How rational is the Forex market vs the Stock market. One view taken in this blog of logic in the Forex market is to view not its response to fundamental data but its self reflective coherence. That is, the market repeats patterns with clarity. This said, as a trading market, when and if such an event will take place is unknown. However in the past, it can be seen that there is a kind of logical coherence to the way the market reacts.
The Stock market on the other hand can be seen as driven by fundamentals, in a sometimes wild and volatile way. It has that logical link to the exterior world, if in any sense the world is exterior to Stocks, i.e. they can be seen as reflecting this world and its interactions, but within the context of a trading market.
The Stock market is known for being highly irrational at times in its expression, however to some extent this is a consequence of the way it values, that is it looks for signs of change and then values on this future. So its actions may not at all reflect the current situation as expressed in data and events (and therefore looks irrational but may be logical). This means that the market is prone to corrections when these future projections some undone.
But does irrational mean illogical ? It might be said that anything that tries to base its current state on a future expectation, may seem irrational, but behind it is logic. That is, the market seems to be logical.
Is the Forex market more rational ? Well separating from fundamentals can make for a seemingly rational market, but one that is hard to understand or more likely is not to be understood. Thus the Forex market is seen as random in its action, while the Stock market is seen as irrational but not necessarily random, as least expressing biases in its irrational outcomes.
The biases of the Forex market can be seen in its reversion to structure, for example the appearance of trends from low volatility states. The Forex market can be seen as being in a less volatile form, but at some level of detail (i.e. time frame) it may express structures to be traded on. When infused with volatility, rational and logical responses can be seen, but these revert back to that kind of internal coherence of forms and patterns.
The Stock market does have the capacity to rise or fall in extended ways as the exterior world is expressing the opposite, or at least is not expressing the exuberance or despair evidenced by the market. This may be seen as irrational. However again, the rationality is in a number of potential factors: the capacity to continue moving, i.e. traders along for the ride, whether going long, shorting or just existing positions, until it cannot, and a sense maybe of what is happening now being a link to future fundamentals, letting it roll. This is something which can come undone, of course, as the link goes nowhere or somewhere else.
In times when it is not clear what is happening with the economy, for example very new kinds of events affecting the economy (or a reprise of old events separated by time), then this can provide another way for a market move to continue, as there is insufficient meaningful data to derail it: rather like the internal coherence of the Forex market.
Then there is valuation - that is lows or highs being reached which set off corrections. This is seen in the Forex market as sharp corrections from lows, which entirely remake the expectation of where the market was going at least for a time. It might be said that the Stock market tends be too tied into the real world to do this exactly, but there may be situations where it can, especially if it is valuing on a future expectation, perhaps grounded in current data. It is interesting how data can become less of an issue over time.
But this can be seen in news trading reactions, which become dulled and prone to oscillations or lower volatility. For those used to Forex patterns these are rational and expected. The logic is clear, but it is a different type from fundamental logic, which has a cause and effect feel to it, as seen in the real world. This kind of Forex logic is more a logic of patterns, that is, it is essentially unpredictable, as the underlying causality is hidden, if it exists at all.
The idea is that indicators perhaps point to that underlying causality in some way, as technical analysis is predicated on a sense that causal relations are expressed in charting data, expressed then in patterns. The issue with this is a sense that these are simply random and apparent in their formation.
A point might be made that the apparent causality of the Stock market is in fact a route to irrational behavior, as it presents a wide range of strands of causality, with varying potential probability. The difficulty and complexity of the Forex market does perhaps not make it such a magnet for these viewpoints, unless one view technical analysis as precisely such a type of causal relationship.
Perhaps one thing common to both Forex and Stocks is that both can operate separate from fundamentals, as they do not simply reflect fundamentals. If they were, their function as trading markets would be diminished, as this capacity can keep them functioning in unpredictable ways. It is precisely the capacity of both markets to, for example, rally in the face of current gloom or fall in the face of optimism that makes them what they are.
Each has a kind of emergent logic and consequent rationality that separates itself from the causal relationships which are the basis of analysis. However the Stock market tends to be grounded more solidly in the details of the world as it exists, while Forex tends to have a kind of occasional mirror (sometimes imposed) to reflect this world, but in ways which can be obscure for those who want to analyse. This perhaps makes the Stock market prone to being affected by fundamental data on both the small and larger scale, simply because it can be.
