Forex as a system... Who benefits? What internal rules exist in FX?

[TraderABC]

Forex as a system with what rules? What laws move forex prices?

I have been obsessed with forex for a long time… As soon as I’ve learned to automate and backtest strategies I’ve been doing that day and night. I have tested enough strategies to write a book… However I have not met good results. There were good strategies that seemed to work, but not on every major currency… Anyways, results have not been that great. Then I’ve started to think, what is the cause of the problem? Is there an underlying cause of all causes that I am missing? And then it downed on me…

The most important question regarding Forex that must be solved is “what are its rules? What is its system?”. Imagine if an alien observed Chess Players and chess game. A smart alien would make detailed and accurate notes of : number of people, size of the game board, colours, number of figures and how they behave. A game may be a mystery to an Alien who might not even KNOW what he is observing… The Alien would NOT make a good chess player, unless, it learns the rules of the game. Then it will all make sense and alien will win. Same is here… I was looking at the indicators, at the currency pairs. I was making thousands of calculations…. And now I realize that the key is what matters.


One thing to add is that FX may not be the same thing as the Stock market, even though they may LOOK the same, they aren’t the same and may follow vastly different rules (and not just the obvious differences). Like 2 variations of a card game, may use the same deck and some rules may be similar – but it has enough variance to make the player who is not aware of additional rules and internal logic, loose… For example candlestick were developed by Japanese RICE traders. What the **** it has to do with currency trading in 2005 I have no idea (I checked candlesticks patterns, they suck by themselves).

Unfortunately all the courses the brokers teach (only for their commercial benefit) and all the books teach miss the mark. If you buy a book on Forex (or trading in general) you will most likely see the standard rehash of these things:



Currency Pairs, spreads, what is bid/ask, value per pip, some other general things that any proper trading station should calculate for you, general volatility of trading sessions,

Importance of exiting before news, some general fundamental analysis (which if followed mechanically works about 50% of the time), some standard bunch of indicators that come on every/most platforms (with all the pics showing how well they work, while avoiding the equal number of situations when these indicators bomb), some major players, and how SAFE and how beneficial (safe and beneficial to the brokers) the forex is.


If all these things worked, then why do 90% of traders fail? Who benefits? Trading is a negative sum game, money earned is money lost. If everyone is taught to look for the same stuff, if everyone has access to computers and programs that calculate all the popular indicators, who would be smart (or dumb) enough to take the other side of a (good as brokers claim) position?
Why do you think that top, richest and the brightest traders would give their money away to some newbie who read another cloned fluffy book about Forex?


Decades ago before the computers emerged, you had to calculate all the indicators by hand. Rich banks could hire dozens of people manually calculating and plotting indicators by hand. Maybe this, slippage and spread are some of the reasons why most trading was long term (try to calculate stochastic for every 1 minute bar). If indicators worked, they probably worked much better decades ago before everyone had access to them. Now everyone can use them which brings a question – against whom are you playing? Also another equally important question, why are there so many indicators? If there is a good indicator, why create another one? Many programs have dozens of indicators, as if you must use all of them at once. What each indicator tries to add to previous one? I have done extensive research into indicators and found that most of them ARE SIMILAR if not identical to each other. After al,l there is just 4 aspects to a bar (OHLC) and to tell you the truth, taking the close value vs OHLC doesn’t make a difference. Plot ema of closing price and ema of OHLC/4, the movement will be 99% identical. The indicators are obviously based on the price in one way or another, thus a shift in price will shift the indicators, not vice versa!!!



FairyTales of Dr.Elder

Even mathematically analyzing so called oscillators and trend following shows that they are virtually identical. There is no such thing as “range indicator” or trend indicator. The difference is only in how the data is presented. The neuronet analysis shows that “oscillators are good for trend following and not vice versa” . If the prices are moved by people than what formula can predict that? What indicator shows what Greenspan will say or where Bin Laden is? What indicator shows the future action of people?


