Rule of large numbers

Hi Guys,

How does the rule of large numbers play out in the forex trading ?

Thank you

Sometimes they form meaningful support/resistance, sometimes they don’t. So the deciding factor in how useful they are is how you play them. Any plans in this regard so far?

Clarification, please! :wink:

When you say “rule of large numbers”, are you asking about “[I]round[/I] numbers” (e.g. prices ending in -00 and -50, which is how Tommor has taken your question); or are you asking about the statistical “law of large numbers” (an expression sometimes used relating to the concept of “statistical significance”, which was my own guess?), in which case could you give an example of the kind of thing you were thinking of?

Hey Tommor,

Thank you for the reply. I am still trying to understand if there is any effect of this in Forex.

Hey Lexys,

I meant the statistics one. I am trying to understand if there is any effect of this in forex. I was watching a show yesterday - and the narrator said - if there are many individual entities whose movement / change / variation is unpredictable, and you put them all together - they will start to get predictable. I thought this applied to the Nasdaq 100 and was wondering if this is relevant at all to any forex pair or anything else in forex ?

Thank you

Thanks for clarifying … yes, I’d say there certainly is. In fact, I’d say that it underlies most of what we do, really (I may be looking at it differently, there, from the example you’ve mentioned, though!).

I’d argue that it’s hugely significant in the sense that in trading, only the long-term view, the [I]collective[/I] outcomes, are what really matter - and in a sense those are all a probability function related to “averages” of various kinds, which in turn rest on what people refer to as “the law of large numbers”.

Ok; I see what you mean. Well, yes, that’s certainly true of indices, which are composite instruments.

I’m not sure it’s true of forex pairs, other than possibly (with a slightly different meaning) regarding the very varying extents to which they’re all directly or inversely correlated?

I think I’d say that although it’s true of all the indices (kind of by definition), in practice the Nasdaq is probably one of the ones of which it’s [I]least[/I] true, in that (a) it’s a small index and (b) it’s more biased than most in the sense of being more industry-specific (by comparison with, for example, the S&P, FTSE-100, or whatever).

I think “not really”, in the sense you’re asking about. :33:

As lexys says, indices are composite figures calculated from the prices of the shares that are members of that index. So if all the shares in the index go up, the index itself goes up.

There is not such an index in forex, each pair stands alone and their is no summation of the market tendency across the forex board because each pair is its own market and is in a sense its own index.

The nearest assistance to this you might find of this kind is the US dollar index. If the USD index is rising strongly, it would be unusual to find a USD-based pair that’s falling strongly, and highly risky to short any USD-based pair.

I’m not aware of any other currencies that have such an index, but to an extent the USD is the base for all of them anyway.

There are some (others) actually … they’re formally calculated, but they’re not tradable instruments.

Well in a nutshell it means that price has same 1/2 chance to go up or down at any point of time (outcome is converges to math expectation, as it has a equal chance to go up or down, its like a tossing a coin) . But I don’t think that price of an asset has normal distribution (the consequence of the rule of large numbers)

Thank you guys for the replies …