10 September 2010

Support, Resistance and Forex Valuation

If one is comfortable being an investor, when one comes to forex one tends to try and think about forex, like an investor. Is this a viable approach ? If one invests in cheap stocks, one can deal with the fact a stock tends to fall after one invests, before rising if one made a good choice.

That is a slow motion form of the tendency to buy at local resistance in forex. But forex is a lot less forgiving of this than equities, hence the need for ascertaining support and resistance levels as precisely as possible usually with technical analysis.

If you have deep pockets or use micro lots then you can buy into that move against you, in a structured way as Schlossberg outlines. As long as you buy near support as local as possible (assuming you want to go long), then a reasonable stop loss will ensure you can financially withstand the drift downwards (you know what your loss will be in advance), since you have probably at some level of detail bought at local resistance.

How do you find support and resistance. Well you can look for past references to indicate support (or resistance), as this blog has outlined. But what about support and resistance coming up based on new information coming into the market, because that is the problem with locking into historical support and resistance.

Well, keep an eye on news, but in quieter conditions, that is where Raghee Horner's 34 EMA comes in handy, it gives you dynamic real time support/resistance indications (the 'Trading Chaos' Alligator tries to do a similar thing, but the 34 EMA seems optimized more for forex).

I find that a combination of this and historical references can be useful. The 34 EMA seems to get at some kind of computational structure inherent in forex calculations. It is perhaps that growth contingent to an extent on the processes underlying long memory processes from the equity market infused into forex.

Fibonacci levels (the possible source structure of the 'Dave Wave' according to Raghee Horner's book) are all about the ability of an entity in the natural world to self design by growth. Design here is the important element. It is about structured growth, not merely growth. The structuring may itself come from chaos, like a program.

That is what gives the apparent randomness to precise memory structure appearance, which can negate any support/resistance analysis, what I mean by the way a pattern could have been another pattern. It is also design that optimizes itself to the environment. That comes from evolution in nature, but is this in the forex market.

It may be the element which is unique to it. It is what I mean as the eternal search for a valuation in forex, which is an optimization process. This reminds me a bit of the parallel search algorithms I worked on in AI.

They were hard computational searches for the best solution, it is just in forex while there probably are parallel computations for value, and such structures as message passing from all the sources of forex valuations, what the best solution is, remains undefined.

The forex market is so far relatively unconstrained by constraints of the kind found in equities. This may give it greater freedom to seek accurate valuations. For example high margin enables one to try trades you simply would not in equities - this is important for valuation, but remember this is taking on a high risk, please see the disclaimer, to get a sense of that risk.

But I believe it is important to have a market like this which can absorb shocks from the equity and other markets.

Remember the forex market was the only market which functioned at the depths of the crisis and it functioned beautifully, it was free from conduits, I mean free from valuation constraint, from primary values imposed by central banks. I noted there seemed to be a sense in which divergences were working particularly well. The computation was more linear perhaps as equities were behaving more linearly.

The premise of the forex market was to value currencies fairly, this arguably was and is not the premise of equities. The equity market is more about providing liquidity to companies and returns to investors which are as safe and assured as possible. Its original premise was simply to provide a market, but the consequences of this forced constraints to ensure some level of fairness.

Forex traders are constantly applying logic to trades, they have to, logic aimed at valuing currencies fairly. Some investors do the same thing, anybody who analyzes a financial statement and thinks a company is undervalued is doing the same thing, though here you are saying this company will fulfill the potential one sees in it.

But these asset values once they come up are mostly then determined by money flow, that becomes like a marketing exercise. To an extent there has been a sense of the forex market being used in a similar way with interest rates via ECB and the Fed, but it seems to reject such things.

The problem is there is nothing to set a final value to range within, or set it up on a trajectory of growth, like equities, which is why one cannot invest in forex. It is at its computational heart a search for valuation.

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