Very interesting. I didn’t think about it before you wrote it. Thanks for sharing!
Great stuff! Thanks alot for sharing!! will keep following and looking forward to your future posts 
[B]Market speculation Part 1[/B]
The few posts I will make will probably be contentious and people will have their own opinions - but take in mind that what I have discerned myself:
We all trade the ‘market’ as speculators. The price is volatile and we hope to take advantage of volatile movements to make money. Many forex traders trade a derivative rather than true instruments, (although there are obviously people who trade shares, futures etc) and it can be easy to forget that there is a world outside of pure speculation. Many teachers in forex I have read seem to indicate that trading is just a ‘battle between bulls and bears’ and the price moves up or down depending on whose will is the strongest. I entirely disagree with this view, and tend to teach this bulls and bear theory as the mainstay of their teaching (again, some people will disagree with me and think that bulls and bear speculators rule the market).
Here is a simple illustration. Let us say that there are 10 traders on this forum, all with fair retail accounts of $30-50 000. They get together and decide that there is a great place on the 61.8% retrace and all decide to go long GBPUSD for 1 lot each. They plan to buy for 20 pips profit. Overall they move $1 million, but because they close their longs, they sell off their total 10 lots within 20 pips, and in fact the longer term movement is only $2000 (10 lots x 20 pips x $10/pip). Even if they have direct market access (and their trades are not b booked or herded off somewhere else which is more than likely) the effect they have is only short term, and the long term effect is $2000 only.
On the other side, we have a 18 year old from London who has decided to spend the summer backpacking around the United States. He figures that he will be gone for 6 weeks, and can spend $50 a day on hostels and eat pancakes etc to get around. He converts GBP to $2100 at the bank so he has enough to spend, and his order is keyed in. This will be a long term effect since that money will be permanently converted.
Of course the 18 year old will not have direct market access either (just as the retail traders will not) but it illustrates a point. 10 retail traders pushing quite large lot sizes for retailers all trading off the same trade idea have less of a long term effect than a spotty 18 year old who decides to go travelling for the summer on a budget. The backpacker has no idea of technical analysis, fundamentals, or what the central banks are doing. All he knows is that he wants to go to the US to get laid, and he has decided to put his order in today because yesterday he was hungover. His order was placed at 10.30am because he missed the 10am bus.
Note this is for illustration purposes only; I fully realise that the backpacker does not have DMA and there is an order book, but the point I am trying to make is that there are a lot of factors outside of trading that influence supply and demand for a currency. It does not have to be a backpacker, it could be rich family travelling to the US from the UK, or a UK company doing business in the US.
These deals have nothing to do with bulls or bears. Or battles between them - they are decisions that are made in ‘real life’ away from the trading charts. Note this is a part 1 - I will continue this thread of thought.
[B]Market Speculation Part 2[/B]
Of course, a busy bank is not just going to have one 18 year old walk through its doors in a day. There are plenty of real life interactions you can do to directly participate in the foreign exchange - you can send money abroad for business, to help out your grandmother pay her hospital expenses outside of Medicare etc. There are also foreign exchange transactions that you can do that influence others to carry out foreign exchange transactions. Clicking on adwords on Google can cause a non US company to pay Google in dollars. Buying American Airline tickets influences the airlines overall profits that can cause eventual conversion to dollars.
Although none of these effects will happen instantaneously on the spot market, they will be balanced on the spot market at some point. We can go further to realise that there are many influences that we have on the foreign exchange market - the weekly grocery shop in the UK for example is a plethora of foreign exchanges as rice comes from America, wheat from India, oranges from the Eurozone, milk from Poland. Filling up your car at the petrol station while you do your weekly shop influences the oil prices (again, this is not an immediate effect on the spot price, but eventually has an effect on total demand). Buying a foreign car has an effect, all significant real world price movement.
Although none of this is instantly relayed to the spot market as there is no DMA access, the seemingly random timing can effect the market as the books will be balanced at different times. Whether you decide to buy your car this week or the next, book your holiday this week or the next effects the total number of foreign exchange transactions that goes through on the market this week or the next. Other more significant effects can be ‘seemingly random’ - a overseas business deal might be agreed this week or the next because the chief negotiator sprained his ankle. A UK businessman thinking of buying a shipment of American goods might be distracted by a trip to Vegas. A foreign exchange transaction might be delayed until the next day because the woman from the back office had to pick her sick daughter from school.
