Broker to Trading

I have noted that forex itself may be a profitable company. But not necessarily as a way of selling, but as a way of returns from trading. For a company to fit the parameters given by some, one needs a number of criteria to be met.

One is a steady growth in returns, year on year, such that share price coheres with this grows at a sufficient rate and with sufficient stability that compounding results for a significant investment (that is, steady growth in a condition for coherence and fast growth based on future projections may retrace).

One needs to understand what it is that the company does. Can a company centered around forex trading ever fulfill these criteria ?

Forex trading is an understandable activity, except that it may be problematic to formalize into systems. That means there may be issues explaining it, unless it can be formalized, and assuming that formalization is explainable. Now it is possible to formalize the process of trading, it is done all the time.

But it needs to be done in a manner consistent with the first criteria, that is, steady return growth over time. What I mean is that such a company needs to have the returns from forex trading profitable over time.

Why, because a profitable forex trading company could be the most structurally pristine form of a company and a set of related companies (this set may be a condition by which individual companies grow over time). The leverage in forex means that the investments needed to generate returns are in theory relatively small.

Except that the (possibly always ongoing) R and D to produce a way of generating these returns needs to be taken into account, as the forex market arguably does not generate returns like this, at least in a consistent way, which is necessary to fulfill the conditions generally seen in the market to generate compounding returns on share price valuations.

Note as well, there is a belief that forex is a zero sum game over time, thus it cannot produce a such increments from forex trading itself. However, R&D has paid off in many industries, precisely to produce these kind of returns from next to nothing.

One can produce systems, one can sell instruments, but the issue is the returns from forex trading. One can note that systems and instruments based on such profitability would be of particular value as assets and as generators of value for the income statement. If one had a system that was profitable over time, one would probably not want to sell it though, as the cumulative returns would be astonishing.

A system is essentially an attempt to exploit regularities more efficiently than a human trader can, up to a point where they are simply following a system. However, regularities are dissipated by the market. More precisely, regularities may not be a consequence of underlying processes, they are simply the imposition of a kind of structure by traders.

The underlying processes may not be regularities. Their effects seem like regularities for the same reason that patterns seem like regularities. That is, trading on regularities is a way of trading on processes, but the extent to which they remain regularities, is indeterminate.

That is, the decay of regularities is precisely indeterminate. Precisely because these are not regularities. Function trading is trading on the process by which regularities appear, but it is still not trading on process.

The indeterminacy of function trading is that the decay of functionality. Is this a problem all the way down. Probably because the market exists to remove any regularity such that it is tradable, that is such that one can establish a value differential over sufficient time to make it worth while to trade. Those processes are such processes. That is why contrarian approaches work in markets, up to the point where they do not.

Trading shows one the depth of process flow, and that is a possible route into some kind of profitability. Any profitability is useful as money can be pumped with regularity into equities, which one knows can grow in such a way, in usual market condtions.

One needs to trade on process itself. That is on the depth of process. When process is deep, one trades, when it is not, one does not. News trading is arguably a shallow process event, though it may initiate process. In all events this brings the trading activity for such a company back to the human for now.

All this said, it is possible that companies which use the dynamics of creative MOATS with forex could generate something like those potential returns, now or soon.

Because so many use forex, it is part of that social revolution that, like the act of trading itself, the outcome is unknown, and in the unknown is freedom and of course those creative MOATS. Creative MOATS thrive on this, but in forex is a way of grounding their lack of stability and perhaps understandability in a structured way in the act of trading itself, given certain conditions.

© 2011 Guy Barry - All Rights Reserved.

What exactly is a retracement. A retracement is precisely a valuation, in particular in forex a valuation of one currency referenced to another, which keeps open the possibility of the market itself valuing the currency, as it wishes, but this is not what tends to happen. What does it mean then that directionality makes a wave opposite to the general direction of a pricing trend.

The point of a retracement is that it is unexpected, but by many, not all. Thus until it happened it had near zero expected probability of happening for many, especially if as some argue, retracements are forced valuations by large players, instead of technical phenomena due to market structure.

It did not have certainty of happening for those why may have caused it, for precisely the reason that the market will not necessarily react to a plunge in a valuation on order flow in the same direction. Sometimes it will simply absorb these valuations, other times it will reverse.

