Price Trend Prediction
One of the goals of over a decade of working on this problem is to be able to “see” the “underlying trend” before the Price makes its move.
Forex traders have a limitation that there is no “Time and Sales” available, which would allow for calculation of “Net Inventory”. The retail Forex trader lives in a decentralized market in which there are “ECN” pools perhaps but there is no centralized Time and Sales such as would be available in Futures markets through the CME, for example.
However, there is one brokerage in Switzerland, Dukascopy, which does provide a Market Depth feed. And from a Market Depth feed sufficiently rich, it is possible to make inferential derivations of a Time and Sales.
The existence of a Market Depth in near real time, allows us to view the sizes and prices on the BID side versus the ASK/OFFER side of the Market in the ECN which is being exposed.
From this, we can derive a “virtual” Time and Sales feed for Order Flow, but let’s leave that for later. What we’re considering now is just “the balance of the Depth of Market” or, as it is called “The Book”… Sometimes, this is called “Level 2” information but it opens a whole new world of information for the Forex trader.
While Dukascopy will not grant Live accounts to U.S. persons, there is a quality DEMO feed which is available to everyone. If you are a non-U.S. person, then you have a rich source of advantage IF you are able to fully exploit the Dukascopy Market Depth feed, and perform near real time computations.
TREND. Most of us want to “follow the price trend”. Obviously, that’s how you make money, by staying in a trend until price moves enough so that you have a comfortable profit.
Along with Currency Analytics based information, I’m planning to expose Trend information for the 28 major Currency Pairs, and make that accessible to interested traders. Since I have to calculate the information anyway, it’s not too much of a burden to make the data graphically available; and we’ll do that over the next few weeks…
Basically, the rule is that “Price moves to Size”. There are two aspects of Size on the book. The amount of BID size versus the ASK/OFFER size being advertised on the Depth of Market within a few PIPs of the inside market. Other things being equal, the side of the market with more size, is the direction that Price will be moving. Basically, Size on the Book “pulls” the price in its direction…
There is another, more subtle aspect of Size on the Depth of Market. And that is the “distribution” of size. What is the volume weighted average distance of the Sizes at each Price, from the inside market? Again, “Price moves to Closest Size”. The side of the market where the mean distribution of Size is closest to the market, is the direction in which Price will be moving. Again, Price is “pulled” toward the more “aggressive” advertised Size, which is that nearer to the inside market price.
So long as the “Size Bias” remains on one side of the market, the Price Trend will continue in that direction. It’s simple, but difficult and subtle to measure. I’ve just started graphing this information, but the attached will show what I mean with Price versus Size Bias. As you can see, the downtrend in price continues so long as the Size Bias remains down, on the BID side of the Market Depth.