The overall sum of all these movements is chaotic and much of it random to the outside especially when you add up all the transactions, all the businessmen, parents with sick kids, sprained ankles, backpackers etc in Singapore, Russia, Brazil, Qatar and Vietnam all having their influence on the market in real money. With so many participants and so much “randomness” it does put a lot of limitations on how much you can realistically predict.
Hello Goldenmember,
Have you ever heard about the omega point.
""The amount of information processed between now and the Omega Point is infinite;
The amount of information stored in the universe asymptotically goes to infinity as the Omega Point is
approached "
Basically the processing capability becomes larger and at the same time, the processors access to more and more information
At some point, any alternative reality might be run as a simulation in the system. ie the ability to access all information and process it at light speed while correlating any event. So “random”, “chaos” or “noise” don’t really exist. Only our limited ability to access and process the information.
I. So your trades rely on a fundamental and technical basis. Do you have any recommendations on these topics (books, courses, forum posts) for a novice trader?
II. You gave insights into your “why to trade”, could please now specifiy on your “how to trade” (e.g. entry, trade management, exit)?
I read your other post “growing my money long term a goldenmember journal”, where you illustrated some of your trade ideas, but it would be great to have something more general.
Thanks, goldfury
Not really heard of it, but I am not sure that infinite knowledge is practical when it comes to what we do day to day.
If you really wanted to boil it down I buy when there is good evidence of buying, and sell when there is good evidence of selling. I exit when I have hit a reasonable equity goal/loss or there is a technical/fundamental reason for an exit. The overall process of learning how and why to do this is what I am going over. Hopefully I shall hit some good stuff that you will find interesting. As for books, courses and forum posts, I would recommend babypips school if you want to learn the language of trading (useless for trading advice). I recommend Fooled by Randomness (not useful for direct trading advice but interesting points of view). I do not have any particular recommendation of any courses or forum posts (but I could recommend that you avoid a lot of them!).
[B]Speculation part 3[/B]
With all these seemingly random events then it becomes hard to imagine how you can possibly predict what is going to happen over a short term. There are of course many teachers and traders who claim to be able to have figured out how to accurately ‘predict’ the outcome of these many events. Now, these events are not random, but from the outside perspective and because we lack the ability to track millions of transactions that take place over the world, I would consider them beyond the capability of a pivot point or a candlestick to predict. The charts or technical analysis has to contain all of these elements and the speculative elements caused by hedge funds, retailer traders, pension funds, life insurance who may not be directly be speculating on currency but may require foreign currency to purchase bonds or equities in certain countries.
I have seen (mainly on babypips) posters who will have a question such as “I did a perfect trade - why did it go wrong?” or “I made 30 pips profit on this trade, but I missed out on 60 pips by exiting too early” and post up their support and resistance lines and indicators and wonder why “real life” did not follow their charts. In my mind, attempting to predict price perfectly (I have mentioned before) is impossible. There will be no doubt people who argue strongly against me and claim they are able to predict perfectly, but predictably I have never seen anyone offer any track record who has those claims. Instead of predicting or forecasting (which reminds me very much of divination of other soothsayer type arts) I prefer to use evidence to speculate on future prices.
Again, I have to write that this may be nothing new to some people but it is a point that some traders who I speak to still do not understand. These traders are still trying to practice forex in the hope of getting better predicting or getting a feel for the future, or practicing their soothsaying skills. In my opinion (repeated often) this is a waste of time, and traders should be looking at evidence based trading to speculate. So what do I mean by evidence based speculation and how does it differ from raw speculation?
Evidence based speculation can come in many forms - it can come in detailed technical analysis tested over many years, it can come in fundamental interpretation of events. it can come from inside information on shares, it can be based on previous scenarios (eg: an earthquake in Japan, or a nuclear disaster), it can come in the form of well tested automated systems among many other things. It is not based on “oh this pivot has confluence with this 61% fib line, I have no idea of the % of time that causes a retrace x amount of pips but it should retrace because the lines match up so I will buy.” This speculation is not evidence based and is purely an anecdotal method which is problematic (before anyone from trade2win says, I realise that this thread is anecdotal, but this is the way I choose to write it) and the source of why there are threads where someone posts “where did I go wrong with this trade” (there is always someone replying back who says “user the higher timeframe” which always makes me chuckle but I will come onto that another time). So when you speculate, make sure that your basis for speculating is sound - this is where the hard work or homework comes from and is the basis for profitable trading.