That is the problem with probabilistic approaches to forex trading. The probability of a tradable move only exists after the move, not before it.

Is the probability of a retracement zero before it happens for many. No, because there are usually signals for it and large orders take heed of this because they have to, especially if they are causing it. But at the same time, many tend to trade at precisely this moment, in the opposite direction to the retracement.

Thus the probability of a retracement is as an exit signal. That is, it collapses the *probability* of the trend continuing to zero, in effect.

Thus part of the causality of a retracement is the large orders or smart money reversing. Thus when a retracement happens and it is noted that orders cascaded at the top, this is not surprising.

By causality I mean external factors which may or may not be internally causal. That is the market can quite easily take this situation and rise to new heights, assuming the direction was long.

However the relatively low probabilities associated with pattern trading, defined widely, is not unexpected. That is, there may be no probabilities associated with charting formations. There is simply enumeration of events after the fact.

What I mean by this is that the market is a dynamic adaptive and anti-adaptive system, it may not be probabilistic, if it were, one could indeed make money by playing it like a pro gambler, by making high probability trades time and again. What it is adapting to may be incoherence in pricing.

If one trades in forex one may notes that gambling in forex is deeply problematic. The problem is that those probabilistic trades have less or no continuity of probability at all. That is, in equities there is information carried through valuations, especially over the long term. That information is biased towards increases in valuations, that is the structure upon which to base a probabilistic decision.

In forex there does not seem to be such information passage, in fact it seems like the discrete nature of forex events, closes off information passage, making this quite structured market essentially random, but not usefully random either.

This is why I look at process, because it provides a structure by which one can value valuations which are not inherently consistent, it provides a bias by which one can make probabilistic assessments of some kind.

So there are probabilistic trades in equities ? I would suggest not. But what there is, is precisely that which one tries to trade on in forex. It is that persistence to an extent, but this is only a structuring, within this is a dynamic process through which valuations may occur.

That is the process to trade on and it is not probabilistic, it is causal. But the causality is probabilistic before the event, since it is essentially unknown, but it may not be probabilistic over extended periods of time, in certain circumstances, in certain markets.

So if probabilities do not help too much, can we talk instead of stability. That is, we assume that a retracement is an instability in pricing. There is an inherent instability in currency pricing, as one is making a relative valuation.

Retracements can be seen as a way of cohering relative pricings. Then we can perhaps give a kind of probabilistic assessment of it occurring. Is this pricing unstable...

However it has been suggested here that valuations are inherently stable, thus we can see any trending process as unstable. This raises the question of the difference between a trend and a retracement. I think that is not a question to consider that much in forex.

In day trading the sensitivity of pricing to external inputs, make the causality of similar chart patterns different. Why this matters, is something one discovers as one makes a valid trade to find it rapidly retracted because of a news event, or trended against your position. But on the chart it is a pattern which may actually fit in with a technical framework, in fact I might hazard it usually is.

However what I have been suggesting is that the processes in the market itself, especially those from its interconnection with the economy and the equity and other markets may be causal in a stronger way and may perhaps be causal on the technical consistency noted.

Thus anything you want to trade on in forex is unstable, short or long term, but in equities, over the long term, it is stable. However forex pricing itself is stable and equity pricing may not be. Why this is, is the apparent fact equity prices can be pushed up on relatively unsound assets valuations. This is not a state of deception, it is simply that the equity market will value on future expectations.

But over the long term, this is inherently unstable, I mean the act of making such valuations. The speed at which prices collapse to or below present asset valuations when such future expectations are shown to be improbable, seems to show how such valuations are like words in the sand, clear and undeniable, just before the wind blows, gone.

In fact when a company attains that state where its share price will range back and forth, it has reached a price stability akin to forex at all time frames. This said, there may be an asymmetry between very short and very long and the rest of forex time frames.

I say this because I note that some believe that long term frames can be valued. that, is the function of the forex market changes at these long terms. At short time frames (1-5min), for a human traders one is coming close to the functional changes high speed trading, which searches for structural regularities as they come and go.

But as well, one may be coming close to the processes in forex and equities. What I have suggested is that those processes are apparent at long term frames and short term frames. Why this might be, is a function of what actually happens thus at these time frames.

