Tuesday, 24 November 2009

Forex Secrets — Developing the Anti-Chaos Trading Strategy and Tactics at Forex Market (Part I)

Trading chaos: B. Williams’s contribution and the reasons why millions of traders all over the world lose their deposits when they work according to the techniques of this author.

The book Trading Chaos by B. Williams is the classical edition that deals with giving the technical analysis to Forex. It is of a great interest not only to me but also to millions of B. Williams’s admirers all over the world. From the viewpoint of mine as a trader, this book is so popular because B. Williams tried to do the following:

1. To present Forex chaotic market as a system, making use of the chaos theory.

2. To depict his vision of logic of the structural components motion in this chaos: a) the strategy (Elliot’s wave theory); b) the tactics (the fractal analysis; the use of fractals and the so-called key factor — i.e. financial and economic instruments.

3. To submit 5 levels of the professional training of every trader. Each of these levels is clearly described and specified — as well as the corresponding goals and the instruments that traders must be capable of using at each of these levels.

In particular, the following chapters of the book in question are dedicated to the problems enumerated below:

Chapter 6. The first level — a trader- novice.

Chapter 7. The second level — an advanced beginner.

Chapter 9. The third level — a competent trader.

Chapter 11. The fourth level — a skilful (trading) trader.

Chapter 12. The fifth level — a trader -expert.

4. Besides, B. Williams enumerates 5 bullets that can kill any trend -i.e. its reversal points (points of reference). Starting from such points, one can develop new strategy and tactics of the work within the trend.

5. B. Williams also recommends making a business plan. In this control list, one must clearly specify the working rhythm, the signals from the big finger concerning the deal opening, stop-loss levels, cushion pads (suspension pillows), etc.

6. As a professional psychotherapist and trader, B. Williams submits practical recommendations to the beginners and skillful (competent) traders — see Chapters 11 and 12 from Trading Chaos. The essence of his attitude to traders’ principal psychological problems can be approximately formulated as the following. We learn how to integrate into the market basic structure and establish contacts with the market via realizing our own prejudices and by the development of our individual trading programs. You should compare this approach with other psychoanalysts’ viewpoints. Such specialists try to make money at Forex market rather incompetently (see Chapter 23, dedicated to traders’ psychological problems that arise during the work at Forex and methods of their healing).

7. As the logical continuation of Trading Chaos, B. Williams has written another book — see New Dimensions in Exchange Trading. In this book, the author presents his business approach — i.e. Profitunity via the web.

He has introduced the indicators (AO, AC and Alligator). Now they are regarded as the obligatory) components of the majority of Forex trading systems.

He tried to specify (detect) all market signals and open deals at the moment when such signals coincide simultaneously, which must be confirmed by different indicators.

I would like to keep on complimenting B. Williams for his accomplishments and contribution to Forex theory but for one snag to it. Several years ago I started to reflect on certain aspects of B. William’s theory. That is, as a rule, 95-97% of traders had lost at Forex before the edition of Trade Chaos 1, -2 and New dimensions. At the same time, notwithstanding all achievements and discoveries by B. Williams, the number of traders -losers still remains the same even after the editing of these books.

This circumstance forced me to scrutinize many of B. William’s positions more impartially and in detail. I have cardinally reconsidered my views on the trading at Forex.

As I see it, one must clearly distinguish domains where techniques by B. William’s and other authors are applicable and where they do not work but only accelerate the process of losing money by a trader. Only after having learned how to detect this boundary one can develop one’s own trading system that will bring profits at Forex.

Further, I try to submit my views on Forex market. Starting from the theory, I make a transition to its practical application. In this way one can better understand logic of the currency pair movement at Forex market. Consequently, this approach helps us to trace out a general pattern of opening and closing of transactions at Forex.

CHANGES in FOREX MARKET. FOREX CONTROLLABLE SYSTEM instead of CHAOTIC MARKET and ITS CONSEQUENCES for TRADER’S WORK

Previously Forex was a chaotic market. B. Williams tried to find elements of a system, making use of the theory of chaos. At present the system tries to disguise its goals and plans with the help of a superficially chaotic character of movements in this market.