Some say that Psychology is the key. Hey, you got to write books, you have to have that “edge” over other writers and you write about what you can. However psychology while being very important, cannot make up for a bad system. Easy test is to write an automated program (PC is emotionless, fearless, tired less machine) and see how well it performs . As far as I know Holy Grail does not exist… yet…

Also as I was talking before, stuff written for Stock market may be useless for the Forex, like strategy for Poker is useless for Bridge…

What is more important? Some stock from some town in Alabama or Currency such as USD? If some stock crashes, 99.999% of the people will not even know about it. Now what if USD crashes (and all the rest of the currencies are connected to it, so they will crash as well)? It will be a financial world crisis… Banks, international companies, entire financial infrastructure that holds us its slave will crumble… Of course the powers that are don’t want that to happen and they are well aware of manias that mass psychology can bring. Thus, how can they give us the power to control the rates? Remember, one cent difference in an exchange rate may mean billions lost for the banks that daily exchange trillions of dollars. If the rate is moved by the majority of the people and knowing how fragile the groups can be, do you really think that rates are allowed to free float? Look at stock charts and at forex. You will notice that Forex rates do not crash… Today with the technology it is not hard to control the numbers that appear on peoples terminals… After all it can mean great profits for the organizators of the game. They see the peoples positions and reverse the rates, thus pocketing the money. After all, what kind of people would offer 100:1 leverage to you? Brokers are not altruists and they are people who need to feed their families as well and free cheese is found only in a mousetrap.. Being a negative sum GAME (where organizations play against you) it starts to answer the question: “Why is everyone taught the same from all the courses and books”…. When all orders are all in one area, when all indicators show the same info it makes catching fish so much easier…


So the major questions are:

What moves the rates? They can’t free float because that doesn’t guarantee that they will be where importers/exporters and banks want them. Banks are in it for the money and power, and controlling us is what they like to do.

if they are moved by people than what kind of indicator would work and how math or geometry possible be used to explain peoples choices?

Why are there so many indicators if they are virtually the same and available to everyone? Who is supposed to loose?

How can some simple, and linear math determine the future rates? Bill William’s chaos theory is incorrect. Alligator is a modified moving average, not something new. What the frick does divergence signify other than some permutations of old numbers?

Why is everyone taught the same?

Why do 90% of traders loose? It is said that two biggest groups of traders are: Engineers (smart at math) and farmers (hard working and patient people), yet I have read that successful traders aren’t necessarily the smartest ones. Is this one of the keys? Even the miniscule minority of traders have had periods where they lost almost if not everything (some even their life).

Why do very successful traders need to sell expensive courses, merchandise and so on? Why do people such as Bill Williams, Dr. Elder and other heroes of trading sell so much at such high prices? If they are pro at trading then they can easily live very well on trading profits alone and enjoy it (especially if you are a level 5 or whatever Bill Williams calls it).


It is not unlikely that people who do WIN did it because they were either lucky or had the kind of information that we cannot have. Of course these people would not go around telling everyone that they were merely lucky or were spoon fed. It is not good for business, your ego and people would not like to listen to this brutal hard truth. You can make a lot of money teaching and selling books. There were millions of traders yet there are only few who make it rich. This does not go against “random winnings” hypothesis.

Comments anyone?

[vishalshan]

Originally Posted by TraderABC

Forex as a system with what rules? What laws move forex prices?

So the major questions are:

[font=Arial][size=3]What moves the rates?

Why are there so many indicators if they are virtually the same and available to everyone? Who is supposed to loose?

[font=Arial][size=3][b]How can some simple, and linear math determine the future rates?

Why is everyone taught the same?

[font=Arial][size=3]Why do 90% of traders loose?

[font=Arial][size=3]Why do very successful traders need to sell expensive courses, merchandise and so on?

Comments anyone?

Here is my 6 cents !!

1. Market is made out of millions of traders and these are the traders who move the rates. The rates move in the direction where majority of traders are biased. This includes you and me also.

2. There are so many indicators available all derived from the same source OHLC as you mentioned. But each one of them throw a slightly different picture or flavour (not day and night difference though..) of the market's current position. Even though there are millions of traders in the world, all can not think alike. Each one has his own frequency of thinking and for some of them some indicators match their thinking frequency. They stick with them they like most. All successful winners in this game do not use the same indicator. They have become successful identifying which indicator suits them best. People who do not know what their inner strength is and what is their natural style of trading end up not finding the suitable indicators for them to succeed. They are 90% and are bound to loose. Again, finding the suitable indicator plays only a part role in their success.

3. Simple and linear math used in the indicators are never developed to predict the future rates. These indicators measure the mass psychology of the traders at any point of time and help traders to decide which way is better to go. Successful traders always take chances by going with the mass. TREND IS YOUR FRIEND. Successful traders never win always. They too lose. Since most of time they are able to read the mind of the mass and go with the trend, their winners are more than the losers.

4. Everyone is equal in this world and that is why everyone is taught the same !! ;-) It depends on the individual how he/she is pursuing what is taught and becomes a winner or a sucker. 90% sucks because they don’t know how to follow what they have been taught.

