The Secrets to Forex & the Delusion Game (pt.2)
Be sure to read my prior article first.
Chapter 1: Persistence is Another Word for Probability
Okay, so we're finally back in action. Last time I edged you pretty far but now we can finally get some release. We determined that managing uncertainty (risk management) is the key to 'winning at losing' and paradoxically becoming a profitable trader of derivatives.
I explained that your trading system, your directional biases don't matter. It's garbage anyway. All that matters is the biases and systems of the institutions, commercials, sophisticated investors, etc. They all have their own indicators and forecasting methods for directional picks, and they all compete. You can't copy those systems because they are either company property (expensive R&D afterall), and even if you did, you would still be unprofitable, they barely win 60% of the time.
But what if we copy their risk management strategies? And what if many of them were similar? And fairly transparent?
Why would risk management be similar (and transparent) but speculation strategies vary?
Because they manage millions and sometimes billions of dollars (in winning and losing market conditions). Many of them have been doing this for decades, some over a century. Some of them, before fiat money was even a thing in your country. Their credibility comes from safety and persistence. That's why so many commercials have generic 'strong' or 'surviving' implied names that are often related to stones, ships, or geographic (sounding) landmarks. "We will weather the storm and protect your wealth." At least that is the image they want to sell to prospective investors. No Lucky 777 Capital or eBet69 Capital. In addition, they earn from account management itself, primarily from fees. It is inherently intuitive that they would be the experts of managing and protecting your wealth.
Their first priority and specialization, is the risk management of capital, a preservation principle. Not highly speculative market returns.
Chapter 2: The Emergence of Estimation
Now, before I go into detail about the popular risk management methods they use, first we need to broach some psychology and philosophy here. This will help you understand why risk management tends to be more similar at the top, when 'big money' is involved. And why generic advice like 'holding through downturns' or 'buying low' tends to come from the wealthiest and most successful investors.
Most of our society attempts to manage uncertainy with speculation. At a macro level, the current paradigm is to make ESTIMATES of SPECULATION. You gather a bunch of 'speculations' (predictions/bets, IE on price level, etc) from credible sources, and find a way to estimate the best value or central tendency. The major systems (governments, markets, organizations, etc) in our society operate on estimation. They develop a likely zone or range of possible outcomes. Now the way this information is presented (and they way experts/speculate) is under constant debate at the pinnacle of our most influential companies, sports teams, armed forces, intelligence agencies, universities, etc. However, estimation overall remains a popular and effective tool, primarily in number heavy domains like markets or weather forcasting (the only field where moon cycles can yield accurate predictions).
This is the line of thinking that gives us fair value models (or the center of gravity notion). Many traders like to focus on PA (price action) analysis, claiming incorrectly that this is a pure and indicator-free approach to studying the market. The 'candle' itself is a form of fair value presentation, delivered via the OHLC indicator many retail traders use. The candle is used as a form of estimation found commonly in scientific articles as well (though with additional features). It's just another form of statistical analysis derived from an estimation formula.
1. Determining the 'fair value' price point or the center of price gravity is the most important technical effort you can undertake for your trading strategy.
2. Determining extremes or ranges against that 'fair value' price point is the secondary technical effort that will help you build proper limits to risk.
Speculation has the property of delusion, it is characteristically delusional, and that is precisely why it is persistent and predictable. Guessing about things you can't yet experience goes against scientific paradigms. You can't observe the future, you can't test it, you can't repeat it, etc. Only with induction, a sort of coherent or emerging 'catalogue of historical delusion', can we come to terms with speculation as socially and sometimes scientifically (in number heavy environments), acceptable behavior. --- Not to wax too philosophical, but the Problem of Grue highlights the weakness of induction as a knowledge tool. Fact, Fiction, and Forecast is a legendary epistemology book and I strongly recommend it as it serves as a nice auxiliary text for Boyd's word-shy OODA loop concepts.
What's important to understand here is that while speculation is essentially irrational, it is still the standard behavior in markets; and therefore, we have to accept irrationality as the status quo. That's the motivation, the prioritization for risk management; to help avoid or deal with all that disorder and confusion and inaccuracy that occurs. It's a game to navigate delusion.
And a final heads up for the big thinkers out there,
To greatly summarize Boyd: he revealed that the *speed* at which you can calculate 'based on observation' can result in a perfect edge in any form of competition. In other words, you gotta be able to find the center of price gravity and determine the extremes of that price point as quickly as possible, or at least faster than others. This is why technicals, ie statistics, are necessary in risk management (but not for picking directions). You can't calculate risk once a year, you can't calculate it in your head (for markets). It needs to be done in near realtime.
Chapter 3: Recommended Models
I will cover these in far greater detail in the next article, but here is the list of key models (and technicals within) I recommend to meet your trading objectives (long-term profitability) as a spoiler. A lot of these will look familiar. Most of you have probably used a few (and lost money). That will change when I show you how to use them correctly.
Center of price gravity (how to find it):
Extremes (how to reduce risk and increase profitability):
There is one final key to all of this, which involves the clever application of these models. To demonstrate why some models work better in different situations/timeframes/sessions, I have to jump into some of Bohm's work.
It all has to do with disorder, which isn't 'orderly enough' to be consistently disorderly. That is, unless you know all the secrets.
See you next time.
Chapter 1: Persistence is Another Word for Probability
Okay, so we're finally back in action. Last time I edged you pretty far but now we can finally get some release. We determined that managing uncertainty (risk management) is the key to 'winning at losing' and paradoxically becoming a profitable trader of derivatives.
