19 January 2023

Reshaping Direction in the Forex Market

The Forex market may be seen as differing from other markets in that there is not generally an assumed direction. There are directions which result from alterations in such factors as changes made by Central Banks or the overall health of an economy. These directions can be seen as directing the Forex market (or attempting to). However even these alterations can have short lived or even opposite results.

In general though, these changes are not necessarily intended to alter the direction of the Forex market. There are interventions that Central Banks can make with the specific aim of changing the direction of the Forex market. These tend to be short term and act as signals for the market that interventions may continue until the desired result is achieved, increasing and sustaining the effect.

A consensus in the Forex market is something which may result in a Forex pair rising or falling. However the kind of consensus from intervention by its very nature is exactly the kind of agreement which can make the Forex market move, that is it is aimed at changing a specific state of the market (the reason for the intervention).

Consensus in general in Forex could be seen as a state of suspended belief, as a trend is followed. The volatile nature of this market perhaps suggests this kind of attitude from time to time, but with some kind of fundamental or technical basis. This is a reason why trading may be left to computer programs which do not act of belief, but do apply logic. This logic may be different from the kind of logic human traders may apply.

This is an interesting distinction. Human logic may entangle (for better or worse) with past experience of trading the market (hence why this kind of logic may need to be suspended as well). Computer logic will apply the algorithms, which are typcially based on some kind of technical signal. Humans may do this as well, and may use their logic to prune decisions that a computer may make. This is why discretion can be a better approach than applying an algorithm whether by the human or the computer program.

However the idea of technical signals is that they somehow capture detail and function which is hidden in some way, thus to use them they must be applied in a way which approaches computer logic. That is they are simply applied without any entanglement unless programmed within the algorithm - however programming entanglement is what can produce cumbersome programs. This is the dilemma of Forex trading, to go algorithmic or to somehow find a way to apply intuition in a volatile complex market, which can be altered by changing fundamentals. However the complexity of the Forex market can overwhelm intuition as much as algorithms can be too simplistic and rigid.

The 'consensus' can be seen in certain types of news trades, if only for a brief amount of time. These kinds of trades look for a state change in effect, as one which has a higher likelihood of finding a direction. This can come from a change contingent on a major alteration of economic policy. However when one economy (i.e. one side of a Forex pair) make a change, the other side may make a change for this or other reasons, so the directionality can change. This results even in characteristic retracements within a Forex pair direction.

To some extent retracements are the directionality of the Forex market, as these can become alterations in overall direction, rather than eventually reversing back to the trend direction. The capacity to change is there, and can come from a wide range of factors, including technical signals.

It might be said that the Forex market in the abscence of major state changes, is a technical market, altering in accordance with technical factors. Fundamental factors are kind of the icing on the cake, they may alter the market, but Forex tends to revert back to a sea of technical signals, which may find consensus in a trend and then retrace or reverse. These cannot perhaps be seen as state changes, they are more like bubbles in a sea, as they are prone to sudden alterations in direction and volatility, that is technical signals may be respected but for an indeterminate time. Precluded is the idea that technical signals point to something deeper in the market, which they may from time to time, but not necessarily at any time.

Forex trading encompasses a range of approaches from fundamental to technical and short to longer term expressed in a mind graph

So fundamentals do seem to play an important role in Forex, just not as clear a signal as they may be in other markets. The role is one of altering the market, for example valuation levels, but not necessairly in a clearly directional way. This may shed light on oscillations in news trading, as news trading can encompass a state change, but may have unclear outcomes (such as oscillations). Thus oscillations would be seen as part of the process by which valuation change may ocurr in a significant way, but at a later stage.

In a type of market which does not have a clear direction, except to express volatility, oscillations may simply be part of this facet of the market. However from unclear states, does tend to come directionality, to the extent this can be expressed in the Forex market. An example is the volatile activity at the begnning of a structured Forex trend. The tendency to fade away from structure and direction, can be expressed in a trend end, which mutates into ranges.

This ebb and flow makes Forex a market which can be traded around the clock, but at the same time makes it a difficult market to trade. It is easy to get in on a trend near its end and to stay away from a trend near its beginning, precisely because at both stages, they look like something else. Technical indicators may be seen as probing beneath the surface of charting patterns, to match other types of patterns. They indicate that something may be happening (matching past signals). Does this suggest that some patterns are more primary than others ?

Technical signals since they may be widely followed can perhaps be seen as indicators of rising consensus, which may push a Forex pair in a given direction, no matter what fundamentals may say, if indeed they say anything. Technical indicators may not necessarily say anything about what it is they indicate but can be seen to work in this market.

While it is true overbought and oversold are factors in a market, for example, in Forex they do not necessarily have any reference (i.e. the relative nature of these signals can break down), so overbought may continue going forwards and oversold may continue going backwards (this can be true in any market as indicators cannot be relied upon). In fact a market may be moving precisely to find a new set of valuations it can move within (to range within support and resistance with altering volatility). This can be true of volatile markets in general, which keep going even when it seems they cannot.

Another example is big figures in Forex, which may evidence complex patterns to get through, or may simply result in a move through the big figure there and then. However the complexity may be expressed in what happens before and after. There is a wide range of patterns to be seen around big figures. Coming up through the big figure - attempts to get into the new figure (which can be seen as a kind of imposed change in value levels) may be met with resistance, resulting in multiple piercings of the levels and then retracements, sometimes steep.

A difference is being drawn here between a fundamentals imposed change in the market, perhaps from a news trading core and one which the market is attempting to impose, simply because it can (or can try). The market being the complex interacting range of perspectives and actions produced by its participents.

In other market driven by fundamentals, markets can see sustained (and post-facto logical) alterations in valuations, but here technical factors come into play as well and can interact with volatility in unexpected ways.

To some extent volatility is behind the generation of moves, as it allows for low volatility states to seem like they can do something interesting (or directional). However whether that is the case or not over longer term time frames, can ultimately depend on fundamentals.

This is complicated by the way that perspectives are based on different future time frames, so it's more like when the fundamentals suggest that there may be a different landscape in a future, which is prone to fundamentals appearing which suggest the opposite. This is to say fundamentals are giving conflicting signals on future direction, as the market direction is tied to fundamentals.

Since Forex has a complex relationship with fundamentals, to the extent that is fades into a technical market, this can be seen as creating a different kind of trading market, at times, but which has a surprising sensitivity to some fundamental factors, although this itself is complex and can appear and disappear.