Category: Advanced Forex Education

Educational Themes of Intermediate and Advanced Complexity. In this section, we include all that is needed to master technical analysis such as complete coverage of price action themes: Support-resistance, volume, volatility, breakouts, reversals, trend and range trading, candlestick and chart patterns and formations, Elliott wave and Fibonacci retracements and extensions, and harmonic patterns. It includes also a section covering all indicators from simple moving averages to the complexity of Ehlels Filters.
Another sub-section is dedicated to trading systems desing.

Categories
Forex Fundamental Analysis

GBP/NZD Global Macro Analysis – Part 1 & 2

Introduction In this analysis, we will analyze endogenous factors that influence both the UK and New Zealand economies. The analysis will also include exogenous factors that impact the exchange rate between the GBP and the NZD. Ranking Scale We’ll rank the endogenous and exogenous factors on a scale from -10 to +10. The score of […]

Introduction In this analysis, we will analyze endogenous factors that influence both the UK and New Zealand economies. The analysis will also include exogenous factors that impact the exchange rate between the GBP and the NZD. Ranking Scale We’ll rank the endogenous and exogenous factors on a scale from -10 to +10. The score of […]

Introduction

In this analysis, we will analyze endogenous factors that influence both the UK and New Zealand economies. The analysis will also include exogenous factors that impact the exchange rate between the GBP and the NZD.

Ranking Scale

We’ll rank the endogenous and exogenous factors on a scale from -10 to +10.

The score of the endogenous factors will be determined from correlation analysis between the GDP growth rate. If the score is negative, the endogenous factor had a devaluing effect on the domestic currency. Conversely, if the score is positive, the factor led to the appreciation of the domestic currency.

Similarly, we’ll do a correlation analysis between the exogenous factors and the GBP/NZD exchange rate. If the correlation is negative, the factor results in a drop in the exchange rate. If positive, then the exogenous factor increases the exchange rate.

Summary – GBP Endogenous Analysis

A -15 score on Pound’s Endogenous Analysis indicates that this currency has depreciated since the beginning of 2020.

Summary – NZD Endogenous Analysis

A positive 5 indicates that the New Zealand dollar has appreciated since the beginning of this year.

Indicator Score Total State Comment
New Zealand Employment Rate -7 10 66.4% in Q3 2020 The NZ labor market is yet to recover from the economic disruptions of the pandemic
New Zealand Core Consumer Prices 1 10 1054 points in Q3 2020 From Q1 to Q3, inflation has increased by 1 point
New Zealand Industrial Production 5 10 A 3.1% increase in Q3 The NZ industrial sector is rebounding from a 12.1% drop in Q2.
New Zealand Business Confidence 7 10 Was 9.4 in November November showed the first positive reading in ANZ business confidence since August 2018
New Zealand Consumer Spending 5 10 Q3 spending was 41.335 billion NZD. Q3 consumer spending was the highest recorded in 2020. This shows that the domestic demand has recovered beyond the pre-pandemic period
New Zealand Construction Output -4 10 Q2 output dropped by 24.2% The worst decline in construction output in about 18 years. It’s bound to increase as COVID-19 restrictions ease
New Zealand Government Budget Value -2 10 2020 projected deficit of 4.5 billion NZD This would be a drop from a surplus of 7.5 billion NZD in 2019. Attributed to the increase in government spending during the pandemic
TOTAL SCORE 5
  1. New Zealand Employment Rate

The employment rate shows the growth in New Zealand’s labor market. The change in the labor market shows how the economy is performing – especially in the coronavirus pandemic. The labor market shows if the economy is churning out new jobs or if jobs are lost. Thus, the growth of the labor market is a leading indicator of economic growth.

In Q3 2020, New Zealand’s employment rate dropped to 66.4% from 67.1% in Q2 and 67.7% in Q1. This shows that the labor market is yet to recover from the economic shocks of the pandemic. The New Zealand employment rate has a score of -7.

  1. New Zealand Core Consumer Prices

This indicator samples the price changes in a basket of the most commonly purchased goods and services by households. The price changes represent the rate of inflation in the overall economy. Note that the computation of the core consumer prices excludes goods and services whose prices tend to be volatile. It helps avoid seasonal distortions in the index.

In Q3 of 2020, the core consumer prices in New Zealand rose to 1054 points from 1048 in Q2. The index had only increased by 1 point in 2020. Thus, we assign a score of 1.

  1. New Zealand Industrial Production

Industrial production in New Zealand refers to the YoY change in total manufacturing sales. It measures the YoY change in sales volume in the manufacturing sector. A survey of 13 industries across the manufacturing sector is surveyed to derive the YoY manufacturing sales data for the whole sector. Some of these industries include; petroleum and coal products, metal products, machinery, equipment and furniture, and food and beverage. Naturally, expansion in industrial production corresponds to the expansion of the economy.

New Zealand manufacturing sales rose by 3.1% in Q3 2020 from a drop of 12.1%. This is the largest YoY increase in manufacturing sales in three years. It shows that the economy is rebounding. We assign a score of 5.

  1. New Zealand Business Confidence

NZ business confidence is a survey of about 700 businesses. They are polled to establish their expectations about the future business operating environment and economic growth in general. Some aspects surveyed include; activity outlook, employment prospects, capacity utilization, and investment decisions.

In December 2020, the NZ ANZ business confidence rose to 9.4 from -6.9 in November. This shows an increased optimism in NZ businesses since it is the first positive reading since August 2018. Thus, we assign a score of 7.

  1. New Zealand Consumer Spending

This measures the value of the quarterly consumer expenditure in NZ. Changes in consumer expenditure go hand in hand with domestic demand changes in the economy, which drive GDP growth.

In Q3 2020, the NZ consumer spending increased to NZD 41.335 billion from NZD 35.197 billion in Q2. More so, the Q3 consumer spending is more than the NZD 40.04 billion recorded in Q1. Consequently, the NZ consumer spending has a score of 5.

  1. New Zealand Construction Output

This indicator shows the overall change in the value of all construction work done by contractors in NZ. It compares the YoY quarterly change, which helps to show if the economy is expanding or contracting.

In Q2 2020, the NZ construction output dropped by 24.2% compared to the 4.1% drop in Q2. This is the worst drop in over 18 years. Thus, we assign a score of -4.

  1. New Zealand Government Budget Value

This is the difference between the revenues that the NZ government collects and the amount it spends. Deficits arise if the revenues are less than expenditures, while surplus occurs when the revenues exceed expenditure.

In 2019, the NZ government had a budget surplus of NZD 7.5 billion. In 2020, it was projected that the budget would hit a deficit of NZD 4.5 billion. This is due to increased government expenditure to alleviate the pandemic’s economic shocks while revenues have been depressed due to nationwide shutdowns. Thus, we assign a score of -2.

For the exogenous analysis of both of these currencies, you can check our very next article. In case of any queries, let us know in the comments below. Cheers.

Categories
Forex Elliott Wave Forex Technical Analysis

Three Things you Ought to Know Before Buying EURUSD

The EURUSD eased the last trading week, losing 1.18%, leaving away from the yearly high at 1.23495 reached on last January 06th. The common currency accumulates losses by 1.14% (YTD), which, added to other market conditions commented in our current analysis, carries us to expect further declines in the following trading sessions.  

The EURUSD eased the last trading week, losing 1.18%, leaving away from the yearly high at 1.23495 reached on last January 06th. The common currency accumulates losses by 1.14% (YTD), which, added to other market conditions commented in our current analysis, carries us to expect further declines in the following trading sessions.  

The EURUSD eased the last trading week, losing 1.18%, leaving away from the yearly high at 1.23495 reached on last January 06th. The common currency accumulates losses by 1.14% (YTD), which, added to other market conditions commented in our current analysis, carries us to expect further declines in the following trading sessions.  

1. Retail Traders Seems to Look for Long Positions

Retail traders tend to place their trades against the primary trend, remaining on the wrong side on most occasions. Regarding this market participant behavior context, retail traders reduced their short positions from 79.77% reached last January 06th to 44% last Friday’s session, as the EURUSD pair accelerated its decline. 

Source: myfxbook.com

Retail traders’ increasing positioning to the long-side carries us to sustain the prospect for further declines in the following trading sessions.

2. The Price Violated its Short-Term Upward Trendline

The big picture of EURUSD illustrated in its daily chart reveals the violation of the secondary trendline plotted in green, corresponding to the last rally developed by the common currency since November 04th from the 1.16025 level, which found resistance on January 06th at 1.23495. This market context leads us to observe that the price could develop a correction proportional to the last rally.

In this regard, the Dow Theory view suggests that EURUSD’s corrective move depth might lie between 33% (1.21030) and 66% (1.18565). Moreover, the price could find support in the long-term upward trendline plotted in blue.

3. Timing and Momentum Oscillator Supports the Elliott Wave View.

The intraday Elliott wave view for the EURUSD pair exposed in the next 4-hour chart shows the completion of an ending diagonal pattern corresponding to wave (v) of Minuette degree labeled in blue and its bearish reaction after its finalization.

Once the common currency topped at 1.23495, the price developed an intraday corrective move subdivided into five internal segments of Subminuette degree identified in green. This five-wave sequence of lesser degree carries us to expect the progress in a potential zigzag pattern (5-3-5). 

