Inside the Currency Market: Signal, Noise and Range Prices

First, the range. Friday March 8, the range prices were 1.3133 high minus 1.2954 low = 179 pips, divide by 2 and my range is 89.1 pips, divide by 3 and my range is 59.2, multiply 179 by 2 = 358, True Range Average, 1.3043. Are we any smarter by this information, no.

How about measurement of a candlestick or sets of candles, no help either unless candles are measured for what they are and that is the Boxcar Average separated by either an average or Median Line to represent frequencies..Afterall , what allows the indicator Andrews Pitchfork 80 years later to be so effective is its use of this methodology. A double top or bottom sees price reversals because price frequencies in relation to its median price reached maximum extremes. Its seen in the candlestick pattern but few understand its actual methodology.

A range factors in mathematical terms many ways: Sine and cosine waves, percentiles, deciles, quartiles, interquartiles, frequencies, Standard Deviation. I measure my ranges by the Signal to Noise Ratio, the relationship between the mean and the standard deviation and an old old metric first used in electronics to measure actual radio sound to background noise.

A market price has two factors: a Signal or True market price and Noise measured by the variation of the True market price and seen in the variability of the Standard deviation. This questions asks how far is the market price from the True price and it changes on a daily basis as market prices trade. Signal and noise is found by first the signal or the mean of the market price and noise is the variation of the market price. An example from Friday.

Friday's True price signal mean was 1.3098 and the Standard Deviation was 0.0133, divide signal mean 1.3098 by Noise 0.0133 and we have a Signal to Noise Ratio of 98.4812, the higher the number the less is the range with good chances market prices will be stuck. As this number contracts, the more the range will increase.

A closer inspection of this relationship can be seen in the square root. 1.3098 = 1.1444, Noise = 9.923. Still high number so square root again, 1.06 vs 3.1. Now we can see the market price as a 1 to 3 basis in terms of the true price vs market noise. Afterall 1.3133 high to the 1.2954 low = 1.01% move and in line with normal market price movements.

If a range was measured by the Standard Deviation alone, we can see a 133 pip range but not enough to capture the actual range because the market moved by 179 pips for the day and because 133 pips is only the variability measure so any market range must be measured by the Interquartile range.

The Interquartile range is always the better measure because its not affected by outliers in my sets of Moving Averages. Plus if the Standard Deviation is larger than the Interquartile range then outliers are present in my averages so one indicator is a check on the other.

Now I take my SD 0.0133 X 1.34896 = my market range of 179 pips is established, 1.3133 minus 1.2954. The purpose here is to catch the top Amplitude of my Noise Ratio since my noise ratio is a high number. When price broke my mean 1.3098 the top amplitude of my signal number, well short without a look back since I know ranges are measured on a high low basis against my mean price. Noise is only the measure of the width.

Others can look at Signal to Noise in terms of Frequencies by high minus low divided by the noise number. My number is 1.8

I use the Signal to Noise ratio range against my probaility bands so then I can trade an actual trade comfortably and hit targets within ther context of my numbers.

I'm Brian Twomey authror of Inside the Currency Market

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Comment by Jasmine C on March 11, 2013 at 12:51pm: crikey... :-)

Comment by No money on March 11, 2013 at 4:00pm: Hi Brian! Thanks! After reading this twice I tot I am doom ;)))))))))))))))))))))) Hope for all its clear enough ;)))))))))))))))))

Comment by Brian Twomey on March 11, 2013 at 4:45pm: And the moral today is EU is going absolutely nowhere, worse for GU, Try EUR/CAD.

Comment by Sundaram on March 11, 2013 at 4:51pm: Huh? What? Oh! ya..yes..Absolutely..Hrmmm...Yes, I think I am understanding it. You are great Brian! Thanks.

Comment by Srinivas dev on March 11, 2013 at 5:10pm: You have well and truly used the Signal and noise ratio range and the probability bands and their relations to hit targerts. I feel after reading this Post I am transported couple of decades and a half back sitting on my Math lecture and Stats lecture too. This is beautifully done. Take a Bow Brian.

Comment by Romano on March 11, 2013 at 5:37pm: Hello Brian, I believe at this point you`re making things much more complicated than they really are. Even Peter is a walk in the park when compare to u ;))

Comment by Brian Twomey on March 11, 2013 at 5:47pm: Hi SRI, SUN, Alexey,Thank you, I wondered how this would be received. I'm thinking about expanding this topic to show how to scale and rescale in and out of trades, how to use frequencies, how Fractals really work. Much can be done with this indicator to use for profits if you get the basics down.

Comment by Brian Twomey on March 11, 2013 at 5:57pm: Hi Romano, I absolutely agree with you but its a larger issue for me since I've been on this 1 1/2 year question to truly truly understand how the currency price really works so I had to do this from many many angles and this post is just one of many approaches. Soon the topic will change after this is completely mastered.

Comment by Romano on March 11, 2013 at 7:47pm: I hear u man. Brian, I will make it easy for you: answer is that none of this is how market truly works. You are searching where there is nothing to find. There is already an answer u seek - check Sam Seiden`s and Steven Patterson`s webinars. Its about liquidity, supply and demand - this is how market work and thats really all there is to it. No magic numbers, nature numbers, or any other fantasy.

Now, if u can utilize that knowledge to make immediate profit is another question of course(considering that trading style is even your cup of tea - maybe not). In short, there lies your answer you dedicated yourself so thoughtfully to find. Deviation have its strong place here but not stand-alone, yen should prove that by now.

Hope it help, best regards.

Comment by Peter jcp on March 11, 2013 at 8:38pm: Hi Brian - I suppose in simple terms Romano is correct - supply and demand is always the most important part of any market in its simplest format.

Where it gets complicated is that there as to be winners and losers - and sometime the losers are the organisations who have more complex maths theories set up in their computer systems and expect to be 90% correct - but can still get caught out.

I appreciate history is always important - but the forex market as gone through massive growth in the last 30 yrs (as the world as got smaller) and also with the technology of the internet and rapid communication systems - its a totally different market - with new rules.

One of the rules the banks and the governing bodies don't like to discuss involves money laundering. Nowadays - its massive and still really uncontrollable - no matter what they say.

If i suddenly came across say 100 million dollars down in my garden - and did not want anyone to know about it - I would launder it through the currency exchange markets into pounds euro's and yens. If on the way i lost 20 million - but legalised the other 80 million - I would accept it - and even better if I could get it through and make profits on it it to bring it up to say 110 million - even better.

When you money launder - its more important to lose in the market then win - less bodies are interested ;-))

The fact the this massive amount of illegal billions are not on the radar - means they cannot be put into the SD formula's you mention. The full amount of money in the markets is still unknown - no one body know its down to the nearest 10 million. - remember the market really is still un regulated so certain banks in Russia and even Switzerland don't report what they actually do with their balances - nor do their brokers ;-))

So i will admit i do have to side more with Romano and supply and demand theories rather than pure maths - as in any maths formula - you have to been able to feed in accurate numbers etc - any you will never get any true accurate numbers in this market - and remember price at any one time - is false ;-))

Regards

Peter