12 October 2012

Surfing News Releases in Forex

It might be instructive to strip away all automation and see what issues may confront a trader, in terms of the act of taking a trade. That is, we remove those things which may instruct the trader place a trade (rules, signals and so on) and assume those elements of fear and greed are contained in some way.

Well, for the new trader, it is perhaps not such an issue, indeed a new trader is useful to consider as such a trader may not use rules, simply from a lack of familiarity. The 'new trader' is a conception of a trader, to capture that sensibility with which one may initially approach the market.

But one learns something in the market, its risk, that is, its capacity to turn capital to a loss and the rapidity with which it can do this and its resistance to any attempts to stop this, especially over time.

These experiences may engender further risk to the trader, that is the unpleasant feeling of this and consequence for the trader. The risk can be quite extended in time, and may only diminish over time. Given this risk curtailment may be practiced, that is an attempt to curtail significant consequences by immediate actions.

Yet, what this tends to do, is limit one to small incremental wins, which, when risk curtailment lapses for whatever reason, gets eaten away by a bigger loss. That is related to how hard it is to get a win, and how easy it is to get a loss. But maybe risk curtailment does make sense, and maybe one is correctly assessing the risks involved, so in line with the logic of those risks, what can one do.

That is to come back to the happy state of this 'new trader', trade on the market, but with a clear realization of the risks and methods to trade complied within, but not following rules. The objective here is to see if the human mind can make trading itself a better experience.

We assume compilation of rules by the trader, to the extent that they do reflect useful information about market behavior, but we assume this is context dependent, that is one needs to see if they are applicable in real time, to reduce the risk associated with following rules.

Well, one can try and shorten the temporal risk. This consists of risk before the trade, during it and after. One can try and shorten the time one is in the market. The time this is feasible, is news numbers, but this exposes you to the rapidity of loss risk.

To do this, one needs to adapt to a fast moving market, to the extent one can. News boosts may stall at structural clumping, that is a way to assess whether it is too late to enter. What I mean by this, is that you get as close to the start of the move, but only after it has started.

Analysis may give you a possible direction, so one can reduce the risk of getting in too late, by taking a position before the move (the enormous risk of this, is getting out if one is wrong about the direction, as the rapidity risk converges to an almost certain stop loss hit, or worse).

This is riding what is seen as the volatility very early on, but one is seeing it as a logical market that finds unaccustomed directionality. It is a responsive market for a short time and the volatility is that response. It may not be, that is a further risk of reading market structure with an indeterminate amount of assumed predictability, or it may only partly be.

To get in after the move, one needs realistically to have the direction right, and one needs a strong response. The volatility of the market here can be seen as the way the market reacts to a strong response of directional movement. Thus the logic remains after the initial response, but it is a reassertion of market logic.

Thus what happens next, which can seem illogical, may be a logical response. There is an interesting question, the extent to which that very first strong reaction coheres with market logic. That is the patterns by which the market builds and deconstructs valuations may be consistent with that reaction. If so analysis may reveal the possible response, if we assume that that response is a temporally enhanced output of valuations expressing that underlying order.

But the risk then is a function of the extent to which one can deal with the temporal enhancement, that is, to get in the order at the right moment, but it is as well a function of all the other possibilities of response. However to what extent can the other possibilities be a function of that market logic. That may depend on the extent to which value is a function of anything.

Consider an equity valuation, one may say it is a function of earnings, or earnings potential over time. Consider a valuation of a Forex pair functionally tied the stock market, one may say it is similar, such that one can regard equity valuations as being interconnected.

However if equity valuations are not a function of earnings, one may see such Forex valuations as still being functionally tied to the equity market, except that the function has changed. But that may still make big number surfing Forex trades, tradable. These seem to be precisely about money flow.

But the logic of money flow may be more complex that an instant burst. In a market that more precisely expresses money flow logic, that logic may be clearer in the run up to the number. But that may not be directional information. However in a more directional market, consequent of equities or interest rates, such information may be there. This is a path to reading market structure, and compiling those inferences.

However with Forex, reading thus may still not give something one can trade on, as the market may not react, for various reasons, or may not react sufficiently.

All of the above is looking for logic, and we strip the market to that where it may exist. That is, we assume that the trained mind always looks for rules, but it inherently compiles intuition, that which gives correctness above and beyond algorithmic thinking. However we may note a hope for convergence of the trained mind and correctness to intuitive thinking in the market, through careful compilation of inituition.

© 2012 Guy Barry - All Rights Reserved