It depends on the analytics one uses. For example it is said that one should not stress too much ratio analysis.

The ultimate reason for this is that the market itself may not use such linear differentials to compute value into a company. One tries to find as complex enough a linearization to feed into a comparative sense of the state of other companies and one's sense of the market.

In a sense one is always doing ratio analysis but one is looking for what one is really looking for in ratio analysis, something for the market to hold onto that one can identify. It is just this is a complex structure, not a simple one.

The point is in equities one has a stable sense of what it is that is being caught onto. In forex one does not. But one seeks it in News Trading, because it seems like one has something stable, the market's reaction to a new event. But the problem is this is an illusion. The market has already computed into its valuation what the effect of this news is, in terms of its computational structure.

This is most true in forex, which is highly keyed into the huge numbers of transactions which make up economic activity. If one looked deeper and deeper at forex structure, one would probably not see fractal structures, one would probably see very fine grained parallel computations engaged in a search for value. These hyper responsive structures (unlike fractal structure which are sturdy and analyzable) move and shift and more than this they compute value real time. NFP is past news.

What this does perhaps give is a direction towards an understanding of the most mysterious of properties of News Trading, how the moments before release can give a very accurate structural representation of what may happen next. That may not actually be a dead zone ('All Quiet of the Western Front' as a new report most memorably described it).

It may be the market at its most stripped, its computational heart which must always exist, the parallel computations are taking place, without distortions of money flow, market makers and so on. It is a pure market. The market itself is acting as the market maker.

Here one gets the most true sense of what does the market say. It may be the bets of money flow on a vast a scale and all the individual traders about to be unleashed go with this powerful underlying computation, they are essentially agnostics as to direction, for once in this market. The computation rules. This suggests problems with analysis in forex, unless it is computational.

© 2011 Guy Barry - All Rights Reserved.

The following are a series of posts from my blog which were tweeted about on Twitter:

What are conditions for a forex system to work. First, what does it mean for a forex system to work. Does it mean one can mimic a human trader. The problem with this target is that there is compelling evidence that no matter who you are, forex is a zero sum game over the long term.

Does this mean one can time one's exits from forex with one's winnings ? Well, only if one can time one's exit from a trade (i.e. it is as much a problem).

Thus what one wants is a system which uses some advantage systems have to get a hold on the causality of the market, or one wants a system to enhance the human trader in some way. For me, both are good and the possibility of both remains open and interlinked as well.

My feeling is that the forex market is far beyond the capacity of any modeling software or model to capture. I do think that it is not beyond the capacity of the brain to capture in this way. But to model the brain in an effective program is way beyond present technology (and may actually be theoretically impossible).

The mind has problems thinking intuitively with non-linear systems, but it does seem to me that it can do this better with forex than equities. It is just mistakes cost you in forex and shield the way your mind may be intuitively solving forex for you, which is why you have to think of the future not as a goal but as a target as you trade.

That may be because of the linearization inherent in that optimization path, which this blog believes the mind can feel and which may be supportable with use of indicators grounded in actual market mechanics.

It is just the path itself is a real time process, and what makes it is based on micro structural events. That means capturing its causality is beyond a trader with RSI etc, it simply will not get at this causality.

This is why I talk about infusions of chaos from equities, they are tradable, but their causality is not so clear either. Systems get caught in the trap that while they may be able to capture such micro-structural changes they cannot be dynamically responsive enough.

So what about a system to limit your losses. My feeling has been that limiting your losses is very important in forex and I use rules to do this. The problem is always that this kind of limiting seems to limit your profits.

But it may not, limiting losses with a logical set of system rules and the mind in my experience produces returns in accordance with expected returns in forex.

It only breaks down when you stop following this. The intuitive sense can be very misleading. Anything such as the need for money takes it apart, which is why it is so dangerous to trade forex on a fixed income.

Remember the market may change radically the surface through which one's path is going, you still have the path but it is invalid in terms of your original goals. What I mean is intuitive trading does not feel differentials at all.

Differentials are the basis for a trade, the belief that a pair is at a valuation different from what the market will value it over time.

Why, because these differentials are meaningless to the market. Even if they are forced by trends and so on, they reverse. In essence the way one trades is antagonistic to the market. A system based on this will not necessarily do anything but simplify the process of having one's money taken from one.

A system to limit losses though is a set of rules to guide your actions. What you really want is an expert mind which can get at micro-structural changes and which can think unaffected by emotional reasoning.

While such a program almost certainly does not exist, it may be possible to enhance the granularity of such approaches as chaos structured optimization or money flow optimization.

There are interesting approaches in terms of co-operative problem solving now. Stability in trading equals investing, it needs a novel approach for this to happen in forex, long term determinism provides it in equities. But innovative structures of parallel expertise in action may provide it.

For the individual trader in the market, there is no greater neural support than a sense of causality. With this one knows when not to trade as well as feeling when one should trade.

What this kind of support might do is in theory bias the market slightly away from a zero sum game over time. But the sheer antagonism of this market may make this not a feasible goal.

In all events the individual trader is not in any danger of being made redundant by a system, it is just co-operation in an antagonistic market seems necessary, for comfort at least (though the benefit of this simply for enabling one to stick with forex cannot be overestimated) and maybe for money.

What I mean is that the system already exists it is in the mind of the expert trader, it just needs better operational and support structures. Of course the market may break down event this.

My sense is that there is a core in this market which is not antagonistic, and part of this may be because of its lack of causal clarity.

Making this causality clearer will result in opposing strategies, but that non-antagonistic core may be part of the way the market functions and may thus be something upon which one can rely at various levels of granularity, which is one way of describing a great trading moment.

But the reliability may itself not be tradable. In essence one is looking for structure to enhance that of one's own mind.

© 2011 Guy Barry - All Rights Reserved.