Hello peeps!
I was looking at articles about why economists make
poor traders, and stumbled upon the above…
Fascinating…
indeed very fascinating. i didnt even knew keynes traded currencies at any point.
but it confirms my reasons why i dont trade any currencies.
it is a market that is simply too broad (you have to take the economy of 2 countries compared to each other (plus cheating factors of central banks and politicians trying to make their economy more competitive by cheating their currency into beeing valued less and therefore trying to boost exports)- there simply are too many factors that are reviewed by too many people in different ways making the market and impact of fundamental news completely unpredictable.
and in my basic believe: whatever is unpredictable is nothing you can make any money on.
like flipping a coin and betting on the outcome.
I think I understand your perceptions of this. But I have two questions, in that case … 
-
How do you account for the people (very small proportion of forex-traders though they are) who have been making their livings consistently by trading forex only, some of them for decades?
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What exactly do you mean by “predictable”? I’ll explain why I ask. I can’t predict forex directions or currency movements at all, and I can’t begin to predict the outcome of any individual trade at all (other than as a probability/statistical function), but I can predict the [I][U]collective[/U][/I] outcomes of my next 300 trades, within a percentage-point or two, and with about 98% confidence. And I would contend that that’s an aspect of “predictability”, too? So I’m really suggesting that it’s necessary, when describing a market as “unpredictable”, to distinguish carefully between individual and collective predictability, because “collective predictability” is really another word for having an “edge”, and I’m sure you’re not suggesting - with overwhelming evidence to the contrary - that forex-trades are [I][U]collectively[/U][/I] unpredictable?
That article makes a [B]pretty strong argument for technical analysis[/B]
versus Keynes’ beloved fundamental analysis.
An excerpt:
Keynes based his investment strategy on his assessment of the fundamentals of an economy, including the likely trends for growth, inflation, the balance of payments, capital flows and political developments.
Other currency dealers, however, follow different approaches. Some bet on currencies that offer higher interest rate yields over those that offer lower interest – the so-called carry trade – while some simply go with momentum, backing those currencies that have recently been rising.
(then, skipping a couple of paragraphs)
Perhaps chastened by the experience, Keynes took a five-year break from currency trading and when he resumed his speculative activities in 1932 he did better. He outperformed the carry trade strategy but still did worse than an approach based on momentum.
.
Keynes vs Hayek
to be honest there truly are very few ones. when were already on it, this forum has 335.000 members of which lets say 10000 are active weekly so could the people who make living out of trading please post a “hello” here.
i dont say that it is impossible im only saying compared to other alternatives, the possible gain/outcome compared with the effort you need to put in is simply not worth it.
ill explain down further with the answare to your second question.
god no, im not suggesting that forex traders are unpredictable. in fact forex traders are the most easy to predict tipe of traders: 99,9% of them go broke within 5 years. no need to make it any more complicated.
i was reffering to the market itself not to traders or their abilities or their style etc whatever.
what i mean by predictable ill give you examples:
if Cuba abandons communism and USA eases the sanctions we all know that we can freely invest into tourism industry in cuba and tobaco industry and we have secure bets to earn on our investment.
so we buy shares of companies that operate hotels in cuba or exports tobaco from cuba.
same example: if cuba abandons communisma and usa eases sanctions: what will happen to their currency will it go up or down? please answare and give me reasons onto your opinion.
stock indexes and therefore stocks are going into one direction, which is up, under normal conditions every stock index will go up. same goes for comparable companies which are doing stable business. thats not hard to predict. if USA and Europe are in a crisis in the same time, their indexes will go down. If USA and Europe are in a crisis at the same time what will the EUR/USD do?(flip a coin and youre going to be more accurate then most “professionals”)
If europe and USA are in a boom time their indexes wil go up. (now ill copy paste) If USA and Europe are in a boom time at the same time what will the EUR/USD do?(flip a coin and youre going to be more accurate then most “professionals”)
Generaly this is how i see the 3 tipes of markets:
Stocks: driven by greed and fear mixed with fundamental supply and demand
commodities/food: driven solely by supply and demand
Forex: manipulated by few people and the masses of little people have no influnce no matter how they trade.