On the other hand, the timing and momentum oscillator lead us to observe the first downward sequence’s exhaustion corresponding to wave (a) in blue. In consequence, the common currency should develop a corrective rally corresponding to wave (b). This upward move could hit the zone between 1.21576 and 1.22523.

Once the EURUSD completes its wave (b) in blue, the price action should start its bearish wave (c), which follows an internal structure subdivided into five waves. In this context, the bearish scenario’s invalidation level can be found at the end of wave (v) at 1.23495.

What’s Next?

According to Myfxbook.com’s Community Outlook, 56% of retail EURUSD traders are positioned to the long side. Likewise, the violation of a short-term upward trendline carries to expect further declines in the common currency for the coming trading sessions. Nevertheless, the EURUSD could be at the end of the first segment of a corrective formation. In this context, the price could develop an upward bounce that could reach the zone between 1.21579 and 1.22523. After the bounce conclusion, the common currency could find fresh sellers expecting to join a new downward sequence corresponding to wave (c).

If you are interested in finding trading opportunities using the Elliott Wave Principle, follow our Forex.Academy Educational Section.

Categories
Forex Elliott Wave Forex Market Analysis

Why GBPJPY Plummeted in Friday’s Session?

The GBPJPY cross declined on Friday trading session dragged 0.70% after the price surpassed the psychological barrier of 142, being the highest level reached since early September 2020.

The GBPJPY cross declined on Friday trading session dragged 0.70% after the price surpassed the psychological barrier of 142, being the highest level reached since early September 2020.

The GBPJPY cross declined on Friday trading session dragged 0.70% after the price surpassed the psychological barrier of 142, being the highest level reached since early September 2020.

Technical Overview

The GBPJPY cross drops over 100 pips on the last trading session of the week, accumulating a modest advance of 0.02% (YTD) since the yearly opening.

On the fundamental side, the industrial production in the United Kingdom eased 4.7% (YoY) in November 2020, informed the Office for National Statistics on Friday. The reading is worse than the decline of 4.2% expected by analysts. Likewise, both coronavirus lockdown and the Brexit uncertainty contributed to the decline in the industrial output.

Source: TradingEconomics.com

On the other hand, the doubts in the fourth quarter 2020 earnings season kick-off and the elected U.S. President Biden’s stimulus plan seem not enough to keep fueling the stock market participants’ euphoric sentiment. This context looks fading the record highs in the stock market, boosting the risk-off bias pushing lower the GBPJPY cross.

The big-picture illustrated in the next daily chart shows the price action moving in the extreme bullish sentiment where the cross ended the Friday session unveiling a bearish engulfing pattern, which carries to expect further declines in the coming trading sessions.

Finally, the piercing below the yearly opening level at 140.779 suggests potential declines during the first quarter of 2021.

Technical Outlook

Our previous analysis saw the progress in a complex correction identified as a double-three pattern (3-3-3). Nevertheless, the corrective rally suggests that the GBPJPY moves in a triple-three formation (3-3-3-3-3), which looks in its terminal stage.

The following 4-hour chart shows the completion of a triple-three pattern of Minute degree labeled in black, which moves inside a wave B of Minor degree identified in green since the cross found support at 133.040 touched in last September 22nd.

The internal structure of wave ((z)) in black shows its last corrective leg corresponding to wave (c) in blue, developing an ending diagonal pattern, which seems finished its wave v of Subminuette degree labeled in green. The breakdown of the guideline that connects the end of waves ii with iv carries to support the ending diagonal pattern’s finalization.

On the other hand, the timing indicator exposes the intraday oversold (see the yellow circle), which leads to the conclusion that the GBPJPY cross should develop an upward retracement as a flag pattern before continuing with its potential further decline.

In summary, the GBPJPY cross plummeted in last Friday’s session dragged by the completion of an ending diagonal pattern, which belongs to wave ((z)) of a triple-three formation, where its upper degree sequence corresponds to wave B of Minor degree. Although the news media continue supporting hopes in the stimulus plan for the U.S. economy, the Elliott wave structure showed by the cross unveils a different story.

According to the Elliott wave theory, the price should develop a downward wave C of Minor degree. The timing oscillator also suggests an intraday upward consolidation likely as a flag pattern before continuing its drops.

If you are interested in expanding your knowledge about the Elliott wave theory from the basics to advanced, visit our Forex.Academy Educational Section.

Categories
Forex Indicators

Using Parabolic SAR With Dynamic Stops Losses

One of the best-known indicators in the Forex market is the Parabolic SAR indicator. This is because it tells us when the momentum is changing, arriving early when the momentum changes can give you a winning advantage. SAR means to “stop and reverse” by definition. However, there is another way to use the Parabolic SAR, […]

One of the best-known indicators in the Forex market is the Parabolic SAR indicator. This is because it tells us when the momentum is changing, arriving early when the momentum changes can give you a winning advantage. SAR means to “stop and reverse” by definition. However, there is another way to use the Parabolic SAR, […]

One of the best-known indicators in the Forex market is the Parabolic SAR indicator. This is because it tells us when the momentum is changing, arriving early when the momentum changes can give you a winning advantage. SAR means to “stop and reverse” by definition. However, there is another way to use the Parabolic SAR, apart from trying to identify trend changes, either in the short or long term, and it is intended to use the indicator as a form of use of dynamic stops loss, either for a partial or total output.

What is the Parabolic SAR?

The Parabolic SAR formula was developed during the boom days of technical analysis in the 70s by Welles Wilder, who is the person who also designed the Relative Force Index (RSI). The relative strength index is pretty much the only Forex indicator that can produce a winning advantage on its own, so it’s worth taking a look at anything written by Welles Wilder.

The algebraic mathematical formula used to calculate the value of the indicator in each candle is complex, so I’m going to explain it in very simple conceptual terms, using for this a long example. When a candle makes a new maximum, the indicator sets a value below that candle. If the candles keep making new maxima, the value of the indicator rises along with the price but is increased proportionally by a factor selected by the user (0.02 is the most common).

The idea is that “time is our enemy” and that the best of any directional movement where we can be is in the part where the momentum keeps increasing. Thus, it is better to use this indicator in commercial trends or in strong directional movements. In fact, Wilder recommends using the Parabolic SAR indicator along with its ADX (Average Directional Index), which is also recognized as probably the best and most useful Forex indicator.

Parabolic SAR and Technical Analysis

Parabolic SAR is an extremely simple “binary” indicator and is often used in forecasting and trading strategies in the following ways:

-Determination of the trend. When a new candle is opened and the indicator prints its point on the other side of the candle from where it was on the previous candle, this indicates a change of trend and a possibility of entry into a trade.

-In determining the trend as indicated above, use the ADX indicator to determine whether the trend is powerful enough to have a justification for a new commercial entry, always in the direction of the trend.

-When a certain number of candles have been making new lows or highs with the indicator point always remaining above or below each candle, use the point price (or one near it) as a manually adjusted stop-loss (i.e., a dynamic stop loss) to signal an exit from a trade.

The Best Way to Use the Parabolic SAR

I think the best use of the Parabolic SAR indicator is like a trailing stop when it comes to operating in a strong directional movement. I don’t think it has a great value to determine when to enter: entering the trend direction in Forex is best determined by the break or, usually, better yet, by moving the signals from triple moving average crosses.

Normally, when operating in strong directional movements, the best benefit profile comes when trying to capture two different movements:

  • The initial short-term momentum movement; and
  • The long-term directional movement that begins at 1.

Trying to capture only movement 1 is usually not very profitable in the long run. A better trading strategy is to take partial gains when movement 1 ends, letting the rest of the position run in the hope that movement 2 will take place. Successfully capturing movement at 1 can give you the “take off” necessary to enter the trade at a good entry price that is sufficient to capture movement 2.

Understanding the Parabolic SAR Formula

You don’t really need to know the actual formula of any technical indicator in order to build a trading strategy, but it’s worth understanding why SAR parabolic points appear. In addition, if you want to create an Excel Parabolic SAR calculation file to build a decision support system for your daily transaction, you would need to know the parabolic SAR formula. However, here is the formula used to calculate the parabolic SAR values:

Sarn + 1 = Sarn + α (EP – Sarn)

In the formula Parabolic SAR, the Sarn is the current period and as +1 indicates, the Sarn + 1 is the value SAR of the next period. During an upward trend, the PE is the highest price on the trend, which would be the highest of most candles or bars on the trend. On the other hand, you can be quite sure that the EP would represent the lowest candle or bar in a downward trend. Since parabolic SAR points only appear above or below the price, it is not a difficult task for you to identify what the PE value represents.

The most important variable in parabolic SAR adjustments is α, which represents the acceleration factor in the formula. When you try to add the parabolic SAR indicator in the graph, your graphics package would normally set the value of α to 0.02.

You see, during an upward or downward trend when the price makes a new high or low, the acceleration factor increases by 0.02. This is why the gaps between the parabolic SAR points become larger during a strong trend and the size of the gaps shrink during a price consolidation. Although the default acceleration factor is set to 0.02, most graphics packages would allow you to change it. Maybe you’re wondering why you need it with the acceleration factor. Well, some stock prices are more volatile than others, and depending on the length of time you choose, optimizing the acceleration factor can actually improve your commercial performance.

