This suggests there is a different form of time in this market. At the very least it has different speeds. That suggests compression and expansion of the real world time line. But compression and expansion results in information changes, changes in structure in the market.
What this means is as you wait for a pre-planned trade, time itself is changing what you are trading.
There seem to be certain behavior in the market: stimulus from money flow and its fading and it resurrection. The reality is that is the control in the market and anybody who has it uses it as much as they can. Others hop onto those movements. The interesting factor is the way that this same stimulus response can be seen in 1 month.
The question is, did EUR/USD fall from 1.5 because that stimulus pushing it reached its limits. That suggests that while traders are stronger than central government talk, they are not stronger than the market and behavior at all time frames bears this out.
So for traders to protect themselves from this, one needs signs of stimulus fading. In essence one is looking for this in RSI for example
But usually RSI is seen as price based. That it is relatively overpriced, for example and the market will re-price it downwards. But as we know that does not seem to work so well. Thus it suggests something else is happening and it may be that stimulus fading.
All who use RSI feel that it does get at something profound, but what is it. It may be another element of that precision this blog feels is in forex (seen in precise price references over time), but whose accuracy traders cannot see, and hence lose money.
This blog suggested that stimulus is a natural process of the markets something to move it to a state that chaos can catch onto. It may be that forex is an expression to an extent of that stimulus movement in action across markets, but it does seem to have its own growth processes as well, but perhaps less chaos based and more optimization based as this blog has suggested.
RSI may show that moment of structure and the moment of optimization thus to use it more effectively it may be necessary to separate out those indications. It may be one is always trying to do that by confirmations. If that is the case one needs to look at it a bit differently and use it with anti-confirmations. That is where time comes into play.
The point about markets where chaos is more native is that time is with you, growth processes will happen, but you have to make a bet on a future, because you have to buy the instruments young, but with a balance sheet and financial analysis you can get some sense of a value differential over time.
But is it less risky to trade chaos based instruments like oil or e-minis as leveraged products on a day trade, i.e. like a currency.
It may be that an optimization based trade is better for day trading than a chaos based trade. That is because those products do not have a day trade based growth process, the growth process is long term. So you are trading a growth process out of its time frame. So in the end time may work against you in these kind of instruments.
One can speculate that entries and exits do not work so well in forex because if time moves at different speeds, then setting entries and exists based on time as we experience it outside the market is pretty pointless. Perhaps it is better to set entries and exits on structure formation instead. In effect one does as one changes ones trade as one trades, as market structure changes.
What one is trying to capture is something like what QE2 may be capturing now, that is a moment when this kind of money flow boost re-starts the growth processes of the market. Here time is compressed it is more than RSI extreme plus alligator for example, one needs to know what money flow can start a chaos growth process (i.e. when).
My approach looks for time to know this, based on linear time from the US equity market, but meaningful time. A step further is meaningful time plus the rate of time. That is to do with structure though, and this is to do with the way one feels intuitive trades.
Think about time in an optimization process and think about what it is you want in forex. What you want is a valuation differential. But it isn't like equities where something is under-priced for some reason.
It is hard to argue that forex is anything but a very efficient market. It is just that there is nothing like a balance sheet for you to price an instrument. There is a gap between valuation and pricing.
The reasons are because this is a process based market and that is what you need to trade. This blog looks for those processes. But the valuation comes from the addition of content, of meaning to those processes. That is time in forex, it is meaningful processes, it is when to trade. Those processes have varying speeds.
It might even be said that time based trading is not that important. Look at it this way, how many times have you entered a trade and seen it go nowhere, not opposite to your trade.
Remember the market does not care about your trade, it is searching for a optimization across a whole range of factors. Money flow, which you can be part of to an extent by getting in on a trend is counter to this optimization, it imposes a valuation that the market breaks.
In part this is the antagonism of trading but it is as well the fact the market has its own range of valuation. Now that is what you want to know, but that is hidden in the optimization surface, but that is what perhaps you feel in intuitive trades.
Time in forex is movement across this surface, as such it is not linear at all. In fact a trade may make sense over time, that is over the process you key into but during that time it may make no sense at all and fake you out.
That is the problem with intuitive trading. For this reason forex trading needs sufficient margin. If you are undercapitalized no matter how good you are you will lose money.
So RSI can be used as a timing device for when to jump in, in that it indicates money flow, but you need to ally this with something to show that this money flow is going to catch onto a growth process, i.e. that there is something to optimize, then the market will move.
That is a value differential native to the market, it works best when there is not a news input, many prefer this to news. But you have to know what the meaning of this process is (overbought RSI can still go up, but after a short correction usually).
That comes from intuition, the feel for the path in that optimization surface but it can be supported by deep content from the market. That is time in forex, deep content. Time itself is a structural thing, the forex market is like a universe with vast gravity wells, with all sorts of temporal distortions on your journey to valuation. But they are part of the process.
Does this mean you have to feel exits and entries, yes, but with a hard logical system to say when not to trade. In the space where you do enter you need to use content to time an exit. In general one is told to trade within a system, but the losses from doing this over time seem to produce at best a zero sum game. But the reality is, losses are the norm.
Follow the valuation process itself and then it is a different matter. That is the great seduction of forex, that sense you have when you first see it…all I have to do it ride those waves.
But the reality is, the determinism in equities that produces a timeline is not in forex. That is to say, look at an equity chart for a stock and look at a currency pair chart. They look pretty similar, but they are not at all.
If properly viewed from a temporal perspective, the stock chart would probably look similar, but the forex chart would look radically different. What do I mean by this.
The time-line, the actual way it could have moved. That is the number of possible movements of a forex pair is vastly higher than those of a stock. So a forex chart would be this hyper complex journey along an optimization surface. A stock chart is pulled by the gravity itself of the growth processes at work and grounded valuation processes (grounded in the balance sheet).
Forex is not hidden it is just represented in such a way that does not reflect what it is doing. That is another reason why I try and find a set of indicator that at least capture some of its structural process. It is a process of building and demolition towards a series of optimizations. Is there a global optimization to forex.
In a sense yes, it is that harmonious equilibrium of exchange rates governments seem to yearn for.
The problem is they really do not, they want those trends, sometimes they want to devalue sometimes revalue, explicitly or implicitly. Forex is a key part of monetary policy, as this blog and my tweets have been arguing for the past years or so in terms of Fed Funds/ECB rate differentials.
What do I mean by that chart example. It is this sense that patterns are disposable, one ends up with one, but really it could just as easily be another. But they have more meaning in equities. That is time, it is that the forex time-line is warped and deviant, but equities is more linear.
How does that help you in trading. Well, it means do not feel beaten up by the market it could very easily have gone the other way.
But it means you cannot escape from content, you need it to give some direction, some value differentials you can trade on, but you really want content native to the market not news inputs. The search for market structure to exploit is not the easy way, it is the only way, unless you can absorb losses or start-up money flow, except for the possibilities of the way the mind can sense that optimization surface.
But that is a counter intuitive process which may need counter intuitive indicator use, what I meant by anti-confirmations, if indicators are to be any support at all. From my own experience, not using indicators can be less lethal to your money than using them. But using RSI to tell you that money flow is becoming less relevant to the market and thus something you want to be in, is one such use.
© 2010 Guy Barry - All Rights Reserved.