That is the stable, adirectional processes at work, are given directionality, akin to the way phenomenal money flow during the crisis could, but not necessarily would bias the market to a currency move, again and again (not a usual feature of forex). That is the long term processes of the equity market simply disappeared and the forex market proceeded to stabilize valuations.

However this process was equivalent to the collapse of a company valuation to its assets pricing, since this was what was happening in the crisis. It was not a collapse based on fears of future valuations, for example earnings curtailed by a coming recession, or missed.

It was a collapse based on the valuations of extremely highly valued assets being based on apparent mis-pricings. As noted, other high quality assets, did not have anything like such a steep fall, and there was a revaluation based on sets of companies. In fact some classes of companies rose as the market began to fall into the crisis itself.

That is, the retracement of the market itself was arguably a true valuation, or more specifically a numerically accurate valuation with coherence. It might be asked are there retracements in forex which are like this, or are they the kind of valuation function discussed above. One might expect that such valuations might be more detectable than others.

However the pre-crisis valuations were not necessarily inaccurate either, as it could be argued that they were based on future projections, that is that financial stocks for example will attain collective heights again. This takes a long term functional view of the equity market, which is not invalid.

That is precisely the problem with forex, for this is even more the case. The separation of valuation from assets is inherent here, and attempt to value like this tend to come undone, in fact retracements could be seen as this slippage process at work, continuously, which suggests that the asset valuation foundations of the equity market should be kept as sound as possible.

© 2011 Guy Barry - All Rights Reserved.

When a company is at a market top, can it be suggested that growth processes decaying or disintegrating are a causal factor. This is a state of the market, not of companies, where companies are saturated in their valuations.

They move at the whim of money flow, and are pushed up as the market itself makes new peaks.

But what does value saturation mean, does it mean that the company cannot grow further. Well, what does company growth mean. This is a complex much studied problem, but one way to approach it is to look at financial statements.

Looked at over time, in accordance with the methods of Graham, one can say that one is looking for an inherent property of the company thus expressed to grow. That is, one is not asking what is the growth, one is asking a qualitative question, is it growing. If it is one can expect a value differential. What that differential is, depends then on the market itself over time. Over long period of times, it depends on the company.

This is a reason why I pay particular attention to quarter on quarter (year on year): here is a snapshot of the present capacity of the company to grow, when taken with its long term efforts, but more particularly it reflects a coherence of the company with the market.

This suggests that it may work irrespective of the state of the market, except in a state of extreme extended saturation. the company may be fine, but there is nothing for it to cohere with, hence its valuations become very relative.

Such approaches care little about the flow of money. Partly because once this happens as the predominant force, growth does not happen, with the notable exception of tech stocks. This may be to do with the basis of the growth in usually computer engineering which itself is a growth process before maturity. But does money flow saturate the potential to grow. Perhaps, but note the immunity of tech stocks to the saturation after the crisis.

That may be why markets top, because to grow again (that is there is a process to regrow), the money flow has to cascade out, and the companies find their valuations in accordance with their inputs into and from the rest of the economy.

So what is the causality. Possibly something like the causality within forex. That is, high speed flash causality predicated on the process enabled by growth/decay/money flow/growth (but not a symmetrical set, because over time the importance of each element, if they can roughly be described thus, changes). As noted, forex may be the process maker for markets.

As a process maker, forex would be expected to function in a crisis based on money flow cascading out, in fact it would find such a process amenable to it. Hence the survival of forex in the crisis.

Because it is possible that growth as a process ends, though I believe this is unlikely, then forex could stabilize the stock market. However what one wants from the stock market are differentials, either with some dependability in short time frames, with very large positions, or that more accessible compounding over years. Or those stocks which just take off, and return within a year or less, no matter what the position.

In such a case there will always be stocks which grow, but it might be biased more towards short time frames (like forex) but I expect as well with the surprises. The detectability of these surprises is I think related to whether there are dependably tradable regularities in forex.

I would note from the crisis that a forex market which is highly interactive and dependent on the equity market, is highly tradable, more tradable than the more stabilized market before the crisis. However a more tradable market is an even more high risk market.

It would be unlikely that the equity market now would be stable, or that one would want it so. However, in general, one wants a happy medium (more like a convergence to investing markets).

It maybe this is what is developing in financial markets and the economy as a whole and the relations between larger economies (if one looks at money flow into bonds and hence into sovereign funds then investing in stocks and now forex itself). The quality of forex is that one could in theory engineer this happy medium oneself, as a trader.

