EURO USD BIASED TO THE DOWNSIDE - forex swing trading system

EURO USD BIASED TO THE DOWNSIDE ~ forex swing trading system

EURO USD CONSOLIDATION BREAKOUT- USD GAINS AHEAD

The current indecision of this pair can be partly explained by the limited activity in the market in general, low liquidity and investigations into illicit trading practices. However, there is also an explanation based on the natural Price Action movements that can be seen throughout the currency market. The chart below shows that the currency is actually above the Resistance of a large Pennant setup on the Weekly Chart that was formed after sharp gains for the USD during the Financial Crisis of 2008. The current position, seen on the right-hand side of the chart, shows that a smaller Pennant has also been formed after a rally to this area ended in October of 2013.

WEEKLY CHART

Source: FXCM Marketscope

Consolidations such as these tend to be formed after sharp, fast movements that end trends or when a currency pair has reached its Weekly or Monthly Range. As the market moves sideways inside the Consolidation, it will form smaller Consolidations, Double Tops/Bottoms and False Breakouts that lead to reversals to the other end of the formation. In the chart below, we can see that there were two previous small Consolidations at the Resistance of the larger Pennant just before the respective downtrends took them back down to Support.

WEEKLY CHART

Source: FXCM Marketscope

The Support of this latest Pennant has also been broken, but is still above the Resistance of the larger Pennant. This presents two possible scenarios that can unfold over the next few months. The breakout short could continue and taking us back down to the Support area at 1,2280. Along the way, several important Support points would be hit that traders can use for profit taking.

WEEKLY CHART

Source: FXCM Marketscope

On the other hand, since the breakout has not yet taken us back below the major Resistance, we could have an unexpected rally that uses this Resistance as Support to start a breakout long. Several past Resistance areas would be hit as the Euro strengthens.

WEEKLY CHART

Source: FXCM Marketscope

Ultimately, the long-term direction will be determined by the respective economic policies and market expectations regarding the underlying economies. Current monetary policy has been very dovish for the respective monetary authorities but the recent cut in rates by the European Central Bank has now given the US Dollar the edge in terms of interest rate differentials. If this bias towards the Greenback continues, then the short, medium and long-run trends are likely to be on the downside. With the economy in the Eurozone continuing to struggle more than its American counterpart, short positions are likely to be the better choice of traders from this point onward.

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Twitter: @WorldWide876

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Even more on news driven trading - forex trading swing strategy

Even more on news driven trading ~ forex trading swing strategy

News driven trading is even more in vogue today than when I last mentioned it, judging from the increasing number of vendors (e.g. Ravenpack, Sensobeat, Recorded Future, etc.) and researchers pitching their wares. Not only are traditional financial and economic news deemed important, but researchers have found even blog posts (at least those on Seeking Alpha) and Twitter (Hat tip: Satya and William) to be predictive of stock prices.

One key ingredient to success in this type of trading is of course the ability to gain access to breaking news ahead of other traders. On the macroeconomic news front, the MIT Billion Prices project has spun off a company called PriceStats to deliver daily consumer product price index to subscribers. PriceStats compiles this index by continuously scanning online retailers websites, and hopefully provides a preview of the official CPI numbers. Whether this is useful for futures and currencies traders is of course subject to their rigorous backtests, though the chart displayed on their website does suggest that the daily price index is a leading indicator of the CPI.

There is an important caveat to using news trading: not all news are equal. So another key ingredient to success is to carefully differentiate between the different types of news and backtest their predictive abilities separately. For example, I recall some research has indicated that an analyst downgrade of a stock from a "hold" to a "sell" rating has more impact than from "buy" to "hold" rating.

