Paul Makepeace ;-)

June 22, 2005

Forex trading

Posted in: Drivel

I've been learning about the currency trading (foreign exchange) trading markets since I have some more spare time these days.

In an alternative life I'm sure I would've had a lot more to do with money, trading definitely clicks with some fairly deep part of me, I get that powerful feeling of enjoyment doing it for no other reason than the process is fun (same as with software and learning). Anyway, most of what I've learnt has been from Refco's "News" source; it seems to be mostly background educational material for their $500 interactive trading course.

This also prompted me to at last read a book I've had for a while, A Mathematician Plays the Market by John Allen Paulos. It's a sobering account about how a clearly intelligent rational person can get so hamstrung by their psychology, fear, and greed. The book also, so far as I've read about halfway through, is laced with some really fascinating anecdotes about seemingly irrational human behaviour like demonstrations that show how humans will take many times more risk to avoid loss than to achieve gain.

What's interesting to me from a trader perspective is that he pans "Technical Analysis", the technique of attempting to predict the future from previous trend data. His stance derives from the Efficient Market Hypothesis which states, as I understand it, that if all the information about a stock (or currency) is reflected in its current price then the past data has no bearing on the future. This effectively says the whole field of TA is bunk. I haven't finished the book and he promises a more nuanced assessment but certainly the obvious feeling I have so far is that information (e.g. reportage about last quarter's earnings) about something plays at best equal standing with the participants' psychology. Furthermore, since there are specific techniques that are taught in TA (Relative Strength Index, Fibonacci Retracements, Double Bottom, Support, Resistance, and on and on) then that means there are a ton of people trading using these methods, and thus emergent properties of group behaviour will presumably manifest themselves quite apart from any real life information.

The hardest task in this endeavour to learn about trading has been to find decent literature. The half dozen or so books I've looked up on Amazon have all got very mixed reviews, and online Google is so polluted with affiliate linkage to ebooks I haven't got a straight answer yet. Any suggestions? By contrast, one of the joys of the Open Source/Free Software community is that when you ask of an opinion ("what's the best book to get started on developing ecommerce sites in Perl?") you can be almost completely sure that the answer doesn't have a background agenda (for if it did an entirely open flamewar would shortly ensue :-).

Anyway, this joke via David Rosam -

I had a bunch of Canadian dollars I needed to exchange so I went to the
currency exchange window at the local bank.

Short line... just one guy in front of me.

He was an Asian guy who was trying to exchange yen for dollars and he
was a little agitated. He asked the teller.."Why it change, yestoday I
get two hunat dolla fo yen - today I get hunat eighty?"

The teller says, "Fluctuations."

The Asian guy says, "Fluc you white guys too!"

Posted by Paul Makepeace at June 22, 2005 18:22 | TrackBack

True, TA is in my opinion only a way to make newbies think that there is a simple way to predict the markets. Then there is a more evolved form called QA (Quantitative Analysis), that unlike TA takes into account much more than past price/volume, but any other factor you can think of (GDP growth, interest rates...) and tries to find some sort of correlation within them using advanced statistical models. Success is mixed at best, with the best results coming from complex models that are regularly reassessed, it was actually one of the first applications for neural networks. It’s nothing that can be done with an excel spreadsheet… Although I spent the best part of my career watching long seasoned professionals wasting shitloads of time vainly running after the holy grail of models in an excel spreadsheet.

Think of it, if a reliable model existed, why would anyone teach it? They’d make loads more money running it…

The key to stock trading is “Know thy Company” or know its sector, and sticking to a disciplined investment process (to minimise the psychological effects of fear and greed).

Posted by: Emir Attig at June 22, 2005 20:46

I practiced technical analysis for several years - it undoubtedly works on a probabilistic basis. Some patterns are those which people simply follow because they work and other emerge from the way mass psychology interacts with those patterns.

Frankly, there are so many people doing trading these days that you need to have the edge on them (and if you're new to it you don't).

The psychological side of it is the hardest though. The slightest bit of fear and greed (ever make £10k one day and lose it the next?) will throw out your system.

Posted by: Dave at June 23, 2005 00:22
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