DEC 6: How to Recognize Patterns in Forex Trading Markets

by David Jenyns on December 6, 2006

Forex works by making transactions in foreign currencies that are not centered on an exchange like the New York Stock Exchange (NYSE) instead; they take place world wide through telecommunications. The forex trade is open 24 hours a day beginning on Sundays in the afternoon until Friday afternoon. There are dealers to quote all the major currencies in nearly every time zone through out the world. After the investor decides on what currency to purchase, the transaction is made through one of those dealers. Some of these dealers can even be found online. Itís very common for investors to speculate currency prices by obtaining a credit line, as small as $500, to greatly increase the potential profits and losses. The term for this is ďmarginal trading.Ē

The term marginal trading is used for trading with a borrowed capital. Many traders find marginal trading appealing because forex investments can be made without using a real money supply. This method allows investors to invest more money with fewer costs for transfer and to open a bigger position with a small capital.

When trading in the forex market, itís best to develop a pattern of recognition in order to become a successful trader. The forex markets often display a specific pattern that repeats over time across assorted time scales. Forex traders can develop an expertise by acquiring the information around the patterns and then discovering how to recognize these patterns for what they are.

Letís use an analogy of a medical student who is learning how to diagnose a disease, for instance, pneumonia. Every disease is defined by a distinct set of symptoms. By running the right tests and making ethical observations of the patient in question, the medical student will be able to collect all the information needed to recognize that the disease is indeed pneumonia. A medical student can never become an expert doctor until he has seen a number of patients, thus gaining practice in putting the pieces of the puzzle together rapidly and correctly.

The brightest illustration of gaining the trading expertise is through pattern recognition and the large literature on technical analysis. Many of the technical analysis books look like the books that are carried around by medical students. They attempt to combine market symptoms into identifiable patterns that are aimed to help the trader diagnose the market. Some of these patterns may be chart patterns, while others may be based on identifying cycles and configurations, and so on. Like the medical student turned doctor, each technical analyst must cultivate a level of expertise by recognizing the various markets and by learning how to identify the patterns.

Notice how the pattern recognition and research answers lead to very dissimilar approaches to the training of forex market traders. The traders tend to learn how to improve their trading by doing their research by learning how to use more sophisticated tools, collect more data, expose the best predictors, and so on. However, from a pattern recognition advantage point, being successful at trading will not come from conducting more research. Instead, gaining the knowledge directly from the experts and through a great deal of practice will lead to the solid development of competence. The research viewpoint fundamentally treats trading as a type of science. Like scientists, we gain our knowledge by unveiling new observations and pattern recognition through a perspective that treats trading as a functioning activity. We gain our expertise through our mentors and by constantly practicing the trades.

It would seem that this type of expertise could be acquired by learning pattern recognition from other experienced traders and then attaining the experience well enough to identify them on your own. Traditionally, this is how itís done, but because pattern recognition normally entails a dependable measure of judgment, it makes it very hard to establish outside efficacy once it leaves the hands of the experts. Simply put, an expert trader may be able to utilize more information in trading than he can actually verbalize. Expert traders often describe their work in terms of monetary value and unpredictability patterns, but it may be the way that the patterns are used that makes all the difference between novice and expertise. Although the experts may be able to distinguish patterns in their work, it remains unclear if their greatness lies in the patterns themselves.

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