As regards Consortium, the PRINCIPAL CONCLUSION that a trader must make after reading this chapter is the following. This market has ceased to be spontaneous. Now it is organized and controllable. At present volumes of transactions, opened by traders, have ceased being of great influence. Somebody’s interest to push a currency towards this or that direction has become much more important. Often this interest aims at usurping an N- transaction volume and a number of traders’ orders. The primary goal has become to reverse all currency pairs into the opposite direction. This is why the currency often moves against the volume, news and the common sense. The charts on April 1, 2005 perfectly illustrate these tendencies. I sincerely hope that everybody sees that these graphs do make exceptions but they don’t confirm the rules of Forex.

This is why the techniques of working at Forex, written by those classicists who dealt with the spontaneous market, will more and more diverge from the currency real (true) quotations. It is necessary to mention that at the spontaneous market the direction of the trend and its intensity coincide with the trading volume. At present the base of Forex market is changed in its essence. Now it’s being driven by INTEREST of a certain grouping but not by spontaneous forces. This grouping prescribes the currency quotations to us at the market. It is ready to reverse currency pairs against any volume of traders’ orders.

The reader should recall one of A. Elder’s principal ideas — this author is the classicist of the stock market technical analysis, a trader and the professional psychotherapist. He states that the market is being driven by a crowd (flock), which opens the deals towards one direction. This results in the trade formation.

It is justified when one deals with the chaotic market.

But what does happen at Forex market at present?

Let us again return to the example of USD trend reversal from the bear type to bull one.

The charts on April 1, 2005 are depicted below.

Chart 8.1. EUR/USD movement (For view picture see notes in end of article)

Chart 8.2. GBP/USD pair movement. (For view picture see notes in end of article)

Let us scrutinize GBP/USD pair behavior on April 1, 2005 after issuing of positive data on GBP and negative ones concerning USA economics. During March, in Great Britain CIPS manufacturing index made 52.0 (the previous value had been reconsidered from 51.8 down to 51.6). In New York, the oil price heightened by $ 2.40 — up to $ 57.70 per barrel. It was the new record-breaking high price in 21 years. During March in USA Nonfarm payrolls were minimal to start from July of the previous year. Its previous value was revised towards its diminution. Michigan sentiment index was 92.6 in March (the forecast had been 92.9 — it had coincided with the previous value). All USA indexes had fallen down.

I hope you take on trust that at the same moment all other currency pairs were adjusted for benefit of USD rate rise against other national currencies. Those who do not believe can check it — these data are public and open to general use.

There arise the questions.

1. Can traders all over the world open transactions in USD bear trend almost at the same moment (from M1 to H4 and D1). That is, under the condition of the issue of negative news on USA economy, all traders simultaneously started to buy USD and sell all national currencies. Consequently, USD rate began to sky-rocket. Clearly, this situation contradicts the news, logic and common sense.

2. One should pay attention to the synchronous character of motion of all national currency pairs. The difference in time makes from a fraction of a second to a minute.

The charts on April 29, 2005 serve as another example.

Chart 8.3. EUR/USD pair movement (For view picture see notes in end of article)

Chart 8.4. GBP/USD pair movement (For view picture see notes in end of article)

Analysts attract our attention to the following facts. In the European session EURO/USD pair rate had increased up to the point 1.2976. In the American session it fell down to 1.2852, minimal to start from April 15. The rate fell more than by 120 points. Analysts emphasize the fact that high values of several other USA indices (CIPS and Chicago PMI) pegged USD rate.

In USA in March the personal income index was +0.5%. At the same time, the prognostication had been +0.4%, which had coincided with the previous value. In USA in March the personal spending index made +0.6%. The prognostication and the previous value had been +0.5% and +0.7%, respectively. In April Chicago PMI made 65.6. The prognostication had been 63.0, whereas the prognostication and the previous value had had been 63.0 and 69.2, respectively.

As the consequence of this second fortuitous reversal of currencies, USD trend at H4 was changed — from April till the end September, 2005 — i.e. during half a year (at least when his chapter was being written).

