22 June 2017

Expectation vs Outcome in Forex Chart Pattern Formation

It is one of the features of trading that the darkest hour is before the dawn. That is, when it seems like a pair will never turn and is set to go in its direction forever, then it turns. However it is also a feature of trading, that having made a major move, perhaps contingent on news, there can be an expectation for the pair to return back to where it was, for a while. However it may not do so, and may continue moving within this level for an extended time.

Why this is the case, can perhaps be indicated by examination of shorter term moves. It can be seen that a pair will evidence a certain set of trading patterns, but what the pattern is, may have some random influence on it. For example, a pair may trend upwards, hit its trend high, produce a pattern typical following a high, namely a volatile move, then it may do a number of things.

It may drop and return to where it began or below, or it may wave about, and then enter perhaps a trend pattern. If it reverses down, it may bounce, or it may not. The move down is seemingly interesting, as it offers the opportunity to fade the trend move at the end and possibly go wit the move up again. But it does not necessarily happen. Why it does not happen is not given by the nature of the pattern. This is also true of the trend trading pattern itself, as its end may follow an expected pattern, but it also may not and can continue. This said, certain market conditions may be more amenable to volatile reactions, but whether this plays out in a bounce is another matter, as volatility can change the extent to which a pair can move in a given direction.

Patterns are traced out creating in Forex a definite appearance. This makes an examination of the chart, look like Forex has all these attractive patterns. It does, but what pattern is traced out in the future, can be unpredictable and difficult to determine, as it can do what are radically different things, in terms of direction and the extent to which it can move (up or down, volatility or its opposite, range or trend and so on).

On the large scale, there is an even greater appearance of determinism, a sense of changed value, in the example above, which must be returned to. But it may be instructive to simply see this as the small scale set of patterns playing out. That is, the bounce may be rare. In both the small and large scale, there are fundamental forces at work, but it can be seen that pairs overcome these unexpectedly. However it may be expected that fundamental factors contribute to the difficulty pairs may have in finding a new pattern out of the one they were sent into, perhaps by a news event which itself signalled a change in key figures, affecting fundamental factors which may limit the number of possible outcomes at a given time. On the larger scale this limitation may be more evident, as on the smaller scale the signs of this may be lost in choppy movements.

It can still be expected, that the unexpected may happen, as it usually the idea on a small scale. But the time factor needs to be considered. That is, on the large scale, long term patterns are still patterns, just playing out extended in time, creating a different sense of determinism, if not a different determinism. Because underlying this, is a similar pattern formation, that can in fact have a number of outcomes at a given time. As the chart is zoomed in, then other patterns can be seen playing out, but within the constraints of the larger scale. Thus the large scale can, by the effect of time, produce an influence on the small scale. And the small scale itself can produce an influence on the larger scale, as it plays out its own patterns, infused by larger constraints, but not necessarily determined by them. In fact the small scale can be seen divulging itself of larger term constraints. But the capacity to do so, may take a new fundamental landscape of value, with different constraints on outcomes.