04 May 2012

Stocks and Forex: Through the Magnifying Glass

This post will explore the structure of information from which inferences may be drawn in markets. This blog has approached this in the past by noting that in charting we do not see a continuity, that gives directionality. But nonetheless we do see continuity. The concept of process is that there is a process at work, which has some temporal regularity.

But it may not, because it may appear at random. But can we look at a set of appearances and find order here. This points at the applicability of sets of statements as a reference for a given examination of company data. That is we create a continuity. What I mean here is that analytical approaches may not find a continuity, but may find random appearances of it.

In fact we can regard day trading equities as precisely this process in action. However what we are really looking for here is long term order, or perhaps more precisely activity on a day trading scale which may be part of this. If we do not, then we are assuming no order, except that which enables random action. That is gambling on patterns, which is a definition of gambling itself (but thoughtful gambling).

However like all gambling activity it has the risk of cumulative losses, no matter how much one manages risk. Why, because one still has to take positions over time, in a game not biased for you and perhaps even effectively dynamically biased against you, in random ways.

That expresses this conjecture: if you trade long enough the market may take away your profits (but not necessarily and more importantly its attraction, that possibility...which is a motivation to be found everywhere there are potential rewards for your risk taking). That is an issue with risk management and is a core issue with trading which is expressed in many different ways.

One way to look at this is by seeing the timeline of the market and the timeline of your trading as mutually exclusive possible futures. So what can you do about this. In theory absolutely nothing. One needs to be able to predict thus, one needs to see that market timeline and eradicate your timeline. But as we know prediction is impossible.

--> But can we make the timeline of the market and the timeline of your trading cohere, by digging into the core of this market, as a set of pattern development. That involves looking at the market or having a program do it for you.

So what could we see on a day trading scale. One could see the beginnings of market turns, especially in forex. That is we see large grained changes, reflected in disorder in the market, or movements from order to disorder.

However the problem is that these are large grained changes, and thus may not be tradable on a day trading scale. That is, the grain disorders any information. This may perturb time frame analysis.

But again is there information in the disordering. Perhaps, not so much at the usefully random level of transitions, but at the level of texture of disordering, that is a metric for relative valuation, in effect. That bring us back to set ordered financial analysis.

The metric here is sensitivity judged by relative valuations, that is the ordering by which the market may evoke share movements, that is the stream into which a company gets pulled to compute on future valuations.

Because we note this may not exist in forex, we note that forex may show signs of this, what we termed the process maker. But the static structure of this metric, is that abstraction, which is why valuation here is systemically problematic, even if it has greater order than equities, as reflected in those crystal clear patterns. That is regarding patterns as symbols of computation of value in the market.

One could suggest that the directional order in forex has a continuity that differs from that of equities. That is, it is stable at all times, unlike the order of equities which is stable at some times, usually expressed as a bull market. It has an apparent stability at times of retracements. But that is an apparent stability, as it actually may express the move to disorder.

One could ask it is harder to trade after an RSI divergence price collapse. This does not mean it is easier to trade at the end of an ordered Elliott Wave. That does have well known order, but the problem is one does not know beforehand whether this is simply a retracement flushing out values before going higher or a collapse. There are other alternatives of course and there is undecidability in the range and extension of the order and at what time frame it is useful.

Is there any decidability ? There is a gambling decidability. That is one delineates options and chooses one, or hedges in some way. The problem is time. One could say that one is looking at an ordered Elliott Wave and thus one can remove this by counting waves.

The problem with all this is that forex is essentially a flat market, that has a magnifying glass put on it. In equities, some stay away from the magnifying glass and only look at the market, which most certainly, long term is not flat. However, perhaps the premise of forex is really this, the order is in the magnifying glass.

So the closer you get the the fine grain of this market, the closer you get to trading. That would be a possible conclusion from this. At a certain level one does not need to decide anymore, it is apparent from the market what is and is not a trade. That is a holy grail. But in general decisions have to be made.

This is why it does come down to a decision to be made. But what is that decision exactly. It is a decision to make a trade, it is not a decision to invest. To invest we need to have something which can effectively ride the retracements, or have an unusual global directionality, relative to your local trades. We do not want too much of a magnifying glass.

But could we regards that unusual global directionality as made up of a set of ordered retracements. That is what an equity rise looks like. But what is the source of the ordering. We have suggested the interconnections. That is in general missing from forex. Yet we suggested that there may be input from forex that makes the quality of those orderings, expressed in precision of valuations.

But that needs to be separate from the assets values, that is equities takes the valuations away from the asset values, as it finds future valuations and uses forex valuations to value itself, not the actual valuations, but the structure of valuation. I might suggest that to provide such structure, forex needs to be a free market, which it is, perhaps now more than ever.

I might note that forex seemed to me to be much more ordered in the run up to that collapse known as the crisis. Perhaps this provision of interconnection to equities, orders, calms forex. Functionality gives direction, in general.

This may come down to quality of interconnections again, as well expressed function may be a function itself of this, that is is enables a cohesion of function and structure. This comes back to function symmetries as well, it might be suggested that such a cohesive market will have symmetry.

That is they are a property of this, and hence may make for a more tradable market. That is symmetry underlies ordering such that one may have a given reaction to a certain action in the market. Which brings us back to the will it bounce question.

And gives this answer to the question I posed on Twitter: that a disordered market may have issues in bounce dissipation. Bounces will always exist, from phenomenon such as overbought/oversold.

But the question is, are they sufficient such that they may be growth enabling. This is a key question presently for the equity market. Is suggest that a number of elements may need to be in place before that epic rise begins again.

What is the quality of that rise - actually it does not come from a bounce in general, it comes from nowhere. It is that in forex, where a flatlining valuation signal becomes a rise. However, a rise from a bounce, enabling growth, may provide for more sustained rises.

So can we regard a bear market as a flat market ? I suggest an equity market that is through the magnifying glass does not show granularity of detail, but shows the dynamics of large scale dynamics. So in a bear market we might expect a different kind of activity.

If we regard a bear market as consisting of random ranges, we might still have a bull market structure shadowed, but unable to climb up on the retracements (for a bull market is this as well, it is just the retracements get stacked).

In this sense we can regard a bull market as more ordered. That is, the random ordering of a bear market does not allow the traders to stack the retracements. We note this all the time in forex. So what adds order, we suggested the interconnections, which may be independent from traders.

The order may have structuring from forex, but we might expect it comes from the way companies grow in bull markets. This suggests real stable growth may give longer stable bull markets with less retracements. But retracements may be part of the way a superstructure of growth is built. If one had a steady increase in valuations, then one would expect a rapid collapse, which would remain collapsed.

One could see interest differentials as giving the appearance of a stable growth structure, but having this actuality of a linear increase in valuations, and then a surprising, yet not surprising price collapse. So we need growth.

But what do we mean by growth. This is suggesting that growth itself is a kind of constant. However it may be that it exists within the market, and thus references itself. At times it may interface with activity in the external economy.

However growth in the market, that which produces tradable value differentials, may work better when it does not reference external growth, that is we may actually want a phase difference, what is sometimes called exuberance or excessive malaise, but in retrospect.

This raises the question of whether there is a symmetry between turns (up or down). I suggest there is not, not even free market forex shows a true symmetry (but a purely symmetrical market may have no directionality). So simply to look for a phase difference at a potential trough event may not be effective.

However it may be effective to look at the inputs from the economy, is there a phase differential within them, what I mean here is that expectations, that is analysis applied, is out of phase with actual outputs, rather then the reverse. That is, what the market reads as negative may not be negative in terms of what the reference is.

© 2012 Guy Barry - All Rights Reserved.