New Forum coming

I am thinking with some friend to open a new  Forex forum. It is just a project by now.
Why a new forum there are plenty of it?

Well I reveal the idea only in private communications because it is too early for public disclosure. It will be not exactly only a forum but more a community of retail traders protecting their interests.

The philosophy will be first things first. And the first thing is to beat the spread. That is the first and the most important thing a retail trader has to do. It is to beat the spread.

Psychological mechanisms of manipulation: freezing and escalation of commitment effects in Forex

Here I give the sources of my reasoning. This is a little book, in fact very interesting about manipulation (well there is a plethora of books on that but this is different). The book is intitulated: Petit traité de manipulation à l'usage des honnetes gens, and is written by Robert-Vincent Joule and Jean-Léon Beauvois.

In a nutshell there are some psychological mechanisms that work without any form of persuasion and that give results that cannot be achieved without them. The interesting point is that there is a statistical evaluation of all this.

Unfortunately this book is in french and I do not know if there is an English version.

You can check also this wikipedia. link http://fr.wikipedia.org/wiki/Petit_trait%C3%A9_de_manipulation_%C3%A0_l'usage_des_honn%C3%AAtes_gens

Ok let get started with the basics. This is the first example.

There have been an experiment by Moniarty (1975) Crime, Commitment, and responsive bystander in two field experiments", Journal of Personnality and Social Psychology, 31, 370-376.

One man places himself close to a group of people at the beach in New York (I was surprised to know that there are beaches in New York). There are two groups. At one of the groups he asks for fire for his cigarette to the other group he ask that he will leave for a while asking them to have a look at his radio. Then a fictive thief intervenes the group with the fire reacts at 20 % of the cases. The other group reacts at 95 % of the cases.

The same experiment was conducted in a restaurant with an elegant and expensive bag. The control group reacted 12.5 % of the time the group asked to take a look reacted 100 % of the time.

The interpretation of the those results is very interesting in the book for manipulation. The authors believe and in both cases to the group was made a demand, this demand is a kind of demand they cannot refuse. And this causes a reaction response that can lead to very different experimentally verified results. This is an effect of commitment, people tend to follow what looks like their own decision. This leads to a freezing. It is called a freezing effect. People get blocked in a certain behavior. Lewin K. 1947. "Group decision and social change" in T. Newcomb, E. Hartley (Eds.), readings in social psychology, New York, Holt.

Those kind of experiments are repeated (of course) making financial world simulations. There has been an experiment. One group of finance students are asked to take a decision. A student has to take the role of managing director and make very important decision in order to finance a branch of the company showing outstanding results. There have been a lot of fundamental data showing extreme profit possibilities. After that intervenes the second stage of the experiment the same directors are given the responsibility to relocate resources between the branches of the company, this time the fundamental data showing a complete disaster of the the first choice and showing very bad expectations for the future for the same branch. However the Managers took a decisions favoring the branch that they have favored at the past.

The other control group in the experiment were asked to replace the boss of the company. This time the first decision for financing was taken by their boss based on the first data. Now they are at the second stage trying to relocate resources within the company. In this group they do not felt bounded by the decision of the manager and made an allocation of resources based on the new date.

This effect is called an escalation of commitment.

Now let see things from trader's perspective. I am simply extrapolating.

There are two groups if traders. To the first group they tell them that they have just an amount of money to gamble with, to the other group they tell them that they have to sign a contract.

Do you think that the people who signed a contract will feel more frozen and will keep and keep playing (trading) than the people who were not bound by an engagement and a contract?

http://ddata.over-blog.com/xxxyyy/3/09/91/24/Petit-trait--de-manipulation---l-usage-des-honn-tes-gens.pdf

Continue reading with Part 2

The biggest problem in the industry

The biggest problem in the industry for the retail traders, we can call them also home traders is that they are not profitable at their majority.

This is a fact. Most of the people who are trading Forex are not profitable. There is some kind of mantra saying that 90 % actually loose money.

http://mechanicalforex.com/2011/04/they-say-90-95-of-retail-traders-lose-all-their-money-any-evidence.html

So the question arises why we do trade. Why we keep doing that knowing that there is a big probability that this would be a great loss of efforts, time, self esteem, and money that can eventually lead to disastrous situations.

