Foreign Exchange Idiosyncracy

Written by JS T Alexander | 30 June 2010

Being able to identify certain behavioral patterns in a structure of charts with a particular instrument like the foreign exchange will help establish a more defined forecast of its where its direction would be.  Certain formations especially in chart analysis can be found during the course of historical movements in a specific currency. 

Once their idiosyncrasies are tied to them the easier the calls of their future movement can be forecasted.  The likes of the British pound whose behavioral patterns of head and shoulders formations are quite distinct in most cases.   The Japanese yen’s even sequences of two hundred points movements prior to market directional change as well as triangular formations isolated from the rest of the group.  A narratively quiet Swiss francs that leaves behind the fact after a major market movement.  In short, it leaves misleading indicators until such time that the traders realizes that they have been left behind by the market and the Euro’s ability of showing negative signal on an up movement and vice versa.  A clearer example is by opening high yet closing towards the low section of the day providing a set negative result.  Although in actuality the established high is higher than the previous and the lows are actually higher than the previous.  A down bar higher than most previous bars.

In some cases, the currency’s directional movement does not go by the total number of points but by certain cycles (time element) regardless of where it may be at.  If prices are working at the higher range levels of the market unless a significant breakthrough to the top can be defined, then a strong possibility that a reversal can occur.  This also happens when working prices are at the bottom range of the market.  Pay more particularly when a corresponding fundamental news would coincide with this behavior.  These behavioral patterns are quite distinctive in their nature (psychologically) since it creates a resemblance of how traders/market participants react or would react to a certain pattern.  This happens more often now that a lot of analysts (technicians) use the Japanese candlestick in their chart outlook.  Interpretation may vary in spite of the configuration of candlestick bare reflects in their formation. 

Since it’s usually used the one thing that makes the difference is not its face value interpretation but by how all formations may mean as a cluster than a single bar formation.  Combining technical analysis and market psychology may tend to be more a success when practiced more often.  However, to be able to achieve this level must first accomplish a certain comfort level of trading experience and maturity where unbiased opinions are derived regardless of fundamental news are being circulated in the market. Prices are moved by traders, investors and institutional trade programs.  However, technical and mathematical calculations can be outweighed by heavy fundamental factors which would change market sentiments within seconds.  Measuring market behavior relatively weighs especially at times of euphoric/hysteria conditions reflective of traders and investors. 

Movements in volume, open interest and price directions are merely instruments in measuring quantity although it does give hypothetical synopsis and summary of market sentiments thus giving probable hypothesis (conclusions) for the next directional movement. It is called “calculated guess” because of volatility created by supply and demand factors being able to measure these conditions as the market would help predict more accurately these programs set where a certain price movement would be going.  Although there are no 100% guarantees, the chances or probabilities of success are closer due to the measurement and managing of risk factors that are also integrated with the mathematical equations.  An example would be the number of attempts breaking highs and lows before a follow thru volume can happen.  Which means some false breakouts can occur unless the momentum and volume would support the price movement. 

However, this can only be learned after the fact has happened.  It is quite easy to pinpoint and explain after the market has moved but utterly difficult to forecast and how to measure a percentage of being correct in a forecast is left more by chance and can only be measured when it had achieved its price objective.  The probability of a correct prediction can be measured only upon achieving a certain number closest to the objective than can it be said that the probability to attain the goal has a greater probability than not.  Overall, to be able to identify what characteristics are more familiar with each currency pair is important.  This will elevate the traders way of analysis and would be able to forecast more confidently in reading the market.  Although the self-fulfilling prophecy of a cyclical pattern in foreign exchange ca happen more often but the task of pinpointing its timing can be very difficult.  Some derive the target price can be attained but when it will be attained is the biggest question mark.