© 2011 Guy Barry - All Rights Reserved.

What is a necessary condition to initiate a trade. One needs, in general, to believe that there will be a value differential sufficient to make it worth your while, over a time frame. The problem is that there is no way of knowing this or knowing the time frame, thus what happens is that one trades to rules, based on those one presume to know the rules.  But can one in markets expect that there are rules to be know.

Firstly what is a rule in a market. It is a regularity. The problem is that as a proposition it exists within a context of an underlying system, which is probably not rule based. This is like the way a chart looks like it has a directionality, after the event. Rules are generated by the market on an ad hoc basis, essentially.

Getting at the underlying process may have issues in information decay, but getting at the process of rule generation may indicate the appearance of regularities, or their dissipation. That is one would want to know whether a regularity such as that occurring when money flow fades rapidly, will be effective or not on the market. That is there is something more to the effectiveness of a structural trade such as this.

That is what is the relationship of money flow to structure in the market at a given time. One does not have to trade on time frames determined by the market that does not reference time frames except as they act like buffers for process in the sense that order flow acts as a kind of stop point for valuation.

So one asks what are the conditions for regularities to appear, based on real time analysis, not on past appearance as one can assume that these are essentially, over time, not regularities at all (as all who trade on them can attest, it is like chasing a will-o-the-wisp). One should look for what the conditions are for the appearance of those regularities as a staring point (one can only look at past data).

One can ask whether those regularities are not particularly time dependent, that is do they have a structural integrity that is a persistence or more than a persistence. One can expect a persistence to decay, but one might ask are there such regularities that they will not decay, but they will in fact be turned off by processes within the market.

That is, can one expect that those regularities one is looking for at a given time frames act to turn off such regularities. Indeed, as that is what they are doing. Thus to trade on them to turn on a process is the problem, as this is a random event, what is not random is the process of turning off another process. That is not deterministic, but it is biased, and in this suitable indicators could help, as they can show bias.

But what bias, that is the issue. One might say a bias to a process being turned off. This may give a justification for RSI, in that it can be seen as a binary indicator. It may be the case that indicators work well in forex as trading signals (that is for trying to trade on regularities) in binary mode. So if you are looking for binary signals, you are not given the directionality.

In forex, a valuation can quite easily move opposite (or not at all) to the apparent bias in the market. That is the problem of trying to use indicators in a non-binary way, because if you do this, you are tying to find directionality in an indicator. There may be an argument for using these indicators this way in equities. Whether there is an argument for using them in day trading equities is another matter.

I might suggest there is (and the utility of Stochastics there) but in forex the discrete nature of pattern formation, that is the practically random appearance of crystal clear regularities, is the problem. But there does seem to me to be a use of RSI to indicate when an appearance of a regularity may be happening, which is the equivalent of a directional use of indicators in equity day trading. The problem with this is time frames, that is there may not be a fractal structure to this process formation.

This may give a justification for multiple time frame analysis. The problem is that does process come from external source or is it an internal process. That is, what is the causality of the market itself. Its deep links into equities (in fact, the forex market can collapse the equity market into itself) suggests a way to find a warning signal of a process formation. This assumes that the market itself is adaptive to process itself.

However I do not believe that the market lacks continuity, there may be regularities in the market between sessions for example. That is, the appearance of process is a function of time frames, which may make multiple time frame analysis problematic, but of course that is the issue with all approaches in forex. It comes down to this: one must analyze the market as it is at the time one makes a trade, and assume that the past has little causality on the present.

I believe programs in forex may be a great area of application for AI. The underlying problem is that programs need to do the same thing. One might argue that a program which can take advantage of storage and reliable precision of reference might have some advantage. The mind has such advantages, but the problem is the reliability of biological data processing.

So what does one analyze, one analyzes, in my view, large scale structure to constrain valuation, and within this one tries to find a cohesion of the market at the time one makes the trade with this, as indicated by suitable indicators, along with the usual elements to keep an eye on.

This assumes the processes of the market are strong. But one needs to bear in mind that forex valuations are not inherently about increases or decreases, in fact the underlying process is one of stability. In forex, one is always fighting the market and the same issues apply as with this in equities.

© 2011 Guy Barry - All Rights Reserved.