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“Holy Grail” indicator. Is it possible?

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“Holy Grail” indicator. Is it possible?

Postby Nikolay.Gekht » Mon Aug 16, 2010 11:44 am

“Holy Grail” indicator. Is it possible?

According to the technical analysis definition, the prices already reflect all influences of further price movements. So, the technical analysis gurus say: it’s enough to somehow (but properly, huh) test the historical market data, such as prices and volumes to forecast further prices. From the mathematical point of view, there is a function of the price and volume which can predict the price, i.e. forecast = F(price, volume). F is a function, so it will give us the same forecast on the same price and volume history regardless who and when is using this function.

So, if all traders knew the ideal indicator and applied it at the same moment on the same market, the forecast would be the same and would lead to the same trade decisions. All participants would get profit. Good for everyone, huh?

However, FOREX is a speculation market, so, you have to buy and sell (or sell and buy) to get profit. So, the profit is possible only when there is anyone who wants to sell when we want to buy or buy when we want to sell. This damned thing is called “liquidity”. But if there is a “holy grail” indicator and all participants get a signal to sell – who buys? Nobody. So, the market has no liquidity and “profit” cannot be realized.

The free market always aims to the point when the volume proposed to sell at the current market price is equal to the volume proposed to buy at the current market price. In other word, supply must be equal to demand. If supply is greater than demand, the market goes down and vice versa. Therefore, if all market counterparts follow to the same signal, the supply/demand proportion becomes disbalanced and the market starts playing against the strategy. This is the main reason why many strategies which worked well yesterday stop working today.

So, the main question is not “which strategy is ideal for FOREX?”, but “which strategy is ideal for FOREX in the current market conditions and when does it stop working?”. Theorists can also ask themselves “why?”.
Nikolay.Gekht
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