[B]Speculation part 4[/B]
The first form of valid speculation (in my mind) that I will talk about is through tested technical analysis. I realise that there are traders out there who are profitable who do not even need to test systems and just take trades based on faith that their teacher or tutor or forum poster was profitable and they claim a lot of money. If you are one of those traders or believe that trading on faith without testing is a good way of trading then I am not here to stop you. I just do not think it is a good idea.
Tested technical analysis is a lot different from the technical analysis that I frequently read on forums, blogs and forex sites such as fxstreet and the like. The technical analysis could read as: “The AUDJPY is reading oversold on the stochastic which could make a good signal to buy.” In my opinion, this is a terrible way to trade or even conceptualise trading, and I would be surprised if anyone made money that way. I still get the occasional trader who I speak to on skype who will excitedly send me a capture of their chart of whatever pair they are looking at. They have a chart and an indicator on that chart, or a support/resistance line, or a trendline and excitedly say that the price bounced off that line and that it was obvious that the price was responding to that line/indicator/trend line and how that proved their technical analysis.
This line of thinking is so extraordinarily wrong to me (it might seem great to a lot of people out there, but I am not going to spend a long time argueing, I am just going to make my point) because it is purely anecdotal. It is like giving a cancer patient a Starbucks coffee - if their blood tests come back better the next time they were at the doctors it must mean the Starbucks coffee is a cure for cancer! Or if you saw 2 magpies outside your window in the morning, and the New England Patriots won, it must mean that everytime you see 2 magpies outside your window you should bet on the New England Patriots to win!
If we go back to our coin flippers, lets say one of them ends up inventing the magpie indicator. If on the journey to work he sees 8-10 magpies, the magpie indicator shows that the world is ‘overmagpied’ he should bet on tails. If he sees 0-2 magpies, the world is ‘under magpied’ and he should bet on heads. 3-7 magpies then he sits on his hands. There is no clear connection between magpies and coin flips, but the effect is to reduce the amount of coin flipping and betting so the coin flipper survives longer, and his equity curve merely shows a slow decline rather than a steep one. This might remind you of the equity curve of many students of these non evidence based technical analysis schools - long slowly dropping equity curves.
Thanks for all of your articles so far. I’m relatively new to forex and must admit that I can see how I’ve already fallen victim to some of the fallacies that you discuss. This has been a great overall view of how to begin approaching things from a new perspective. Looking forward to continuing to learn from your thoughts.
Pretty much all of the thread is my posting so they are content that you I think is interesting.
Thanks for the support and I am glad you find it interesting.
Speculation part 5
I mentioned the wrong way to do technical analysis on the last post - in my opinion technical analysis must be robustly backtested. There is no way around it unless you want to bet on magpies to predict the coin flips. You can either do this through manual backtesting - there are some excellent forex testing packages out there that can let you backtest visually.
Commercial ones include Forex tester 2, and simple forex tester - I think forex tester 2 is $200, and simple forex tester is about $60. You can also use free forex testing systems - V hands is a tester for MT4 and is ok, a better one is available from MT4i who do a visual backtester. These systems are free but are limited by the strategy tester. There is also a python version that someone on babypips made that I haven’t tried and no doubt loads of other systems that I have never heard of. All these methods take time, but are infinitely preferable to test a system over a few days rather than spending months trading the ‘magpie indicator live’ while watching your equity and life drain away.
A better way is to test through expert advisors or to learn how to program. By using tick data you can get fairly high accuracy (1 min data from metaquotes only gives 25% accuracy which is reasonable for a ‘higher timeframe system’ but poor for anything trading below the 1 hr chart. The disadvantage of this is that you have to learn to program or you have to have a friend that knows how to program. Once you are able to program efficiently then you are able to quickly sort profitable systems out, and by using useful tools like the myfxbook strategy tester you can isolate and spot weaknesses.
