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The Music of Forex

Discussion in 'Forex Discussions' started by painofhell, Sep 18, 2016.

  1. painofhell

    painofhell Content Contributor

    Jun 24, 2015
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    A recently published book- The Psychology of the Foreign Exchange Market, Thomas Oberlechner(John Wiley and Sons Ltd) provides the results of research on how professional traders view the markets. In Chapter 7, Professor Oberlechner focuses on how Forex markets are characterized with different metaphors. Metaphors are an important way people organize information, as well as form their own expectations of the market. Professor Oberlechner cites the main metaphors used by Forex traders. Forex is like the following: a Bazaar, Machine, Living Beast, Gambling, Sports, War, and the Ocean. Many of us have probably used one or more of these concepts to characterize the Forex market. Such uses are not accidental. People need to organize complex phenomena and use metaphors as tool for thinking. The major point behind the research is that the mind-set used to understand and observe the Forex markets is itself a factor on how one proceeds to trade. The person who views the Forex market as sports will look to winning trades as the main focus, but may become emotionally damaged when confronted with a losing trade. In contrast the person who views Forex as an ocean may tend to adopt longer term views of market moves. Many view the Forex market as a war and as a result may formulate trading strategies that capture pips as if they were the enemy. Even if you do not read the book, it will be useful to ask yourself - which metaphor applies to your own views of the Forex market and why.


    Forex traders also bring to their trading different perspectives based on their job and life experiences. Each perspective provides different strengths as well as weaknesses. Engineers who seek to learn Forex often have a tendency to try to model the market and project direction based on equations. In contrast, Doctors approach Forex trading with the medical mindset of diagnosing the price action. While the medical workplace provides an environment where patients convey a great deal of respect to their doctors, the Forex market provides no such ego gratification. The market is not a patient that returns respect. Those traders that come from a sports background such as the martial-arts, bring a disciplined mind-set and ability to control emotions. Yet, emotions can provide valuable insight into managing a trade, and too much control of emotions may be counter productive. It turns out that Forex trading is a great equalizer among all professions, leaving most people challenged, as never before, in mastering profitable trading. However, if one profession would appear to provide important insight for Forex trading, it would be the field of Music - because there is harmony in Forex price movements and rhythm in the market.

    The Webster Unabridged Dictionary of the English Language defines harmony as a consistent, orderly or pleasing arrangement of parts; congruity. What is most interesting is that one doesn't need an in-depth knowledge of music to recognize when one is hearing a harmonic set of sounds or an opposite cacophony of noise. The more experienced Forex traders focus less on applying more indicators as they become familiar with the inherent rhythm of the market. Yet, those new to Forex trading face the huge challenge of trying to separate the noise in price movements and find an inner pattern or harmony. The entire body of technical analysis has been evolving to provide tools that enable pattern analysis and the ability to smooth out the data. The person new to Forex trading seeks to master Technical Analysis and is challenged by the overwhelming number of indicators and information streaming all day. What is important and what is permissible to ignore? How does the Forex trader know what to pay attention to? Part of the answer derives from looking at Forex price movements as a form of harmony. Let's explore this further.

    In searching for trades, many traders have a favorite time interval. They could have a day chart, or a 1 hour chart and then they apply a variety of analytical techniques and shape a trade. While this may be a rationale set of procedures to evaluate the market, an effective technique to consider is to let the time interval choose you! To clarify what we mean, consider the everyday experience of driving your car and trying to find a radio station that you would like to listen to. Selecting the scan button allows you to listen for a few moments to each station until the right tune comes along. The driver did not need to know in advance all of the songs being played at every station. All that was necessary was to hear the song that is appealing. Similarly, the Forex market is constantly streaming a variety of patterns. There are many potential trades. By scanning through the price action that is playing, a tradable pattern will be perceived.

    For example, you might see a sideways pattern (as shown in the chart below) in almost any time interval. If you notice that the pattern has a repetition of the movement up and down the price scale such patterns reveal an inner harmony. The engineer would recognize this pattern as a simple harmonic motion that is sinusoidal in time with a single resonant frequency. He might even be tempted to put an equation to project its path.


    Yet a person versed in music would not need equations to sense the pattern as being clearly melodic with a repetition of the tones. Whether the source was the vibration of a string on a violin, or a result of the energy released by the clash of buyers or sellers trading a currency pair- it is an unmistakable non-random cycle of self-similarity. Traders with different backgrounds may all come ultimately to the same conclusion about the price action and its structure of movement.

    Fibonacci Tones
    In further understanding forex prices and how they move, we cannot ignore the pervasive presence of Fibonacci ratios. It is certainly the case that professional traders know and use Fibonacci ratios to map market patterns. One of the milestones in becoming a more savvy Forex trader is developing your own understanding of how to recognize and use Fibonacci ratios to shape the trade. Fibonacci is important because currency pairs often move between support and resistance in tune to a Fibonacci syncopation. After some base of experience, looking at almost any chart, one can see retracement patterns often along Fibonacci lines. The chart below shows such a sequence of upward and downward moves followed by retracements stopping at Fibonacci ratios. We can observe that first the pair made a move from a low to a high and then retraced back down to 38.2% of the way down (pt 1) and starting moving back up. It in fact, created a new High and then moved down to a low (pt 2). Having completed that low, it proceeded to move back up again, but stopped at 50% of the way up (pt 3). This is a sequence that, like music provides an underlying theme to market moves.


    The application of Fibonacci patterns as a universal phenomenon is further underscored as musicologists have discovered them in the works of many composers including Debussy, Bartok, etc. The next time you listen to the second half of Scott Joplin's Maple Leaf Rag you will notice the pattern of 13 stressed and 8 unstressed notes. In fact, one can find Fibonacci patterns in the basic structure of instruments themselves. The piano, for example, has 13 notes that separate each octave, which has 8 white keys and 5 black keys. Forex traders will recognize the ratio of 13/8 as a Fibonacci ratio. When using Moving Average crossovers, try the 13 and 8 time intervals on the charts.

    What does this mean to the Forex trader? By understanding that currency prices are not linear movements, but expressions of emotions and human behavior, the Forex trader begins to move beyond a linear approach to trading. By expanding one's perspective on the underlying tones of the market, they will likely see nested patterns that are recursive, and as a result, new trading opportunities. Ultimately, as one trader notes, "Everyone's got the same information at the same time, therefore you need to find a different way of finding an edge over your competitor" (The Psychology of the Foreign Exchange Market , page 203) . The ability to obtain the sought after trading edge may very will depend on how one looks for it. It would be wise to look for patterns and "listen to the market". It may be playing a Fibonacci melody or for a brief moment another profitable tune.

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