As the result of this reversal, national currencies were depreciated with respect to USD. The corresponding indicators (gauges) are the following:

EURO fell by 1100 points (from 1.2972 down to 1.1865);

GBP fell by 1900 points (from 1.9164 down to 1.7271);

CHF fell by 1600 points (from 1.1882 down to 1.3484);

AUD fell almost by 500 points (from 1.7844 down to 1.7365).

It is an absurd joke, isn’t it?

That is, the trend has reversed synchronously with respect to all national currencies by 1000-1900 points for half a year just because of the following events in USA on March, 2005:

- Chicago PMI index was +0.5% instead of +0.4%;

- personal spending index made +0.6% in place of the previous value +0.7%.

Were these events stimulated by traders’ wishes and expectations? That is, does it look like all traders simultaneously were being staking wrong over and over again during half a year!

Giving analysis to all the events of those two days, one can see a striking alternative:

1. Either we assume an absurd possibility that there does exist a world-wide plot of traders — big gamblers at Forex included. That is, traders can always act synchronously, whereas National Banks of all countries keep on remaining oddly passive.

2. Otherwise, proceeding from these and hundreds of thousands of the analogous examples, we must admit that Forex is not a spontaneous, unpredictable and chaotic market any more. Now it is replaced by a market, controlled by somebody. In terms of Financial Times and the journal Currency profiteer (speculator), this parent group (the organizer of Forex ), is called Consortium. Below I use this term as well. Consortium is capable of the following:

a). in a fraction of a second to reverse USD trend more than by thousand of points with respect to all national currencies of the world;

b). not to give any chance to National Banks of all countries in the world to prevent the steep fall (or rise) of their national currency rates with respect to USD. Surely, it is assumable that National Banks closely collaborate with this Consortium. However, in this context another statement is important. That is, USD rate reversal occurs simultaneously with respect to exchange rates of all national currencies. However, it looks rather dubious that this very day wishes of all National Banks’ suddenly coincided with the purposes of Consortium. Probably, another situation is more realistic. At least some of National Banks were forced to obey Consortium’s resolution — i.e. to reverse USD trend with respect to other currencies, their own included.

Thus, there emerges a completely different model. One must not follow the crowd (the flock), trading volumes and postponed orders at Forex. Giving analysis to a series of factors (the trading volume included), it is necessary to understand the interests and aims of those who give quotations at Forex. Our goal is to trade together with those individuals. Very often it is against the crowd and volume of transactions opened by traders. It is illustrated by the example of the charts on April 1, 2005.

Let’s dwell on the difference between the goals of Organizer and common participants of any of financial games.

Imagine yourself in the position of an organizer of any financial game, the game of Forex included. In the shoes of Organizer, first of all you must determine your goals and principles, opposite to those of other participants of this game.

1. For the game organizer it is to gain profit regularly and stably.

2. For this purpose, Organizer tries to establish the game rules as simple and impartial as possible. His goal is to make this game attractive for all other participants. In this way Organizer collects a large audience of traders, independently of their age, profession and other differences between them.

And now one should look at the familiar aspects from this viewpoint.

a). The fundamental and technical analysis; the army of economists-analysts and other specialists who teach all participants to work at Forex as all do.

b). The classical version of notions of the support and resistance levels (indicators, advisers, etc.), intended for placing all suspended orders and stop-losses approximately at the same points.

c). An abundance of news and factors that influence the currency quotation behavior. As the result, one can readily explain the movement of any currency pair in any way one likes — however, such explanations are submitted post factum.

In case of logical gaps in impartiality of the currency pair movement explanation after the issue of news, foul (forbidden) methods are always at service. It is just impossible to refute this reasoning! There are the examples: the market is unpredictable, the currency has already finished working for the given news before its publication, the participants have noticed a negative aspect of the index high values, which for sure will manifest itself in future, an unknown clearing bank has placed an order for buying a given currency in a large amount — under the condition of the bear trend (when all trader stake on sell), etc. Can you prove the opposite? Surely, you cannot.

You should compare the behavior of the controllable and spontaneous currency markets under the condition of force major.

Only the force major factor is totally unpredictable by Organizer. Such circumstances impartially and clearly indicate the difference between the spontaneous and organized (controllable) markets.

