Do Forex prices move randomly ?

[mishak]

Part 4 of 6 threads discussing various [color=sea-green]characteristics of the Forex Market[/color] and different approaches to Money Management.
Parts 1,2,3 covers risk:reward ratio used to set S/L-T/P orders. Please read here.
Part 5 covers winning rate - here


Thesaurus gives synonyms for random - haphazard, accidental, irregular, objectless, unplanned, unexpected.
Well, I believe that forex prices move randomly. Do you ?

If you do not agree you probably mean that forex movements are distributed uniformly bacause there is the same chance to go up or down.
Uniform distribution means that the values of a random variable are uniformly distributed over an interval. Well known examples of descrete uniform distribution are the coin and the dice.
The coin tossing may give two results - head or tail (0 or 1, buy or sell . Chances for head or tail are the same and equal 1/2 or 50% (excluding "special" cases of dropping the coin onto the sand).
The dice comes with a value of 1,2,3,4,5 or 6 with same chances, each is equal to 1/6 or 17%. Chances that the dice shows 3 are the same as chances for 6.
However, chances that the dice will come with smth less or equal to 4 are much better than the chances for the "6" (4/6=67% against 1/6=17%).
Say, you play the gaim of throwing dice with the rules: you pay $1 when 6 comes up, you pay nothing for 5 and you receive $1 when the dice come with smth less or equal than 4 (1,2,3,4).
Is that a good game ? Wow, I can play it all my life My chances to win are 4 times better than chances to lose !

Ok, what this is all about ?
Well, the life is not so simple on the forex market. The EUR/USD has thousands of possible price values. The price can go up, down or stay flat.
Please try to answer the following questions about forex prices and check yourself.
Say, the price for EUR/USD is 1.1650 now.[list=1][*]What are the chances Euro will go up in the next hour ?[*]What are the chances Euro will be higher tomorrow at the same time after 24 hours of trading ?[*]What are the chances Euro will go up OR down in the next hour?
Tough questions.
Now please try to compare chances of two events in the future. Which chances are better (or same):[*] A. The Euro will reach 1.1700 (+50 pips) during next 24 hours or
B. The Euro will reach 1.1600 (-50 pips) during next 24 hours[*] A. 1.1700 (+50 pips) or B. 1.1630 (-20 pips) ?[*] A. 1.1700 (+50 pips) or B. 1.1670 (+20 pips) ?

Human nature tends to believe that prices will continue the previous movement. Do you agree ?
Try this:[*] I look at the chart and see that EUR/USD is 1.1660 now (at the moment at writing), so it went up from 1.1650. Can you estimate the chances that Euro will go up again when it reaches 1.1650 next time ? Are they better than 50% ?[/list=1]

Thank you for your time Answers are available here.

Well, what do you think about forex price movements ?
Are they random ?
Are they uniform ?
Are they predictable with chances better than 50% ?
Please share your thoughts

[FloFri]

Mishak,

Nice subject!
it is a question of Jin/Yang: in case the market is populated by traders like you and me only, the behaviour is uniform, because we are all looking at what will the market do, where will the market go, this and that tech/stats etc...so we are all followers of this principle, we are part of/caught in it (you might call it scared, cautious, sensible...). We are not able to move the market ourselves, we are passive: Jin. Then a big force steps in, that doesn't care much for all of this, but just needs to trade big. Then the market moves big, Yang. In case of powerful initiative, the movement is random (to us) until we get to know the machinery behind it, and then we come with an explanation afterwards: we still fall victim to it, but bigtime. Either win or loose. Like with everything: there is no difference, just conscienceness. Our "random" is a mechanism initiated by powerful forces, where we fall short of recognition. Our "uniform" is a harmonious situation where only small forces act and as long as we have it for ourselves treat it like if we understand it.
Cheer up, we might get away with it for a while!

[neil4x]

If the markets are random then certain people must be blessed with some magic touch, as they consistently manage and grow funds beyond what stataticians would call chance, and for extended periods of time.
As a chartist I try to avoid news items, although I know when I see a large swing some news item will later make it clear what happened. Those market makers who hear news ahead of the pack are moving the markets.
In one sense, because life and the events of each day are random, a large contract is won, a bomb goes off, etc then yes, the markets are random, but years ago Edwards and Macgee saw the efects of that 'randomness' on price charts and saw that paradoxically, randomness has a pattern.