For example, in the Tradingsim, it can reproduce the price action with different SAR acceleration factors to find the optimal value and test the market to see if the new value makes a major difference in the generation of parabolic SAR buy signals or Parabolic SAR Sell signals. If you see a positive result, you must customize the SAR formula to fit the share price feature of the share.

Using Parabolic SAR as Trailing Stop

One of the best things about this indicator is that it is extremely easy to use and does not really require any concern on the part of the user with regard to input values. The default values are perfect. One method is simply to manually adjust the stop-loss price to place it a few pips just beyond the indicator point as each new sail opens. A second option may be to wait for the candle to reverse and close beyond the point. This will most likely contribute to you getting better results in the long run.

Remember that your own calculations on any strategy you are using should be moved to the image. Let’s take an example, if you what you expect make a 50% commercial exit at a risk-reward ratio of approximately 2:1, and get an output signal at 0.5:1, which is far from that desired target, you would best ignore the output signal, or maybe move the stop loss to the balance point.

Warning: Only Use With Trending Markets

There are different ways to know for sure if a market is on a trend, but the Parabolic SAR indicator provides good visual aid. If the graph shows that the indicator is changing the point only occasionally, and fairly long chains of consecutive candles with all the points on the same side, then the market is “swinging” enough to give your operation a good chance of making a profit. If the dots are not in a series and are all displayed mixed, then it is a hectic market and it is probably best to avoid it.

Categories
Forex Daily Topic Forex System Design

Trading System design – The pathway to Success

This article outlines the steps needed to find, create, test, and verify a trading system. We have to bear in mind that there is no way to create a forex trading system with an equity curve straight upward. Well, yes, it can be made. I’ve made it, but only optimizing it so much that expecting it to continue performing like this under real trading would be silly. Most trading bots advertise curves like this. If you believe them, your money will be in jeopardy.

This article outlines the steps needed to find, create, test, and verify a trading system. We have to bear in mind that there is no way to create a forex trading system with an equity curve straight upward. Well, yes, it can be made. I’ve made it, but only optimizing it so much that expecting it to continue performing like this under real trading would be silly. Most trading bots advertise curves like this. If you believe them, your money will be in jeopardy.

This article outlines the steps needed to find, create, test, and verify a trading system. We have to bear in mind that there is no way to create a forex trading system with an equity curve straight upward. Well, yes, it can be made. I’ve made it, but only optimizing it so much that expecting it to continue performing like this under real trading would be silly. Most trading bots advertise curves like this. If you believe them, your money will be in jeopardy.

It would be best if you’re proficient in coding on a trading platform such as MT4/5, Ctrader, Tradestation, Multicharts, or Ninjatrader. Not all traders can do it, so we will approach this for anyone willing to create a DIY trading system without programming. It would take longer, but the added benefit is you will learn a lot while doing your testing. This methodology will also create simpler and less prone to over-optimization systems.

The results obtained will vary, and not always will we get sound systems. Of course, we should not expect great, drawdown-free equity curves. But, there is no need for that. We will show you that what is necessary is only long-term profitability.

 

The Idea

 

The first step to creating a trading system is an idea that will provide us with an edge. Among the most basic concepts are,

 

 

  • Breakouts from a range or Fading breakouts from a range

 

  • price above/below a moving average

 

  • Moving average crossovers

 

  • Overbought/oversold conditions using an indicator such as the MACD, the RSI, or the Stochastic

 

 

  • Volatility spikes

 

 

  • Support/resistance levels

 

Please bear in mind that the market already knows all these key concepts. Therefore, their direct application would probably fail.

 

Testing the Idea

The first step to see if the idea has merit is to test it in a historical sample under the market conditions it was supposed to operate. Of course, a trading idea is almost always referring to a market entry, as the concept is supposed to time the market. This entry is usually combined with a stop-loss and a take-profit to create a complete solution.

But, to test the efficacy of the idea, we should forget the stop-loss and take-profit and use a standard exit, be it,

  • After n bars
  • After a percentage profit
  • A random exit.

If you don’t have the means or skills to code, the best solution is closing after a determined number of bars. You can even register the results of closing after 5, 10, and 20 bars, so we test the predicting power at increasing time intervals.

You could also use Tradingview.com to perform the test; therefore, we recommend you open a free account there. The free account gives most of the capabilities of a pro account but is limited to fewer indicators.

There are four kinds of testing:

  • Historical backtest
  • Out‐of‐sample test. Also called forward test
  • Walk‐forward test
  • Real‐time testing

Historical backtest

The Historical backtest is the simplest test. You will need to create a spreadsheet with the required fields and computations.

After defining the rules of the trading idea, you define a start date, for instance, one year ago. For initial testing, it is recommended not to register the trades with spreads and commissions. Just the brute profit.

  1.  Set the desired timeframe and move your chart so that the initial date is near the chart’s right end.
  2. From there, you shift your chart one by one.
  3. When you spot an entry point, you write it down in your trading log:
    1. Trade #
    2. Entry date and time
    3. Trade size: enter one lot
    4. Entry price
    5. Expected stop-loss: use a standard 2 ATR
    6. Expected target: use also 2ATR
    7. Exit price
    8. Exit date and time
    9. Maximum Adverse Excursion: Written down after the trade ended.
    10. Maximum Favorable Excursion: Write down the next pivot point higher/ lower than your exit.
    11. Compute the profit of the transaction.
  4. Continue the test until you reach at least 100 trades.
  5. Compute the statistical figures of your exercise
  6. Average profit: Sum of the profits / N, the number of trades
  7. The standard deviation of the profit = STD (profits)

Optimization

After 100 backtested trades, the developer has enough information to detect the basic mistakes of the strategy. Maybe the entry has a large lag that hurts profits, or, worse, it is too early, thus triggering the stop-loss too often.

We could also spot if the stop-loss can be improved. Maybe it’s too close, so the percent winners are low or too far. The use of the Maximum Adverse Excursion info will surely help in deciding the best placement.

On the profit side, we can use the Maximum Favorable Excursion to check if the system is leaving money on the table. The idea is to adjust the profit target, so most of the trades end close to the MFE level.

Walk-forward Test / Real-time trading

After optimizing the strategy’s main parameters, we could begin a forward test, using a demo account and live market data. We should proceed as if it was a real trade. In this stage, if we use a demo account, you’ll be able to add the costs of the trade: Spread, slippage, and commissions.

This last stage before committing real money should last at least one month, preferably two or three months, during which you should continue detecting errors, improving the strategy, and having a feel of its behavior. In this stage and the coming use with real money, the trader needs to be disciplined and accept all signals the system delivers. You cannot cherry-pick the trades because this introduces a random factor that will change your system’s parameters, so you’re losing information about it.

Changing the parameters of the system

When trading it live for several trades, you may feel you need to optimize your system. This is wrong. Of course, you may adapt the system to the market, but modifying it too often is a mistake. You need to have statistical evidence that something has changed and the system is now underperforming. Therefore, at least 30 trades must occur before doing a change. In fact, since the distribution of results is not normally distributed, it would be optimal to wait for about 60-100 trades for a measure with statistical significance.

Starting light

That means you need to start slow, risking no more than 0.5 percent on every trade, or whatever you consider is small for you. That way, you won’t be affected psychologically, follow the system for the required time to have propper stats, and get a grip on the normal behavior of your strategy.

Categories
Forex Technical Analysis

Can Trend Lines Alone Be Used to Make Trade Decisions?

Trend lines are simply lines that are drawn on a chart that when analyzed will give you as a trader an idea of the possible directions of the markets. A trend line is generally drawn over a pivot high and under pivot lows in order to show h prevailing direction of the markets. They are […]

Trend lines are simply lines that are drawn on a chart that when analyzed will give you as a trader an idea of the possible directions of the markets. A trend line is generally drawn over a pivot high and under pivot lows in order to show h prevailing direction of the markets. They are […]

Trend lines are simply lines that are drawn on a chart that when analyzed will give you as a trader an idea of the possible directions of the markets. A trend line is generally drawn over a pivot high and under pivot lows in order to show h prevailing direction of the markets. They are a visual representation of the support and resistance levels for the timeframe that you are looking at, they can show the direction and the speed of the price, and can also be used to help in the aid of working out various different patterns within a chart.

That’s what trend lines are, but what exactly do they show us? Trend lines are one of the most widely used and important tools that many traders use, especially for those into technical analysis. Instead of looking at past results and patterns, people who use trend lines are looking for the current trends in the markets. They will help a technical analyst to determine the current direction of the markets, as well as how quickly the rice is moving in that direction. Many traders believe that the trend is your friend and will trade in the same direction, so they use the trend as an indicator as to which direction to trade in.

Trendlines are pretty easy to use, even for those that are just starting out with trading. They can be drawn onto a chart in a simple way using open, close, high, and low markets. Some traders also like to use more than one trendline, they connect the highs to create an upper line and the lows in order to create a lower line. This will then create a channel that will offer the trader a view of the support and resistance levels. This can then be used to look for breakouts, a situation where the price breaks above or below the upper or lower lines, and this for some is the best opportunity to put on a trade.

