The purpose of this thread is to identify theoretical differences between various financial and commodity markets and to determine how trading systems should be adjusted to take account of those differences. I separate markets in two groups, natural markets and hybrid markets.
<p>1. Market participants in <i>natural markets</i> are <b>private agents</b> maximizing profit or minimizing risk (with options for example) where the price of goods/assets <b>continuously</b> reflects the information available and expectations derived from it.</p><p>2. <i>Hybrid markets</i> include both <b>private and public agents</b> where the participating public entity <b>occasionally intervenes</b> to set or influence the price of some of the goods/assets traded.</p>Bond markets where the price of money (interest rate) is established are hybrid markets due to the occasional participation of a central bank that exercises its power to set a price -- the bank rate or the discount rate. Because of the existence of private agents trading on the basis of their expectations, the other prices (bills, notes, bonds rates) usually incorporate the expected action from the central bank before it intervenes. The power of one market participant to set or influence prices is enough to make the behavior of that agent the most important variable to anticipate so the timing of its actions (set by a calendar in the United States) becomes the boundaries within which expectations are formed. Other important boundaries are, by extension, release dates of key statistical data used by the central bank to make its decisions.
<b>The existence of time boundaries means that price expectations will form over a time segment bounded by important key dates. The formation of market expectations within time segments instead of price discovery over a continuous ad infinitum timeline should be taken into account when trading reversals in hybrid markets because any reversal in sight will have to be timed with time boundaries.</b>
The foreign exchange market is also a hybrid market because of the direct influence central banks and fiscal authorities have over the value of assets traded.
The stock market and the oil market on the other hand are natural markets, also influenced by time boundaries but to a much less direct and much smaller extent.
<p>1. Market participants in <i>natural markets</i> are <b>private agents</b> maximizing profit or minimizing risk (with options for example) where the price of goods/assets <b>continuously</b> reflects the information available and expectations derived from it.</p><p>2. <i>Hybrid markets</i> include both <b>private and public agents</b> where the participating public entity <b>occasionally intervenes</b> to set or influence the price of some of the goods/assets traded.</p>Bond markets where the price of money (interest rate) is established are hybrid markets due to the occasional participation of a central bank that exercises its power to set a price -- the bank rate or the discount rate. Because of the existence of private agents trading on the basis of their expectations, the other prices (bills, notes, bonds rates) usually incorporate the expected action from the central bank before it intervenes. The power of one market participant to set or influence prices is enough to make the behavior of that agent the most important variable to anticipate so the timing of its actions (set by a calendar in the United States) becomes the boundaries within which expectations are formed. Other important boundaries are, by extension, release dates of key statistical data used by the central bank to make its decisions.
<b>The existence of time boundaries means that price expectations will form over a time segment bounded by important key dates. The formation of market expectations within time segments instead of price discovery over a continuous ad infinitum timeline should be taken into account when trading reversals in hybrid markets because any reversal in sight will have to be timed with time boundaries.</b>
The foreign exchange market is also a hybrid market because of the direct influence central banks and fiscal authorities have over the value of assets traded.
The stock market and the oil market on the other hand are natural markets, also influenced by time boundaries but to a much less direct and much smaller extent.