What currency pairs should we trade and why we’re ‘programmed’ to see chart patterns where they don’t actually exist
Many FX blog writers and contributors to FX forums will often quote which FX pairs are their “favorites to trade”. They’ll also often allude to the special characteristics of their favourite currency pairs and how these pairs (in their opinion) act differently on their charts to many others. And yet if we ask professional and successful FX traders if they see the same pattern in a particular pair they’re likely to say no. Instead they’ll probably suggest that we should be focusing on the spread and liquidity of the currency pair as these two factors are inextricably linked to each other. And that it should be the spread and overall ‘popularity’ of a certain pair that makes us prefer its behaviour and not the patterns that it can temporarily ‘draw’ on our charts.
A neat circle may be being completed. If the spread is low it means the liquidity is high, which also means the currency pair is highly popular amongst our peer group of traders. In short that low spread is for a reason, the currency pair is traded the most. All that being said is there any validity into these easier to trade patterns of a currency pair that many amongst us supposedly see, or are many of us simply buying into a myth that has stood the test of trader time? There could actually exist a scientific and rationale reason for our propensity as traders to see patterns in many of the prices of data we assemble and collate as data.
Apophenia – seeing patterns in meaningless data
As human beings we are constantly rewarded (from an early age) to separate chaos from our daily lives. From a very early age we’re also actively encouraged to solve problems. For example; we’re encouraged to live tidily by keeping our rooms neat and some of our earliest school memories involve solving basic maths puzzles and reciting times tables. Therefore it’s hardly surprising that when we discover trading we partly become fascinated and (to a degree) obsessed by attempting to create a form of order out of the what could be random chaos. We may also witness how emotionally attached to their core beliefs many traders will become if challenged regarding the random patterns that they believe actually ‘make sense’.
One of the reasons we crave order in our lives is to make sense out of what could be a series of random events. We like structure in our lives. Work at certain hours, attending gym classes at certain hours, attributing our spare time to certain hobbies and waking and sleeping at certain times. This structured development delivers a sense of control to our lives and has become a cornerstone of how many of us exist in our modern society.
But patterns do exist in trading; we can clearly see trends on many FX pairs
It’s hard to argue versus the fact that we can see a pattern developing on a chart when, for example, a major currency pair trends for perhaps a month upwards on a daily chart in a virtually unbroken pattern. However, strip down the chart to a virgin chart, by even resorting to a line graph and what do we have? A simple line with a fairly even trajectory upwards and yet we use many indicators and draw countless lines to support our pre-cognition and prejudices that this pattern has meaning and in some instances is preordained – if we believe some of these indicators may lead and not lag. In reality the simple line graph only illustrates the lagging sentiment market makers and movers have regarding a particular security, based on much of the fundamental data we’re constantly delivered.
If we dial down the time frames to where day traders may gravitate it’s here where the theory of Apophenia is most relevant. It’s often referred to as “patternicity,” or the tendency to find meaningful patterns in meaningless noise. Our brains are belief organisms. We own a highly personal pattern-recognition machine that connects the dots and creates meaning out of the patterns that we think we see everywhere. Sometimes A really is connected to B; sometimes it isn’t. When it is, we have learned something valuable about the trading environment from which we can make predictions. We are the descendants of those most successful at finding patterns. This process is known as association learning.
Apophenia is the experience of seeing patterns or connections in random or meaningless data
The term is attributed to Klaus Conrad who defined it as the “unmotivated seeing of connections” accompanied by a “specific experience of an abnormal meaningfulness”, but it has come to represent the human tendency to seek patterns in random information in general, such as with gambling and paranormal phenomena.
Apophenia is heavily documented as a source of rationale behind gambling, with gamblers imagining they see patterns in the occurrence of numbers in lotteries, roulette wheels, and even cards. One variation of this is known as the Gambler’s Fallacy.
The origins and discovery of Apophenia
In 1958, Klaus Conrad published a monograph entitled Die beginnende Schizophrenie. Versuch einer Gestaltanalyse des Wahns (“The onset of schizophrenia. Attempt to shape analysis of delusion”, not yet translated or published in the English language), in which he described in groundbreaking detail the prodromal mood and earliest stages of schizophrenia.
He coined the word “Apophänie” to characterize the onset of delusional thinking in psychosis. This neologism is translated from the Greek apo + phaenein, to reflect the fact that the schizophrenic initially experiences delusion as revelation.
In contrast to epiphany, however, apophany does not provide insight into the true nature of reality or its interconnectedness, but is a “process of repetitively and monotonously experiencing abnormal meanings in the entire surrounding experiential field”, which are entirely self-referential, solipsistic and paranoid: “being observed, spoken about, the object of eavesdropping, followed by strangers”. In short, “apophenia” is a misnomer that has taken on a bastardized meaning never intended by Conrad when he coined the neologism “apophany”.
In 2008, Michael Shermer coined the word “patternicity”, defining it as “the tendency to find meaningful patterns in meaningless noise”. In The Believing Brain (2011), Shermer says that we have “the tendency to infuse patterns with meaning, intention, and agency”, which Shermer calls “agenticity”. In 2011, psychologist David Luke proposed that apophenia is one end of a spectrum and that the opposite behaviour, the tendency to attribute chance probability to apparently patterned data, can be called “randomania”. Luke indicates that this often happens in the hand waving away of everyday phenomena, such as apparent dream precognition, and that this occurs even if scientific research suggests that the phenomena may be genuine.
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