There are some limitations to trendlines. The main limitation is that they need to be readjusted as more price data comes in. Keeping the same line when the markets have changed will make the indication that they are providing completely irrelevant to the current situation. So you will need to adjust it each time the prices change. There is also no set place to attach the points to, different traders will use different data points, meaning that each person’s trend lines will be slightly different from each other, which can, in turn, give a completely or slightly altered image of what the markets are doing. If you create a trendline during a period of low volume, as soon as the volume increases it can easily break through the lines, so trend lines are more reliable during times of at reduced average volume.

There are ways to get around the fact that they need to be constantly adjusted. There are some indicators and expert advisors that can help to draw on the lines automatically, these can also then be used to update the lines without any input from yourself. The downside to this is that it will be doing it automatically, so you won’t have much control over where the lines are being drawn. You’ll need to work out whether you want to put the work in and do it manually and accurately to your own likes, or to allow it to happen automatically but understand that the ones may not be in the exact places that you prefer.

So the question now is whether or not you could use trend lines by themselves in order to trade. The answer is both yes and no. Not the most helpful I am sure that you agree. Trend lines offer us a lot of information and can be enough for some people and for certain more simply trading strategies. Using the trendline will give you an indication of the direction that the markets are going, and many traders will only trade in the same direction as the trend. So the indicator does give you an idea of the direction to the trend, but the problem is that it does not give much more information than when used by itself.

You can also use two trend lines, an upper and a lower. This can give you slightly more information. Having both the upper and lower trendlines will create a channel that the price is moving along, and you can use this channel to work out a little more information. If the channel is narrowing or widening will give you a little idea of what the markets are about to do. You can also use those trend lines to look for breakouts. The price should be moving between the channels. Once it breaks out from either the lower or the upper line, then this could indicate that a breakout is about to happen, something that a lot of traders like to trade.

Ultimately, the trend lines are very simple to use but they offer limited information. So you can use them alone in order to analyse the markets and to trade. There may well be some people who are successful at trading this way. Having said that, a lot of traders like to use trend lines along with a number of other indicators, and the trend lines are exactly that, an indicator. They do not give you exact trades to enter, they do not provide you with a whole host of information, just a simple high and low channel. So many traders like to use trendlines along with a number of other indicators which will allow them to better analyse the markets and to work out what may be happening next.

The answer to our question is yes, you can use trendlines alone to trade, but you will be provided with very limited information. Using only trendlines will work with a few basic strategies, but if you want to use a more advanced strategy then you will need to use more than just trend lines to do your analysis.

Categories
Forex Fundamental Analysis

GBP/CHF Global Macro Analysis – Part 3

GBP/CHF Exogenous Analysis The UK and Switzerland Current Account Differential A country’s current account shows the sum of its net exports, net secondary income, and net primary income. In this case, the current account differential is the difference between the UK’s current account balance and Switzerland. In international trade, when a country has a current […]

GBP/CHF Exogenous Analysis The UK and Switzerland Current Account Differential A country’s current account shows the sum of its net exports, net secondary income, and net primary income. In this case, the current account differential is the difference between the UK’s current account balance and Switzerland. In international trade, when a country has a current […]

GBP/CHF Exogenous Analysis

  1. The UK and Switzerland Current Account Differential

A country’s current account shows the sum of its net exports, net secondary income, and net primary income. In this case, the current account differential is the difference between the UK’s current account balance and Switzerland.

In international trade, when a country has a current account surplus, it means the value of its exports is higher than imports. Thus, its domestic currency is in higher demand in the forex market. Therefore, if the current account differential is positive, it implies that the UK has a higher current account than Switzerland. We can then expect that the price of the GBP/CHF pair will increase. Conversely, a negative differential would mean that Switzerland has a higher current account than the UK. In this case, the price of the GBP/CHF pair is expected to drop.

Switzerland had a current account surplus of $10.11 billion in the third quarter of 2020, while the UK had a $20.97 billion deficit. The current account differential is -$31.08 billion. Hence a score of -7.

  1. The interest rate differential between the UK and Switzerland

Interest rate differential is the swiss interest rate subtracted from the interest rate in the UK. Forex carry traders use a pair’s interest rate differential to establish whether to buy or short the pair. For GBP/CHF, if the interest rate differential is positive, it means that the UK’s interest rate is higher than in Switzerland. This makes traders and investors go long on the pair; hence, a bullish trend.

Conversely, if the interest rate differential is negative, it means that Switzerland’s interest rate is higher than in the UK. Thus, forex traders will short the GBP/CHF pair; hence, a bearish trend.

The Swiss National Bank has maintained the interest rate at -0.75%, while the UK’s interest rate is 0.1%. Therefore, the GBP/CHF interest rate differential is 0.85%. It has a score of 3.

  1. The differential in GDP growth rate between the UK and Switzerland

GDP growth rate differential is the difference between the economic growth in the UK and Switzerland. A negative differential means that the UK’s economy is expanding faster than that of Switzerland. Consequently, the GBP/CHF pair will adopt a bullish trend. Conversely, if the GDP growth rate differential is negative, the swiss economy is growing faster than that of the UK. Hence, the GBP/CHF pair will adopt a bearish trend.

The UK economy has contracted by 5.8% in the first three quarters of 2020, while the swiss economy has contracted by 1.5%. That means the GDP growth rate differential is -4.3%. We assign a score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Switzerland Current Account Differential -7 10 A differential of – $31.08 Switzerland has a $10.11 billion current account surplus, while the UK has a deficit of $20.97 billion
The interest rate differential between the UK and Switzerland 3 10 0.85% The differential is expected to remain at 0.85% all through 2021
The differential in GDP growth rate between the UK and Switzerland -3 10 -4.30% Switzerland’s economy contracted by 1.5% in the first three quarters of 2020 while the UK by 5.8%
TOTAL SCORE -7

The exogenous analysis of the GBP/CHF pair has a cumulative score of -7. Thus, we can expect a short-term downtrend in the pair.

In technical analysis, GBP/CHF’s weekly price is seen bouncing off from the upper Bollinger band.

We hope you find this analysis informative. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

GBP/CHF Global Macro Analysis – Part 1 & 2

Introduction The global macro analysis of the GBP/CHF currency pair will involve analysing endogenous and exogenous factors. Endogenous factors drive the domestic GDP growth in the UK and Switzerland. Exogenous factors influence the exchange rate for the currency pair. Ranking Scale The analysis will rank the endogenous and exogenous factors on a scale from -10 […]

Introduction The global macro analysis of the GBP/CHF currency pair will involve analysing endogenous and exogenous factors. Endogenous factors drive the domestic GDP growth in the UK and Switzerland. Exogenous factors influence the exchange rate for the currency pair. Ranking Scale The analysis will rank the endogenous and exogenous factors on a scale from -10 […]

Introduction

The global macro analysis of the GBP/CHF currency pair will involve analysing endogenous and exogenous factors. Endogenous factors drive the domestic GDP growth in the UK and Switzerland. Exogenous factors influence the exchange rate for the currency pair.

Ranking Scale

The analysis will rank the endogenous and exogenous factors on a scale from -10 to +10. The score for endogenous factors will be determined from a correlation analysis with the domestic GDP growth rate. If the score is negative, it means that the endogenous factor has led to the domestic currency depreciation. If positive, it has caused the appreciation of the domestic currency.

The exogenous analysis score is from a correlation analysis with the exchange rate for the GBP/CHF pair. When the score is negative, traders can expect the bearish trend for the pair. If positive, then the pair is expected to have a bullish trend.

Summary – GBP Endogenous Analysis

A -15 score implies that GBP has depreciated since the beginning of 2020.

Summary – CHF Endogenous Analysis

A score of 3 implies that CHF has partially appreciated since the beginning of this year.

Indicator Score Total State Comment
Switzerland Employment Rate -3 10 79.7% in Q3 2020 Slightly below the 80.4% recorded in Q1.
Switzerland Core Consumer Prices 4 10 100.82 points in November Inflation, as measured by the core consumer prices, rose by 0.28 points from January to November
Switzerland Manufacturing Production -2 10 4.7% decrease in Q3 2020 The YoY swiss manufacturing production is recovering
Switzerland Business Confidence 3 10 103.5 in November Swiss KOF Economic Barometer dropped in October and November. The majority of the consecutive drop was driven by private consumption
Switzerland Consumer Spending 5 10 Q3 spending was 91.929 billion CHF Q3 had the highest consumer spending compared to Q1 and Q2.
Switzerland Construction Output -2 10 A 0.4% drop in Q3 2020 Q3 output recovered from the 5% drop in Q2 but is still lower than the 3.1% growth in Q1
Switzerland Government Budget Value -2 10 An expected deficit of 2.2 billion CHF in 2020 Switzerland had a surplus of 8.1 billion CHF in 2019. The projected deficit is on account of aggressive government stimulus program and decreases in revenue due to COVID-19
TOTAL SCORE 3
  1. Switzerland Employment Rate

The Swiss employment rate measures the quarterly change in the percentage of the labour force that is employed. Changes in the number of people employed in the economy are a leading indicator of economic growth. When the economy is expanding, businesses create more job opportunities; hence, higher employment rate. Conversely, a shrinking economy leads to job cuts, which result in a lower employment rate.