I explained that your trading system, your directional biases don't matter. It's garbage anyway. All that matters is the biases and systems of the institutions, commercials, sophisticated investors, etc. They all have their own indicators and forecasting methods for directional picks, and they all compete. You can't copy those systems because they are either company property (expensive R&D afterall), and even if you did, you would still be unprofitable, they barely win 60% of the time.
But what if we copy their risk management strategies? And what if many of them were similar? And fairly transparent?
Why would risk management be similar (and transparent) but speculation strategies vary?
Because they manage millions and sometimes billions of dollars (in winning and losing market conditions). Many of them have been doing this for decades, some over a century. Some of them, before fiat money was even a thing in your country. Their credibility comes from safety and persistence. That's why so many commercials have generic 'strong' or 'surviving' implied names that are often related to stones, ships, or geographic (sounding) landmarks. "We will weather the storm and protect your wealth." At least that is the image they want to sell to prospective investors. No Lucky 777 Capital or eBet69 Capital. In addition, they earn from account management itself, primarily from fees. It is inherently intuitive that they would be the experts of managing and protecting your wealth.
Their first priority and specialization, is the risk management of capital, a preservation principle. Not highly speculative market returns.
Chapter 2: The Emergence of Estimation
Now, before I go into detail about the popular risk management methods they use, first we need to broach some psychology and philosophy here. This will help you understand why risk management tends to be more similar at the top, when 'big money' is involved. And why generic advice like 'holding through downturns' or 'buying low' tends to come from the wealthiest and most successful investors.
Most of our society attempts to manage uncertainy with speculation. At a macro level, the current paradigm is to make ESTIMATES of SPECULATION. You gather a bunch of 'speculations' (predictions/bets, IE on price level, etc) from credible sources, and find a way to estimate the best value or central tendency. The major systems (governments, markets, organizations, etc) in our society operate on estimation. They develop a likely zone or range of possible outcomes. Now the way this information is presented (and they way experts/speculate) is under constant debate at the pinnacle of our most influential companies, sports teams, armed forces, intelligence agencies, universities, etc. However, estimation overall remains a popular and effective tool, primarily in number heavy domains like markets or weather forcasting (the only field where moon cycles can yield accurate predictions).
This is the line of thinking that gives us fair value models (or the center of gravity notion). Many traders like to focus on PA (price action) analysis, claiming incorrectly that this is a pure and indicator-free approach to studying the market. The 'candle' itself is a form of fair value presentation, delivered via the OHLC indicator many retail traders use. The candle is used as a form of estimation found commonly in scientific articles as well (though with additional features). It's just another form of statistical analysis derived from an estimation formula.
1. Determining the 'fair value' price point or the center of price gravity is the most important technical effort you can undertake for your trading strategy.
2. Determining extremes or ranges against that 'fair value' price point is the secondary technical effort that will help you build proper limits to risk.
Speculation has the property of delusion, it is characteristically delusional, and that is precisely why it is persistent and predictable. Guessing about things you can't yet experience goes against scientific paradigms. You can't observe the future, you can't test it, you can't repeat it, etc. Only with induction, a sort of coherent or emerging 'catalogue of historical delusion', can we come to terms with speculation as socially and sometimes scientifically (in number heavy environments), acceptable behavior. --- Not to wax too philosophical, but the Problem of Grue highlights the weakness of induction as a knowledge tool. Fact, Fiction, and Forecast is a legendary epistemology book and I strongly recommend it as it serves as a nice auxiliary text for Boyd's word-shy OODA loop concepts.
What's important to understand here is that while speculation is essentially irrational, it is still the standard behavior in markets; and therefore, we have to accept irrationality as the status quo. That's the motivation, the prioritization for risk management; to help avoid or deal with all that disorder and confusion and inaccuracy that occurs. It's a game to navigate delusion.
And a final heads up for the big thinkers out there,
To greatly summarize Boyd: he revealed that the *speed* at which you can calculate 'based on observation' can result in a perfect edge in any form of competition. In other words, you gotta be able to find the center of price gravity and determine the extremes of that price point as quickly as possible, or at least faster than others. This is why technicals, ie statistics, are necessary in risk management (but not for picking directions). You can't calculate risk once a year, you can't calculate it in your head (for markets). It needs to be done in near realtime.
Chapter 3: Recommended Models
I will cover these in far greater detail in the next article, but here is the list of key models (and technicals within) I recommend to meet your trading objectives (long-term profitability) as a spoiler. A lot of these will look familiar. Most of you have probably used a few (and lost money). That will change when I show you how to use them correctly.
Center of price gravity (how to find it):
- Bollinger Bands
- Seasonality Models
- Major Moving Averages
- Point of Control
- VWAPs
- Linear Regressions
- Channel
Extremes (how to reduce risk and increase profitability):
- Bollinger Bands (standard deviation)
- ATR Bands
- Channel
- VWAPs
- VaR
- OI
- Historical Models
- Currency Options
- Traditional Arbitrage
- Session Psychology
- Carry Hedge
There is one final key to all of this, which involves the clever application of these models. To demonstrate why some models work better in different situations/timeframes/sessions, I have to jump into some of Bohm's work.
It all has to do with disorder, which isn't 'orderly enough' to be consistently disorderly. That is, unless you know all the secrets.
See you next time.
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