I am only a beginner at programming, but spend some of my free time learning instead of chart watching and its allowed me to filter out a lot of rubbish systems. For example - here is a classic stochastic buy when oversold, sell when overbought system, a stochastic crossover system, an RSI oversold/overbought system and a 3 ducks system with a couple of filters:
Some are classic ‘magpie counting’ type trading systems (though the indicators can have their uses) that might sound great they really are ineffective, but someone convincing enough on a forum was to extoll their virtues, you might devote a significant portion of your life to it. Others are actually useful of course, once you have found a system that works (either through programming or manual testing), then you can apply forward testing on a live account having saved a significant portion of your life and fortune by speculating the right way.
This is something that I find to be invaluable. I am also just learning the ropes in terms of programming, but have been able to code a couple of more basic EA’s and am looking forward to implementing more to save time with back testing. Once you become proficient, an EA can easily be written in hours, while manual backtesting can take up to a few weeks to test properly on multiple pairs. I completely agree, that learning to code is a very wise use of your time when it comes to learning forex. In addition to the backtesting abilities, it has also helped me get a much better understanding of the market in general.
I’m actually trying to build a system to supplement my manual trading to push my earnings into the 8-10% range per month. If you come up with any good systems its nice to share knowledge.
Speculation Part 6
A lot of retail traders are pure chartists and they constantly spout the same phrases again and again - as you might have guessed I am not a fan. I think charts have their use but their use is overemphasised. How often have you heard the following:
“Trade what you see on the chart, not what you think.”
“Charts tell you everything you need to know”
“Its all in the chart”
“Price Action pew pew pew!”
When I first came into forex (from shares) this is what I am came across, and the impression I got was that all the future events could be predicted from past events on the charts, and that you didn’t need to know anything else other than what was on the chart. I don’t believe this, and I will show you a few examples why.
I know there are plenty of people who are pure chartists and will disagree but this is my opinion***
Here is a real past example of a chart - the red line represents standard support and resistance. All these chart examples are real charts on “high timeframes.”
Person A sees the price bouncing off the resistance line along the red line and taking out the lows, while the Person B sees a bottom and the price continuing along the green line and taking out the highs, and they have arguments about it on various forex forums. Person C who is new doesn’t know who to follow because they both present such angry and argumentative evaluations.
Eventually the following situation resolves itself as:
Person A laughs his head off and claims that his Preying Mantis technique is the best ever and that it was “all in the charts” as despite an initial scare as the price spiked up, eventually the price went his way as “he always knew” because after all, it was all in the charts, and you just needed to read the charts, and it was obvious how it was going to take out the lows. Person C bows and scrapes to Person As smarts, Eventually Person B sheepishly returns and Person A lords it over him. BUT Person B claims that he took partial profits and then he swiftly set a break even stop loss, so he still made money. Amazing!
But Person A extols how “he knew” price was going to go down just by looking at previous price and Person C becomes his groupie while Person B slunks in the shadows. Soon another virtually identical situation comes up:
Person A excitedly says - look here is the same situation coming up again, and Person C follows. Person B claims that it has hit a bottom but no one cares about him because obviously he can’t read charts because of the last situation.
So Person A claims it goes down to take out the lows while Person B claims it goes up again to take out the highs - note that these situations are virtually identical (they are real charts and are high timeframes).
But OH NO - look what has happened! Price climbs up and takes out the highs. Person B jumps up and claims that it was obvious it was going to happen because it was “all in the charts” and “he always knew” it was going up. Person A slunks off and again claims he took partial profits, and Person C gets confused.
How can two such venerable traders such as Person A and Person B both look at the chart and see the same chart but both be told different things and both be wrong? Person A might even throw in a he was wrong because “it was a Friday” there was divergence on copper, or another classic gem to hold onto the claim that the charts were telling him the future. Even better, wise old Person D might interject here and say: “and thats why one technique suits one person and not another” or a better classic “thats what makes a market.”
Hopefully you are Person E and realise that Person A, B, and D are all talking total rubbish.
I’ll elaborate on this post later as this post is already quite long.