In 2020 Q3, the Switzerland employment rate rose to 79.7% from the 6-year lows of 79.1%. Although the Q3 employment rate is lower than the 80.4% recorded in Q1, it shows that the Swiss economy is recovering from the economic shocks of COBID-19. The swiss employment rate scores -3.

  1. Switzerland Core Consumer Prices

Core consumer prices measure the rate of inflation by monitoring the price changes of only a select basket of goods and services. Consumer products with volatile prices are excluded. The rate of inflation is a leading indicator of economic growth. That’s because when inflation rises, it means domestic demand is on the rise, too, hence a higher GDP growth rate. Similarly, a decrease in the inflation rate means domestic demand is depressed, which may be followed by a contracting economy.

In November 2020, the swiss core consumer prices dropped to 100.82 points from 100.89 points in October. However, it is still higher than 100.54 points recorded in January. It has a score of 4.

  1. Switzerland Manufacturing Production

This measures the YoY change in the value of output from the swiss manufacturing sector. This sector plays a significant role in the Swiss economy. Therefore, growth in manufacturing production is accompanied by growth in the labour market and, consequently, the domestic economy’s expansion.

In Q3 of 2020, the YoY swiss manufacturing production dropped by 4.7%. That’s an improvement from the 9.6% drop in Q2. We assign a score of -2.

  1. Switzerland Business Confidence

The KOF Swiss Economic Institute compiles this index. It measures company managers’ optimism based on their perspective of the economy and the growth prospects of their businesses. The business that is surveyed are drawn from multiple sectors in the economy and contains 219 different variables.

In November 2020, the Swiss KOF Economic Barometer dropped to 103.5 from 106.3 in October. This marks the send consecutive month of a drop in the swiss business confidence. Notably, the drop in the index is primarily driven by the manufacturing sector and private consumption. Swiss business confidence has a score of 3.

  1. Switzerland Consumer Spending

This is the value of the total consumption by Swiss households. Domestic consumption is a primary driver of GDP growth. More so, it also an indicator of the performance in the labour market. With a higher rate of employment, disposable income increases, which increases consumer spending.

Swiss consumer spending increased to CHF 91.929 billion in the third quarter of 2020, which is the highest recorded compared to CHF 89.79 billion in Q1 and CHF 82.03 billion in Q2. It has a score of 5.

  1. Switzerland Construction Output

This indicator measures the percentage change in the value paid for construction work in Switzerland. The construction work includes building and engineering works done by public and private companies. Typically, when construction work increases, it is expected to be accompanied by an increase in the employment rate and economic growth.

In the third quarter of 2020, the YoY swiss construction output dropped by 0.4%. That is an improvement compared to the 5% drop in Q2 but still less than the 3.1% growth recorded in Q1. It has a score of -2.

  1. Switzerland General Government Budget Value

This represents the difference between the revenues received by the Swiss government and its expenditures. Government expenditure includes all transfer payments and purchases of goods and services. The general government budget value shows if the Swiss government has a surplus or a deficit. Too much deficit means that the economy is probably not responding to expansionary fiscal policies.

In 2019, the Swiss government had a budget surplus of CHF 8.097 billion. In 2020, the general government budget was expected to hit a deficit of CHF 2.2 billion. This deficit is primarily driven by a significant drop in revenue collection due to COVID-19. It has a score of -2.

In the very next article, you can find the Exogenous analysis of the GBP/CHF currency pair, so make sure to check that out. Cheers.

Categories
Forex Daily Topic Forex System Design

Trading System design – Basic Concepts

In previous articles, we explained the importance of a plan to succeed in Forex and described its general features. In this article, we will describe the concepts that need to be considered when designing a trading system.

In previous articles, we explained the importance of a plan to succeed in Forex and described its general features. In this article, we will describe the concepts that need to be considered when designing a trading system.

In previous articles, we explained the importance of a plan to succeed in Forex and described its general features. In this article, we will describe the concepts that need to be considered when designing a trading system.

A trading strategy is what most traders call a trading system, but it is not. A trading strategy is just a set of loose rules discretionary traders use to trade. A trading system is a set of closed rules used to systematically trade the market, usually through a computer EA, although a disciplined trader could also use it.

Traders, especially novice traders, get emotional and lose money because their emotions interfere and stop making rational decisions in the battle’s heat. Thus, the first thing to avoid is discretionary trading. Please read the article Know the Two Systems Operating inside Your Head. That’s why what we aim to create is a trading system that should be systematically traded.

Price imbalances

There are plenty of criteria to find these imbalances. There are two visual clues we can think of. The first one is a rubber band. The rubber band idea describes the price as if it was a rubber band or spring. When it moves far away from equilibrium, we expect the force to pull it to its center to increase and eventually drive it back to equilibrium.

The second visual clue is looking at the price moving in waves. Since there are numerous traders, their goals set in different timeframes, we can expect waves of different periods and amplitudes. A trend form when the combination of different waves are in sync, and chaotic moves occur when waves desync.

The main idea of a trading system is to find imbalances in the price and profit from it. Essentially, it takes the form of “buy low and sell high,” “sell high to buy back low,” or its variants “buy high sell higher,” “sell low, sell lower.”

The Effect of timeframes and a portfolio in the trading results

In their book Active portfolio management, Grinold and Kahn described the fundamental law of active management. The formula has two variables: The manager’s skill (IC) and the number of investments performed (N).

We could think of IR ( Information Coefficient) as a quality index of the results.

If we analyze the equation, we see that IC measures a trader’s ability to produce profits, since if N is constant, IR grows if IC grows.

But, if we keep the IC constant, we see that IR grows with the number of trades (N).

This explains that a portfolio of assets will be more profitable than only one asset. It also explains why shorter trading timeframes would produce higher results. Of course, with very short timeframes, the trading costs would eat a growing portion of the profits, so there is a limit to how short we could go.

Diversification

Diversification is a key concept to reduce the overall risk in trading. The idea is simple. Let’s say we have a long position the EURUSD with an overall dollar risk of 10 pips. If the dollar moves up and drives the pair southwards, we lose $100 on every lot. If we have an equivalent long position on the USDJPY, we will cover the risk on the EURUSD with the gains on the USDJPY, driving it to zero or, even, being positive overall.

If the assets are uncorrelated and the risk on each trade is similar on all trades, the overall basket’s risk will less than 50% of the sum of all open trades risk.

The profitability rule

Two parameters define the profitability of a system: the percent winners and the reward risk ratio.

The formula that tells the minimum percent winners (P) required with a determined reward/risk ratio (Rwr) for the system to be profitable is:

P > 1 / (1+Rwr) 

Conversely, below is the formula of the minimum reward/risk ratio needed with a determined percent winners figure on a profitable system:

Rwr > (1-P)/P

If you play with the second formula, you will see that at reward/risk ratios below one, the system should grant winners higher than 50 percent. Furthermore, Systems with high reward risk ratios would need less than 50% winners to be profitable.

The conclusion is we must look for systems with high reward/risk ratios to protect us from periods of low winner’s percent.

Assessing the quality of a trading system

There are several methods to measure the quality of a trading system. We propose the use of Van Tharp’s SQN, which is a variation of the chi-square test, a well-known method to evaluate the goodness of a sample against a random distribution. The SQN test is a Chi-square test that is capped to 100 samples so that the length of the sample does not modify its value.

  SQN = 10 x E / STD(E)

Where E is the expected profit on each trade, which is the sum of all profits divided by the number of trades, and the denominator is the standard deviation of E.

But if the sample is less than 100 instead of 10, the multiplier is the square root of N, the number of trades.

SQN = √N x E / STD(E)

Systems below 1 are bad. systems of 1.5 to 2 average, and from 2 to 3 good and over 3 excellent.

Elements of a Trading System

We can decompose a trading system into its several elements, although not all of them need to be present.  We have already discussed this, but let’s describe its basic elements.

A Setup: The setup is a market state where we think there is an imbalance in the price, or a condition we expect can be resolved with a price move, for example, the price reaching a top or a bottom of a channel.

A permissioning filter: This forbids trading under specific market conditions: Low volume, extreme volatility, particular hours or days.

Entries: This the stage that times the market. It can be a breakout, a candlestick pattern, or an indicator signal.

Stop-loss: This defined an invalidation level, under which the trade is likely no longer profitable. This level will limit our losses and save our capital for further trades.

Take-profit: It defines our planned profit. It may be set using support/resistance levels or any other sign the current trade movement is over, such as a reversal signal or the crossover of averages.

Re-entry rule: You may also consider this rule in your findings. For instance, a market failing to do something, for example, continue moving up, may signify it will move down. Thus, you could stop and reverse instead of close the position. Also, if you got out of a position, you could consider re-entry if the market flags a continuation of the previous movement. That way, you could tight your stops keeping most of your profits and reenter instead of loose stops, which may eat a large portion of your hard-earned profits if the market does not recover.

Categories
Forex Elliott Wave Forex Market Analysis

EURAUD Under Bearish Pressure, What’s ahead?

The EURAUD cross is advancing in its incomplete third wave from a mid-term downward sequence that remains in play. Follow with us on what the Elliott wave theory tells about its next movement.

The EURAUD cross is advancing in its incomplete third wave from a mid-term downward sequence that remains in play. Follow with us on what the Elliott wave theory tells about its next movement.

