It’s an interesting topic.
machines will learn the experiences from the past and will follow instructions by human. so it can be tools for human.
however big decisions will be made by human at last.
Make no mistake, the investment banks and other large institutions have paid hundreds of millions of dollars to brilliant programmers to write sophisticated software that is in use as we speak. There is a battle among those that have the resources to purchase the talent to write this type of software and a never ending attempt to discern what the other trading entity has actually done so that they are able to counter their techniques.
Black box mania is alive and well and the argument is whether it affects the retail trader, the little guy. The short answer is yes…and no. The ones with the black boxes have the capability of moving the market due to large orders that need to be filled and in most cases, will not enter a trade with the goal of just a few pips, points on small gains. It does leave a little for the small trader. It is also entirely possible that there is collusion among the big boys, who surely, by now, have developed programs that far out pace the platforms and programs that we utilize. One only needs to look at the LIBOR scandle…they are not above reproach and as it has been said many times, Wall Street and the like are indeed the most talented crooks in the world, save, of course, the governments; federal, state and municipal, who collectively have the “other set of books” that clearly show that they have combined assets exceeding 60 Trillion Dollars…liquid assets!!! It is all spelled out in the CAFR, the annual accounting report that all governments must write. We’ve all been had…they need no taxes of any type and have sufficient capital to wipe out the national debt in seconds.
In fact, the government actually is responsible for better than 50% of the GDP…think that one over tonight! They have all these funds invested in the markets, so, in essense, when we trade we are trading against the governments! You can read it for your self via the “Thrive Movement” on the web.
This site was designed by the heir apparent to the Proctor & Gamble fortune, Foster Gamble. He could have had the literal life of Riley but chose to dig into the truth in an array of matters and one is the CAFR debacle. Once you have the site up, scroll down to the “Taxpayers Strike It Rich?”. A former CTA discovered these reports and began to ask questions. He has his own site as well, replete with the updates, etc. There has been an administrative move by PA, MA and I believe, NY to change the status of this information by creating a Professional Association within the states that will not be subject to the CAFR requirement! Cute, absolutely…the lawyers are thinking. Hope you all sleep well tonight.
I believe it a logical fallacy to presume that one can apply an arbitrary algorithm however well designed and scientific to a process that is not scientific.
The Forex market is controlled by humans. Because of the human component, it enters into the equation a form of chaos theory. While the large institutions may be able to create a directional movement in the market, the decisions to create those movements are still made by humans and as such are subject to the unique rational and emotional psychological makeup of the individual charged with initiating the orders that can move a market. An UN-calculable number of factors can be at play regarding those decisions and as such no model can consistently predict, or judge the magnitude or the direction of the movement.
Personally I look at the Forex market like the ocean. Waves come in and wash ashore and then they pull back. The tide comes in and gos out. I look for the waves and ride them into shore and use the pullback to carry me back out for the next wave. And when I think I see the sun setting I prepare for the tide to go out or come in. Misjudging the current and mistiming the wave and you could get caught in the undertow so my life preserver is my stop loss.
Clark, the articles I read are from technology related sites and I am much more interested in the HOW and WHY than the WHAT. I really don’t care if the article is discussing finance apps, medical or whatever kind of applications. I am interested in the technology used - both hardware and software. In that regard, I seldom read about technology related to the markets, so I doubt if you or others are interested. I just wanted to share my insights and opinions in a thread that was technology related.
if high frequency traders can push a market down (via the program they created) that must mean most of them trade with the trend and possibly a progressive style
Thanks CodeMeister, I always tend to find little gold nuggets in your posts. 
Clark
If that were the case, then the entire field of quantitative analysis would cease to exist. As well as a couple undergraduate and graduate degrees (which is what I am currently persuing).
Quantitative analysis, indicators, bands, etc are all attempting to do the same thing; predict the future using past results in a market not governed by any consistently predictable pattern. For any indicator of an “up” it can be shown historically that it could also result in a “down”. For all the years they have been around no one or no black box has achieved the holy grail.
That doesn’t mean they won’t stop trying and they shouldn’t but remember your still trying to predict the future.
Does a
If you look at the larger firms you’ll notice most of these firms are mostly doing one form of arbitrage or another. Financial modelling have been used with more or less a certain degree of success. Predictive models does have its flaws and I’m well aware of them, that’s not to say they are not profitable. I’m not talking about black boxes, I’m talking about quantitative trading using applied mathematics and statistics. These firms, I’m sure, understands their strategies and portfolios quite well.
