This article is the beginning of a series of educational papers. It is designed for both experienced and beginners Forex traders who want to learn and discover new methods and ideas to make online trading on the Forex market not just a game but a full-fledged job opening doors to financial freedom.
Analysis of the forex market as a non-stationary time series
Analysis of the forex market as non-stationary time series is a difficult task because changes in the market can be speedy and heterogeneous. While the classical stationary time series analysis assumes that the statistical properties of a series do not change with time, in the Forex market, this approach may not be applicable.
Here are a few methods to analyze the forex market as a non-stationary time series:
- Time series differentiation: You can make a time series more stationary by removing the linear trend component or seasonality. Differentiation allows you to estimate the rate of price change in the market.
- Exponential smoothing: This method reduces noise and variability in non-stationary time series and improves forecasts. It is based on the fact that newer data is more important than older data.
- Wavelet analysis: Wavelet analysis can extract information from the forex market, characterized by heterogeneity, multiscale and multiresolution. Wavelet analysis uses functions that can describe the behaviour on different time scales.
- Autoregressive models with integrated moving average (ARIMA): ARIMA is a statistical model used to analyze time series. It is based on the principle that the current value of a time series depends on previous values, errors and a random component. ARIMA can be used to predict future values of a time series.
- GARCH models: GARCH models simulate non-stationarity and variability in time series, such as asset prices on the Forex market. These models can help in risk assessment and decision-making about market positions.
Any prediction of forex market behaviour using standard methods can be made only in areas close to stationary. For this purpose, the trader or forex analyst should single out areas relative to stationary.
The allocation of stationary areas on the forex market can be helpful for analysis. It will help to see a clearer picture of market trends and statistical properties of price movements. However, stationarity is not constant in the forex market, and these areas can be short.
Analysis of the forex market in areas close to stationary
Here are a few methods to distinguish regions of stationarity in the forex market:
- Decomposition into trend and residual: This method allows you to divide the time series into two components - trend and residual. The trend component is the general path of price changes on the market, and the residual part is random changes unrelated to the movement. After dividing the series into these components, the residual component can be analyzed as a stationary time series.
- Smoothing with moving average: This method smoothes the time series by removing noise and outliers. The result is a stationary series that can be used for analysis.
- Stationarity Tests: There are various statistical tests for stationarity of time series, such as the Dickey-Fuller and KPSS tests. These tests can help determine if the time series is stationary.
- Use of filters: Filters can remove the low-frequency component of the time series, allowing you to highlight high-frequency changes that may be more stationary.
It is essential to understand that stationarity can be rare in the forex market, and analysis of stationarity areas should not be the primary method of market analysis. It is also necessary to consider fundamental factors, news and other significant events that can affect prices in the market.
Both approaches are rather complicated and often do not lead to precise forecasting of the forex market behaviour. Why does it happen?
Forex market casino style
It is because many forex brokers and developers of trading platforms for forex brokers have turned trading in the forex market into an online casino, as in every way trying to make money not on the commission but on the loss of the deposit. For this reason, comparing any, even the best online casino with most forex brokers for retail traders, you will find many similarities:
- Deposit bonuses.
- Re-deposit bonuses
- Affiliate programs
- And much more.
Comparing the forex market to casino-style can be viewed from different perspectives. On the one hand, both have elements of risk and uncertainty. There are some similarities to gambling in the forex market, such as the possibility of quick wins and losses using luck, analysis and intuition.
On the other hand, the forex market has characteristics that distinguish it from the casino style. The forex market can use data analysis, economic theory, and risk management tools that can help reduce risk. There are also rules and regulators in the forex market that regulate trading and protect investors.
At the same time, risks are associated with forex trading, such as unexpected changes in currency rates and political and economic events, as well as risks related to leverage and inadequate risk management.
While some elements of the forex market and online casinos may be similar, the market has characteristics distinguishing it from casino-style. It is always advisable to assess risks and use careful risk management when trading forex to reduce the likelihood of losses and increase the chance of success.
The relationship between successful forex strategies and casino-style strategies
Analyzing the above, we can conclude a relationship between successful forex trading strategies and successful strategies to win at online casinos. And the developers of the process for online casino games are often faced with the same problems as those for forex trading. I say to begin to apply the martingale system in online or offline casinos; we will see that at some point, the number of repetitions of red if we bet on black, will be so high that the player's financial capacity will not let him win by increasing the bet on black. The same will happen in the forex market. At some moment, the deposit will not hold out, and the trader will lose it completely. With a high probability, the risk management worked well in both cases - it can be either the software or the dealer. But the main thing to understand is that the advantage of a casino and the advantage of a Forex broker is unlimited time and unlimited money, which the player or trader does not have.
The best strategies for forex trading
That is why when developing a forex strategy, you have to understand that the best method will be the one which is short-term and which does not use averaging or increasing the size of the position. Also, the strategy should not depend on any technical indicators. Even the economic analysis for short-term trading may need to be more productive due to speculative market movements. Therefore, the most accurate, profitable and low-risk strategies are forex arbitrage and trading on the news. Both of them presuppose a fast feed of quotations or news releases. Applying these strategies is possible only when the trader has the tools to mislead a forex broker's risk management.
This article is the first and introductory in the series of educational articles about such trading methods as forex arbitrage and news trading. Still, it allows traders to understand the overall picture and move in the right direction to financial success instead of wasting time and money on studying non-prospective market analysis trends.