--->What we will be doing in this article is moving from the behavior of markets, its share or pair rises and falls over time, to its function, as a way of examining behavior, from the perspective of interacting with them.
Ideally because the reality of trading is that one tends to ignore the whole, not to mention other time frames for the one market. But that 'over time' is the key. It is the question implicit in time frame analysis, does it make a difference which time frame you examine, it there a difference significant to trading, that level of granularity of the process of trading.
The granularity of trading itself, of the process of it, is not necessarily fixed, one can trade high speed, and even do this as a human and one can stake out longer term position trades. But is it the case that these should be a similar thing, that is their process granularity should be essentially the same.
One reason not to ignore the market as a whole, is the motivation that perhaps examining another market may help you with determining pricing movements, at least it was and is for me.
That is, the predictability of the whole with reference to the part is a regularity. However we might have to assume that the appearance and importantly the disappearance of regularities is random.
Traders look for signs and signals of appearance and disappearance of regularities. But is such signalling itself any more than random. That is the quality of signalling that they signal too late, for example. That is, they are just doing what you asked them to do, describe the market functionality in some accurate sense, but not give you signals.
But they do give you trading signals they indicate what the present function of the market may do with the given structure of the market, but the problem is, that structure may not be persistent, and may decay and may be changed by inputs from random sources. Assuming that indeed the signals do represent functional action on structure that is of relevance to pricing movements.
If you try and make signals signal a tradable event, one could argue that it may be employing wishful thinking, but with money on line. This perhaps is a root for some of the feelings in trading. The euphoria, of getting away with it and the gloom from what should happen, happening, but with a debit.
But is may be that one is randomly not employing wishful thinking, if there is coherence for the conditions which make these signals of tradable events.
This is a problem with contrarian trading in forex, the directionality may be effectively random. That is, if one achieves a great precision and can see for example a regularity appearing (that is, you get lucky and you have analyzed what you are seeing correctly) where the market will take it, is not included in the information. If you have a sense of market directionality, one finds that when becomes a problem.
Why, perhaps because the event is not necessarily contingent on the structure or function given by the signal. That is, it may be an entirely different set of structural events which happen to coincide with the events desired. That is a random events like a coin toss coincidence. So 'when' is a function of market activity which may itself be random.
So are those events which play out ones which have a temporal coherence in terms of structure and function. Well, suppose structure remains and function dissipates. I would suggest this is at least as likely in forex on a day trading scale as structure dissipating.
That is the forex market may be called upon to apply various function that easily turn on and off its primary functions. This may not be the case with equities, and this may show up in equity day trading as well, which we can express as a greater sensitivity to structural changes in markets, in a bull market or a clear bear market.
A market turn event even a protracted one, may make this more like forex. This is assuming that a market turn is characterized by functional incoherence, which then finds coherence (up or down). That is the directionality becomes random, unless perhaps there are clear signs of external growth to bias it. But this may not even be the case, as rises which do not happen in extended bear markets show.
So could we expect functional changes in forex, on a temporal view to indicate something in equities. That is perhaps a demand on it, a rapid changing of function, a dis-coherence of its valuing. Very hard to tell, as its valuing process is the basis of its hardness.
It is like looking for order on the surface of the water, finding it and using to reference later movements. It might be said that forex is resistant to directionality, especially the imposition of it on it. It might even be conjectured that those stable trends are only a function of directionality in other markets. But as noted above that may be only a regularity to be dissipated by arbitrage.
So is the effectiveness of functional arbitrage (which may rule out contrarian functional trading) something to indicate the functional calls made on the forex market. This is perhaps something which might show in charting patterns. It might show as well in profitability.
One can see profitability or reduced losses in forex markets as related to directionality in the market, if we strip away all other factors and if it were possible to get at this data. So we assume that functional calls significantly and uniquely bias the market for those who are trading for whatever reason on this. That is we assume that in general the market does not favor a profit.
Does this tie in with correlations. This is a way of looking at what correlates, rather than the correlation itself. That is the correlation is not important, what is important is that correlation has occurred.
But one might note the frequency at such correlation is occurring relative to the time frame you are interested in. That is, there is every reason to expect that functional arbitrage is a function of time frame and will be more significant at some time frames.
That is potential trading information, but whether it is tradable information is another matter. In general the forex market is a judgement call, rather than an analytical call and high speed trading is the reduction (but not ad absurdium) of this.
That is the assumption is that there is in effect no process granularity, at a very coarse grained view of trading process, but it may be the case that there is at finer and perhaps significant granularity.
In stocks there is something similar, except that the overriding growth of equity, that primary function, establishes a unity of process at all levels. Now, the problem for high speed trading here is that it does tend towards working against this primary function.
There are strong arguments that the provision of liquidity and the precision of valuation it brings may help with this. But what I am asking is does this support the function whilst it may support the structure to do this. Is the behavior of the markets we are witnessing a result of impairment of the function of the markets to grow.
One can see how this is not necessarily a problem in forex, unless it is the case that forex is important to the primary function of equities and high speed trading works against this. The primary function of equities is vital to the economic well being of the world, it is that great auction house which bids up real world assets on future belief of financial paradise, and the world with it.
We may not reach paradise but successive iterations of this have greatly improved the economic well being of the world. The question I have asked is do these iterations bring an improved capacity to do this. So that is a function pointer to what may bring the next rise, which some might ask how is it possible without inflation.
It as well brings a utility of the action of the markets from 1998 onwards, in particular, but as well from 1981 onwards. Remember the market is about function, it is how we get wildly high valuations which bring such comfort, when the asset reality, is anything but. It is how we get markets without a clear function, which roam about seeking valuations.
To improve those asset valuations and get those rises to the extent it is possible, is perhaps the future we are being engineered towards, but there are alternative views on this right now. That is to say the resistance to the protests is to those rises being impaired. But it may be the case that such engineering is required to get those rises again.
There are many ways to have a revolution now and nobody complains much when the Dow reaches its epic highs (and think what 15,000 + Dow will be like, especially with a firmer asset base). But as well think what a 12,000+ Dow is like.
But in the optimistic spirit of the market functionally evolving to enable such valuations over time (and the role of high speed trading in this is...?), perhaps this could be fulfilled (even that lofty 18,000), hard though it may seem right now, as the promise of tech seems now to be almost an underestimation.
There are other alternatives of course, but that capacity to compute on future valuations does rather depend on this being the case (it is based on a belief that there can be a possible world and the market will enable this). Let us look briefly at an abstract concept of other markets and ask what could be happening here, in a very generalized manner.
In general that reference to future growth tends to be either the US or perhaps China in a more abstracted sense. Thus one can say that in general the movements of these markets are functionally equivalent to the US, including this valuation roaming, well familiar to those who know the forex market.
But perhaps more accurately they value only on a belief in future growth. Thus they rise significantly when the US rises slightly, but do not fall so hard because what moves them is directional, upwards.
In this case I am talking about asset deflation moves, not full scale recessions/depressions which have a corrosive effect on markets and their function (this does not seem to have happened, so far).
This is not a criticism, it makes for great safe havens and stability, which it itself a reason to value a market. Its functionality is perhaps the difference between a return to a range of previous values of the Dow and a new rise.
© 2011 Guy Barry - All Rights Reserved.
