Let’s look at the nature of price changes in the Forex market, without paying attention to the reasons why these changes occur. This approach will allow us to identify the main factors that affect the price movement.
For example, let’s take the opening prices of bars on the EUR-USD currency pair and the H1 timeframe. Let’s build a Lameray diagram for these prices (Figure 1).
In this diagram, you can see that the price movement mainly occurs according to a linear equation. To determine the parameters of this equation, you can use the least squares method. In this particular example, the equation of the opening price change took the form:
Open[i]=0.99989*Open[i 1] 0.00013.
Let’s check how well this equation describes the price movement. To do this, we remove the linear component and analyze the residuals (Figure 2).
As it becomes clear from the figure, these balances are quite chaotic and if we take them into account as noise, we can get a fairly simple system for predicting the opening price of the next bar, which is implemented in the form of this indicator.