In any area, extremities always play the role of the moment of absolute truth. That is, such extreme situations indicate weak and strong points of any system. It relates to politicians’ behavior at crucial periods in a State, to putting on trial equipment and to the situation at the currency market under force major circumstances.

The Episode #1. The force major circumstances in USA on September 11, 2001. There is the difference in the behavior of spontaneous and controllable money-markets.

Chart 8.5. EUR/USD pair movement (For view picture see notes in end of article)

Chart 8.6. GBP/USD pair movement (For view picture see notes in end of article)

The results of trading at Forex on September 11, 2001 ( Forexite Ltd.) are the following. The dollar rate sweepingly fell as compared with the principal national currencies. EURO/USD rate increased more than by 200 points (from 0.8965 up to 0.99167). GBP/USD rate increased more than by 210 points (from 1.4559 up to 1.4773). USD/JPY rate fell almost by 330 points (from 121.84 down to 118.58).

The reason for drop in USD rate was the terrorists’ attacks on New-York and Washington. According to news agencies, terrorists had had high-jacked passenger planes. The latter were directed at Trading Center in New-York and Department of Defense (Pentagon) in Washington. The planes had fallen down, which caused the subsequent conflagration and collapse of Trading Center two sky-scrapers. As the result, the trading at New-York Stock Exchange did not take place that day. It was suspended for a not fixed period of time.

The events in USA stimulated the drastic strengthening of CHF rate. In American session USD/CHF rate fell more than by 530 points (from 1.6895 down to 1.6365). EURO/CHF rate fell more than by 200 points and came down lower than the level of the strong psychological support — 1.5 CHF for 1 EURO — to the point 1.4950. The matter is that CHF is considered saving (salutary) currency under the conditions of various world crises. Consequently, investors were anxious to buy CHF as many as possible in such an uncertain situation, induced by the act of terrorism in USA.

Do you get it? Panic captured the whole world — in the first place, USA itself. At the same time, USD rate fell with respect to

- EURO by 2%;

- GBP by 1.47%;

- JPY by 2.7%.

Now let us determine the real fall in USD rate all over the world. As the starting point we take Special Decision by National Bank of Ukraine.

The board of directors of National Bank of Ukraine adopted the resolution, in accordance to which National Bank of Ukraine could fix a rate without taking into account demand and supply. After the act of terrorism in USA on September 11, currency exchange centers in Ukraine raided USD buying rate from 5.25 down to 3.0-2.5 hrivnia (Ukrainian national money) per $1. USD selling rate was being maintained at 5, 35 hrivnia per $1. National Bank of Ukraine stipulated that USD exchange rate had not to deviate from the official rate more than by 10%. Only after threatening to cancel the license to work at the currency cash payments market (Available Funds), currency exchange centers return to buying of USD in cash according to the rate that had been in force before September 11, 2001.

That is, in contrast to the controllable market, the spontaneous one reacted to one day of the force major of September 11 by the double fall in USD rate and more!

Thus, the difference between the reactions of the currency exchange spontaneous and controllable markets makes 50 times and more.

Is it a pure accident? Thus, it looks as at that day the traders, one and all, deciding to stand by USD — so that in their transactions they did not stake on USD rate slump? Or, probably, some of traders bought USD against other national currencies, even not knowing whether USA economics will retain the leading positions in the world or it will level with undeveloped countries (e.g. such as Ukraine). Is it possible? You just imagine what would happen if another plane or two were fallen on reactors of nuclear power plants in USA so that the major part of America would turn into Chernobyl zone!

See continuation of this article under name Forex Secrets — Developing the anti-chaos trading strategy and tactics at Forex market (Part II)

Note: Full text of this article and pictures of examples Article

If you wish to be trained on Trading System Masterforex-V — one of new and most effective techniques of trade on Forex in the world visit Masterforex-V Academy

Vyacheslav Vasilevich (Masterforex-V)

Professional Trader from 2000 year.

President of Masterforex-V Trading Academy.

Author of Books:

1. Trade secrets by a professional trader or what B. Williams, A. Elder and J. Schwager not told about Forex to traders.

2. Technical analyses in Trading System MasterForex-V.