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Can the Forex Market Be Forecasted? How to Create One's Own Trading Strategy?

1 October 2007, 16:21
DAO
9
2 163

"What is half will become perfect. What is crooked will become straight.
What is empty will be filled. What is old will be rejuvenated.
Who has little, will receive in plenty.
Who has much, will be deprived."
Laozi, Tao Te Ching

Introduction

Really, there are many discussions about Forex: is it of a random nature? to what extent is it random? can it be forecasted? I cannot give an irrefragable answer to all these questions, because the market is a very complicated phenomenon. But I can give you two examples from my own experience. The first one does not refer directly to this topic, but it helped me, instilling confidence and patience, to manage to forecast the Forex market.


Can the Forex Market Be Forecasted? How to Create One's Own Trading Strategy?

It happened 30 years ago. In Soviet Union a game Sportloto (kind of Bingo) was very popular. There is a lottery drum with balls numbered from 1 to 36. One by one 5 balls are thrown out into a special tray. I decided to write a program that could forecast, what numbers will fall out in the next drawing. Although theoretically I knew that a random process cannot be predicted, I had not only confidence, but an inner knowledge that I will find the solution of this task. I will not go dip into details, but the fact is I managed to forecast 3 numbers out of 5.

This was enough for receiving almost 1000% profit from one ticket. Pity, after ten years of hard work, having achieved positive results I didn't have chance to use it. The fact is, this program written on a quite good for that time computer EC-1055 needed 1 day for calculations. At that time I could come Saturday morning into a computation center, start the machine and wait for the results till Sunday evening. In working days the machine was busy, so it was impossible to use it. The tickets needed to be sent till Friday, drawings took place on Sunday. But what is really important is the result of my work.

In reality there are almost no absolutely random processes, each one has though a weak, but determined part, because a process cannot be singled out and isolated from the environment. Any interaction creates correlation, and this allows detect directly or indirectly such relations and using this relations predict the process itself.

In my example there was an interesting moment. First the lottery drum was an octahedral cylinder that revolves on its axes. But then the drum was replaced by a spherical one with a vibrator in its bottom, which through up balls falling to its center. And after this replacement my program failed, stopped forecasting. And I had to wait half a year for new statistics to be collected enough and to change completely the program algorithm and only after that I managed once again to achieve stable forecasting. The algorithm change was connected with the description of space inside the drum.

Inside the sphere from the point of its contact with the plane, a vector moved on the inner sphere surface; its coordinates were indirectly expressed by winning numbers from drawing statistics. The task of forecasting directly by numbers was not solved. First it was necessary to create the model of space in which the numbers were formed and only after that the quasirandom process, formed by this space, could be forecasted by setting my own artificial limits.

For better informative character of input features one needs to create their covariations between each other, using different laws of combining these features and to single out an optimal group that forms the most accurate model. For forecasting I used methods that were very close to present-time genetic algorithms.

When I first saw Forex charts, they seemed very familiar to me. The statistic of Sportloto drawing that I used looked like almost identical. Sportloto and the Forex market regardless of the equal difficulty of their prognosis are antipodes. In their size they can be compared to a water drop and an ocean. In the lottery the determined part is very weak, while in the Forex market, on the contrary, random processes constitute quite a small part.

The numerous events in the market itself, as well as in global economy and politics that directly influence the market, are marked by deep cause-effect relations. Exactly these relations in case of insufficiency of information and because of complexity of their correlation may look like random events for a casual observer.

From the year 2000 I started studying and modeling the Forex market. My conclusion is the following: it can be really forecasted, but like any complex event it cannot be done using casual technical means like indicators and oscillators. After many years of working in the Forex market, I made some conclusions that may be interesting to many of you, and they are connected not only with the technical side of the problem, but also touch upon the market nature.

The world we live in is so complicated and multivariate, that it is impossible to bring it to one formula. Though the processes that take place in it seem obvious at first sight, in a closer examination they reveal that behind this outer obviousness they hide the inner nature that is absolutely different than we think. And for the correct understanding of this nature we should change our existing thinking stereotype.

For example, black coal seems to be solid. But if we change our superficial perception and try to apprehend its inner nature, we will see that behind the outer unchangeable solid substance there is a dynamic energy structure, consisting of multidimensional force fields connecting myriads of elementary particles and forcing them to move in their orbit at a very high speed.