5. Same as 4.

6. Yep, trading is a challenging experience and demands the same amount of effort from you to analyze the market for each and every trade. The effort required from you for every trade is same when you have 1 year exp or 10 years exp. It does not mean a highly experienced and successful trader can trade while he/she is sleeping. They have to sweat to win every trade moving on. They don't have a magical net which will attract all the fishes without the pain of waiting. Being highly experienced and successful, they know where and when they could catch more fishes but have to go thru the hardship of normal fishing to catch their booty.

Some winners decide to take things easy after a while by diverting their energy somewhere else (writing books, seminars, classes etc.,).

Shan

[TraderABC]

Originally Posted by vishalshan

Here is my 6 cents !!
1. Market is made out of millions of traders and these are the traders who move the rates. The rates move in the direction where majority of traders are biased. This includes you and me also.

Hi vishalshan,

Then why doesn't it behave like that crowd of people it is made off (especilly during times of crisis)? For example during surprise 9/11 tragedy/attack and few days later the stock market was closed because financial powers were afraid of a stock market crash. Forex worked well and it looked almost the same as any other day. For example Euro only changed by 2 cents, Swiss by 5. On the other hand Hryvna (currency that isn't traded by forex and no one cares about it) rose from 5.25 to a US dollar to 2.5-3 to a dollar (at unofficial exchanges). A change of ~50% percent. Later national banks intervened and forbade these free floating rates.

(not in english)
http://www.dinform.ru/archive/docs/f...s22118345.html

2. There are so many indicators available all derived from the same source OHLC as you mentioned. But each one of them throw a slightly different picture or flavour (not day and night difference though..) of the market's current position.

Some of them are 99% exact. Some of them are 100% exact (roc and momentum or WLR and Stochastics). Also If one indicator shows the signal earlier this time, next time it will be another one, so at the end they are similiar. For example an SMA may react quicker in some situations, and sometimes it may be right, sometimes EMA may be right....

Even though there are millions of traders in the world, all can not think alike.

When everybody is taught to look at the same indicators and the same patterns I wonder how true it is. When you are offered 100,200,400:1 leverage that means that your brokers have to find a way to fund that...
What does 100:1 means? It means that for every 1,000$ you commit, a broker has to add 99,000!!! Brokers are not altruists so how do they find that much money? They probably bucket your orders with orders of 99 other people who have entered on the identical position.... Maybe this is why everybody is taught the same....

3. Simple and linear math used in the indicators are never developed to predict the future rates. These indicators measure the mass psychology of the traders at any point of time and help traders to decide which way is better to go.

a. How do you know that the rates are mass psychology of the traders
b. Where would you go? Against the trend (moved by these massess of people) or with the trend (and the sheep that has too loose).

Successful traders always take chances by going with the mass.

Trading is made so that most lose. If everyone is the winner, who will pay those winners? Didn't Dr.Elder say not to play with the massess?

TREND IS YOUR FRIEND. Successful traders never win always. They too lose. Since most of time they are able to read the mind of the mass and go with the trend, their winners are more than the losers.

Trend is your friend until it ends. How do you know when and where is the trend and at what stage is it? I have seen many situations where there was strong trend (from monthly level to intraday), the price broke some minor level and turned around 100-200 points in a matter of hours. I bet many people have jumped in on all the perfect greenlights and got hooked like a fish.

4. Everyone is equal in this world and that is why everyone is taught the same !! ;-)

The brokers don't view you as equal. The floor traders don't view you as equal... Equality is not found in the material world...

Some winners decide to take things easy after a while by diverting their energy somewhere else (writing books, seminars, classes etc.,).
Shan

If a trader is a PRO, s/he will enjoy the work and in trading you could earn much more money much quicker than by lecturing people. Remember that doing seminars costs a lot of money, travel takes time, problems with organizing, etc....

Thank you for your replies!

[vishalshan]

Hi TraderABC,

I had just put my view of thinking. I have no intention to confront you.

I would like to convey some of my points I mentioned earlier.

Again this is just my opinion...

Forex market is not manipulated and can't be manipulated if you are doing with genuine brokers. All news and major events influence the minds of traders to react but it is not guaranteed that the mass would react the same way for similar events. That is why Psychology plays a good role in trading.

All indicators developed show how the market is reacting for the recent events and it helps traders to decide whether it is the right time to enter or exit and to be on right side of the market.

I'm not experienced to answer all your questions and absolutely no offence intended.

