16 August 2017

Why Do Good Forex Trades Go Wrong ?

At a given moment analysis can be performed on a pair. This can take the form of multiple time frame analysis for example, candlestick analysis and pattern analysis. If this is done down to a one minute time frame, then one can take the position that a reasonable amount of information has been gathered about a pair. Adding in fundamental analysis and trying to correlate it with technical analysis can help further the expanse of this knowledge.

So a position is taken in the market based on this analysis, yet the expected outcome does not happen. Why is this ? Firstly, a pair will tend to have its own internal movement, perhaps like an internal clock (but based on a large number of reactions to buying and selling of the currency), which guides it through the market. It could be expected that reactions to more obvious inputs into the market may not necessarily divert it. Therefore no analysis may thus be helpful. Technical or fundamental analysis may not sufficiently capture a set of constraints which may point to a potential set of outcomes.

That is, the pair may move in ways which do not conform to the supposed direction or structure this analysis has suggested. However like all analysis, one could say that one is looking for even a faint glimmer than the market will do something with. Thus the pair may later conform to the expected analysis, which is to say taking a direction within a structure suggested by the analysis.

This puts Forex analysis on a possibly more reasonable basis, as it says that this kind of of analysis is unlikely to do what is expected just as is the case with any other market analysis. But it provides a basis for analysis, such that one assumes that it can determine some kind of internal structure within the movement of a pair that can be gleaned from technical and fundamental analysis.

So does technical and fundamental analysis work this way. It may, as it is based on a wide range of repeated events, patterns for example which suggests it looks for some kind of dynamic to movement in a pair than can be matched to a given moment in the market. So even though the pair will do its own thing, it may conform.

This suggest that time frame is very important, but it may also not suggest this, as the one minute chart may capture longer term processes. The one minute chart may also give hints of the internal oscillatory movements of the pair, but this may not be tradable at all.

Forex trading is like a trade off between the oscillations of a pair and its tendency to move in a structured directional way (which also contains oscillations). That is, it is an action based on expecting something which is not that likely to happen. But may, though not at the time expected. This is why Forex trading becomes a hunt for regularities, to try and find order the market itself imposed.

But the problem is that this kind of order is imposed by external events (e.g. liquidity events when a market closes). And these events interact with the oscillations the pair will make. In fact these times can seem attractive as liquidity changes can swamp the oscillations, but may do so in unexpected ways.

But as this fades, the pair reverts to form and produces unexpected events, relative to the behaviour around the liquidity changes. The exception to this may have been the crisis when the market with regularity fell (or rose depending on the pair). But even here the oscillations suggested it might revert back to its normal patterns of behaviour, which is the problem with any market change or turn.

This suggests a utility for the Forex market as a gauge of broader market conditions, a theme covered in earlier day in this blog. Why though. Because it may be expected that this is itself a pattern within the movement of a pair and a pattern which changes. However unless this is an extremely strong pattern (e.g. the crisis), it may be expected that it may not produce directional tradable moves, as the pair ticks its way though the market.