We will find nothing solid inside it, everything consists of energy only, and the solid form is only illusion of our perception due to the limitedness of our sense organs. The solid black coal contains a powerful energy potential, which appears when it burns, and the energy contained in it passes from one form into another. I am describing obvious matters, and hope you can draw an analogy and what I am going to tell further will also be evident.

Everything in this world is energy. Some of its forms are explicit, other ones are hidden behind the illusion of materia or reveal themselves only as symbols, through which one can get access to processes that take place in a delicate field and very often we do not suspect the existence of such processes.

Money is also energy. And like any other energy it does not appear from nowhere and does not disappear to nowhere. It follows the principle of conservation of energy, passing from one form into another. Dollars, pounds, yens are only symbols that represent certain kinds of energy, and the Forex market is a large transmutator, transforming energy of one kind into another kind energy. Behind the evident side of this phenomenon another one is hidden, which is unavailable to our limited perception unable to enter other dimensions.

When money moves or is converted in our world of consequence, energy pathway move in correspondence with the potential of this money in a delicate cause plane, which without special training is unavailable to our sense organs. Forex itself is an informational energy system including not only technical system means, but also emotions and psychology of all its participants and the variety of different energy flows corresponding to money movement in the world. This energy creates a powerful Egrigor which is like a magnet - on the one side it attracts additional energy from those who touch it, on the other side it influences the psychology of those, who is in the sphere of its influence.

Knowing that large amount of money daily moves in the Forex, that the emotional tension of those trading in it is very high, we can imagine the huge energy potential and power of energy flows that accompany its operation. And there is nothing accidental in the movement of these energies, they follow certain laws.

Despite its global nature, the Forex market is very sensitive and vulnerable. Events from the whole world influence it directly or indirectly. Statements of famous politicians and financiers, military and political conflicts, states of economy of different countries, price fluctuations in other markets - all these elicit changes of the situation in Forex. Besides there are attempts to manipulate the Forex market.

Some large traders try to do this, executing risky speculative operations, trying to disturb its balance. Also this can be some structures and persons who have mastered techniques of energy control and management and trying to influence directly energy flows in a delicate plane, thus provoking price movement into a wanted direction in the physical dimension. The main noises and distortions, or what can be called the accidental part of the Forex, are produced by dealing centers and connection channels. Are there ways out?

One can learn to feel the market and forecast it without additional technical means. What is important, one should not try to guess, because by doing so you distract your subconsciousness. And everything is done exactly on the level of subconsciousness. Simply observe, trust yourself and be patient. Charts are only symbols, but they help to catch the energies that form and lead the market movement.

This energy appears long before a price changes on the chart. By concentrating attention on the chart you will connect on the subconscious level to these energies, start sensing them. After that you will be able to forecast the direction of the following tick.

Move to the next stage. Open several (4-6) minute charts on different symbols well correlated with the symbol you are going to work with. Observe price movements, trying to catch the general movement dynamics. You will see, that combination of dynamics movement of some symbols predetermines the movement of other symbols, so you will know the further movement of your symbol.

The next stage is trading on a demo-account using the acquired knowledge. To find out how good the knowledge is, try different trading strategies. You can experiment also on real accounts, because the psychology here is different. You should understand that losses are inevitable. And you should learn to lose. If you want to learn to forecast the market, you should take into account all said above.

First, a person needs a back-up - some technical means like indicators and oscillators. Of course they can help. And traders widely use them. But actually those who have been trading for a long time feel the market intuitively. This is the secrete of success. And the earlier you understand this, the earlier you achieve this success. Indicators and oscillators are based on the past time. And what we need is the future. So, technical and fundamental analysis only hinder our quick movement to the future.

So what is the principle that lays in the basis of most trading strategies? It is a very simple fact - the chance that a market will continue its movement in its direction is a little higher than the probability that it will change its direction. Another variant is that tomorrow the market will be the same as it was yesterday. And many traders use these principles together with indicators and oscillators. And while the difference in probabilities is not very high, traders either lose, or gain very little profit.

But the supposition about the unchangeable character of markets is initially wrong. The market is dynamic and it constantly changes during a day which is connected with the dominating market (Asian, European or American), with entering or leaving of large participants, with news releases and other reasons. Optimization is a very long process and it cannot be conducted in real time. So optimization does not help much in adjusting used instruments which reflect only the market's past.

