16 March 2017

Why are Forex Patterns Unreliable ?

The essence of Forex is that it is being decoded, by analysis, by programs or other methods without being able to verify the accuracy of this encoding except by future events, which may or may not bear out this decoding.

Thus the validity of any explanation is based on an event which may itself simply be random, in that it happens because of some market input occurring in the future, even if a very close future. However it can also seem like it is an event which has some causality from the continued formation of a pattern, perhaps augmented by or ended or disturbed by an event or set of events. But does the closeness in time matter.

This has some bearing on the question of whether it makes a difference which time frame is looked at, that is, is it the same thing as one goes deeper into a chart. Because as one goes deeper, the validity becomes closer and closer in time. And validity matters, it is the basis upon which future trades will be made which will help shape the form of the chart (reflected in different ways of trading on shorter vs. longer term time frames). But do these events help shape longer term events.

On the one minute chart, the effect of future events will have an amplified bearing, relative to shapes and forms on longer term time frames. As one goes deeper one sees patterns play out, which can disappear as one goes further out.

This is a reason why the one minute time frame can be worth looking at. A pattern forming there can itself feed back into higher time frames as a confluence of events (some of which are important on higher time frames) can cause a move to change in a way which is noticeable on higher time frames. Thus it may provide a warning signal, or it may not, as the pattern forming may only affect changes which do not change the overall trend or range on a higher time frame.

Thus short term time frames can be seen as bouncing off the immediate future, in ways which higher time frames may not. They may instead tend to bounce off past reference from support and resistance, creating patterns, but driven at their short term base by the capacity to move in surprising ways, which is also at the heart of pattern formation, providing an engine.

This would imply that the one minute chart, while having characteristics of other time frames, would be more volatile. What this could mean is that patterns may form with greater frequency and clarity, as volatility can also push the pair into a new potential to form a pattern.

This may imply that patterns are reactive rather than causal. That is, the events which shape the chart are inputs into the market (including news events and trader and program behaviour), which patterns can react off and if given a chance work out their apparent shapes around these inputs.

So because a pattern is forming does not mean that this pattern will play out, it can quite easily change to something else depending on market inputs. News trading can be an example of this, because in the absence of a strong reactive force, the market can behave in ways which are unexpected. In the event of a surge, it does tend at some stage to respect past support and resistance. Here the time frame may be very short, perhaps under one minute, yet the behavior is like a longer term time frame at its limits. Arguably, the causality of Forex trends also reflects a number of disparate factors enabling a trend pattern, some of which may be stabilising inputs from other markets.

So the reactiveness of patterns is also a reactiveness to themselves, which can seem causal as a Forex pair makes patterns expressing the movement of value in the market. On higher time frames (including short term intense moves), this may be more the case, that is there is more space for patterns to play within their own frame of reference. But a frame of reference created by the past, which at some level of detail is caused by the many inputs into the market.

This can be seen in situations where the market revalues on a large scale from an input (which can be like a very intense news event) and stays there for an extended period of time, caught within this new frame of reference and more immediate inputs.

The past structures of support and resistance and movement around them, creating patterns, have no reference to inputs anymore, but they exist as a kind of potential template to make present and future patterns, helping reflect shapes into a creative volatile present to the extent they can, and creating an appearance of their stability.