16 February 2011

Growth and Indicators in Forex and Stocks

What is it that one wants an indicator to do ? One can assume that they indicate past behavior of the market and how the present moment relates to it. But one really wants them to indicate the immediate future. But can one assume that they do give information about the past and is this even as reliable as a future indicator of action.

That is could they be better at future indications of action than as past indicators of action. This is important as it tells you the value of relative comparisons of forex data with past data. That is that past data contains future predictions of traders (like equity valuations at high intensity).

So forex contains high intensity equity like valuations. This suggests that one can indeed look at forex as symmetrical with equities. Is it a matter of scale, not because one cannot invest in a traditional manner on long term scales any more than you can on short term scales.

The problem is data representation, which this blog has suggested is a problem in forex. Is data better represented in equities. This blog has suggested that most indicators are native to equities and in this sense better represent there, in as much as they can.

Certainly the very concept of long term growth processes are suited to indicators than the flash memory of forex processes although this blog has suggested that where they appear indicators can be useful in detecting equity processes in forex.

However the flash elements of RSI in particular are suited to forex: the extremes which result in momentum reversals. That may be why RSI is more effective in forex. The problem of course is those reversals can just as easily reverse, thus this can result in effective losses as well.

The Analytics in this site are geared towards a concept of market driven use, the assumption, from practice is that using them like one uses them in equities is a problem. However the changes in the equity market may make for their use in equities possible as well.

The above observations suggest an answer to why chaos driven indicators work like this in forex: precise signals which go nowhere. In equities they are not so precise. In fact that is the trade-off which makes them perhaps equivalently not useful as predictors in either markets.

What this is a cause of, is perhaps the forces which break down success in either market, at any level which is not long term investing. These forces are strong in equities at the day trading level and the very heart of forex trading action.

Only in long term investing is there agreement to direction. But of course it is prone to money flow surges either way (why you need to buy and sell) and to the fact that it is not really agreement, it is a fundamental process within the market itself. Thus an equity growth process is like riding the waves of the market itself.

Might one say that the way trends work in forex, that they emerge from internal core market processes, perhaps coming from equities which then traders surge with money, may make for a better trading environment if one can detect growth processes.

Yes, but there is something else, and that is the possibility that growth processes really are not native to forex and that its core process is not conducive to trends at all. In fact a trend itself is a signal to the market to break it. Only where there have been strong growth processes imprinted into the forex market do these survive, like the Elliott Wave driven trends one sees during the US market.

That means what is it that gives a growth process strength to survive forex. I would suggest nothing in forex. The efficiency of a trend is this: forex traders will enter one. Many will enter too late. Those who entered in time will have entered something that probably did not look like a trend. This suggests that forex traders do not give it strength.

It is something to do with long term computational processes in the Dow, why because the evidence is that there are no short term growth processes. But that is to do with investors. If they do not make this process, they certainly add valuations to it. They are essentially giving it directionality by optimizing it intensely over time, and continually adjusting these optimizations.

What I am saying is that at the level of forex day trading the directionality of that process is dependent on the actions of investors and traders following those investors in equities. Money flow movements in equities tend to be determined by what investors and analysis believe will happen to its equity over time. Thus a company can be removed from that growth process.

But how accurate are these beliefs, and indeed such companies can continue their way along to future growth. This suggests to me why this process of growth is an internal process of the market. Such evidence as the black box nature of chaos determinism and the nature of long term processes in the equity market might back this up as well.

What this suggests to me is that forex is part of this internal process. It is true one must not fight the market, but in forex it is so hard to see what the market is saying. I am suggesting that it is optimizing long term investing processes. Effective computational processes require fine grained processes and the forex market provides these.

So what is the problem, well in a way you are looking at the machine code of the markets in forex. The aim is to make it more like C, going any higher and you lose too much representation. When you use indicators from equities you are going far too high. Indicators can be adapted, but some are more adaptable than others.

But indicators that use chaos, are good indicators to look for signals of growth as this is a commonality to both markets. Whether it holds or not, is up to the forex market itself and up to the stock market (that was my observation from those crisis trades). Those future valuations in forex may be flash expressions of that re-optimization of the equity market.

The forex market is imposed upon by money flow it is highly susceptible to this, but of course it has these extraordinary tendency to reject such impositions in a devastating way to those trading on them. What I am suggesting is that it is not rejecting them at all, it is just they are pushing it in ways it is already going.

Growth processes are fundamental, the actions of governments to set ranges on economic activity, but interest rates and so on, are reactive to this. That overheated economy governments like to slow down because of inflationary pressures, is arguably not growth. It is arguably the end of such a process resulting in outpourings of inefficient use of cash generated by that growth.

That is, one might expect they are fundamental in markets, and this I mean deterministic. Whether they are depends on the extent to which markets are an abstraction of the economy. What this suggests is that this growth is itself coming from economic growth processes and as I suggest from the companies themselves, who structure growth in ways the markets can compute on. Now markets can be controlled without growth, but that falls apart in a spectacular fashion. This applies to countries and aggregates of countries.

That is growth processes dictate direction in forex, unless there are powerful conduits established by interest rate differentials across major economic power. These fall apart, leading to money flow outpourings and unstable markets. Computable growth is the solution for markets and countries, and that means company growth.

It suggest one should trade on growth in forex, not money flow (jumping into trends is usually a loss maker). I'm suggesting RSI at extremes in conjunction with a growth indicators is telling you about a flash process of money flow and growth interaction which may start a trend, to be killed by traders.

One of the problems in forex trading is expecting RSI to tell you something outside of its extremes. It probably does not, but it may in equities. Will a surge of money flow induced by a news event start a trend, yes, if the growth is there and at an early enough stage. This means it is important that interest rates are congruent with growth not monetary or political policy.

If they are not, the market will still process this, but doing this is like trying to fight the market. The crisis demonstrated that even large scale economic policy convergence could not fight the Equity market of the United States of America and its computational heart.

© 2011 Guy Barry - All Rights Reserved.


Get SmartMoney - USA subscriptions: 36 issues for just $24 - SAVE 87%