So, building an efficient trading strategy is possible, though it is difficult. This must be expert systems that can analyze the market in real time, as well as combine all available data. Actually the information we get is a well-mixed cocktail that consists of numerous components. Upon artificially built signs that adequately reflect the existing tendencies, one can make short-term and medium-term forecasting. Such is the algorithm of an efficient trading strategy and after its program realization - of a trading system. Of course the algorithm takes into account the individual characteristics of its developer, because it already includes the experience, temperament and fears of its creator. But it is not enough. This should be done consciously. The system is only a tool and for its efficient operation it must be the continuation of yourself. And the maximal result can be acquired only if this harmony is achieved.

Well, how can we do this? Just follow the recommendations above. Learn to sense the market, its energies and you will always be a step ahead of all its changes. For creating an adequate market model you also should use the maximally possible number of symbols. The market is constituted by all its symbols, they are all connected with each other. The mutual dynamics of its symbols is a key moment in building the tendency model.

When building the model it is better to use a tick history, because methods, used in candlestick formation lose a sufficient part of information reflecting the dynamic character of the market. The principles of candlestick construction were formed when there were no computers. And the main task was visualization of information, though some of it was omitted.

Unfortunately it is hard to find a tick history, the more so it should be synchronyzed on all symbols, used for calculation and the history depth should be five-six years. So such a model is hard to calculate for most computers used by private traders.

But there is a way out. We can build dynamic models using the principle of self-organization. Here the small prehistory may be enough. On it, train the model and synthesize new features, reflecting the trend dynamics. The built model should continue training at each receipt of new data and dynamically trace and forecast not only all market changes, but also detect newly beginning trends of this changes. Based on such a model one can prepare short-term forecasts of the market dynamics which leads to a successful trading.

And this model can be implemented in practice. The program implementation of this algorithm can be different depending on the experience and preferences of a developer as well as other factors. But this task is not an easy one. One needs patience and must be ready for a hard job for an efficient solution of this task.

For me developing a successful model took many years. I tried many times, searching for a solution and only when I started to experiment with market sensing described earlier, I suddenly managed to find an algorithm of a trading system optimally suiting my market understanding. After that it was easier to implement this algorithm.

On the first stage of the algorithm implementation I synthesize a trend model for a symbol I am going to trend on. According to the resulting model a two-step forecast is conducted. The firs step is forecasting six points forward. The second step is forecasting six points forward more based on the previous forecasting. As a result: building a new trend model, continuation of its training on new data and two-step forecasting - all this takes less than one minute and by the receipt of a new bar on a minute tick the program stops its operation. I also tried to make a five-step forecast thus increasing the forecasting up to thirty points and the result was quite satisfactory. This algorithm can be applied to any timeframe with any symbol.

This is only one approach to Forex forecasting. I am sure many of you can find your own way out. Moreover I am persuaded that the systems like mine already exist. Though, probably, their developers prefer not to announce the existence of such efficient systems.

This article could probably disappoint those who wanted to build a successful trading by writing a simple trading system using only MQL4 means and gain millions. But I hope it will inspire those who, having spared a lot of time and hard work, have not achieved any successful results and have lost their enthusiasm. There are a lot of ways to solve this task and I am sure you can find you own one following the conditions I have described.

And I want to draw your attention to the fact that I used technical means only as a secondary means, I tried to use them during my work and achieved no success until I managed to form a clear understanding of a strategy and algorithm that should be implemented. Only if you have a clear understanding of the market and its processes, you can develop an algorithm that will adequately reflect such processes. I suppose one cannot rely on a computer hoping that it will form a necessary model using available technical means and software, because the market is a very difficult phenomenon. This will be possible after the appearance of much more powerful software and technical means, possessing artificial intelligence and operating on the principle of a heuristic self-organization of models.

But today we can solve only local tasks, and for their realization we need a clearly determined task and algorithm, reflecting these local processes. When this algorithm is created, we can implement it using different available means, including MQL4. For example, when using the package PolyAnalyst http://www.megaputer.com, working on the principle Data Mining, one can train a neural network and further formalize its parameters. As a result we get a non-linear polynominal that connects the network exits with its entrances; this polynominal can be included into any indicator or a trading system, written in MQL4 or any other programming language. Thus we get an autonomous neural network not using any external packages. This package includes many different possibilities for an efficient modeling, finding regularities, clusterization, though nowadays there are more efficient programs to be used as external applications.

