subject: The Butterfly Effect And Forex Trading [print this page] Look at 1, 2, 3, 4, 5, 6 forming a sequenceLook at 1, 2, 3, 4, 5, 6 forming a sequence. What do you think is the next number? Surprise! Surprise! It is 7. Well, not much of a surprise there. You just need basic mathematical skills. To predict numbers in forex trading, you have to appreciate that the basic logic remains the same as in the previous case. To obtain a correct answer, you need to have a memory of numbers and you need to be able to retrieve from that memory.
Now, consider the numbers (1, 2, 3, 5, 8, 13, 21) that comprise a sequence. You will acknowledge that 34 is the next number. The logic behind the series is that the next number in line is obtained by adding the last two numbers in the series. The above series of numbers, called the Fibonacci series, is a fundamental property of many systems, which includes the forex as well, and its price ranges.
This only shows that the greatest test that every forex trader has to go through is to predict the price movements of the market. Your excellence in doing this task is going to show your Forex Trading Intelligence Quotient, or the FX I.Q. One great start to the estimation of your FX I.Q. score is to observe the data on a series of random events, for instance the four hurricanes that hit the Florida coast a while back.
First of all, you have no way of telling when or where a hurricane will hit. Although science can say whether a hurricane is on its way or not, it has no way of predicting if one will happen a month from now. The reason for this is that there is something called the Lorenz Butterfly Effect, named after Prof. Edward Lorenz of M.I.T,founding father of Chaos Theory. He had been working with weather predictions, and it was then that he had come up with the Butterfly Effect.
If there are a large number of variables governing a system, then the butterfly effect states that there will be severe limitations to the level of forecast possible in it. Lorenz said that the hurricanes initial conditions are so varied and sensitive that even a butterfly floating in the vicinity somewhere (when it is about to start) can change its course and intensity by a huge amount. So, only when you put together the exact, precise values that represent each variable of the hurricane's system will you be able to say exactly when and where it will hit. Even a tiny omission can mean that the predictions will be supremely off the mark.
Forex prices and the hurricanes are not that different when the question is about predicting their numbers. It is difficult to foretell the next value in a currency pair because we know only a fraction of all the variables that have an impact on its output. This is the reason why all the predictive algorithms in the finance industry have innate accuracy limits on them. These computer based projections are unstable because they miss conditions that affect the market.
The butterfly effect is responsible for this again. You can't afford to overlook even the tiniest factor or the results will go haywire. Yet, patterns and structures that sometimes crop up in the prices can be utilized to make safer forecasts about the currency pair and their general movements. Thus, very few programs can give reliable results as in general, forex predictions require a great sense for analysis of pattern recognition.
The only way by which you can hope to fuel your FX I.Q. scores is that you memorize all those patterns that you noticed while a trade went really well. Although it may seem at first glance that the forex prices are completely random and chaotic, it is only due to our lack of complete knowledge of the underlying system. The prices in forex markets are the outcome of more than $2 trillion worth of emotions,resulting a diffusive canvas of repetitive patterns.
Only by recognizing the basics of the concept of intelligence in the forex can one find the formula to become sharper in the forex market. The first step then to a greater FX I.Q. should be to note the patterns in our trades. Then, take a challenge and see if you can generate winning trades in a run. The important thing here is the pattern in the trading rather than the trades themselves.
You don't call it luck when one gets to win trades in a run,sometimes even till ten trades. The traders specializes in trying to remember the historic market patterns and then shrewdly guesses where the prices are headed from now on. The winnings stop being a theoretical goal after you start indulging in the actual practice of these philosophies. It is within the reach of anyone. All it requires is having or building your FX I.Q.