through a lot of examples in this forum you can see that 98% of traders have no impact on the exchange rates as they are beeing serviced off the real market so 98% of trades do not influence the price. therefore its very clear and safe to conclude that the impact of opinions of traders like on babypips do not count in any way to the market of currencies exchanges.
but there is a great up side which makes a few people able to make living from currency trading. and that is solely risk and money management.
to trade currencies people must only know risk and money management and have full self control 24/7. ill give you an example: if you cant predict the outcome of a happening but you know its one of 2 you get 50/50 chance. same on stocks same on currencies. so without knowing the direction (as you said that you dont know the direction) you can conclude that if you choose a direction 300 times (like you did in your example) you will guess 150 times corect and 150 times wrong.
but unlike in casinos where you always get 1:1 risk/reward-ratio, in trading you choose your own RR-ratio. if you choose a RR ratio of 1:2 and you truly stick to it in 100% cases then mathematicall you will be able to make gains from trading currencies. which in this case with 300 trades and an (assumed) take profit of €400 you will make a profit of €60.000 on 300 trades.
and this is it, the only true secret behind currency trading: money management and risk management. the people who are truly able to act like computers will prevail in this market and get bored to hell and back. they wont make millions but they will trade have fun and maybe a few of them will make a living out of it.
the same goes for stocks and comodites but there aswell other factors come into place which can (if you know how to interprete them) give you an edge on the market which can make you earn the big money and makes it possible for even people who do not sit infron of theirscreen like currency traders, to make a living out of stocks.
so basicly said the amount of time a currencxy traders invest into learning and educating himself only to get a living out of it is in my eyes not worth it as simply in my mind if you invest the same amout of time and effort into stocks and commodites you can not only make living out of it but aswell get rich through it if youre really good.
my opinion:
forex? a market driven by few big people and sold by marklers (brokers) to a lot of small people who will in the long run always get broke simply because that market is not created to give the possibilty to actualy create any surpluses.
Keynes fundamental is working very well as we can see on examples like Warren Buffet who is exclusevly basing his concept on the theories developed onto Keynes ideas and evolved into “value-buying”.
Keynes fundamental analysis is an analysis for the long term of years and decades, a time frame which is completely impossible in forex. forex is limited to the short time rumors and news, a market which does not run on supply/demmand but on opinions and manipulations of bankers and politians. the best example for this is the chinese currency (i forgot the name of it sorry, i think its Yuan or so) which is never exposed to any markets or true value and does not reflect the sucess of the chinese economy in any way simply because the exchange rate is beeing dictated by a hand full of chinese economist under the supervision of chinese politians. they set it up and what they set up is the only option.
Turbo, I just fed my five-day-old daughter, rubbed her back for.her burp, cleaned her and changed her nappy…
PipMeNappy indeed…
I am now going for a sleep but your post truly
shows the randomness of currency movement,
which makes day trading forex truly a casino
sport, indeed - as you say, risk management
is all a forex trader has as an edge.
I still believe that some fumdamentals
are true in forex, namely central bank intervention
and natural calamities, as I explained in one of
my FreeFX trading videos when showing the effect of
the Japanese tsunami on the Nikkei225, for example.
You only have to look at the last two years
to find the two downtrends (one in the Euro
from 1.40 and the other in the Pound from
1.72) that confirm how central bank rate
speculation and action do drive currencies,
therefore trend-trading or buy-and-hold/sell-and-hold
is still an edge in forex trading if you want to trade
manually, as this is the only way to be competitive
against machines that suck volatility out of intraday
trading.
That is one of the reasons why I have decided
to try treating currency trading like investing
or stock trading, because it is less labour-intensive,
which you explained very well.
Thank you (and Lexy, and Clint) for your posts…
I kind of agree with lexy. Maybe because I’m reading van tharp’s book. Expectancy is another edge I think. Though market can be highly unpredictable . better not predict what is going to happen. Consistently having a good expectancy over a long period is good IMO. Cause mathematically the edge is on one side. Than again this game is very artful .
On the other note:- if there is any books worth reading please post it. Especially regarding money management & psychology . tq
Good read.
