Warren Buffett once said “beware the geeks bearing formulas.” ¬†Now, he is not the best forex trader but this particular quote can apply to forex trading, and in many other markets as well. ¬†Now when Warren Buffett was saying it, he was referring to the derivatives weapons of mass destruction.
But in forex trading, especially on many forums there are all sorts of traders, whether they are geeks or not, but they are bearing formulas. ¬†Not just any formulas, but complex mathematical formulas. ¬†As if the financial markets are one giant mathematical puzzle to solve.
The markets are just a bunch of human beings, making decisions, sometimes rational, many times not. ¬†They go long, they go short. ¬†They place stop loss orders. ¬†They all have pain tolerance points. ¬†They all have different expectations and different objectives.
But these math geeks bearing the formulas don’t want to pay attention to that. ¬†They have this immense fascination with developing a magical formula that once created, and variables inputted correctly, they will have cracked the code of the markets.
Well high frequency trading code may be useful for scalpers. ¬†But I have never seen a 1,000 pip move in currency pair occur because of a financial formula. ¬†Nor have I have seen a formula predict where the price will be weeks and months in advance. ¬†It is just mathematically impossible.
I suppose it is possible if some algo goes wrong and trips a whole bunch of stops during an illiquid session. ¬†But then that has to do with order flow, liquidity, and volatility.
A mathematical formula cannot possibly know what the sentiment will be at that given day in the future. ¬†The mathematical formula cannot know where the stops are at that given date in the future. ¬†The mathematical formulas cannot know what news will occur that can move the market at that given date in the future. ¬†Doesn’t mean you can’t sometimes predict currency direction months in advance. ¬†You can sometimes, but don’t try to nail a price to a pip,¬†that’s¬†just foolish.
Everyone Has Their Own Formula
Some people have their own non math formulas. ¬†The technical indicator traders formula may say technical indicator #1 + technical indicator #2 + technical indicator #3 = trade entry
The price action traders have their own formula. ¬†It can go something like price action pattern #1 + price action pattern on higher timeframe + fibonacci = trade entry
The order flow trader can have their own trading formula as well. ¬†It can be order flow generators #1 that moves the market 100 pips + order flow generator #2 that moves the market 50 pips + order flow generator #3 that moves the market 250 pips. ¬†And there is your 400 pip move.
There is a formula that applies to all financial markets:
I will re post it here as well:
Order Flow + Information Flow = $$$$$
Information flow is included in the formula because many times information flow can generate order flow.
Crazy Math Formulas
Doesn’t mean math isn’t useful. ¬†It can help with money management and position sizing.
But every time I see a complex formula posted in some article or book, I cringe.
Here is a formula I stumbled across in some ebook I downloaded:
I cringe when I see this. ¬†Then I go back to my order flow mindset. ¬†I don’t need these junk formulas. ¬†You don’t need them either if you hate math. ¬†Instead of these complex mathematical formulas, just find the order flow generators that will move the market a few hundred pips. ¬†Focus on those and you will find them. ¬†When the scenario plays out, you place a trade and profit. ¬†End of process. ¬†No complex mathematical formulas needed.
Order flow research is needed, but luckily you can skip the complex mathematical formulas.
Beware the geeks bearing formulas.