15 October 2011

Prediction in Forex and Stock Trading: Order into Disorder

Are there cycles in forex such that the market moves from order to disorder and back to order. The problem with cycles is the predictability of their beginning and end and the extent of the tradable differential within them, which is a function of their predictability, with an exception of a program which does not try and predict, but searches for such regularities. However is there a difference between what are similar things.

Well, the human trader tries to predict for a number of reasons, but the one most pertinent here is to slow down the speed of price movements, in effect. The program does not need to do this.

The problem is that the forex market may not be predictable in such a procedural way, thus the program does have an overall advantage, as it is better at procedure, which non-predictive approaches to the market usually are. This does not necessarily imply any improvements in profitability, just the act of trading itself.

That is the predictive facility of human, the ability to project, may not be an advantage. The idea of intuitive trading is that one can project, except the projection does not have the advantage of procedure, it's that feeling. One of my interest in AI was creative reasoning, which is precisely the capacity to intuitively project, but to try and proceduralize it.

Let us look for some way to make prediction more procedural, whilst maintaining accuracy. This is an assumption that intuitive trading could be more profitable, in that at least one prunes the loss making trades that program may not, but with a big problem, how do you know when to trade, as money is not intuitive.

Procedure tends to build in when to trade, at a price of sensitivity. The argument is that a) sensitivity is not necessarily a good thing in forex because either the market is deceptive or unclear in its procedure or b)you will succumb to emotions and so on and become unclear yourself (all entirely correct).

Can we say that a movement from order to disorder has a predictability we can chunk at some time frame to have a level of temporal predictability. This would suggest a freezing of movement, or a slowing at some temporal level. That we have suggested is the trading advantage of prediction.

Why would this happen. Because process may itself freeze at some temporal level, possibly the level at which it operates, but it may be that the level at which it operates is totally hidden or if it is not, its detectability or functional visibility may be random.

This may be nature of flash process, and at a certain threshold this may be the source of flash revaluations. This means it is imperative that the functionality of the equity market to grow needs to be restored or at least not undone. Else the equity market collapses back to the functionality of the forex market, which is made of flash crashes, at the level of detail leverage exposes.

This suggests that the separation between the markets is a function of the strength of the process of equity to grow, which is a function of companies. But given the growth in companies in tech, why does the market not grow, because that kind of growth is based on the belief in future growth.

Suggesting the wall between the markets is based on belief of traders, but a belief made functionally concrete by acting on this belief by bidding up prices. It suggests that falling prices are a function of the wall dissipating. Thus a possible test for a new upturn, is the reappearance of the wall. However it may be the case that diffusion or at least symmetry between markets changes them, even when they are restored to functional separation.

But if as has been conjectured here that wall is a function of micro processes, then at some level it is always there as these do not disappear, as long as activity takes place in the market.

So what exists when no activity is taking place in the market. There is always some action, in liquid open markets, but we can look for such a state in a forex market on a quiet day after NY close. Then we see clear micro trends and clear small ranges, in general.

These can be seen as mini versions of the trends which appear at the end of a valuation plunge. They add realism to this, by showing how their formation is random, which is the clear problem with plunge trends, and their much higher risk.

But what is the predictability of this activity. Well, if it is random, none. But where are these movements coming from. Are they a function of the market itself. That is does the market generate pricing movements itself.

The idea is that the predictability in procedural terms is so low, that they are not trader or program generated (if anything is). One can ask if there is any point in projection of a procedural kind if this is the underlying order of the market.

I suggest there is, because this activity when it occurs is highly technical. But as always, the clarity of technical patterns in forex does not help in predicting them. But this may be their source, that is the market is ordered by technical activity.

Whether this is because it is responsive to this or because technical analysis indicates order within the market is another matter. I could suggest that at times it is responsive and it does indicate structure, but in unpredictable ways.

So if you want technical indicators to work, you have to make them cohere with times when the market itself is responsive to this. This is another way of looking at the visibility of tradable patterns.

That is some patterns may be more patterns than others. Suggesting that some patterns may have more predictability. Not in terms of their formation, in fact one might even expect that more tradable patterns may be less crystal clear.

Some of the best patterns in forex are hard to trade, those stable equity induced trends. They can be stopped by activity in the equity market and because they have their source elsewhere, they are not so clear. Yet forex can give them a great stability in their trending, an example perhaps of coherence of technical action (defined as a structured movement in pricing) with a responsive market.

This is order elsewhere cohering with structure in forex, that capacity to find clear valuations within ranges, but with a tendency normally to end suddenly. That is why such trends are hard to gauge. However I would note that once they begin, they have a tendency to continue.

That is the forex market itself takes over the valuation, but with disordering inputs from equity events. However these disordering inputs may provide that coherence which maintains a technical event in forex.

*responsive to technical ordering -> coherence -> technical event.

*not responsive to technical ordering - > coherence -> disorder event e.g. RSI divergence - now this is differentiating between technical events, but this may be appropriate, it implicitly subsumes order and disorder into tradable events and the transition from order to disorder may give signs of such events, because it may make coherence events, which may be causal on technical events.

That is such a cycle postulated above may be contingent on coherence events. But that itself may be a truly random event in terms of expected order in pricing, as coherence would be contingent on extraneous factors. It may even have that level of randomness that makes for events in the natural world.

It may be that is what is indicated in those times of random trends, not coherence itself, but the event of coherence, unreferenced to ordered market activity, suggesting there is order somewhere, but not necessarily order related to tradable valuation.

But that order itself may be tradable, but the issue is making it tradably visible in a procedural way, rather than a predictive way, which is one way of expressing the aim of this site.

Now as to what that means for predicting valuations is something else, but that is the issue with forex, what is the causality of those valuations, that is how do you value flash events. This of course seems to be an issue with the equity market presently.

I suggest one looks for the expression of such ordering activity in valuations, as regularities. This is looking for what causes what one wants to predict, with the caveat that what one elucidates may not be what one can trade. However, as noted that can be useful information.

It may even reflect to an extent what forex itself is doing, assuming a kind of systemic intentionality, given a) its role in (effectively) high speed intense arbitrage foreign exchange valuations in the real world and b) its precision in valuations and c) a systemic existence of it own, now and then merging to an extent with other markets, given their systemic vulnerabilities.

That is forex optimizes and prunes market friendly valuations on assets, to the extent is it directed to do so (this gives room for internal systemic intentionality and external effective intentionality). Now are there limits on this, perhaps the limits are on a lack of coherence between what traders want the market to do and what it is doing.

At the top of a bull market is there there such coherence, yes, but probably separated from the systemic tendency to value assets. The distortion of present versus future asset valuations creates that lack of coherence, not matter what the traders want to do.

One sees this if forex is at a confluence of major technical numerical levels and belief of what will happen versus what does. One can expect the major technical levels to destabilize that coherence further especially in conjunction with political input, and indeed one noted that at the recent high for US oil. That is $114.79, which fits with that key range of +-15 on the '00' (in this case $100).

© 2011 Guy Barry - All Rights Reserved.