As many point out, the odds are stacked against you as a retail trader and essentially many say that you try and remove yourself from this antagonism by trading on longer time frames, taking a loss until you hit a winner and going with it. There seem to be processes there which overwhelm the antagonism, or do they.
That is the problem, there does not seem to be much asymmetry in forex, in terms of time frames. That is the same things happen at 30 min as at 1 min or 1 day chart. One would expect this. For example there is evidence that the short term equity market is functionally different from the long term market, and evidence that this distinction does not exist in forex.
That does not mean that short and long term forex time frames are the same, it just means those long term processes in the Dow are not significant at the day trading time frame. However when comparing the day trading time frame in equities with forex day trading time frames, I noticed apparent interactive processes.
In my most recent post Forex and Stock Time Frames I conjectured that these processes are those long term processes in action and this is a tradable proposition. They get the market moving and given certain fundamental assumptions they may give you a possible direction.
This gets you away from having to bet to a significant extent. In practice the direction is simply a bias towards looking for a viable bounce if the market is moving in a direction you believe not to be consistent with processes in the economy at large.
I do believe that the forex market is remarkably keyed in with economic processes in the economy. The idea is that the trend started at such a bounce (which may begin because the instrument is oversold for example, this is the money flow required to start growth processes) may have a reduced bias against it continuing, but it may be it will not reverse down into a counter bounce.
It may indicate when to get off as well. Here the symmetry of forex time frames helps, as one can translate this up and down frames. All forex processes can be derailed by outside events, though if these are contingent on economic growth processes they might already be showing up in some forex pairs, for example in the pre-news announcement sensitivity discussed in an earlier post.
Thus even if you had a foolproof method, then you would still be exposing yourself to a high level of risk in this market. And that antagonism is coming from expert minds, it is highly dynamic and responsive. As well, the capacity to take huge losses for an eventual retracement in your favor, gives one a powerful capacity to move in forex.
So how do you reduce risk. Well what is risk in forex. It could be described as the fact that there does not seem to be processes one can track to trade on. There are in the long term Dow, there does not seem to be in short term Dow (day trading) or forex, long or short term.
Those who follow some schools of financial analysis and investing essentially remove risk, in their belief, based on a significant body of evidence, that such companies *will* develop to the potential of their equity seen in their balance statements. These are powerful processes of predictable directionality over time. It is is just they do not seem to be useful or visible in sort day trading time frames.
But if there there are long term processes that show up in short term terms in forex, but that express themselves as dynamic processes, one does not need to track (which antagonism and volatility makes very hard at short time frames) but one needs to watch for their formation.
So, in essence using such methods could in theory reduce risk, because one is in effect trading on risk. The more support you have for this from indicators, the less you have to rely on yourself.
I have even argued that very short term time frames are more stable than longer term frames. But the risk remains. At very short term trading one is up against that antagonism.
What may help is to trade on a long term view on short term time frames. That is looking for major structure breaking events, for example, on the 1 minute chart. It actually gives you a sense of risk because one can see the extent to which structure one can rely on is not present.
Structure that one can rely on will be a feature of a longer term chart (as one is looking for structure breaking). Of course the fact structure breaking may temporally be a longer term process, does not mean it will not have short term signs. That is a very interesting way of looking at forex. It means in theory you can trade long term processes based on 1 min structure.
The question remains do you have to separate market maker activity from these processes. Perhaps not as the market makers are seeing the same thing, you just have to be aware of what they tend to do and use this information to go with them.
What market makers are doing is designed not to be something you go with, but the idea is to use hard market data, which you can surmise they are aware of and will go with, to go with them as well, a their trading is mostly detached from yours.
It is like confirming a trade hypothesis based on market functionality with market functionality. Your risks become, to an extent, your function to trade with, on the market.
© 2011 Guy Barry - All Rights Reserved.