At the end of the article let us try to speculate about the near future to see the ways of trading development. With the growth of computer power and software development, using in their basis the principle of searching knowledge, self-organization and self-training algorithms of forecasting, more and more popularity in trading will be gained by efficient mechanical trading systems. For traders that try to use trading systems built on the basis of indicators and oscillators it will be more difficult to compete and stay in the market.

Computer technology development is going on at a geometric progression. There is already the first information about the development of experimental samples of bio-computers, the power of which is billion times higher than that of the already existing ones. With the course of time the struggle will be more between robots, than between people and the winners will be those with a more efficient trading strategy, and not with higher technical resources. As a result in about twenty years financial markets as we see them now will cease to exist, because they will become absolutely predictable.

Conclusion

What is written in the article is applicable not only for the Forex market, but also for any other financial market. Forex is the largest market among all others and is the most dynamic and hard-to-forecast. I tried to answer myself during my personal search all the questions, contained in this article. And here I presented my own small experience of investigating the Forex nature and my own conclusions based on my personal practice. Some of readers will agree with me, most of them will question my conclusions, some will consider all this charlatanism.

This is like a parable about four blinds, who tried to guess about an elephant's appearance by touching it and each one had a different opinion, because one touched its tail, the second one - its leg, the third one - its trunk and the last one touched its tusk.

I touched only the tail end and made my conclusions. I hope this article will provoke a wide discussion of this topic. Other sides of the problem will be found and thus one by one, idea after idea a whole picture of the market will be drawn.


Translated from Russian by MetaQuotes Software Corp.
Original article: https://www.mql5.com/ru/articles/1477

Last comments | Go to discussion (9)
MQL4 Comments
MQL4 Comments | 24 Apr 2008 at 15:22

This article is really intersting. Espicially for thinking money instead of energy. I have another idea. But sorry for my english maybe i cant explain it very well. And also i only want to share my idea with you. Maybe my idea will be nonsense for you. I think u have knowledge of the physics because when i read your article i thought that. But i dont know if it will make sense for you dear DAO. I thought that like Einstein model of the space. the model is very easy but i am thinking how to apply it to forex trade. when we think that the space is only in two dimensional plane. Think that also this plane is a net. When any mass introduce to net, Net will be deformed by mass. Because of this deformation the mass will create its field. because of the gravity field, the small masses can be affected by other huge masses. In the space when a deformation axiested in a region of the space net, then everything will be complex untill an equilibrium time. the sytem will be in equiblirium position for a while and then complexcity will increases. So we can think the same model for forex. when nobody buy or sell anything in the marked the currency chart will be constant. when somebody buy euro/usd parity ( very big quantity which can affect the all flatted space) so the chart will be changed by a huge buying of eur/usd parity. And after that small quantity will be bought by many people. so the currency will increases. when currency increase enough then it will decrease. i think that all buying and selling in the marked behave like mass in the space net. I hope my explanation is cleary to understand for you Dear DAO. by the way i am physics engineer and very intersted in forex. If you want to say anything about my idea, please dont hesitate to write me mail to sezerh24@gmail.com And I am sure that you have many intersting idea for forex trade. so hope that you guide me by your intersting models.

MQL4 Comments
MQL4 Comments | 7 Jan 2009 at 17:22

Dear DAO,

your article is inspiring. Your ideas are expressed clearly and simply. I have been considering the relationship between several symbols for some time now, and I learnt a lot from your thoughts. It points out that I am not alone in this all-inclusive model. I specially like the comparison with energy systems. Sincerely, Fernando C.

JD4
JD4 | 4 Jul 2015 at 07:15
Interesting article, but I think there might have to be another one to explain what exactly "irrefragable" means.
Alain Verleyen
Alain Verleyen | 4 Jul 2015 at 09:14
JD4:
Interesting article, but I think there might have to be another one to explain what exactly "irrefragable" means.

Exhaustive.

You can read the original article

JD4
JD4 | 4 Jul 2015 at 19:42
Alain Verleyen:

Exhaustive.

You can read the original article

I did try, and while I am sure it does have a lot of good information in it, I can't read Russian.  Despite my wiseassedness about certain words, the article tied to this specific discussion does go through and explain everything, the comparisons and some recommended possible paths or methods to try.
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