Guys, I have almost swallowed the whole stuff. Very complicated to understand but belivable but you have made a terrible mistake. I am not stupid. Quite not long ago, I have said we trade derivatives and I was eaten alive, here it claims so and nothing happens, you all say “oh great thread” to the words I had said before and some pretty lady depicted as a donkey, and it is kind of rare lately in many forums a lot of hot women in their avatars are coming to join, I really doubt you all read the whole text. See, this is what real traders do: we put inside the mind of the other behind the screen and watch for the same info and details they se but understand wrongly.
Well there are some people find this thread as informative… Maybe to them it is useful and maybe to others are not. We are free to choose what we read and what we believe. Take everything of what read here as a grain of salt… Maybe it works or maybe not… Your choice…
Oh and by the way, it is not my fault if some traders like to copied what I like to put on my avatar… I know they don’t have originality. I apologize on behalf of their actions if they were true or not… If I were you, just look way lol…
Oh, suddenly you are showing some respect, thanks a lot, the more you talk the more you expose yourself. I am done. I am sick of you guys.
I am subscribed on this thread too so you are very…very Welcome
At this stage of my forex career, I can say that I have not put anything together that is profitable. In fact, I think I jumped into trying to find a system too quickly and that is why I’m taking a step back to really get a firm grasp of the market and a better understanding of how it really “works”. With that being said, as I do get a better grasp and begin implementing various strategies that do begin to show some promising results that are based on strong theory, I’d be happy to share ideas. Everything that I have done up to this point has been without any regard to the “why”, which obviously won’t work. Regardless, I have at least picked up on how to achieve certain tasks using mql4, so I don’t feel my time has been wasted.
Not quite sure what you are getting at, but I’ll give it a go. I don’t think most retailers trade directly on the spot market because we are not directly converting euros into dollars and vice versa etc. Most retailers are trading a derivative of the spot market because they do not have direct market access and are trading a variant of ECN/market maker which is not true spot - essentially they are betting on a value dependent on their broker and not the real currency exchange hence derivative. If you read the small print of some broker sites and pretty much all UK spreadbetters they will say that you are trading a derivative of the spot price, and that prices may vary from spot as part of their terms and conditions. However, this is not the same as a foreign exchange derivative which are swaps, options etc. Hope this is as clear as mud for you.
Speculation 7
So I have gone on at length about why traditional charting is fairly useless. This extends to teaching, and forex blogs. Sorry for labouring the point (I might be repeating the same points again) but I do get frustrated when people will constantly come to me with:
Other: “aha - but did you see today? A pivot lined up with a fibonacchi and the price fell, so you were wrong.”
Me: “Groan - explains again.”
Other: “Hmmm, I see. But what about this chart? There was a head and shoulder pattern.”
Me: “Smashes head against wall.”
I know this is somewhat beating a dead horse, but I will give it a go, because there are traders that will constantly argue with me on this point (btw the same applies to other charts as well including COTS). If I haven’t convinced you at this point, then there is nothing else to say.
Here is another example that I noticed in commercial forex blog.
The professional forex trader/commentator would state that there was a head and shoulders occuring. When this did not occur, he predicted a double bottom. When this did not occur he just ignored it and pretended that nothing had happened and he would go onto make other predictions. Note that this particular forex blog gets a lot of traffic (I visit it from time to time and can’t believe some of the stuff they come up with including their order levels at 10, 20, 30, and 40).
Basically speculative patterns have little predictive power. This is the most important point to make. They have power if they can be statistically backed up over x number of scenarios, but teaching them in isolation, showing isolated charts has no predictive value. Isolated charts (even 3 or 4 or 5) have little value other than retrospective value or hindsight which is why so many hindsight teachers love them.
Tools such as support and resistance, fibonacchi lines, pivots, indicators themselves have extremely limited value by themselves and if you use them you should know what value they have (a point that I will discuss hopefully at some point in the future -they don’t predict price to go up and down). A single support and resistance line does not tell you the direction - it just tells you that there was sell or buy interest in the past at that point. A single pivot line does not tell you how much the price will retrace - it just tells you the mathematical average.
The only predictive value they have is if they are taken in a statistically significant number (see my posts on statistics especially the p value ones) to be worthwhile. Teachers or systems who teach off technical analysis off chart examples without statistical backing are not worth the time to follow.
In my next post I will talk about the value of charts as I see them.
Very interesting thread. Looking forward to see where you are leading us!