07 August 2018

News Trading Events and Shadow Pattern Formation

Forex retracements can be seen as consisting of structured moves. They may appear as patterns, for example as three within an overall structured move, defining the middle of a trend. This idea of structure helps define a pattern, as it enables a regularity, by which they can be identified. But the question is, does this have any bearing on whether they are repeated market patterns, or simply that they are charting features, which reappear. One reason to expect they are features, is that they do not appear with regularity. Indeed one can except that a repeated pattern at a given time, may not repeat itself. For example, trading on regularities at market close or open. However allying liquidity with pattern regularity may help to ground a pattern as a true market feature. That is, strong liquidity bursts, such as happen in the lead up to a market open, may have the effect of creating this pattern which we can say is predisposed to form as a charting feature, which reappears.

So if patterns are seen as charting features which appear and disappear on charts, then liquidity bursts can be seen as providing a kind of structure within which grounds them in market events. The disappearance of liquidity also creates regularities, but it can be seen that these create perhaps particularly unpredictable patterns. So underlying the idea of a market patterns is momentum and behind this, surges in liquidity helping to form patterns, which will form anyway, but at least giving them some added temporal predictability.

It can be noted that news trading may be evidenced by liquidity surges. However it can be noted that pattern formation in news trading is generally something which is not tradable in the way it can be in more stable markets (presumably a reason why pattern detecting trading strategies are turned off). This may be consequent on the positioning of these surges. That is, they are already temporally set. This adds an inherent instability to the pattern formation. In the run up to a news release (though not immediately before), there can be a pattern formation positive environment. But then this is like the run up to market close, consisting of surges in liquidity, the time of which is not predetermined. Thus like all trading events, setting one factor, the time or the pattern may result in unpredictability in the other. Traders want both to be predictable, but typically may get one.

So when can it be expected that there is a predisposition for the time and pattern to be congruent ? The attraction of a news trade is it suggests it may offer this. This is because the time factor is so short, at least relative to the time frames many traders trade on. So it is either going to happen or it is not. However what actually tends to happen is that the market has enough time, even in a short event of one minute or less, to create a version of an unpredictable pattern development (a problem for all very short term trading). This is the oscillation, which can happen directly after a strong directional move. Even if all the ducks are in a row for a news trade, the market can still surprise and do something completely different from what is expected. But of course a news trade can deliver exactly what it promises, a strong directional move which may pause and then keep going (i.e. not oscillate). However even here, it can be seen that there are three components (rather than one), each of which has uncertainty associated with it. Firstly the reaction to the release, secondly the pause and third the continued move.

However, is this news pattern a pattern, like a pattern which can occur in other market states. It would seem that it is not, rather it is a kind of breakdown of pattern formation, stripping it to its core components and creating something different. It is perhaps that temporal constraint, allied with sudden huge bursts of liquidity. But can these component of patterns be worthy of cataloging. What is perhaps worthy of cataloging, is what they are components of, as the shadow of this pattern and its function in the market is presumably there.