An interesting question Mishak. I take it you have your own thoughts apart from posing the question. Would be interested to hear more...
Neil

[Truville]

The EUR/USD has thousands of possible price values

No it doesn't. It can move one pip, in one of only two directions, from it's previous price.

Think about it.

[mishak]

To be accurate, EUR/USD was quoted at 38 major price values in the range from 1.19 to 0.82 during its short history. (I am just comparing fx rates to a dice)

Movements of EUR/USD are limited to up, down or flat (for some period of time).

If we are speaking about quotes, next bid can be +1 pip, -1 pip, same bid, +3 pips or more in some turbulent times, etc.

[rezo_s]

Once again Mishak, you raise a good point for discussion. I heared, read and discussed this issue many times, and my opinion stays as before...

Well, what do you think about forex price movements ?
Are they random ?
Are they uniform ?
Are they predictable with chances better than 50% ?

Ok, here is what I think:

Random - no, its not fair to talk like that. If it was random, we would have 50:50 chances. This is not the case.

Uniform - no, bcos in that case we would have accurate (and maybe even simple) knoladge of what we are dealing here with. This is much more than that. Market price movements are not uniform... but maybe this kind of description would be most suitable after all. I will try to explain what I mean:
I would call it uniform movements, but that form is not same one for all. For example, I have my own module/perception of market, and for me (as I see it and trade it), price movements uniform in the way I see it, so I try to trade based on that perception. I hope at least someone understands what I mean...

As for your last question about being predictable with chances better than 50%, I would say YES. I know some traders having more than 50% success. Even if we take my trading:
losing trades : 33%
profitable trades : 28%
breakeven (zero) trades : 39%

I move stops to breakeven after price moves in my direction 40 pips roughly speaking. It depends on currency pair and the way I see current situation. So generally speaking, all trades that are stopped in breakeven, moved in my direction after I entered the trade, they just didnt move to my target and got closed when they came back to my entry point. So if we take those trades as positive predictions, we get well over 50% of correctly predicted price movement. As you see, it depends on how we all see it.

Market is complicated and sometimes it gets unpleasant and tough, but its not that bad. It is difficult, but not such a catastrophe

Good Luck all, and thanks again for such a great discussions to Mishak and everyone who participates.

Rezo

[eternalfuture]

Mishak,

I've been pondering for quite some time on how to respond to this posting of yours.

Well, about randomness, my answer is no.

Within a chaos, there's an order, and within an order, there's a chaos.

And simply put, if the market is random, why would we bother to analyze the market? We don't even need to look at the quotations. Just buy or sell, there's no differences at all, right?

If it's uniform, well, may be I'd say there are some patterns and tendencies that recognizable enough, but re-occuring in not-so-uniform time interval.

Cheers.

[skater68]

Meriam Webster
without definite aim, direction, rule, or method

lacking a definite plan, purpose, or pattern

relating to, having, or being elements or events with definite probability of occurrence

Cambridge
happening, done or chosen by chance rather than according to a plan:


Based on the above definitions of random...it appears that FOREX is RANDOM....

prices are not planned...they do not have definite aim, rule or method....they are a product of outside forces...supply..demand...interest rates..inflation...speculation..and many other forces....

So unlike the Chinese Yuan....FOREX is random......the Yuan is planned


no matter how much TA..Fundementals you do there are times that the prices goes against what you have predicted...you are therefore witnessing randomness....

aside from dice or coins...if you look at the weather it is random...however it can still be predicted with some reasonableness....

when a currency pair has certain characteristics that one follows we can say with X% probability that it will go up or go down....similar to the weather...when there are certain characteristics..humidity..jet stream....barometric pressure etc...the meteorologist can say that 60% of the times when conditions were similar to this in the PAST it rained...


but there is no guarantee and that is the randomness (other outside variables such as a large sale/purhcase...unexpected news...etc) these things can not be planned or predicted...therfore they are elements of randomness in the market...


But because the market reacts in certain measureable ways to events/variables and we can identify, capture and quantify these variables and events this is what makes FOREX statistically predictable with randomness......

Conclusion...its random but still predictable.....

dave