20 September 2010

Elliott Waves, Predictability and Forex

As this blog enumerated, evidence and research suggests that if markets are chaotic it is possible to make very short run predictions but not long term predictions, but has this predictability changed over time.

It is postulated that in Wave 1 of an Elliott Wave strange attractors start appearing, these give rise to the non-periodic cycles, they essentially restrict movement in a chaotic system, they add structure, that is predictability which can be observed.

As the cycles are non-periodic, it is impossible to make clear predictions from the observations of them. One would need to get at the equations which give rise to them, which one cannot. What one tends to be left with is that impression of persistence, which is but a shadow of the real thing.

This blog has postulated that Elliott Waves in forex are the result of interactions between equities and forex, as the processes which give rise to chaos may not be in forex. Thus we can look at Elliott Waves in forex and equities as contextually different, yet the same thing.

In the context of forex they have little meaning, which means their appearance seems random. One would need to get at the causality producing the interaction between the markets. That was what I spent the crisis trying to do, at least intuitively. This blog is partly a continued examination of this hard problem.

BTW if intuitive trading is you, then you need early on to delineate times not to trade, but whatever your intuition is tracking can be waylaid by other causal factors in the markets. Again I find Raghee Horner's 34 EMA useful for delineating times not to trade.

But in the context of equities Elliott Waves do have meaning, they are probably part of that fractal growth mechanism, which is possibly the source of company share growth, the core program underlying this.

So what do they functionally do in forex, well perhaps they direct the reference of forex into the economy, in essence they provide a kind of long memory process. Perhaps the forex market needs a functioning equity market, not one drenched by money ebbs and flows.

Perhaps more importantly traders need this, to have any chance at predictability in forex and perhaps thus the formation of coherent trends. Traders themselves add structure to the market and provide long memory processes, but the antagonistic nature of trading works against this. Is there any evidence the forex market became less predictable in the wake of the crisis.

I might tentatively suggest this may be the case, that shock to the system a few months ago, what was mistakenly called the fat finger issue, as I said at the time, was what the market was like during the crisis.

Is it becoming more predictable now ? The ideas in this blog suggest it is but it is being masked by reliance on money flow, contingent on artificially low interest rates.

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