My own experience with news driven trading is that for all this trouble, the trading opportunities are relatively few compared to pure price driven trading, the consistency of success is low, and finally the profitability lifespan is short. If you have better experience, do share it with us.
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More on parameterless trading model - forex trading system analysis

More on parameterless trading model ~ forex trading system analysis

I have written before that my ideal trading model is one that has no parameters, and what ways there are to accomplish this. Actually, I forgot to mention that a trading strategy proposed by Dr. Andrew Lo discussed previously is in fact parameterless, and the technique is so general that it can be applied to any mean-reverting strategy.

The technique is simply this: maintain a long (or short) portfolio with capital proportional to the distance between a supposedly mean-reverting measure and its long-term mean value.

For e.g. if you are pair-trading PEP vs KO, and you believe that the spread between PEP and KO is mean-reverting, then this spread is the mean-reverting measure you should employ.

As the spread moves away from its mean, keep buying (or shorting) the spread in equal dollar amount. And as the spread reverts, keep selling (or buying) the spread in the same dollar amount. What this dollar amount should be depends on: a) the total buying power you possess, b) the expected maximum deviation of the spread from its mean, and c) how often you intend to buy/short. Note that point c is not a parameter: it is arbitrary and limited only by transaction costs, technology, and other operational issues. As for the expected maximum deviation, it can be obtained by observing the history of the spread since inception.

This scheme thus obviates the need for entry or exit thresholds, and with them, the possibility of data-snooping bias. (You may still want to impose an entry threshold based on transaction cost consideration - but that would not count as a free parameter.)
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GBP USD Rally or More Sideways Dancing - forex trading system templates

GBP USD Rally or More Sideways Dancing ~ forex trading system templates

In line with growing expectations of an increase in interest rates, the British Pound has been in an uptrend against the US Dollar since August of 2013. During this time, the currency has rallied by approximately 2000 Pips, breaking the Resistance of the large Pennant Consolidation on the Weekly Chart along the way. With the pair now above this boundary, we could either see further gains for Sterling for the rest of the year or a continuation of the patterns of sideways movement on the Daily Chart.

PENNANT BREAKOUT

The Chart below shows the breakout that has taken place from the Pennant setup on the Weekly time frame. This formation followed the sharp gains for the USD during the period of risk aversion in 2008. Under normal circumstances, breakouts from consolidations such as these are normally fast and sharp. However, in this case the breakout has been somewhat laboured, reflecting the current period of indecision and low market liquidity affecting the market. 

WEEKLY CHART

Source: FXCM, All Rights Reserved

This slow movement of the currency can also be seen on the Daily Chart in the form of small periods of consolidation and pullbacks above the Pennant.

DAILY CHART

Source: FXCM, All Rights Reserved

From this point, the trend could either could continue with a U-turn in the next few days, or a sharp move down to form a Range for another period of market indecision.

UPTREND SCENARIO

If the break of the Counter Trend Line takes place within the next few days, we would see an uptrend that takes us up towards the 1,7350 area. This target would be in line with the Weekly Range of the GBP USD pair that is 400 Pips on average.

DAILY CHART

Source: FXCM, All Rights Reserved

This uptrend would form an Inner Uptrend Line that would support the new breakout that could last over the subsequent  7 to 10 days.

CONSOLIDATION SCENARIO

If, however, this U-turn does not take place and the USD continues to gain strength, it could lead to the formation of a Range that takes the pair down to Support at 1,6991. This would see the start of downtrend and uptrend waves that lead to the formation of this consolidation.

DAILY CHART

Source: FXCM, All Rights Reserved

Taking advantage of this scenario would involve buying at Support and selling at Resistance within this large 300-Pip-Wide Range. Strong Candlestick Formations that start the movements between these boundaries will be needed to pocket these gains over the next few weeks. The stronger and clearer these entry signals, the faster the movements to the other end of the boundary with very little volatility and reversals taking place to take out our Stop Losses.

