Pink noise is a concept taken from physics which refers to a type of noise which has correlations which fade over time. White noise is purely random noise, which does not have correlations (but may also seem to have correlations). Financial markets are noisy and seemingly random; there are factors that can produce correlations, such as traders coalescing on trends or reacting to market news. Though even here the tendency is for correlations to break up, as traders short a trend or take profit, for example, or react to news changes.
Both the Forex market and the crypto market are subject to random noise, and both are hard to trade. From a trading perspective, they can seem like quite different markets. Forex tends to have complex variations on patterns on longer to shorter time frames. Its volatility can ebb and flow, and it may be reactive to data inputs into the market (news releases). Indeed, the trading methodology of news trading is dedicated to predicting the directional effect of these inputs.
Forex can be a very difficult market to trade as its directionality can change and, even if directional, can show complex retracements and moves opposite to the traded direction. Forex, however, tends to be traded on an assumption of persistence in the market, the presence of pink noise, which will take a trade where it is intended, through the volatility.
Pink noise is not about predictability; it implies statistical memory (which is why it seems like something to follow, but can often be a will-o'-the-wisp). Past movements influence future variance, but do not determine direction. This is an important distinction that tends to get conflated in the complexity of the market. The Forex market can seem more like white noise with appearances of pink noise, which gets broken up. This might be seen as a reason why some traders use robots or very strict self-trading strategies, as these may take them through the noise into the desired outcome, or at least do so on average over multiple robotic trades.
The crypto market is less liquid, although becoming very large, and has been around for a lot less time than the Forex market. Both are traded electronically, and each is open for 24 hours, with the difference that the Forex market stops on Friday evening and opens again on Sunday evening GMT, while the crypto market is fully open at weekends, 24/7. It might be said that the crypto market is evolving, as this market, unlike Forex, is only recently being entered by large institutional players, as well as being new, i.e., it is still in a formation phase.
Forex does not have central exchanges; it is a market that ripples down from huge transactions made by banks based around currency exchange. Crypto most certainly does have central exchanges; it also has decentralised exchange trading via DEXs. To some extent, crypto is bottom up, from smaller traders, enthusiasts, though now increasingly larger players and more mainstream entrants. The top down may be seen as market highs which are shorted by larger players, for example, but smaller players can drive the exuberance which can characterise this market, as well as its crashes.
When trading, Forex traders may have a feeling of being on the sidelines watching vast money flows, which they try to hop on and off. Crypto is more like a flattened market, which many traders and participants may choose to stay out of. Forex has the capacity to be tradable around the clock and throughout the year (apart from weekends). However, crypto has so far shown bear/bull phases. In the bear phases, volatility can be very low, with changes of a few percentage points in valuation over a day, back and forth, as well as drops and occasional news-driven surges. In a crypto bull market, the market is typically driven initially (and ended by) one crypto, namely Bitcoin, so the phases of the entire market follow one crypto. This is not normally the case in Forex as the market has a complexity in direction but may, however, be pulled by USD, for example, by changes in Fed Funds interest rates, since it is a component of the highly liquid major pairs.
Within the overall direction given to the market by Bitcoin, cryptos can then show surges and ebbs, but potentially with a directional move up. This is what may attract people into this market, as smaller coins might show remarkable growth, but also with the tendency to crash even in a Bitcoin bull market, potentially down to zero or close to it. Cryptos can be seen as being linked to their underlying projects from a fundamental analysis perspective, but some have no utility, and these coins can demonstrate rapid changes in growth and also rapid reversals. The smaller a coin is in terms of market cap, the more opaque it can be; thus, sentiment may primarily drive movement in these coins, and altcoins in general.
Both Forex and the crypto market are analysed by technical analysis, via indicators that capture past trading patterns and have signs of their appearance and disappearance. Fundamental analysis, a mainstay of stock analysis, is a complex issue in and of itself for crypto and Forex. Both markets may be analysed using fundamentals. For example, Bitcoin is a fundamental reference for volatility and potentially direction in the crypto market. For coins with underlying projects, news trading on announcements and milestones, and potential, as well as setbacks does certainly happen. Additionally, negative events from outside the market but referenced to the market can have a huge impact on crypto.
Forex can be and is analysed using fundamentals, but its tendency towards white noise makes for uncertainty in this analysis. So traders try to narrow things down by news trading. That is, trading on a specific data release at a given time. However, all who trade the news recognize that even in this window, unanticipated outcomes can happen.
Traders try to narrow down the reactions themselves by looking for surprises. The nature of a surprise is that it is unexpected. However, in the event of a surprise, the market may react with a significant directional move. But it may not, and even if it does, it might quickly reverse or oscillate backwards. News or other events propelling a crypto might show surges that look like they are going on forever, but which rapidly peak and then crash down with a potentially extended time of low volatility and downward drift.
One issue with crypto is that news events may be more hidden, so a trader sees a crypto move and just trades into it. However, the danger of getting on the wrong side of a volatile top is a very real peril in crypto (as it is also in Forex). So these correlations can be likened to pink noise, which gets broken up into white noise, with random drift and low volatility. Forex seems more stable, but that may be because it is a market that can go up and down, rather than having a preferred direction. That is, up or down does not have the same conceptual sense as it does in crypto. However, this can also contribute to a fading into white noise as the randomness on smaller time frames dissipates order on higher time frames.
Shorting Forex is part and parcel of trading it, while shorting crypto is arguably not, at least in the same way. Those shorting crypto may tend to be larger traders who can deal with the enormous risk inherent in the volatile market, which does indeed have a 'preferred' direction (when the market changes against shorts, vast liquidations can happen via margin calls). So traders trade into white noise in Forex, but don't tend to in crypto. Traders do, however, tend to favour pink noise correlations in both markets as they can be analysed. Short traders may trade on technical signals, in the absence of fundamentals, so trades are being made on the basis of past trading patterns, which may not happen.
The up or down pattern-driven nature of Forex contributes to its self-similarities as one moves up or down time frames. One can look for correlations by seeking intersections of events across time frames, via multi-time frame analysis. But the way that Bitcoin acts as the fundamental reference to crypto makes for the appearance of correlations that cut through time frames, in the way a news trade event can directionally surge across all time frames in Forex.
