Stocks & Commodities V. 26:11 (14-17): Forex Focus: The Trend Determining Method by Aleksey Yudin

Stocks & Commodities V. 26:11 (14-17): Forex Focus: The Trend Determining Method by Aleksey Yudin
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The Trend Determining Method by Aleksey Yudin

This model is based on the theory of determined chaos, which posits that accurate market forecasts can be generated when trading the currency markets.

Determined chaos theory has attracted many followers in recent years in various fields of knowledge. Unfortunately, along with its many advantages, such nonlinear methods of analysis have their own deficiencies — namely, the very short time horizon for forecasts. This problem could be solved by applying additional methods with a longer time horizon for forecasting, but that would create a complex and time-consuming system. Nevertheless, it is possible to balance sensitivity and “short memory” of a method and produce trades with a high winning percentage. This can be done by applying simple models based on the theory of determined chaos.

DETERMINED CHAOS Among system creators there is endless debate on what number or type of parameters is best used to describe the market. Most trading systems are built around one parameter — price. Using price alone, or any indicator based solely on price, cannot explain or predict market movements with any regularity.

The system described here is based on the concept that markets are driven solely by supply and demand. Market order flow can in fact be accurately tracked by analyzing volume and open interest in conjunction with market price. While price is an important aspect of our system, it is more a product of how supply and demand interacts rather than the determining factor when it comes to market forecasts.

Because forex is traded over the counter and not through a central exchange, open interest is not available. Because futures are the derivatives of the cash market, there is a strong correlation between the two so you can use open interest from the futures contract as a proxy.

A deeper discussion of volume and open interest in different markets is beyond the scope of this article. What is important to understand is that there is a connection between open interest, volume, and price, and by exploiting this relationship, you can generate consistent profits.

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