Does PAST price action determines future price action?

[pipscooper]

Originally Posted by TraderABC

Hi all.

Does past price action in any way shape the direction of future price action?

Lets brainstorm, are there any ways to check this? Any ideas? Indicators, etc?
thank you!

This is actually a very thought provoking question. I would guess that most traders never think about issues such as these and simply hope that because their charts have a moving average, for example, that it must mean that the moving average is good for predicting future price movement, and for money making. Otherwise, why would a software company have included it in the charting package in the first place if it didn't help make money?

I pick on moving averages because they are a perfect example of an average of past price movement. I have done my own testing with averages and have found that they are very poor (terrible) predictors of future price movement. It is easy to fall into the same trap by assuming that certain analysis performed on a chart of past price movement will predict future price movement.

I think the real value of past price movement is in analyzing it for statistical anomolies. Once you identify an anomoly, a strategy can be devised to exploit that anomoly. As markets change all the time, it is important to continually analyze the target market for shifts in these anomolies, and to continuously adapt your strategies to those shifts.

[BullMarket]

Originally Posted by pipscooper

This is actually a very thought provoking question. I would guess that most traders never think about issues such as these and simply hope that because their charts have a moving average, for example, that it must mean that the moving average is good for predicting future price movement, and for money making. Otherwise, why would a software company have included it in the charting package in the first place if it didn't help make money?

I pick on moving averages because they are a perfect example of an average of past price movement. I have done my own testing with averages and have found that they are very poor (terrible) predictors of future price movement. It is easy to fall into the same trap by assuming that certain analysis performed on a chart of past price movement will predict future price movement.

I think the real value of past price movement is in analyzing it for statistical anomolies. Once you identify an anomoly, a strategy can be devised to exploit that anomoly. As markets change all the time, it is important to continually analyze the target market for shifts in these anomolies, and to continuously adapt your strategies to those shifts.

Moving averages are very good indicators of trend but, they fall short in choppy market condition , They can give you a good indication of where the market is going to go once a trend is in place. After all trend in motion is likely to continue.

If you had poor performance with them it was in your application of them. Ed Seykota, used them as a cornerstone of his trading strategy. He, as you may know, realized a 250,000% return on his accounts over sixteen years.

You have to realize your dealing with human behavior and psychology , which dose repeat, and is roughly quantifiable, just ask any psychologist. It’s never 100% accurate, it’s only probably. So, dose past price action predict future price action? Probably.


-Frank

[tommyfx]

Its imposssible to predict the future but you can definately use the past to give you an assumption of what will happen in the future.

Psychology rules the market, if the price went up from (y) to (x) and everyone started to close their positions and take profit at (x) and prices reverse, when prices reverse like that you are taking money from the poor people that went long at this point. These poor people are now holding losing positions, if they aren't stopped out chances are they are going to try and get out at the best price possible, so when the price gets to (x) again these people will think, "the price reversed here before, there is a chance it will again so i will get out at break even" again people sell at (x), this is combined with the good traders that got in at (y) with a profit target of (x) who also sell at this point. You now have a trading range and the longer it holds the stronger it becomes all because of past performance.

Eventually prices will go above (x) or below (y) but this is only when something happens on a macroeconomic scale that says these levels are invalid and its time to move to a new trading range.

This is how markets work, of course a few extraneous things happen, but nothing in life from trading forex to boiling an egg is exactly the same everytime and you probably live in a dark and scary world if you assume nothing will ever change, i believe markets are very organised about 99% organised 1% random in my opinion and looking at past performance is a good way to start understanding what is likely to happen in the future.
But i suppose newbies would say markets 99% random, its just learning what to look for.

Tom

[TraderABC]

To Tommyfx and Bullmarket regarding psychology.

In my humble opinion psychology is valid for the stock market where you actually trade against the other people, not in Forex where other people are not your competitors. After all unlike the stock market, FX is interbank market.

Other than that, good replies!!! Thank you.

[tommyfx]

HI Trader ABC,


I feel the same laws of market psychology applies to everything that is traded, regardless of whether you trade against people or not prices are dictated by supply and demand, banks quote a price, the banks want to get orders so they can make money in spread, so they will show prices where they are going to be accepted, if the overall psychology of the market is fearful prices are at resistance level (call it x) and people are fearful of going long banks can quote x+1 all day long and people are unlikely to take it but if there are 1 billion dollars worth of sell orders at X-1 the prices will gravitate towards getting these orders filled, thus buying demand has dropped, more people are selling therefore supply has increased and prices will drop. Hope i've understood your point,

Tom

[TraderABC]

Originally Posted by tommyfx

HI Trader ABC,


I feel the same laws of market psychology applies to everything that is traded,

But FX ticks are not based on people's supply demand.

regardless of whether you trade against people or not prices are dictated by supply and demand, banks quote a price,

More like set it. It is not stock market.

the banks want to get orders so they can make money in spread,

And in by playing against us.

so they will show prices where they are going to be accepted,

The price is where it is ideal for (banks,government,country's economy,exporters/importers) needs. Alan Greenspan does not play dice when it comes to picking Interest Rates, and neither are the banks with currency exchange. FX is not some little stock that nobody knows or cares about. If FX rates can free-float as people choose and get beyond certain boundaries then entire world will suffer. No way is FX moved by people... Stocks, Futures, commodities yes, but not "unregulated" (it is, just of a different kind) FX market.

[tommyfx]

"But FX ticks are not based on people's supply demand."

So are you suggesting that if there is a 1 billion dollar buy order (therefore demand) for euro at 1.2000, this will not have an effect on price and it won't therefore rise.
Or a billion dollar sell order at 1.9990 wont cause the price to free fall from this long held support?

"The price is where it is ideal for (banks,government,country's economy,exporters/importers) needs."

Yes this is very true, however they dont do this by not just not moving the price to an area that doesn't suit them they spend billions each day maintaining certain levels, thus causing demand, i can't remember the exact figure but the bank of england spends billions each day from stopping GBP diminishing too much as do all other countries.

[Nonpiker]

Originally Posted by TraderABC

But FX ticks are not based on people's supply demand.


More like set it. It is not stock market.



And in by playing against us.


The price is where it is ideal for (banks,government,country's economy,exporters/importers) needs. Alan Greenspan does not play dice when it comes to picking Interest Rates, and neither are the banks with currency exchange. FX is not some little stock that nobody knows or cares about. If FX rates can free-float as people choose and get beyond certain boundaries then entire world will suffer. No way is FX moved by people... Stocks, Futures, commodities yes, but not "unregulated" (it is, just of a different kind) FX market.

TraderABC your assesment of FX price action is really inaccurate. Banks do not set rates they are set via supply and demand in a free floating currency. People dont move markets? I can think of one person that comes to mind...Soros for example...You dont think Warren Buffet selling 21 billion $'s in forwards has any impact when the dollar was getting hammered last year? The price is ideal for exporters? That is why you run into exporter offers in usdjpy above the market and importer bids below? The price is set to ideal rates? There is central bank intervention so the price can stray from the ideal. I am not sure where you are coming up with this stuff.

Market psychology is 100% applicable. The perfect example can when the usd was unwanted last year and everyone so dollars any way. Now people ignore the bad data (trade deficit for example) and continue to buy dollars anyway.