Is Forex Chaotic or Predictable?
Is Forex Chaotic or Predictable?

Is Forex Chaotic or Predictable?

Some forex traders thought that "treasury bonds are random, the stock market is correlated, and forex is chaotic."

Firstly, let me say I haven't actually read any study in this question and probably never will. Also, I've never studied chaos theory, higher math, or physics. So obviously, I'm exceptionally well-qualified to comment on this research in a thoughtful, informed, and in-depth manner. So here goes...

While I agree that a lot of forex market activity appears chaotic, and as soon as you come up with a predictive rule, the market breaks it, there are still a few things you can predict with some accuracy amid all the chaos. And these are the things that keep me trading forex.

Off the top of my head, they are:

Trading range

I can confidently say that the trading range of the EUR/USD tomorrow will be somewhere between 30 and 150 pips. Occasionally it may be more, sometimes less. But it will almost certainly not be 500 pips. Or 1000 pips. Nor will it flatline and refuse to move at all. Now a currency whose range varied from 10 to 1000 pips a day on a reasonably unpredictable basis...that would be chaotic.

 

Reaction to specific news events

Some events will move the market. Period. What direction, and how many pips, can be hard to predict. But I can predict with a high degree of confidence that there will continue to be news events that shake things up periodically.

 

Periodic emergence of trends

Very real, very tradeable trends will emerge from the chaos every so often, and in all likelihood, will continue to do so. Just looking at a price chart without a single fancy indicator on it can tell you this.

If you place trades long enough, you'll eventually get one right. This is the principle behind the Martingale strategy. I'm not saying it's an excellent strategy to use, but it's based on a statistically valid and predictable observation. So, chaos or no chaos, the odds will eventually swing in your favor.

Buying some currency pairs pays you interest. Holding others cost you interest. This is what carries trading is all about.

Someone who routinely takes on too much risk when trading in chaotic conditions probably won't last as long as someone who knows exactly how much risk they can afford to take.

Someone with a clear head can combine observations like these into a trading strategy with decent odds of paying off in the long run. Conversely, someone whose outlook is clouded by wishful thinking, impatience, inconsistency, lack of discipline or impulse control, and any other problems of the compulsive gambler doesn't have a chance in the world.

Forex can be boring for long periods. Whether that's chaotic or not, I can't say. But it's certainly predictable.

I'm sure the chaos theorists wouldn't disagree with any of this and point out why chaos theory allows for all of these possibilities. But I'm not writing for them - I'm writing for the traders out there like me who see a statement like "forex is chaotic" and think they must be crazy to keep chasing the market if the MIT scientists say it's a giant chaotic whirlpool ready to suck your accounts dry.

So, if I've made any of you feel a little better, I've done my job. Enjoy the chaos!

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