FOREX market

As prices are formed in the FOREX market

As prices are formed in the FOREX market

In the short-time scans (intraday trading) within one cycle in the process of price formation in the FOREX market are observed systematic bias. How can it be used effectively in trading - is told in the article.

On the fractal and market efficiency
As you know, the processes of pricing of FOREX can be described using fractal theory of the market, which was a logical extension of understanding of the efficient market theory. Recall that in this theory is compared to the "truth" (estimated) price of the asset to its market price. The problem is, how much and how often the market may underestimate or overestimate an asset. A trader who has discovered or underestimate the market of the asset would be able to risk-free profit. Efficient market hypothesis tells us that this is impossible. Indeed, in the course of study an asset laid almost all the available information to market participants. This implies that the observed exchange rate fluctuations should occur randomly, and no one can predict the market prices. The existence of the market as a stable system with the liquid assets necessary to conduct bidding on it. Foreign exchange market with its fractal structure of the normal probability distribution of price changes on the selected intervalevremeni depending on the volatility of the market and regardless of the depth of the investment horizon - is a stable, self-regulating system.

Because the market involves a lot of investors with different investment horizons, the collapse or a panic in one investment horizon will be absorbed and mitigated through other horizons. Each market participant has its own investment horizon and decides, in accordance with its duration and the expected behavior of the market at the selected time interval.

However, if the market had the same investment horizon, he would become unstable and illiquid. Lack of liquidity in the market creates panic. Thus, a source of liquidity to the market - investors with different investment horizons, different conclusions on technical analysis (or differently interpret fundamental information) and, therefore, have a different understanding of the test asset prices.

Since market prices are constantly experiencing fluctuations, then, according to Soros, the market balance in life is extremely rare. Supply and demand curves are correlated not only among themselves but also with the mindset of market participants, which may, in turn, significantly affect these same curves.

Decisions about purchases or sales are made based on forecasts of future prices, which, oddly enough, is largely determined by these decisions in real time. All this greatly resembles the work of an amplifier with positive feedback. Projections and actions of market participants price fluctuations serve as a self executing prophecy.

Expectations and price fluctuation amplitude
The role of expectations in recent years has increased markedly because traders the opportunity to work with a large bank on the shoulder of many financial market segments. The amplitudes of the fluctuations of prices increased because of the possibility instantly noticeable to attract capital to the markets and manage mode intraday trading. In this situation, there is no guarantee that the drivers will manage and extinguish such fluctuating price hikes. From physics we know that near the equilibrium second law of thermodynamics leads to a gradual decay of fluctuations. The equilibrium system is usually described in terms of averages, because the equilibrium state is stable with respect to various fluctuations and noise that constantly perturb these averages. And what happens to the fluctuations in a strongly nonequilibrium system? In such a system fluctuations can no longer be just noise and can be a factor in directing the evolution of the global system. Near equilibrium, as a rule, a cause-effect relationships are working more or less regularly. But the system is significantly deviate from the equilibrium position, as the very reason why evolution is a victim of circumstances. In this case, we can only deal with probabilities, with no increase in knowledge does not allow you to restore the broken chain of causation, and to predict what results will this system.

On the other hand, price fluctuations themselves at a certain time interval may be a trend in the emergence of other, much smaller time scales. Such a re-nascent trend will join the mass of speculators, open positions on this trend and thus changing the very conditions of supply and demand, which until now were based on fundamental laws. As a result, the market may become highly non-equilibrium with deviation from the average price of four or more sigma (standard deviations researched prices of currency). In this case, understanding the dynamics of exchange rate movements can only be an asset in terms of elements of fractal geometry to the analysis of the market.

On the "long memory" of the market
The hypothesis of a fractal of the financial market explains the existence of the financial market of a nonlinear stochastic process. This process, in turn, is a generator of long-range effect - the effect of market (longmemory process). Its essence is that the random walk of prices is, however, quite a long time (much larger than the theoretically estimated time horizon of the market) keeps the memory of their previous numerical values, and in the process evolution are still focused on .

Indeed, the market is constantly encountered various combinations, proportions and combinations that allow you to quite successfully predict the subsequent development of the market, despite the chaotic process of price formation in shallow investment horizons. I have not once, not only demonstrated the existence of long-range effect, but also showed the ability to measure its length (including the bars). And it is - a direct way to test your technical indicators for true and false signals.

The main issue of pricing in the market FOREX - the prices are random key, highly liquid financial instruments? Trader - geek often explores the historical behavior of selected asset for verification of a technical indicator, for example, MACD, which he uses in real trading. In this case, he must be sure that the correct prediction made using MACD, not random, but based on the ability of an indicator to predict reversals or Emerging market correction.

In practice to distinguish between a random walk on the price of non-random? At first glance, one may conclude that if the market there is a pronounced trend, it is a sign of non-random price movements. Or, in other words, the long-period moving average curves are moving in the random walk rate of the asset should be placed horizontally, as an average over a large ensemble of random variables, as a rule, gives zero. But is it really? More precisely we can say that the dynamics of the foreign exchange market trading from a position can be considered completely random, if past stock price dynamics is close to the trajectory of a sequence of numbers issued by the random number generator at regular intervals.

About two states
At the Physics Department of Moscow State University I did a few more paths modeled in such a generator under the following conditions:
A. The initial number was chosen 1.5000, which is comparable with the rate of USD / CHF;

Two. The standard deviation of the price of artificial currency is 50 points, which also falls within the range of real trading market for the USD / CHF. After a fairly long comparative study of the trajectories obtained with the rate schedules USD / CHF at various time intervals I was able to find a more or less similar pattern.

Trajectory, drawn random number generator can be taken for any currency exchange rate dynamics. If desired, they can see trends, turning points, loops, and other attributes of the charts. The trader saw the schedule, asked what instrument he belongs. In his opinion, it is easy to trade as a distinct trend can be traced, and besides, the schedule is full reversal pattern and has some strong support levels.

Every trader knows how dangerous it is to see trends where they do not, and pick up signals technical indicators - and wrong. On the other hand, a trader who does not like to know how difficult and imprudent to trade against the trend, as dangerous to stand against the obvious signals or indicators published political news. Even more dangerous than categorically deny the existence of trends and signals of the major technical indicators or the fact that the impact on the rate of chosen asset of political news.

Let's take another look at that part of the figure under discussion, where there is a real currency. From its dynamics are clearly visible tendency of the duration - the processes of price formation is not random.

Or is it random? Again we turn to the concept of fractal market. As we mentioned earlier, the fractal feature of financial markets is the possibility of far from equilibrium a variety of different situations with the same initial conditions. In each of these situations the behavior of the market has changed dramatically, in particular, it can go to state in which his behavior better symbolizes the new, which introduced the concept of randomness and non-randomness of modern science. Both states - and the randomness and nonrandomness - coherent. This means that for typical operating conditions of both the correlation and the two states in general are unpredictable. The dualism of randomness and nonrandomness suggests that both states are integral parts and products of correlated evolutionary processes.

The future of the past
If present and past financial market can be described in the usual way (say, in the form of trajectories depending on the price and its derivatives from time to time), then the evolution of the market allows only a probabilistic description, and the same for all markets, characterized by the same fractal attractor - regardless of the initial conditions of these markets.

This fundamental difference in the description of past and future of the market is an objective in the sense that it is not associated with any level of information support and technical virtuosity of ownership analysis.

It is the existence of every trader, acting on the financial market, which is characteristic to a certain depth of the investment horizon gives crucial to any limitations imposed by imperfect mastery of the principles of a technical or fundamental analysis.

In theory, efficient market a random walk prices we are seeing a normal distribution of our statistically similar curves, the probability of price changes on the volatility of the market for different investment horizons. Any other abnormal distribution of these curves refers to the nonrandom movement of prices. In reality, we have a statistically self-similar curves, which are at best approximate a normal distribution (stock and currency markets for small intraday investment horizons) or far from it (as in the case of money market).

To circumvent these sharp corners random and nonrandom processes, pricing, and introduced the concept of long-range effect.

On the effect of long-range
In a normal probability distribution of price changes on the volatility of the market above the probability is virtually zero when volatility is greater than 2 .. Therefore, all that is happening in reality in the market with volatility greater than 2., - Or of the devil (for supporters of the random pricing), or a non-random walk of prices. Consequently, the fractal financial market there are many traders who can be divided into two classes: those who blindly believe that the market rate of the selected asset completely random, and those who believe in the presence of trends and the ability to predict the evolution of the test asset. This division of market participants, like the classification of traders, depending on the level of understanding of the true price of the currency under study. In this case, as is known, traders can be divided into bulls (who believe that the currency is undervalued) and bears (they believe that this instrument is overvalued).

For a trader with a shallow insvestitsionnym horizon is not so important dualism is random and nonrandom movements in prices. More importantly, the million-strong army of traders with similar investment horizons makes extensive use of technical analysis. And this is more than sufficient reason to investigate the price charts. If a large group of traders on the asset has a similar opinion for its further evolution, it enters into force the so-called the law of reflexivity Soros, according to which the study of the price chart multimillion army of traders generates a self-fulfilling prophecy. In other words, the fragmented nature of the financial market as a clone market that begins to exist at one and the same moment from different points of time. Any fluctuation in the market in one dimension may lead to the emergence of a trend in the other, followed by a global change in the market without exception in all of its time slots. In this case we say that the fundamental does not have coped with the accident (or accidental?) Fluctuation occurred and failed to return the market to its equilibrium state. As a result, a new equilibrium state of the market.

Successful traders like trends for their ability to trade on the basis of . Even if one of them says he does not believe in technical analysis, while he adds that it is necessary to investigate the price chart to know the driving force techies. Perhaps this is why the price chart reference points (support or resistance lines, trend lines as well as various technical analysis figures) usually have more meaning.

And the last one. Trading is a game to some extent, the casino. Casinos to the players has only a unique advantage - zero. Falls to zero a negligible probability of 1/36. Nevertheless, the casino has a stable and high income. Therefore, in the case of trading a slight advantage in understanding the market and its driving forces can enrich the trader. Consequently, the technical analysis and other methods of predicting the market should be taken seriously, even if you are a supporter of the theory of random walk prices.

What we have on the calendar?
In favor of a stochastic process of pricing in the FOREX market by the following facts: the probability distribution of price changes on the volatility of the market is close to normal, the proof that the daily market closing price of USD / CHF for the year 1999 committed a Gaussian random walk, the trajectories of stochastic processes by the generator random numbers, sometimes similar to the dynamics of the course of an instrument of the market, etc.

It is clear that the absence of a trend - it's a coincidence graph of the probability of price changes on the volatility of the market with a normal distribution. Any deviation from this graph of a normal distribution throughout the period in the history of prices is usually associated with certain laws of dynamics study of the course, then there is a nonrandom process of pricing. I have repeatedly shown that the probability distribution of price changes on the volatility of the market has marked differences from normal, which is usually neglected in the theory of efficient markets. Shed light on this problem can be economic calendar. Emerging news published statistics on the economy of the country under study and its main branches of production gives us good reason to assume the existence of short-term trends in the foreign exchange market, which can then pay off or amplify the actions of speculators (according to the theory of reflexivity Soros Foundation), and then the fundamental driving forces.

Example 2-minute response rate USD / JPY at an unexpected message of withdrawal of R. Rubin, who headed the U.S. Treasury since 1995. Immediately after the news of the U.S. dollar fell against the yen (with a gap) is about two hundred points, but after ten minutes, the price returned to its original level, so that the scans of 10 minutes or more, this event could be perceived as a random fluctuation of the prices (especially of the part of traders who do not sell on the news and keep track of them.)

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