New Frontiers in FOREX Market Analysis

This type of article is one of the most fun for me to write because it's really just a romp through the imagination. Since the 1990's, I have made a hobby out of exploring new and varied ideas for analyzing the markets, and this is a great opportunity to dust off some of my old notes, publish some of those ideas and perhaps get some feedback on them. I'm also looking forward to using some of the following concepts in my ongoing research work on FOREX price behavior. So put on your "what if..." hats and let's get started!

Market Models - Old & New

Most traders are familiar with the two basic schools of market analysis that we call Fundamental Analysis and Technical Analysis. In the 1970's, members of the academic community proposed a new model of the market known as the "Efficient Market Hypothesis". This is more commonly known as the "Random Walk Theory" and basically said that the first two schools of thought were both wasting their time. In response to the Random Walk Model, other academics put forth an even newer theory of how markets work called "Behavioral Finance". These are all examples of comprehensive explanations of what factors drive market prices. Here's a brief summary of market models, some of which are only in their infancy:

Fundamental: Market prices are driven by tangible events and conditions in the real world, such as earnings, sales, management, natural disasters, weather, economic conditions, geopolitical tensions and so forth.

Technical: Market prices are driven by what prices have done in the past. As traders observe these past and present price movements, their expectations about future prices lead to feelings of greed and fear which in turn create buying and selling pressures.

Random Walk: Current market prices are efficient reflections of all known fundamental and technical information, so we can discern nothing about future price movements. The factors that cause future price movement will be so varied that such movements can only be random in nature.

Behavioral Finance: Prices are driven by human psychology which is not always rational. Traders may base expectations about price movements, risk and reward on erroneous reasoning, thus causing prices to behave in non-random ways. Bubbles and crashes are classic examples of this.

Chaos Theory: Market prices are part of a non-linear dynamic system in which outputs are re-introduced back into the system as inputs, causing complex behavioral loops and very sensitive dependence on slight variations in conditions.

Fractal Geometry: Price patterns are recursively nested, meaning that a large pattern may be composed of several smaller similar or even identical patterns and so on through all time scales. Elliot Wave Theory is a classic example of this idea.

Scott's Emergent Property Model: I've discussed this one in more detail in other articles, but the idea is basically that identifiable properties of price behavior emerge from the combination of unique individual trading styles of the current market participants. An analogy would be how a person's personality emerges from the combination of individual neurons in their brain. This price behavior changes gradually over time in an evolutionary way in the same way that the behavior of an organism changes over time due to both internal changes in its makeup and external pressures from its environment.

My apologies if I have neglected or grossly mis-represented any of the various ways of explaining what makes the market tick.