05 January 2011

Forex Systemic Causality

The following are a series of posts from my blog which were tweeted about on Twitter:

What are conditions for a forex system to work. First, what does it mean for a forex system to work. Does it mean one can mimic a human trader. The problem with this target is that there is compelling evidence that no matter who you are, forex is a zero sum game over the long term.

Does this mean one can time one's exits from forex with one's winnings ? Well, only if one can time one's exit from a trade (i.e. it is as much a problem).

Thus what one wants is a system which uses some advantage systems have to get a hold on the causality of the market, or one wants a system to enhance the human trader in some way. For me, both are good and the possibility of both remains open and interlinked as well.

My feeling is that the forex market is far beyond the capacity of any modeling software or model to capture. I do think that it is not beyond the capacity of the brain to capture in this way. But to model the brain in an effective program is way beyond present technology (and may actually be theoretically impossible).

The mind has problems thinking intuitively with non-linear systems, but it does seem to me that it can do this better with forex than equities. It is just mistakes cost you in forex and shield the way your mind may be intuitively solving forex for you, which is why you have to think of the future not as a goal but as a target as you trade.

That may be because of the linearization inherent in that optimization path, which this blog believes the mind can feel and which may be supportable with use of indicators grounded in actual market mechanics.

It is just the path itself is a real time process, and what makes it is based on micro structural events. That means capturing its causality is beyond a trader with RSI etc, it simply will not get at this causality.

This is why I talk about infusions of chaos from equities, they are tradable, but their causality is not so clear either. Systems get caught in the trap that while they may be able to capture such micro-structural changes they cannot be dynamically responsive enough.

So what about a system to limit your losses. My feeling has been that limiting your losses is very important in forex and I use rules to do this. The problem is always that this kind of limiting seems to limit your profits.

But it may not, limiting losses with a logical set of system rules and the mind in my experience produces returns in accordance with expected returns in forex.

It only breaks down when you stop following this. The intuitive sense can be very misleading. Anything such as the need for money takes it apart, which is why it is so dangerous to trade forex on a fixed income.

Remember the market may change radically the surface through which one's path is going, you still have the path but it is invalid in terms of your original goals. What I mean is intuitive trading does not feel differentials at all.

Differentials are the basis for a trade, the belief that a pair is at a valuation different from what the market will value it over time.

Why, because these differentials are meaningless to the market. Even if they are forced by trends and so on, they reverse. In essence the way one trades is antagonistic to the market. A system based on this will not necessarily do anything but simplify the process of having one's money taken from one.

A system to limit losses though is a set of rules to guide your actions. What you really want is an expert mind which can get at micro-structural changes and which can think unaffected by emotional reasoning.

While such a program almost certainly does not exist, it may be possible to enhance the granularity of such approaches as chaos structured optimization or money flow optimization.

There are interesting approaches in terms of co-operative problem solving now. Stability in trading equals investing, it needs a novel approach for this to happen in forex, long term determinism provides it in equities. But innovative structures of parallel expertise in action may provide it.

For the individual trader in the market, there is no greater neural support than a sense of causality. With this one knows when not to trade as well as feeling when one should trade.

What this kind of support might do is in theory bias the market slightly away from a zero sum game over time. But the sheer antagonism of this market may make this not a feasible goal.

In all events the individual trader is not in any danger of being made redundant by a system, it is just co-operation in an antagonistic market seems necessary, for comfort at least (though the benefit of this simply for enabling one to stick with forex cannot be overestimated) and maybe for money.

What I mean is that the system already exists it is in the mind of the expert trader, it just needs better operational and support structures. Of course the market may break down event this.

My sense is that there is a core in this market which is not antagonistic, and part of this may be because of its lack of causal clarity.

Making this causality clearer will result in opposing strategies, but that non-antagonistic core may be part of the way the market functions and may thus be something upon which one can rely at various levels of granularity, which is one way of describing a great trading moment.

But the reliability may itself not be tradable. In essence one is looking for structure to enhance that of one's own mind.

© 2011 Guy Barry - All Rights Reserved.