The EURAUD cross is advancing in its incomplete third wave from a mid-term downward sequence that remains in play. Follow with us on what the Elliott wave theory tells about its next movement.

Technical Overview 

The big picture of the EURAUD cross unveiled in the following 12-hour chart exposes the price action moving in the extreme bearish sentiment zone during the second week of the year. However, both the acceleration and oversold could suggest the exhaustion of the bear market.

The following 12-hour chart exposes the market participants’ sentiment, unfolded by the 90-day high and low range. The figure reveals the institutional activity pushing the cross in the extreme bearish zone and consolidating under the yearly opening price at 1.58763.

On the other hand, the EMA(60) to Close Index recently pierced the -0.0300 level. This reading suggests both the oversold and the exhaustion of its accelerated downtrend identified with the black trend-line.

In this context, the accelerated downward trend-line breakout and the close above yearly opening price should warn about potential recoveries in the EURAUD cross.

Technical Outlook

The short-term Elliott wave outlook for the EURAUD cross unfolded in the 8-hour chart reveals the progress of an incomplete bearish impulsive wave of Minuette degree labeled in blue, suggesting further drops.

The previous chart illustrates the downward sequence that began on October 20th when the cross found fresh sellers at 1.68273 and started a bearish structural series of Minute degree labeled in black, which currently could be in its wave ((c)) or ((iii)). The internal structure seems developing its wave (iii) of Minuette degree identified in blue. 

The wave (iii) potential bearish target can be found between 1.56175 and 1.55359, which coincides with the descending channel’s base-line. Once the price tests the possible target area, the market participants could carry up the EURAUD cross toward the short-term descending channel’s upper line.

Regarding the wave (iv) in blue, considering the alternation principle, as wave (ii) is a simple corrective formation in price and time, wave (iv) should be complex and should last longer than wave (ii).

On the other hand, both the trend indicator and the timing plus momentum oscillator remain, supporting the bearish bias. Each rally could represent an opportunity to add positions to the bearish side.

In summary, the EURAUD cross continues in the extreme bearish sentiment zone advancing in an incomplete downward sequence, which could find support in the potential target zone between 1.56175 and 1.55539. Once the price finds support, the cross could start to bounce toward the upper line of its short-term descending channel. Finally, the bearish scenario analyzed will be invalid if the price soars above 1.60416, corresponding to the end of wave (i) in blue.

Categories
Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 3

GBP/JPY Exogenous Analysis The United Kingdom and Japan Current Account Differential The current account data is the most comprehensive measure of a country’s participation in international trade. It is the sum of net exports, net factor income, and net transfer payments. Remember that in the forex market, the value of a country’s fluctuates depending on […]

GBP/JPY Exogenous Analysis The United Kingdom and Japan Current Account Differential The current account data is the most comprehensive measure of a country’s participation in international trade. It is the sum of net exports, net factor income, and net transfer payments. Remember that in the forex market, the value of a country’s fluctuates depending on […]

GBP/JPY Exogenous Analysis

  • The United Kingdom and Japan Current Account Differential

The current account data is the most comprehensive measure of a country’s participation in international trade. It is the sum of net exports, net factor income, and net transfer payments. Remember that in the forex market, the value of a country’s fluctuates depending on its demand. Therefore, when a country has a current surplus account, it means that the demand for its currency is higher, and vice versa.

In this case, the current account differential is the difference between the UK and Japan’s current account balance. If the current account differential is positive, it means that the GBP will appreciate more than JPY hence a bullish GBP/JPY. Conversely, if the current account differential is negative, JPY will appreciate faster than the GBP hence a bearish trend for GBP/JPY.

In Q3 2020, Japan had a current account surplus of $15.4 billion while the UK had a $20.97 billion deficit. Thus, the current account differential between GBP and JPY is – $36.37 billion. Thus, the UK and Japan current account differential have a score of -3.

In the forex market, the interest rate is one of the most closely monitored economic indicators. Suffice to say, traders and investors monitor every other domestic economic indicator to predict the interest rate policy changes. The interest rate differential for the GBP/JPY pair is the difference between the UK’s interest rate and that in Japan.

If the differential is positive, traders and investors can receive better returns by selling the JPY and buying the GBP, hence, bullish GBP/JPY. Conversely, if the interest rate differential is negative, currency traders would prefer to sell the GBP and buy JPY hence, the bearish GBP/JPY pair.

In 2020, the BOE cut interest rates from 0.75% to 0.1%, while the BOJ has maintained an interest rate of -0.1%. Therefore, the GBP/JPY interest rate differential is 0.2%. It has a score of 4.

  • The differential in GDP growth rate between the UK and Japan

The GDP growth rate differential measures the difference between the UK and Japan’s average annual growth rate. This is an effective way of comparing two economies since all economies vary in size and composition.

When the GDP growth rate differential is positive, it means that the UK economy has expanded more than Japan. Hence, the GBP/JPY will be bullish. Conversely, if the differential is negative, Japan’s economy has expanded faster than the UK’s. Hence, the GBP/JPY pair will be bearish.

In the first three quarters of 2020, the UK economy has contracted by 5.8% while Japan contracted by 3.5%. The GDP growth rate differential is -2.3%. Thus, we assign a score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Japan Current Account Differential -3 10 A differential of – $36.37 The UK has a current account deficit of $20.97 billion, while Japan has a surplus of $15.4 billion. This is expected to continue to widen as both economies recover from the pandemic
The interest rate differential between the UK and Japan 4 10 0.20% Both the BOJ and the BOE have no plans to change their monetary policies in the foreseeable future. This means the differential will remain at 0.2% in the short-term
The differential in GDP growth rate between the UK and Japan -3 10 -2.30% The UK economy contracted more than the Japanese economy. As economic recovery progresses, this differential could change
TOTAL SCORE -2

The cumulative score for the exogenous factors is -2. That means that the GBP/JPY pair is set on a bearish trend in the short-term.

Technical analysis of the pair shows the weekly chart attempting to break below the middle Bollinger band.

Categories
Forex Daily Topic Forex System Design

Building a Trading System: Elements of a Trading Plan

Now that we know the importance of having a plan, let’s discuss the necessary components of a trading plan.

Now that we know the importance of having a plan, let’s discuss the necessary components of a trading plan.

Now that we know the importance of having a plan, let’s discuss the necessary components of a trading plan.

A trading plan should consist of at least these elements:

  1. A basket of instruments
  2. A trading system consisting of timeframes, permissioning filter, entry rules, trade management: stop-loss, take profits.
  3. A position sizing methodology
  4. A trading record
  5. Trade-forensics analysis.

In this article, we will provide an overview of these elements.

A basket of Instruments

Every asset has its characteristics, and its market movement differs from others on volatility, liquidity, and ranges. Therefore, professional traders track a limited basket of instruments to trade. A few, even, specialize and trade just one instrument.

 

The best criteria to decide which are best are:

  • Liquidity: It means how much trading volume it moves. Illiquid assets are easy to manipulate, spreads (the difference between the bid and ask prices) are wider, and the trading rules fail more often.
  • Price Action: The instrument should have enough swings in the trading timeframe to merit trading it. Instruments that do not move or move too erratically are prone to failed trades. A security that trends are the best.
  • Familiarity: As said, your trading results improve if you’re familiar with how an asset moves, its usual support and resistance levels, the typical length of swings, and so on.
  • Economic Data: Economic news releases affect the security and trading signals fail at the time of the release. Therefore, it is advisable not to trade it in the vicinity of a news release.

The Trading System

As said in our previous video, financial markets are unbounded territories where each trader needs to set his own rules; otherwise, they will be influenced by his emotions and fail. A trading system is their set of rules that enable them a long-term success.

 

Timeframes

The chosen timeframe should match the availability to trade. A trader with a day job would need to select a daily or a 12-hour timeframe, whereas a full-time trader could use shorter frames, such as 15-min, one, two, or four-hour timeframes.

Similarly to asset selection, the trader must familiarize himself with how his assets move in these timeframes and evaluate the liquidity and range at different times and weekdays to choose the best periods to trade.

Permisioning filter

A permisioning filter is a way to avoid trading under determined circumstances. It can be a filter that allows only trading in the direction of the primary trend or an overbought/oversold sign that should be on for a determined candlestick or pattern formation to be valid.

The key idea of the permisioning filter is to screen the trades and pick the ones with the best odds of success.

Entry rules

Entry rules can be technical or fundamental rules to time the market, although we will focus on technical rules.

 

There are two philosophies regarding entries.

  • Enter on the trend’s weakness

This methodology aims to profit from pullbacks of a primary trend to optimize the price entry. Different indicators and patterns may help time the entry: MA crossovers, Oscillators, or reversal candlestick patterns such as the engulfing pattern or morning star and evening star.

  • Enter on the trend’s strength.

Enter on strength aims to profit from an increasing momentum of the price. We acknowledge the trend’s strength is increasing and recognize the trend will continue for a while. Technical indicators such as the Momentum, RSI, and MACD may help time the entry. Price action patterns, such as range breakouts, are quite useful too.

Trade Management

Trade management is a vital element of any trading system. It is responsible for getting out of unprofitable positions, trails the stops to break-even, and above to optimize profits or close the trade when the target is hit or when a technical signal warns of a trend reversal.

