e-FOREX : INTERVIEW


down during the course of a year, is an astounding 1600%. Tis 1600% is 53 times larger than the total price risk of roughly 30% of the maximal change in price level from 1st January and 31st December. During the course of one year, there are lots of price overshoots, when the price has moved too fast up or down. At U.S. Non-Farm Payrolls, for example, it is a frequent occurrence that the price moves 0.5% in only one minute. If the price movement would continue at the same rate, then the total price movement during the course of an hour could be approximately 30%. Clearly this is not sustainable. Te predictive technology can identify overshoots, when the price movement is too fast, and take advantage of these opportunities.


Economic models deal with time series, so the meaning of time is of key importance. We do not rely so much on physical time, but on a more general concept called ‘intrinsic time’. Intrinsic time resembles a point and figure chart, where a new time interval starts whenever a directional change of price of a minimal size occurs. Using the concept of intrinsic time, we have discovered 12 new scaling laws— essentially we have made a quantum leap in how we formulate our predictive models. Tese scaling laws identify typical statistical properties of the foreign exchange market or for that matter, any liquid market. One of these scaling laws states that if the price has moved down by 1% from its last high, the price move


104 | april 2011 e-FOREX


will on average continue by another 1% before it reverts. Te same is true for other thresholds, so if the price has moved down by 0.5%, it will continue to move down by another 0.5%. Te importance of these scaling laws cannot be exaggerated. Tey provide a dynamic frame of reference—the necessary foundation for building powerful predictive models.


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