A limit order is a setting of a range for a value differential. What is that. It is probably saying the market will optimize itself into that valuation. If forex is a growth process optimized via money flow then we need to see that the conditions for this to happen are in effect and remain in effect.
Content sets the optimization, so we need to look for incoming news to change this. Essentially content changes the structure of the optimization surface. Is it the case that without news events the market structure stays the same. Perhaps for markets structured by chaos.
The forex market seems not to be. Searches of which an optimization is, will change dynamically in the search for a solution, i.e. a valuation. This may be why it is so hard to get limit orders to work in forex.
But why do limit orders stay in the sky. Because whatever you used to set your valuation differential is exactly what the market wants to keep away from. Part of its valuation function is to avoid static valuation differentials. If it did not, then money would not flow in this market, it would become stuck with occasional enormous volatile changes.
This would be when the forex market would cease to function. It is this functional basis of forex to flow money that probably overwhelms the chaos functionality of financial markets.
But chaos is always there to re-start structuring from equities and from the inherent nature of any market to grow. One of the sounder bases for a forex trade is chaos growth, but it can be overwhelmed by an optimization over money flow at any time.
And always order flow is there to impose its own antagonistic structuring. To set a limit order pre-supposes predictability in this market. There really is none. But one can make an assumption of momentum sometimes and that is a basis for a limit order.
But it is a structural momentum, it is the belief that the structure of the optimization is staying the same for a time. If you have a feel for news, then you can make another kind of momentum bet and that is a fundamentalist sense that the market will support a value differential because of economic conditions and so on. This blog searches for such conditions.
However, this said there is a big advantage to setting a limit order and that is to trades where one can feel that surface. What one is feeling is a path through it. Now that itself can change but it seem like it is more sturdy than changes in the surface itself.
But as the surface changes over the time of your trade it will look like like the path is changing. And indeed it is the case that order flow is trying to show you a way away from that path.
But it can be argued that ultimately order flow is determined by that path, because these market makers will have a strong sense of that path and will not go against it. Even the deepest pockets will have their positions destroyed if they go against it. That equals exactly the experience retail traders have of a good trade they get stopped out of or kill themselves only to see the conclusion they desired.
Thus if you have a trade like this supported by structural pointers by indicators set a limit (tighter than what you think) and let the market runs its course. But to this you have to be sufficiently capitalized.
This is argument for high gearing for margin, btw, that sense of this is in tune with the nature of forex, but for the small trader, you have to reduce your lot sizes relative to your capital. It is as well an argument about not torturing yourself watching the market is essence trying to fake you out.
Indicators thus can help show you where that path is changing, where the surface is setting a new optimization goal, ultimately a whole new path, but with a transition where re-scaling takes place. Sometimes content will tell you this, i.e. a Fed Funds rate change.
RSI seems to be useful in showing path changes (i.e. extremes when coupled with chaos at certain points). So the necessary conditions for limit orders seem to be that the path to a valuation you *correctly* deduced remains intact.
The issue here is correctness, if you do not have that, then you are in a gambling situation. What this means is that you are guessing on a goal state for the market's optimization.
Think of it like this, how well will you do in a trade in forex if you guess. I would imagine you would be wiped out very quickly. That does happen to traders, both new and experienced. This market turns information to guesses very easily.
The forex market seems to have a limited sense of a solution, there are not many desired goals states in the search tree it generates, the vast majority are loss states for all traders. It may be the antagonism directs traders away from goal states.
This is as well a determinism in the market, it is searching for something. Content gives it a valuation direction and then new content changes this. The task of the trader is to find that path as it happens. That is the issue and why it is hard to use limit orders. In equities there is some sense to it, one can set limit orders based on undervalued stocks for example.
But in forex one has to stay with the trade. But there does seem to be some structure in this market that can indicate direction as it happens. And if one has a strong sense of it one can set a market on where it is going, that is set limit orders. In this voyage, indicators can get your back, but using them to predict direction for your trade seems to be a mistake in this market.
But maybe they can be used to set limits to changes in that direction. That is, they can indicate whether that direction you feel to be correct is being breached by money flow or other structural alterations.
That breach may be in the direction of your trade. But the result may be a move radically away from your trade within your limit. At that point the limit needs to be changed. RSI can be useful in this. The idea here is that indicators are pointing to structural alterations in a very complex optimization process.
© 2010 Guy Barry - All Rights Reserved.