Many top traders value more trade management than entries. The money is won on exits, they say.

Money management should be consistent with the concept of cutting losses short and letting profits run. A sound trading system should present an average reward/risk ratio at least over 1.5, and ideally above 2.

Position sizing

Position sizing is the part of your plan that tells you how much risk you should take on a trade. We have had a complete video section on this subject, which we encourage you to study. To summarize it here, position sizing is the tool to help you reach the trading objectives and put drawdown under the levels that fit you. Finally, proper position sizing enables you to minimize the risk of ruin while optimizing your trading account’s growth.

The trading record / Trade-forensics

The path to improvement is an analysis of past results. Nobody is perfect, and, also, markets aren’t immutable but changing. A trading record is necessary to evaluate your system’s performance, detect and correct weaknesses, such as stops or target placements, errors in timing – too late or too early on a trade, and evaluate how permisioning filters work. Finally, the trading record will help traders know their system’s key parameters: the average profit and its standard deviation, percent winners, and average reward/risk.

Key Elements of the trading record:

The main data you should record on the spreadsheet record are:

  • Entry date/time
  • entry price
  • trade size
  • entry level
  • stop-loss level
  •  $risk of the trade
  • planned take-profit level
  • Exit price
  • Exit date/ time

Other desirable parameters that would help optimize stops and take-profit targets are:

maximum adverse price of the trade if there were no stops.

maximum favorable price of the trade if not considering the take-profit

The first one would help you find better places for the stops, and the second one will show you the best place for the take-profit placement.

Main Parameters:

With the suggested trading record entries, you will be able to measure the key parameters of your system:

Average profit: Total profits/ number of trades

Standard deviation of profits: Use Excel’s Standard Deviation formula

Percent winners: Nr of Winners/ total trades x 100.

Average Reward/ risk:  Sum of Profits / sum of $risk

You may find an example of a trading record in this forex.academy article. Furthermore, since we consider it an essential element to your trading success, we offer you to download our freely available trading log. You are free to adapt it to your taste and needs.

Forensics

After the closure of a trade, you should analyze its quality, regarding execution and goals. A losing trade does not have to be of low quality if executed according to your system’s rules. But it is necessary to determine if you’re acting according to the rules and assess how much of the available profit did you take.

Points to consider

  • Percent of the available profit ( if any)
  • percent of the loss you’ve taken ( if any)
  • Timing: has it been right, too early, or too late?
  • Exit timing: right, too early, or too late?
  • Stop-loss: Can stop-loss settings be improved?
  • Take profit: Can they be improved?
  • Average Reward/risk: is it according to your settings?

Also, after  a determined number of trades/weeks, you should assess:

  • Is the system improving or worsening over time?
  • Losing streaks: are normal for the system you’re using or due to bad stop-loss settings?
  • How many trades could be on profit if you’ve loosened your stops?
  • How much profit could you pocket if your take-profit levels were moved here/there, based on the maximum favorable price data?

 

This ends our overview of the main elements of the trading plan.

Categories
Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 2

JPY Endogenous Analysis Summary An overall score of -13 implies that this currency (JPY) has depreciated since the beginning of this year. Indicator Score Total State Comment Japan Employment Rate -4 10 60.4% in October 2020 The Japanese labor market has shed about 820,000 jobs between January and October 2020 Japan Core Consumer Prices -1 […]

JPY Endogenous Analysis Summary An overall score of -13 implies that this currency (JPY) has depreciated since the beginning of this year. Indicator Score Total State Comment Japan Employment Rate -4 10 60.4% in October 2020 The Japanese labor market has shed about 820,000 jobs between January and October 2020 Japan Core Consumer Prices -1 […]

JPY Endogenous Analysis

Summary

An overall score of -13 implies that this currency (JPY) has depreciated since the beginning of this year.

Indicator Score Total State Comment
Japan Employment Rate -4 10 60.4% in October 2020 The Japanese labor market has shed about 820,000 jobs between January and October 2020
Japan Core Consumer Prices -1 10 101.2 points in November 2020 The index has dropped marginally by 0.8 points in the first 11 months
Japan Manufacturing Production 2 10 3.1% drop in October The decrease in YoY manufacturing production is slowing down
Japan  Business Confidence -2 10 Q4 reading was -10 Businesses are growing increasingly optimistic
Japan Consumer Spending -2 10 Was ¥280.8 trillion in Q3 2020 The increase in Q3 expenditure by households shows that the economy is steadily recovering
Japan Construction Industry Activity -2 10 YoY drop of 6.9% in July 2020 The July drop was the second-worst recorded in over ten years
Japan Government Budget Value -4 10 the budget deficit of ¥308414 in Q2 2020 This is the worst deficit in 20 years. It’s expected to improve as the economy goes back to normal
TOTAL SCORE -13
  • Japan Employment Rate

This indicator shows the number of Japanese nationals employed as a percentage of the entire Japanese working-age population. With this indicator, we can track the Japanese economy’s performance since employment corresponds to the expansion and contraction of the economy.

In October 2020, the Japan employment rate rose to 60.4% from 60.3% in September. Although Japan’s employment rate is higher than in January, the labor market has lost about 820,000 jobs since January. We assign a score of -4.

  • Japan Core Consumer Prices

Core consumer prices measure the inflation rate in Japan based on a select basket of goods. The core consumer prices do not include goods and services with volatile prices. Typically, when inflation rises, it implies that the economy is expanding and the labor market is growing. Conversely, when the index drops, it means that the labor market is shrinking.

In November 2020, Japan Core Consumer Prices dropped to 101.2 points from 101.3 in October. Since January, the index has shed 0.8 points. Thus, it scores a -1.

  • Japan Manufacturing Production

This indicator measures the percentage change in the value of the output in the manufacturing sector. Since the Japanese economy is highly reliant on the manufacturing sector, changes in this indicator can be considered a leading indicator of economic growth.

In October 2020, the YoY manufacturing production in Japan decreased by 3.1% compared to the 9% decrease recorded in September. The October decrease is the slowest since February.  We assign a score of 2.

  • Japan Business Confidence

In Japan, the business confidence index results from a survey of about 1100 large manufacturers with a capital of at least ¥1 billion. The survey evaluates the current industry trends, business conditions within the company and the industry, and expectations for the next quarter and year. The sentiment in Japanese businesses is ranked with an index of a scale from -100 to +100. The negative index shows pessimism, while a positive index shows optimism.

In Q4 of 2020, the Bank of Japan’s Tankan business sentiment index increased to -10 from -27 in Q3. This improvement shows that the economy is potentially recovering from the impact of the COVID-19 pandemic. However, it is still lower than the -8 registered in Q1. Thus, we assign a score of -2.

  • Japan Consumer Spending

It tracks the quarterly value of expenditure by households. In Japan, the consumption expenditure accounts for both the supply-side and demand-side. The supply-side from the survey of family income, while the demand-side is from the expenditure survey. The weighted average of both these estimates represents the final consumption expenditure.

In Q3 2020, the consumer spending in Japan rose to ¥280.8 trillion from ¥268.2 trillion in Q2. However, it is still lower than the consumer spending recorded in Q1. Japan consumer spending scores -4.

  • Japan Construction Industry Activity

This index tracks the YoY changes in the construction industry in Japan. It shows the changes in companies’ monetary value of construction work and billed to the clients. Note that in Japan, the construction industry accounts for about 6% of the total industrial activity. Thus, the construction output index can be a leading indicator of the entire industrial activity. More so, since it is a tertiary industry, it can signal longer-term changes in the GDP.

In July 2020, Japan’s YoY construction output dropped by 6.9%. This drop is the second-worst in over ten years. The worst was recorded in June at -7.9%. The Japan construction industry activity scores -2.

  • Japan Government Budget Value

In Japan, the government budget value evaluates the difference between government revenues and expenditure. This is meant to determine whether there is a government budget surplus or deficit. A budget surplus arises when revenues exceed the expenditure, while a deficit occurs when government expenditure is more than revenues.

In Q2 of 2020, Japan has a government budget deficit of ¥308414. This is the worst deficit recorded in over two decades. Thus, the Japan Government Budget Value has a score of -4.

In the upcoming article, you can find the Exogenous analysis of the GBP/JPY currency pair where we have forecasted its price movements. All the best.

Categories
Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 1

Introduction

Introduction

Introduction

The GBP/JPY pair’s global macro analysis interrogates the endogenous factors that drive the GDP growth in the UK and Japan. The analysis will also cover exogenous factors that affect the exchange rate between the GBP and the JPY.

Ranking Scale

The analysis will use a sliding scale from -10 to +10 to rank the endogenous and exogenous factors’ impact. Endogenous factors impact the value of the domestic currency. Thus, when it is negative, it means that the domestic currency has depreciated. When positive, it means that the domestic currency has increased in value during the period under review. The ranking of the endogenous factors is based on correlation analysis with the domestic GDP.

On the other hand, a positive ranking for the exogenous factors means that the GBP/JPY pair’s price will increase. Conversely, when negative, it means that the price of the pair will drop. This ranking is derived from correlation analysis between the exogenous factors and the GBP/JPY exchange rate fluctuation.

GBP Endogenous Analysis – Summary

A score of -15 implies that GBP has depreciated since the beginning of this year.