The best ones to trade within these types of Setups are;

1. ABC Reversal Signals;
2. Double Bottoms/Tops;
3. Breaks of Trend Lines within the Range;
4. Breaks of Small Consolidations;

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Duane Shepherd 

(M.Sc. Economics, B.Sc. Management and Economics)

Currency Analyst/Trader

Contact: shepherdduane@gmail.com

Twitter: @WorldWide876

Facebook: DRFXTRADING 

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More on automated trading platforms - forex trading strategies singapore

More on automated trading platforms ~ forex trading strategies singapore

The ideal software platform for automating backtesting and executing your algorithmic trading strategies depends mainly on your level of programming expertise and your budget. If you are a competent programmer in, say, Java or C#, there is nothing to prevent you from utilizing the API offered (usually for free) by many brokerages to automate execution. And of course, it is also easy for you to write a separate backtesting program utilizing historical data. However, even for programmer-traders, there are a couple of inconveniences in developing these programs from scratch:

A) Every time we change brokerages, we have to re-write parts of the low-level functions that utilize the brokerages API;

B) The automated trading program cannot be used to backtest unless a simulator is built to feed the historical data into the program as if they were live. To reduce bugs, it is better to have the same code that both backtests and trades live.

This is where a number of open-source algorithmic trading development platforms come in. These platforms all assume that the user is a Java programmer. But they eliminate the hassles A) and B) above as they serve as the layer that shield you from the details of the brokerages API, and let you go from backtesting to live trading mode with a figurative turn of a key. I have taken a tour of one such platforms Marketcetera, and will highlight some features here:

1) It has a trading GUI with features similar to that of IBs TWS. This will be useful if your own brokerages GUI is dysfunctional.

2) Complex Event Processing (CEP) is available as a module. CEP is essentially a way for you to easily specify what kind of market/pricing events should trigger a trading action. For e.g., "BUY if ask price is below 20-min moving average." Of course, you could have written this trading rule in a callback function, but to retrieve the 20-min MA on-demand could be quite messy. CEP solves that data retrieval problem for you by storing only those data that is needed by your registered trading rules.

3) It can use either FIX or a brokerages API for connection. Available brokerage connectors include Interactive Brokers and Lime Brokerage.

4) It offers a news feed, which can be used by your trading algorithms to trigger trading actions if you use Javas string processing utilities to parse the stories properly.

5) The monthly cost ranges from $3,500 - $4,500.

If Marketcera is beyond your budget, you can check out AlgoTrader. It has advantages 1)-3) but not 4) listed above, and is completely free. I invite readers who have tried these or other similar automated trading platforms to comment their user experience here.

P.S. For those of us who use Matlab to automate our executions, a reader pointed out there is a new product MATTICK that allows you to send order via the FIX protocol which should let us trade with a great variety of brokerages.
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More discussion on returns risk and leverage - forex trading system for beginners

More discussion on returns risk and leverage ~ forex trading system for beginners

Previously I discussed an important debate on whether it is better to increase a portfolios return by taking on more risks (e.g. holding high-beta stocks), or by increasing leverage but holding low-risk assets. A reader Mr. F. Sudirga has kindly send me some other research papers supporting the conclusion that increasing leverage is the preferred way.

In a paper titled "Risk Parity Portfolios", Dr. Edward Qian at PanAgora Asset Management argued that a typical 60-40 asset allocation between stocks and bonds is not optimal because it is overweighted with risky assets (stocks in this case). Instead, to achieve a higher Sharpe ratio while maintaining the same risk level as the 60-40 portfolio, Dr. Qian recommended a 23-77 allocation while leveraging the entire portfolio by 1.8. The stock-bond dichotomy is for illustration only -- the results can be improved further by including other asset classes such as commodities.

The only reservation I have with all this enthusiasm with increasing leverage is one that many risk-managers are aware of: most of the research uses concepts such as standard deviations to measure risk. But as the LTCM debacle as well as the recent subprime mortgage meltdown has reminded us, risky events have fat-tailed distributions. Therefore, one should be very wary of using standard deviation as the sole determinant of leverage.
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