Before a trade makes sense, a simpler question deserves an answer: is the proposed price level algebraically possible? Not probable. Possible. This is a question the forex market can answer with precision, and it is a question that the standard analytical toolkit does not ask.
The forex market is a closed algebraic system. Eight currencies generate 28 pairs. Every exchange rate is arithmetically related to every other exchange rate involving the same currencies. These relationships are permanent and exact. They define a space of states that the market can occupy and a complementary space of states that the market cannot occupy. The second space is not improbable. It is geometrically excluded.
If EUR/USD is at a certain level, and EUR/JPY is at a certain level, then USD/JPY is not free to take any value. It is constrained to the value that satisfies the arithmetic relationship between the three rates. Any other value for USD/JPY is not a low-probability outcome. It is an algebraically impossible outcome. The market will not produce it regardless of news, sentiment, or any other factor, because producing it would require breaking an arithmetic identity.
This principle extends across the full 28-pair system. Every currency participates in seven pairs. Its coordinate position in the Cartesian model is determined by its exchange rates against the other seven currencies. A proposed movement for any one pair implies specific displacements for all other pairs involving the same currencies. Some of those implied displacements will be consistent with the current positions of the other currencies. Some will not. The ones that are not consistent identify price levels that the market cannot reach from its current state without other pairs moving first.
On a time/price chart, this information is invisible. The chart shows the price of one pair. It does not show the algebraic constraints that the other 27 pairs impose on that price. A level that looks reachable on the chart may be algebraically prohibited by the current state of the broader system. A level that looks distant may be the only algebraically consistent destination given the positions of the other currencies.
Working within a Cartesian model of the full system makes the space of possible prices explicit before the market moves. The jMathFx Platform is built to map that space. See what is possible before it happens at jMathFx.com.
