15 September 2010

Systems versus Trading in Forex

The problem with the forex market is that the more specific your strategy, that is to say the less your risk, then correspondingly the less your reward. Remember any method in forex is based on this. One tries the method, if it fails one takes the loss, at your unmoved stop loss and repeat until it works then you let it run in some way which has matched past patterns.

That itself is an algorithm, a program for trading and should have a structuring effect on the market over the actions of many traders or large sums of money. The first problem with this is that one needs freedom of movement to capture the profit, which gives scope in your strategy for losses as well. Also, the market will act against attempts to optimize this strategy (making it specific).

The next problem with this is the forex market will not remove patterns, but it will change the way they appear. That is the great attraction of forex, those crystal clear patterns (probably a function of the computer program and system trades).

But as you find out that optimization process of valuation and the fact it is more or less an antagonistic market, where you slip through the different objectives of different players causes an appearance of random formation. It isn't, it is just the fact that the computers can play on a variety of patterns at a given point (like degrees of freedom). There is something else which is the nature of that optimization process.

Remember in equities you have in theory these factors going for you:
a) the way the market computes companies up to their valuation potential
b) the way money flow can push shares up and down

Against you is the fact the market still is antagonistic and is causally ill understood thus attempts to push shares around tend to results in sharp corrections which hit, but do not destroy the valuation optimization process (which may itself link into forex). That may be a function of fractal growth, it may need to re-optimize the way money flow changes the market, to work.

For example, the tech bubble made no sense for the trend line of the market in 1999, but it did make sense for the market later, and the way the market has been supported now to an extent by the same kind of companies exploiting Internet technologies. In the long run, the correction of the crisis may only be a return of the future behavior of the market as a valuation optimizer. Such a process cannot work with unsustainable valuations.

As for forex, it may not have that long memory process to grow, but it has something more it has a precise valuation process (that gives it the appearance of cycles). It is a process because it is optimized. But optimization is not necessarily exact at all, and that again is why there is that appearance of precise patterns appearing in a way which is antagonistic.

So what is for you in forex ? The way the mind can feel structure, the intuitive feel for a direction of optimization plus expert knowledge, processed into your mind to structure these intuitive decisions (that is so important). That expert knowledge is things like order flow, the way the market behaves at '00', listening to other expert traders and so on.

With expert knowledge and processed expert knowledge you have a chance with one of each only you have problems. With a system you need neither, but the market takes apart systems.

© 2010 Guy Barry - All Rights Reserved.