Looking for momentum Check outside the US - adx forex trading system

Looking for momentum Check outside the US ~ adx forex trading system

Momentum vs. mean-reversion has been a perennial theme in investing, not least quantitative investing. My contention has always been that momentum strategies are generally less reliable than mean-reversal strategies. (See here or here.) My reader Mr. J. Rigg told me about a recent article in the Financial Times suggesting that momentum strategies are alive and well, according to the research by Prof. Elroy Dimson et al at the London Business School. The strategy is very simple: buy the stocks with the highest returns in, say, the last 12 months, short the ones with the lowest returns, and hold for, say, 1 month. If you run this strategy for the top 100 UK stocks from 1900 to 2007, the average annualized return before costs is about 10%.

There are, however, a number of caveats worth noting in this study:

First, it is very transaction-costly to implement momentum strategies for small or even mid-cap stocks. If you factor in costs, 10% can easily become 5% -- not an impressive number even for a dollar-neutral strategy. (Though one should note that the infrequent rebalancing renders transaction costs consideration less important.)

Second, the drawdown durations are quite lengthy -- sometimes exceeding 2 years. This is not acceptable performance for many hedge funds. Such lengthy drawdowns have been a common feature of many momentum strategies that I have personally studied and traded.

Third, and most interestingly, in the period 2001-2007, this momentum strategy has stopped working altogether for the US market, while continuing to deliver positive returns in other markets!

What may be the reason for this dichotomy between US and international markets? Momentum strategies generally derive their power from the slow diffusion and analysis of information: if all investors are simultaneously aware of all the relevant financial information about a company and can analyze the significance of the information instantaneously, they will have come to a consensus fair market value instantaneously and no momentum in the price will result. Hence perhaps the disappearance of momentum in the US equity market means what most people know already: that it is the most efficient equity market of all.
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USD CAD AT MAJOR TREND LINE STRONG RALLY AHEAD - forex trading system scams

USD CAD AT MAJOR TREND LINE STRONG RALLY AHEAD ~ forex trading system scams

The USD CAD is now just above a major Uptrend Line following a recent downtrend that led to strong gains for the Loonie. With this Uptrend Line having defined the direction of the pair since 2012, we could either see a strong rally above the current Downtrend Line or a major break to resume the downtrend.

This Uptrend Line supported a very strong rally that carried the currency pair from 0,9632 in September 2012 to the high of 1,1277 in March 2014. We can also see that there were four previous rallies at this Trend Line, indicating the strength of this boundary.

DAILY CHART

Looking at the recent downtrend that has carried us to this Trend Line once more, we can see that it provided a trading opportunity when a Range setup was broken. Entry at the breakout candle could have given the trader a little over 100 Pips with the exit taking place above the Uptrend Line.

DAILY CHART

From this point, the currency pair can either rally to break the Downtrend Line or break below the Uptrend Line. If it does rally, it can do so with a direct break of the Downtrend Line followed by a test and then a further break long. Alternately, it could also move sideways in a Consolidation before breaking out. Such a setup could also be the precursor to a breakout short below the Uptrend Line.

DAILY CHART

With the pair already reaching its 2nd Weekly Range, however, further moves bearish could be limited if we dont see a large setup formed in the near future (see Trade Manual). This would give the break of the Downtrend Line a higher probability of taking place, providing a larger range of pip targets to choose from.

As with all scenario analyses, one will have to wait for the best signals to be provided by the market to justify entry. In this very low volatility environment of few opportunities, one will have to be sharp to monitor several currencies at a time to be able to spot these rare, but profitable trades.

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11 YEAR SUPPORT KEEPS AUD NZD IN CHECK - forex trading system signals

11 YEAR SUPPORT KEEPS AUD NZD IN CHECK ~ forex trading system signals

This pair has just completed another bearish wave within a large Pennant setup on the Daily Chart to now settle at the Support area of 1,0615. This Consolidation has been formed following a strong downtrend in favour of the Kiwi, stretching back to March of 2011. It also coincides with a major Support area of 1,0612 being tested for the first time since being formed by a set of Triple Bottoms between 2003 and 2008.  Now that the pair has reached this important juncture, we will either see a rally to return to the Resistance of the Pennant or a strong break of the Support to continue the downtrend for the rest of 2014.

The chart below shows us the current position of the pair within the Pennant. Following a short-lived breakout above the Resistance, it U-turned sharply to return inside of the Consolidation, forming a downtrend line in the process.

DAILY CHART

In the next chart, we can see the downtrend that preceded this Pennant which led to the 3-year decline of over 3,000 Pips.

DAILY CHART

We can further appreciate the significance of the current consolidation by looking at the set of Triple Bottoms that were formed over a five year period. When tested for the first time, major Support or Resistance areas such as these usually lead to strong pullbacks or large Consolidations being formed. They can then lead to either a complete reversal in the trend or a breakout that resumes the current direction of the market.

DAILY CHART

So given this overall setup for the pair, what are we likely to see take place in the next few days or weeks? Taking a closer look, we can see that a rally to Resistance would lead to a break of the downtrend line formed while a continuation of the overall downtrend will require a strong break of the Support boundary. 

DAILY CHART

In either case, we are likely to see a short period of Consolidation above this Support before a clear picture emerges. For the pair to provide an opportunity for trading, the signals given on the Daily and/or the 4 H Charts will also have to be strong and clear. 

One of the risks of trading within Consolidations, however, is that the movements can be very erratic. Sometimes the signals and the trends that follow can be strong and smooth in one direction and then be unexpectedly volatile and risky when going in the other  direction. This requires carefully choosing the best signals for entry. A trader should also ensure that there is at least 100 Pips of gains that can be comfortably attained as the smaller the distance between the boundaries the more volatile the trend becomes.

Breakouts from these boundaries also have to be careful analyzed to avoid unexpected reversals- the dreaded False Breakouts. Given the size of this Consolidation, a breakout should be preceded by the formation of a setup such as a smaller Consolidation or a Counter Trend Line. Both can be formed within the boundary or shortly after it is broken. This becomes increasingly necessary when the currency pair is close to or has reached its Weekly or Monthly Range as is the case here, since False Breakouts tend to appear at these areas if there arent any of these breakout setups- the main reason for the False Breakout at Resistance.

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Twitter: @WorldWide876

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