31 March 2016

Can the Market Provide a Guide to Orderly Trading

Arguably trading can be a chaotic experience. It can be at the beginning and it can be after this stage. Why is this.

Firstly, the market can be expected to do unexpected things. What is meant by expected. Well, the market does what it does, find values over time for assets. But traders want to know what that future value might be. So various methods are used to establish order in the market, to interpret it. But what that order is and what the market is doing may be very different things. Even if it matches, it can stop matching.

So any systemic approach used, is prone to being proved entirely wrong at any time, and this is a source of trading chaos. So what can be done. My belief is that letting the market guide is a way forward, but with this idea close in mind, that the market may not be guiding anywhere. At least with an imposition of order, there is basis for making decisions which is automated to some extent, but doing this may lead into potential chaos.

If the market is to guide, what is that exactly. Firstly is the chart itself, secondly is the movement of prices, and thirdly is time. These three processes capture some of what happens in a market. An indicator uses some assumption that price movement over time of a certain state, may result in a certain chart activity over time.

So for example RSI can say that the value of an asset is over or undervalued. But it can perhaps easily be the case that the expected outcome does not happen. While results can be fine tuned by filtering, those fine tunings can be found to be specific to the market conditions at the time and may not work later. So the need is perhaps to fine tune on market specific conditions, using generic events in the market, such as big figures.

For example, a move may stall or turn in accordance with RSI, and this may be happening around a big figure change. So one could envisage this scenario - the market pushed down towards the big figure, then reached an undervalued state and also had its power absorbed by reverse orders increasing (and decreasing) in density as the big figure is approached. So here one indication reflects another.

But what one really want to know is whether the market will reverse back up, or push down through. In this case, one can do some fine work, around uncertainty. That is, one can remain agnostic about whether it will push through or not, see this as being random as many definite things in the market are, but then note that it may stall or reverse in its journey, after this event.

So what can control chaotic market activity. Following prices is problematic in that they don't have much meaning. However the chart can reveal past support and resistance and multiple time frame analysis can indicate the interplay of support and resistance, over time.

This still does not predict what will happen next, but it can give warning signs of what might happen as it provides a basis for interpretation of price movement. As for processes which may affect the movement of prices then an indication for this may come from a careful examination of price movement over multiple time frames.

This is to capture the way fundamental events can influence prices, but it seems to be the case that certainly the Forex market does things with this influence which are perhaps counter intuitive. So even a certain news event may make for an unexpected result. But the event may have an expected result, in a way which is more hidden, for the obvious result seems to get broken up quickly in Forex, even if it can happen.

This is why remaining agnostic at key areas can be helpful. But of course those key areas are exactly the areas one wants indicators to indicate what will happen. So in relying on indicators of any kind to predict where they are most desired to predict, lies a potential source of chaotic trading.