THE MUSIC OF FOREX

In The Psychology of the Foreign Exchange Market (John Wiley & Sons, 2004), Thomas
Oberlechner provides the results of research on how professional traders view the markets.
In Chapter 7, Professor Oberlechner demonstrates that traders actually think about
forex markets metaphorically. He shows that metaphors are an important way traders
organize information, as well as form their own expectations of the market. Professor
Oberlechner cites the main metaphors used by forex traders: a bazaar, a machine, a 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. The point of this research is to better understand 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 longerterm
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 mind-set 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 who come from a sports background, such as the martial
arts, bring a disciplined mind-set and ability to control emotions. Emotions can provide
valuable insight into managing a trade, so too much control of emotions may be counterproductive.
It turns out that forex trading is a great equalizer among all professions,
leaving most people challenged, as never before, in mastering profitable trading.
One profession that appears to provide important insight for forex trading is 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. 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 rational 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 Figure 11.6) 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 formulate an equation to project
its path.
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 nonrandom 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.




By ABE COFNAS