Inside The Currency Market: Mathematics of Trading

Written here without a prior plan, I hopefully bring enlightenment to those interested.

Here's my question. What type of traders exist. Let's begin with Waves and cycles. We must go back to three market greats to investigate, Charles Dow, Elliott and the ultimate great in my opinion William Delbert Gann.

Charles Dow in the early 1900's found markets correct to 1/3 of price based on his mathematical calculations. Born was the first trend line charted to catch 1/3 market corrections of price but it was a strategy that looked not at future highs but possible lows. Later in the 1920's, Gann built on Dow's 1/3 market corrections with the Square of Nine's to predict future prices and possible bottoms.

From current FX Trader Magazine, Gann found the Square of Nines begin with 1, increasing order of patterns. So Gann squares 1, 9, 25, 49,81, 121, 169 and onward. Odd numbers squared= 1, 3, 5, 7, 9, 11, 13. Squared even = 2, 4, 6, 8, 10, 12, 14, onward. Numbers are then charted to form angles and formulas. Now we take the square root of  the high minus the angle to = the square root of the low. Now apply trigonometry and apply degrees to each angle. For example, 360 degrees = 1, 90 degrees = 0.5, 250 degrees = 1.4. What's missing is time to predict market market tops and bottoms. Gann saw time periods to 26 weeks with Gann years divided by 3rd's while normal years were divided by 8th's. Gann then found tops and bottoms occurred between the 49th and 52nd day, intermediate trend chnges between the 42nd nd 45th day because 45 = 1/8th year.

To build on Gann, in the 1930's, Elliott applied waves in relation to a long dead mathematician, Leonardo Fibonacci to apply what he saw as 5 wave patterns that would retrace back to a Fibonacci number. The most important Fibonacci number in the eyes of modern day Elliott/ Fibonacci great Robert Prechter is the 61.8, called the Golden Mean due to its most popular point to act as a retracement of price.

For wave and cycle traders, today's trade methodology in mathematical terms to build on prior greats should focus on Trigonometry's sine, co sine and tangent lines because Trigonemetry calculations will make loads and loads of money if the calculations are perfected.

My methodologies are means, averages, standard deviations, percents and probabilities all viewed and charted from a bell curve. We thank Carl Fredrich Gauss in 1809 for giving us the Normal Bell Curve and abilities to transform that curve into other formations. Further, prices can easily chart in a Normal Curve to show its Leptokurtic, Mesokurtic and Platykurtic formations.

A Mesokurtic curve has a smoothed and normal bell shape which shows prices are within the normal bounds of their means and standard deviations. Leptokurtic curves show price clusters hence small standard deviations and depicted with a long and narrow upward bell shape. The opposite is the Platykurtic curve that shows large standard deviations with a flatter bell shape.

What I describe here are price distributions looked upon from the overarching bell. This is your Y axis as a measure of the bell to measure prices. A Leptokurtic price cluster that is tall and narrow will eventually form a flatter Platykurtic curve as prices redistribute and move away from their cluster. Similarly, flatter Platykurtic curves with far price spreads will eventully move to Leptokurtic clusters. Standard deviations is the measure of the X axis to determine where the next price move will occur. An X axis line is where prices are found while the Y axis is the bell shape. Both inform each other and serves as a powerful trading plan.

Logarithms vs Exponents. Because logarithms was the first method to calculate exchange rates going back to the 1300's to 1700's, today's central banks still employ this old method to calculate exchange rates when they buy and sell currency pairs in today's markets. The opposite of a logarithm is an exponent therefore to know logarithms and exponents is to deploy a powerful and highly accurate trading strategy.

To further attack prices to determine future direction, we may employ tactics to determine the range of prices. A range of prices is found by highest price minus lowest price. A range is established but that's not enough. We want to know how fast or slow prices actully change to have ideas of future direction. The slope of a line tells us the rate of change and is found by vertical prices divided by horizontal rise to know the rise over the run. Remember quantitative methods. The formula is Y2 minus Y1 / X 2 minus X1.

The point of this post is many, many mathematical formulas exist to calculate not only a currency price to hit targets for profit but many are quite easy and simple to learn for those not inclined mathematically. I'm no math genius  to personalize this post but I've worked hard to become proficient. I have a 1 1/2 year fascination testing and actually employing real trades to various mathematical strategies with great success. In my book Inside the Currency Market is found a slew of various formulas to calculate exchange rates.

My upcoming book that I previously spoke about its publication will be published. If it works and others show interest, I will bring more of the same type strategies in future publications.

I'm Brian Twomey, my book called Inside the Currency Market is found at btwomey.com

Views: 2453

Comment by Romano on November 7, 2012 at 10:33am

Hi Brian, did u erased all comments??

Comment by Brian Twomey on November 7, 2012 at 11:19am

Yea Romano, no information overload for me

Comment by Srinivas dev on November 7, 2012 at 11:44am

Hi Brian Any quick update on eurousd. What do you expect in the New york session pls reply.

Comment by Srinivas dev on November 7, 2012 at 11:47am

Is it  a Sell for today and yes no disrespect to your target. I agree your target will hit soon.I know you are not much of an intraday man but today I am curious as the new york session hits every 4 years ie after presidential results?

Comment by Brian Twomey on November 7, 2012 at 12:15pm

Srinivas, checking now, give me a second

Comment by Brian Twomey on November 7, 2012 at 12:48pm

Srinivas, Peter, Looks like we're heading back to 1.2874, 1.2873 from 1.2750 present levels, Mathematical Stops, benchmarks  at 1.2790, 1.2829. This should be posted as a Trade Peter

Comment by Peter jcp on November 7, 2012 at 12:55pm

Ok Brian - respect your revision - so now a new buy from 2750 to 2873 area ?

I am in scalp buys but need over 77 and understand why you look at 2790 and 2829

Good Luck Brian for trade Number 11

Comment by Romano on November 7, 2012 at 1:25pm

Here is my update, trendlines still hold as u see but it look dangerous. If we get broading triangle on 1h it could reverse. 2740 is daily fib retracement and first of few important supports. But I think if price bounce here it will probably be only retracement before more down. MAs on 4h are screaming as well as weekly price action so far...

Comment by Brian Twomey on November 7, 2012 at 1:32pm

On this trade Peter, let's drop to 1.2850, 100 pips. Yet I see 1.2873 and 1.2874. The 253 day is in freakout mode and dictating this down move.

Comment by Peter jcp on November 7, 2012 at 1:35pm

No problem Brian for trade 11 to be buy from 2750 target 100 pips to 2850. That would be a great trade if it happens - would under 2736 - rule it out though ??

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