Speaking of Keynes vs Hayek, here is a very good, three-part economic history of the 20th Century from the perspective of Keynes versus Hayek.
The beginning of the breakdown of Keynesian economic theory beginning in the 1970’s is chronicled near the end of Part 1.
YouTube — The Commanding Heights - Part 1
YouTube — The Commanding Heights - Part 2
YouTube — The Commanding Heights - Part 3
I recorded this series (on video tape) when it was first broadcast by PBS back in 2003, and I have watched my own tape (6 hours total) several times. I learn something new each time I watch it.
•
Have any of you read Keynes’ book, [I]The General Theory of Employment, Interest, and Money[/I] (1936)?
I haven’t read it, although I keep thinking I should do so.
I’ve read Hayek’s [I]The Road To Serfdom[/I] (1944), and I recommend it.
.
In my opinion you are completely and absolutely correct in this. The key to consistency over a period of time is entirely within strict risk/money management. Most traders (based on inputs to forums) concentrate on developing their charts and hunting for the method that will turn them into millionaires and the only “money managment” factor is the time deadline by which they will get their first million!
You are entirely correct that forex trading is “boring” in that most of the time should be spent analysing trade performance and accurately executing trade entries/exits precisely according to the rules of the strategy that provides the necessary risk/reward that one’s risk/money management is based on. I recently mentioned on another thread that I do not agree with the old saying that “it is never wrong to take a profit”. One should always remember that the cost of one’s anticipated losses, according to one’s trading strategy, is built into the anticipated profits. If you cut your profits early you are excluding the reimbursement of your losses.
Many traders, no matter how much time they spend on their charts, trade off the cuff as soon as something looks “great” and close trades whenever it “looks” like the right moment. They plan one thing and do entirely another. That will never work long term.
In my opinion, there is no need for predictability in forex trading, all that is necessary is that when price starts off in one direction there is usually sufficient follow-through to ride it for a predetermined distance. The skill is in identifying a quality new move (contrary to just a wobble) and estimating how long to stay with it. This is exactly the same principle whatever the timeframe chosen or whether one is a swing trader, trend trader, scalper and so on.
But it is precisely this “hunter instinct” that requires sometimes hours of sitting and waiting for the strike that is “boring” and which most people cannot take. It is the same in many fields, for example, a nature photographer, who may sit for many, many hours, often in very uncomfortable surrounds, to get that prized photograph. He then will spend maybe hours on editing and perfecting his photo and studying the technical details of light, exposure, lenses, etc and learns from this how to improve his next shots - but the actual taking of that photo only took a fraction of a second. So it is with consistent trading, the background study and planning is far, far, far more important than the actual trigger pull - but so, so, so boring for the average trader…
I guess I am “lucky” in that my years in retail/international banking and a trading room environment trained me far more towards risk appraisal than the actual trading. I spend more hours on my excel trade/strategy analyses and journal than on actual trading. But this is the best way to drum one’s trade strategy into one’s head and to maintain the discipline - and maybe even more relevant, the patience, to “trade the plan”. I cannot trade outside of my rules simply because I don’t have anywhere to enter it into my excel! 
And without that kind of discipline one is so prone to spontaneous reaction to market movements - and I guess that is probably one reason why newbies often go wrong because forex movements are not only so volatile but also so [I][U]visible [/U][/I]. It is right there on your screen, right under your nose, and the button is also right there, under your finger, - how can one [I]not [/I]trade spontaneously in that kind of environment? - and, of course, the next minute it looks entirely different.
In general, I don’t think that forex is so hard to trade, what [I][U]is[/U][/I] hard is to [I][U]not [/U][/I]become glued to its every movement - and [I][U]not [/U][/I]to become dazzled with over-expectations…
Great post, Manxx
Speaking of boring,
looking after a new baby is
like trading: find a good method
and repeat over and over again…
Excellent,Clint…
Well if we are going to celebrate Hayek, we have
to talk about Mises and the Austrian school
.
…
Essential reading:
Hi pmh. What is this book about ?
Hello Joe!!
It is about the Austrian business cycle theory,
which is fundamentally opposed to the Keynesian
interventionist approach and to central banks
meddling with the economy…
…in a short lecture: