The reality and chaos of forex
When Forex trading for beginners produces stable losses and every deal is closed in the red, the beginner starts thinking that to trade successfully he should learn to predict the price movement.
Having read books and talked to experienced traders he will find out that one should study fundamental analysis to make long-term forecasts. When our beginner starts studying the market history where he/she trades, he/she will definitely find what is called repetitive patterns.
What are recurring patterns in Forex?
During long periods of time the market moves in cyclic waves up and down. If a trader is attentive, he/she will notice various technical patterns that appear on the price chart over and over again. Discovering the world of mathematical forex indicators, he will see that most of the shapes are repeated near the most important peaks and troughs.
By discovering all these patterns, he will calculate how staggeringly huge the profits could be if a certain trader takes the right action at the right time. No wonder, when a new trader will conclude that the market, time after time, repeats itself, and it is enough just to learn all figures and install on the terminal Forex Grail indicators to become a billionaire. Maybe, the market is organized in such a way, that it repeats itself every time in some encrypted form. All you need to do is to find this cipher and solve the puzzle! Then it will be possible to completely avoid losses and make huge profits.
Armed with all possible literature, our trader, like the first Templar looking for the holy casket, will begin to pursue the goal of finding the secret cipher. From time to time he will receive e-mails with offers to sell some perfect trading systems that are able to recognize repetitive patterns. Since quite often such "brilliant" strategies are worth several thousand dollars, a trader may easily believe that they are able to provide their owner with profits and get a new forex scam for good money.
As a rule, such MTSs are advertised in brochures, which usually talk about legendary traders or reclusive traders who have suddenly discovered an incredibly profitable trading formula. And such statements further strengthen a beginner's faith that there really are people who have managed to discover in the market what is hidden from others.
But even with so many predictions in books, trading systems and programs, every year nearly 95% of traders lose their money. But none of the players think about whether there really are repetitions in the market? Could it be that it is chaotic?
It is human nature that we are receptive to ideas that give us hope. People believe in an idea even though there are hundreds of proofs that it is wrong. The most dangerous kind of trader is a trader who made a profit on a short period of time and fiercely believes in his idea. A fleeting success can turn a sensible trader into a fanatic. What is the most important quality of a successful trader? Undoubtedly, a lot of different qualities are important for a trader, but one of them is the most important. He must perceive reality as it is.
Losers traders have a wrong perception of the markets, of themselves, and of their actions while trading. To make a profit in the future it is crucial for them to get rid of this distorted view of the world. It is important to realize that the market will try to reinforce their false perception of reality all the time.
People who have gone through this begin to relate to the market in a different way. They now look at it through chaos theory, eliminating the study of price movements by mathematical or statistical methods and by not trying to identify some recurring cycles.
Markets are non-linear dynamic systems that can be analysed using chaos theory. In particular, when this theory is applied, it becomes clear that markets are a random set of price characteristics with a small presence of a trend component. The value of this component is measured according to the type of market and the time frame value.
In order to better understand the chaotic motion of the market we use the term 'fractals'. The definition of a fractal is rather difficult to grasp by ear: it's an object which has the property that one of its parts is similar to the whole object. However, once we put this definition into our everyday framework, everything becomes clear. For example, take a tree. As we approach its top, the branches of the tree become smaller and smaller, although any branch is similar in structure to a larger branch and finally to the tree itself. The same property can be found when studying price movements on hourly, daily, weekly and monthly charts. In spite of the different timeframes, their structure remains similar.
Why is a chaotic market so difficult to predict?
Now it's time to talk about such market characteristic as "sensitivity to starting conditions". Because more and more errors in describing the market situation are accumulated over time, the system becomes more and more complicated, and therefore it becomes impossible to make predictions.
Even if we forecast price movements accurately for tomorrow (which is impossible to do in reality), predicting price movements two weeks ahead will still be close to zero.
Many experienced and thinking traders assume that trading, for example on a five-minute interval, is an attempt to make money on random noise and equates to a waste of time. In the end, noise traders are left at a disadvantage because their profits eat up the cost of trading (commissions, overheads, etc.). However, at the same time they say that long-term price movements are not random. Therefore a trader who trades on a daily or weekly chart has a good chance of success.
Think about how it is possible that short-term movements with a random character merge into long-term movements which already have a clear trend. Doesn't it seem like an absurd idea? In fact, the idea is correct and such a paradox exists. One should remember that there are no repeating cycles in the short term, and indicator patterns and prices that players rely on when trading can always be found in a set of random numbers. It turns out that price prediction in a short-term movement is a kind of prediction of numbers falling out in a lottery ticket.
Does it mean that the market is a random fluctuation, so every trader is doomed to fail sooner or later? Not at all. Players can take advantage of the long-term trend component, which will give them an advantage. All trend-following systems work in the same way, and this, by the way, explains why such systems, on the background of their other fellow traders (who trade intraday) bring good profits a year.
If you want to be a successful trader, put yourself in the shoes of the casino owner as often as possible, who has the upper hand on any bet. Yes, the casino may incur losses, but the more a person bets, the more the casino wins. Therefore, a trader whose approach is based on the long term may incur losses on any given day, however, he will always end up winning in the end.
What is the result of a successful trader? There are three components: discipline of trader's trading, market choice, and system itself. The last point is quite specific: we can never predict when our system will show its advantage over others or when it will fail.
Most traders use trading methods, which they have read in books or learned from others. They do not think if their method has any statistical advantages, and if their trading system is described in a book by a trading guru, it must work flawlessly. Besides, they are too lazy even to test their system on history. Do you recognise yourself in this description? Then don't be surprised that trading brings you nothing but losses. Yes, trading can be fun for you, but remember that you have to pay for the fun.