I find it unfair that one should say automated trading does not work, and backup their arguments using reasons that are also prone in manual, discretionary trading. Sometimes, arguments that affect manual, discretionary trading more.
I appreciate your view point and it is reflective of the current business models incorporated into many of the worlds largest firms.
My contention is the goal of the institutions and companies that employ these methods in the Forex market, be they quantitative or similar or not is still the same: increase the frequency and or magnitude of their success in the marketplace. Their success (and ours as well) is based on what the market will do next. And unfortunately, there is no model out there that can be relied upon to provide the results consistently enough to ensure success. The reason is the Forex market doesn’t adhere to any set model. It adheres to the whims of those that make their trades be they large market makers or not. I know of no system that has yet to provide results consistent enough to walk away from it knowing it will provide a consistent return preventing any complete loss of one account.
Truth be told, the “guru’s” on wall street aren’t a bunch of uber economic geniuses. Remember it was Madhoff that was able to scam BILLIONS from many of these well known and respected fund managers with all these degrees and such whereas if they had done an ounce of due diligence it would have raised plenty of red flags. Greed got in the way.
If that were true, there would be no winners in the markets in general, be they algos, or manual traders.
We can develop an neural algorithm, for those who does not know about computers a neural algorithm is a software or firmware that learns. But it’s learning capability is limited by the program itself, the number of variables and the interconection between those variables. The human brain instead has an infinite way to resolve a problem, a neural software must learn learn ant is limited by logical, a human mind can make a last minute desition, a software does not have instinct it is only a math formula, nothing more.
Of course there are models that can be relied upon to provide consistent results.
Especially when you are talking in context of High Frequency Trading.
The problem is that we do not have access to the markets the same way the Big Banks do. You can not execute 10 trades per second & if you could it would cost you too much money to execute.
Even with MT4 if you could lower the spread , no commission and faster execution, you could make a killing with ea’s. But unfortunately in our reality it is not currently possible.
I’m sorry but that’s just not the case (in regards to models that provide consistent results). Further those models have been specifically implicated in disasters or near disasters including the crash of 1987 and the flash crash of 2010. It shed light on the erroneous reliance on HFT systems. As my friend whom has a seat on the floor told me, they “aren’t the golden boys they once we’re thought to be”.
Forex HFT operates with a latency of less than 1 ms, while most of us mere algorithmic traders typically suffer a latency of at least 10ms. Almost by definition, the bid/ask quotes placed by HFT tend to remain on the book for a very short time, measured in ms, unless forced by the exchange to stay longer.
It’s not that only the big banks can trade in this manner it’s the actual physical location of the servers to the exchange that allows for such rapid trade execution.
HFT is GOOD for the Forex market as it ads and spreads liquidity around and created tighter bid-ask spreads.
It is good for liquidity but it can’t be good if they actually manipulate the market, can it? The regular tools and strategies that are used by most forex traders were not developed in an environment where 3/4 of the market is operated by HFT-bots.
Ok, I wasn’t talking about the big banks. I have no idea what they are up to. I was just referring to my own experiences.
Not that I am a HFT. Just in reference to if I could get better spreads and faster execution, I could make consistent results and mega bucks. I have run the simulations on just lower spread.
I mean if I can make consistent results with mt4 and my crappy broker, I can only imagine the possibilities if i was a bank. I know that is speculation, but it is speculation of faster execution, lower spread, high tick frequency, etc.
Point being if I could do it(and others) then you would expect the banks could do it?
Whether its HFT or another cause, markets will change and evolve and traders (good ones) will evolve right along with the changes. What are you suggesting they do, go back to the days of no computers except for back office operations? If you are stuck on something that doesn’t work anymore, I know where the blame lies and its not HFT-bots.
I’m just trying to wrap my head around it. So far i’ve never traded a cent in my life. I agree good traders will evolve along with the market but i’m wondering if not the entire market mechanism is about to be thrown upside down.
You have always had your investors and your speculators but i’m not sure what to call these monster entities that can buy such huge amounts in a fraction of a second and then sell it or as in most cases cancel the order before it’s executed, when they are not doing it to necessarily profit from it, they do it to throw off the other firms algos to induce a mistake from them that they can then in turn profit from.
Or does this not affect the individual Forex-trader since he’s trading in a much longer time-frame compared to the HFT-bots? So that having the bots fake each other out isn’t really noticed anyway? I can see that being the case.
There is a way : “Parasitic trading”
This PDF (University of Southern California) is a good intro.