Is there some psychological reason for which we keep doing that and that reason is completely below the radar?

I think that there is such a reason. I will elaborate more on that later. There are psychological studies (of course not in the domain of finance, but the results are really meaningful ) showing that there is a very strong hidden psychological process that keep traders to trade and trade again. Even if they know that there is 90 % chance of loosing in the long term that does not change anything. I will not reveal exactly right now the mechanism. Let holds a little suspense!

Fractal geometry adaptive Volume Weighted Moving Average

I am thinking about the Volume weighted moving average. I am going to make a new mod. This time we would have a hybrid adaptive moving average. The idea is to use a fractal adaptive moving average into the formula of the volume weighted moving average.

I am curious what that would give. Is it going to be a nice input into a predictive model?

Until then refer to this portfolio of fractal adaptive moving averages.

Volatility and Fractal dimension states

Here on this post in TSD in my thread about the Digital ASCTrend system I discuss the combination between the concepts of fractal dimension and volatility.

http://www.forex-tsd.com/manual-trading-systems/28328-digital-acstrend-11.html#post385636

Volatility illuminated discussion

I want to share some thoughts about the book Volatility illuminated by Mark Whistler. I have always a problem spelling right his name but this time I think I got it right. I have not read yet the book Macro to Micro volatility trading so I will not comment it.

The main idea of the book is to point out how the volatility understanding can enhance our trading.

The basic feature is the heteroscedasticity of the volatility. Please check this wikipedia article if you do not know what it means. http://en.wikipedia.org/wiki/Heteroscedasticity

The main idea as far as I understand is to trade only when we have a bigger volatility.

In fact here and this is my assumption the volatility replaces the trend as a guiding principle.

In the classical way we are looking to enter into position only we have a trend going on and classically the Average Directional Index (ADX) was revealing if we have or not a trend (in fact there is a plethora of methods for trend identification).

Well when we talk about volatility there comes into place the Bollinger bands. However here Mark Whistler replaces the moving average by volume weighted moving average. Here this is innovation because according to him the big institutional players are looking at this indicator (I do not know for sure that is his assumption). I am a little bit reserved on this because in Forex we do not have a volume, we have a tic volume and that is different, and as the market is decentralized who knows what the real volume is and the indication of the Volume Weighted Moving Average appears to me more or less arbitrary. On the other hand there are many respected traders who swear by the volume and they apply the principles of the volume analysis VSA (volume spread analysis) on Forex, there are some very interesting treads in Forex Factory. As for me I am joking and call that Tic Volume Spread Analysis and not merely Volume Spread Analysis. Maybe the truth is somewhere in the middle signifying that the tic volume reveals some information even if it is not the real volume.

The second main point is the use of indicators for tracking the volatility.

There are two indicators. The CCI indicates both direction and volatility. The WAVE-PM classifies two states: volatility and non volatility state.

The developpments about the CCI are very interesting per se. In fact Mark Whistler tries to reveal the true logic of the CCI. The ideas is to track a volatility expansion and the volatility expansion is when the CCI expands over 100 or -100, and that does not mean that the market is overbought or oversold. That means that we have a volatility expansion. According to him we have an expansion beyond 1.2 - 1.5 of standard deviations (in fact the standard deviations are not used in the formula of CCI). This zone between - 100 and 100 he calls the containment zone.

However it is a little bit more complicated than that because he uses CCI with different calculation periods in order to track it. That is because there are different subsets.

A will continue later on this topic together with my insights on it. Unfortunately my model is much, more complicated than Whistler's model because I track not only the pure market statistics but also the fractal geometry of the price time series. Here on this post I discuss some of this.

http://www.forex-tsd.com/manual-trading-systems/28328-digital-acstrend-11.html#post385636

And finally comes into play the chaotic at tractors however I a little bit resilient to publish it.

Factors affecting the FX market

There are many factors affecting the Forex market: psychology of the masses, the interests of big sharks, the demand for liquidity from market makers, the pure randomness and there is a new factor.

And this is the psychology of robots. Look at today. Such collapsing impulses without interference of algorithmic trading systems (which play in tandem) can not happen so often.

But my tests show that this new trend comes from pretty soon, since the last 4 years.