Shan

[forexhr]

TraderABC,
I am little confused with your posts.
I don't know what are you trying to prove?
What is your goal in forex?

I had read your long posts about how markets are random, unpredictable, how people who do win did it because they were lucky...
So, if you manage to convince 99% of traders that markets are random, that there is no way to predict the market, that all indicators does not work, that fundamental analysis sucks…, what you have achieved?
Still there will be successful and unsuccessful traders.
If you are unsuccessful your goal is to gain experience and knowledge to become a successful one. I you can't do that than find another hobby.
Clear and simple. All IMHO.

[TraderABC]

Originally Posted by forexhr

TraderABC,
I am little confused with your posts.

I am confused with Forex...

I don't know what are you trying to prove?

I am trying to have good discussions.

What is your goal in forex?

Consistently earn money and live on them.

I had read your long posts about how markets are random, unpredictable, how people who do win did it because they were lucky...

I hope that is not the case. But all options are on the table...

[MacDFx]

All you need to succeed in FX is "hidden in plain view". The only part of the market, from a consumer standpoint, that may be "rigged" is when a broker does not provide:

a. timely execution or posting of your order
b. spikes prices to trigger stop losses (after trolling your own orders to determine same)
c. spreads that are out-of-touch with the current market (5 pip spreads on the majors should be banned) [img]images/smilies/tongue.gif[/img]
d. places your account on "manual execution" because of your successful trading style

It does make you wonder that, given the sheer size of the FX market, and its inherent liquidity, why any broker (IB or market-maker) would even have to stoop to playing such games in order to survive.

[tommyfx]

Hi ABC,


I have replied to a number of your questions that you post, most of which ask things along a similar line of markets are unpredictable, fixed etc etc and every time people write back telling you this is nonsense. I know when things arent going your way its hard to believe there is sense in what appears chaos.

Look at a Eurodollar chart right now at time of writing 7:53 am (london Time) we have eur/usd at about 1.1939, as you can see price has fallen a long way and stopped here. WHy has it stopped here? Well zoom out to the 4hr and daily charts and you can see we are at a major support line. Because we have stopped and bounced at this level before this tells us the market (whether fixed or not) does not want to go below this point. Think about it, you would have to be VERY brave/foolish to place a sell order here because you know the USD is currently very expensive at this level. Other traders know this also so they are unlikely to place sell orders. The banks which quote us prices will tempt us by showing lower prices but people are not brave enough to accept them, and if they do they are just bought at a bargain level, the dealers know there is now a bullish undertone and they offer higher and higher prices untill people start saying "hang on, i think this Eur price is too expensive" and start selling, this is what the markets do, there is no fix about it.

You do not need lots of indicators, firstly markets range trade 80% of the time, most indicators just highlight trends so at least 70% of indicators will therefore be wrong 80% of the time. Secondly, most indicators lag, the charts look good when you overlay them on past price action, but by actually trading them you are missing part of the move, you have to anticipate not follow. Thirdly the majority of the rest of indicators show you over bought/sold levels in a range, this is utterly pointless, get a ruler, draw a trend line and there you will see the true overbought oversold levels.

But the real key to the market and the way people actually make money is not in the entry system, its in the exit, you could flip a coin, heads buy tails sell SL 10 TP 20 and you will probably make money because you have a 2:1 risk reward with a 50% accurate entry. What most newbies do is run losses and cut winners, so even if you are 90% accurate you will lose over the long run. You should be aiming for a 2:1 risk reward with an average system 50%-60% accurate, above 60% and you can get away with 1:1. The key is calculating what is a relistic TP i.e "am i likely to make 20 pips off this trade and if so does it make trading sense to have a stop 20-40 pips away? " These are the thoughts traders have, not is a 20,5 Ema cross better than my 40,3 Ema cross system and this is why most traders fail and then turn around and blame the market for being unpredictable.


Yes banks/institutions do step in and stop the currency from falling, but this isnt "fixing the market" or making it unfair, this is one of the main reasons we have FOREX so people can do this, fixing would just be not publishing offers below a certain price even though supply was there to push it down, this doesnt happen, if a bank wants to risk hundreds of millions of dollars to stop USD dropping thats their problem, they are jumping in the market like the rest of us, hoping their demand for the dollar will prop it it, sometimes it works and sometimes it doent (i.e when a resistance level fails) as a trader we must assess whether the banks demand to prop the dollar up is greater than the supply that wants to see it drop. You cant programme that into a computer, that is skill.