How to Use Point and Figure Charts to Minimize Randomness in your Forex Trading
by: sas_forexpnf
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Traditional methods of technical analysis, such as candlestick charting and the use of technical indicators, have their limitations. These methods rely too heavily on historical observations and can't account for the randomness that is associated with the forex market.
The randomness that is associated with the forex, and all financial markets, is due to human involvement. Technology may improve, and trading systems may become more "complex", but markets won't change so long as people are involved. Markets move from greed to fear, and back again, creating huge gyrations that are extremely profitable if you can spot them.
Alan Greenspan, the former chairman of the Federal Reserve, recently wrote a piece in the Financial Times elaborating on the human element in markets. Whether you like him or not (I don't), Greenspan is a student of the markets, having the benefit of a front row seat.
I want to share with you a part of the article that I think is of great importance to forex traders:
"Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters’ concerns should be not whether human response is rational or irrational, only that it is observable and systematic.
" But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response. "
Source: Financial Times
As Greenspan points out, as forecasters (read: forex traders) we don't really care whether the actions of traders are considered rational or irrational. Rather, all we care about is that traders are taking action, that currency pairs are moving, and that the responses are "observable and systematic".
Human response is indeed "observable and systematic" in the forex market through the lens of the point and figure method. The forces of supply and demand that influence exchange rates are moving in repeatable, measurable, systematic ways. The only difficulty is in deciphering the randomness, or noise, from meaningful movement, or signal.
The point and figure method of trading the forex has built within it a filter: the three box reversal. This simple and intuitive aspect of point and figure charting removes much of the noise and randomness that is associated with currency pairs and places the focus squarely on meaningful shifts in supply and demand, the signals. It's certainly not a perfect method: perfection is impossible in trading. But the point and figure method of trading in the forex is among the best and most accurate due to the simple three box reversal, the filter of randomness.
Eric Stout
http://www.fxpnf.com
About the Author
The randomness that is associated with the forex, and all financial markets, is due to human involvement. Technology may improve, and trading systems may become more "complex", but markets won't change so long as people are involved. Markets move from greed to fear, and back again, creating huge gyrations that are extremely profitable if you can spot them. Submitted by: Auto Content Distributor
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