Indicator Score Total State Comment
UK Employment Rate -5 10 75.2% in September 2020 Dropped by 1.4% from January to September. The labor market has shed around 551,000 jobs
UK Core Consumer Prices 2 10 109.82 points in November 2020 The UK core consumer prices have increased by 1.82 points since January. Shows that the demand in the domestic economy has not been depressed
UK Factory Orders 3 10 Was -25 in November The CBI trends orders are improving. The -25 recorded in November was the highest since February
UK Business Confidence -2 10 Neutral in Q4 of 2020 UK businesses are still pessimistic about the future operating environment.
UK Consumer Spending -5 10 Was £304.5 billion in Q3 2020 Q3 household expenditure shows domestic demand is recovering from the lows of Q2. Consumer spending is still below the pre-pandemic Q1 levels
UK Construction Output -2 10 YoY drop of 7.5% in October 2020 The construction output is improving, which implies that the UK economy is steadily recovering from the economic disruptions of the pandemic
UK Government Budget Value -6 10 UK public sector net borrowing deficit was £22.3 billion The growing budget deficit is a result of increased government expenditure in the wake of COVID-19 pandemic. Also worsened by reduced revenues due to business disruption
TOTAL SCORE -15
  • United Kingdom Employment Rate

The employment rate shows the percentage of the UK labor market that is actively and gainfully employed. It is a comprehensive representation of the growth in the labor market. Note that the changes in the employment rate measure the changes in the economic activities of a country.

In September 2020, the UK employment rate dropped to 75.2% from 75.3% in August. From January to September 2020, the employment rate has dropped by 1.4%, equivalent to about 551,000 job loss. The UK employment rate scores -5.

  • United Kingdom Core Consumer Prices

This index measures the change in the rate of inflation in the UK by tracking price changes of specific consumer products. The index calculation excludes items whose prices tend to be highly volatile, such as fuel and energy.

In November 2020, the core consumer prices in the UK dropped to 109.82 from 109.9 in October. The index has increased by 1.82 points since January. The UK core consumer prices score 2.

  • United Kingdom Factory Orders

In the UK, the CBI Industrial Trends Orders tracks orders from about 500 companies in 38 sectors of the manufacturing industry. The survey’s components include domestic goods orders, exports, inventory, output prices, and expectations of future investments and output levels. The surveyed manufacturers respond whether the current conditions are normal, above, or below normal. This is used as a leading indicator of industrial production.

In December 2020, the UK CBI trends orders were -25, 15 points up from -40 in November. This is the highest level since February 2020 but still lower than -18 in January. We assign a score of 3.

  • United Kingdom Business Confidence

This index gauges the optimism of businesses operating in the UK. A survey is conducted on 400 small, medium, and large companies to determine their optimism. The survey covers exports, output levels and prices, capacity, order books, inventory, competitiveness in the domestic market,  innovation, and training. The business sentiment is then ranked from -100 to +100, with 0 showing neutrality.

In the fourth quarter of 2020, the UK business confidence was neutral at 0, a slight change from -1 in Q3. It is, however, still below the 23 recorded in Q1. We assign a score of -2.

  • United Kingdom Consumer Spending

Expenditure by households contributes to a significant proportion of the domestic GDP. In the UK, this index tracks quarterly changes in the amount of money spent by households and Non-profit institutions serving households (NPISH). Note that when the economy is performing well, consumer spending is high. Conversely, a poorly performing economy corresponds to low consumer spending.

In Q3 2020, consumer spending in the UK rose to £304.5 billion from £258.3 billion in Q2. However, the Q3 expenditure is still lower than Q1. The UK consumer spending scores -5.

  • United Kingdom Construction Output

This economic indicator tracks the yearly change in the value of work done in the construction sector. The amount of money charged by construction companies in the UK is based on a sample of 8000 companies that employ over 100 employees. Note that in the UK, the construction sector contributes about 6.4% of the GDP.

In October 2020, the UK’s YoY construction output dropped by 7.5%, up for the 10% drop recorded in September. This marks the smallest decrease in the UK’s construction output since the pre-pandemic period. We assign a score of -2.

  • United Kingdom Government Budget Value

This indicator tracks the changes between the government’s revenues and expenditure. When the revenue exceeds the expenditure, it is a surplus and indicates that the economy is expanding. When the deficit is increasing, it means that the government is spending much more than it receives. This poses a threat of overburdening the economy with future debt repayment obligations.

In October 2020, the UK public sector net borrowing deficit was £22.3 billion. This is an improvement from the deficit of £28.6 billion in September. In January 2020, the UK had a surplus of £9.6 billion. Thus, we assign a score of -6.

In the next article, we have discussed the endogenous analysis of JPY currency to see how it has performed in the year’s due course. Make sure to check that out. Cheers.

Categories
Forex Psychology

The Fundamentals of Mental Accounting in Forex Trading

The vast majority of agents involved in the financial markets know the term accounting. We also know the different categories within the generic concept: financial accounting, corporate accounting, analytical, management, banking, etc. However, what do we know about Mental Accounting? Have you ever wondered about the internal processes that our minds follow when we open or close a position? Why isn’t it easy for us to close a loss-making operation? Why do we rush to sell the winning trades, even knowing that they can have a favorable path to our position?

The vast majority of agents involved in the financial markets know the term accounting. We also know the different categories within the generic concept: financial accounting, corporate accounting, analytical, management, banking, etc. However, what do we know about Mental Accounting? Have you ever wondered about the internal processes that our minds follow when we open or close a position? Why isn’t it easy for us to close a loss-making operation? Why do we rush to sell the winning trades, even knowing that they can have a favorable path to our position?

The vast majority of agents involved in the financial markets know the term accounting. We also know the different categories within the generic concept: financial accounting, corporate accounting, analytical, management, banking, etc. However, what do we know about Mental Accounting? Have you ever wondered about the internal processes that our minds follow when we open or close a position? Why isn’t it easy for us to close a loss-making operation? Why do we rush to sell the winning trades, even knowing that they can have a favorable path to our position?

In the same way that a company has to identify, evaluate, and record the relevant accounting facts, individuals face the same problem. When an institution provides a service or sells a product it has to record this fact, when we in the market open a position, we open a mental account that will move with the fluctuations of the market even if we do it unconsciously.

Mental accounting seeks answers to questions such as those I have just asked and the purpose of this article is to show that mental accounting influences decision-making whose final outcome is uncertain, that is, the decision under uncertainty, and that its study and knowledge can provide us with greater mental stability to face activities such as investment or trading. Mental accounting is the set of cognitive operations developed by individuals to organize, evaluate, and track financial activities.

Fundamentals of Mental Accounting

Financial accounting is composed of a set of rules that have been codified over the years, can be found in quite a number of textbooks and unfortunately, there is no equivalent of these rules in mental accounting, We can learn them by observing human behavior from which we can infer rules of conduct. In this article we will try to see three components of mental accounting:

– The first refers to how we perceive actual events and how we make decisions based on those events. In the diagram below, the individual or trader is linked to the actual events.

– The second component is the allocation of each activity in your specific mental account. Financial accounting teaches us that there is a classification of expenses and revenues that are within a budget.

– The third component tells us about the frequency with which we evaluate accounts, we can audit our financial accounts annually, monthly, or daily if we consider it, what happens with our mental records? , Do we have enough willpower not to count the money we are earning or losing while we are positioned in the market? In the diagram below would be the return flow of each account to the trader.

A more detailed study of our mental structure shows that it is not advisable to count money in situations that require decision-making under an atmosphere of uncertainty such as poker, black-jack, or trading so that the audit of our accounts should be done with enough time to not affect our decision making, this time-space will be different for each trader, who through a process of trial and error must find its optimal review frequency.

The Profit and Loss Environment

To get us into the decision-making process of each individual, we must infer a utility function that offers us an output value for each of the decisions and thus be able to decide between our range of possibilities in matters such as, When to buy? At what price to buy? How much to buy? For this we will use the function of Kahneman and Tversky which has three essential elements:

– Transactions processed by mental accounting are mainly evaluated one at a time and not in relation to other transactions.

– Both the loss function and the profit function show a decreasing sensitivity, and this implies that the difference between 20 and 30 euros may seem larger than the difference between €1,000 and €1,010.

– Risk aversion. The loss of 100€ causes us more pain than the satisfaction that provides a profit of 100€. The influence that risk aversion has on our minds is considerable, as we shall see later.

Below we will review with some examples the characteristics of the function exposed. Suppose we want to buy a tie and a suit for €10 and €120 respectively, and when we arrive at the store the seller informs us that in the store located 20 kilometers from the store where we are, they have lowered the prices of both products by €5, leaving them at €5 and €115 respectively. Given this circumstance, most people will prefer to travel the distance to benefit from the reduction of the tie but will not do the same for the suit, although the reduction in both cases is the same. In this case, our mental accounting is based on relative rather than absolute perceptions.

The example of the tie and the suit shows us that we are willing to travel a distance to save money on the lowest priced product and not for the same savings on the most expensive product so we infer that the utility that provides the savings is associated with the differences in value and not in the value of the difference. This helps us to model how the individual processes event combinations to maximize their usefulness. We need to know if for two events, X and Y, their joint utility function F(X+Y) is greater than the sum of the individual functions F(X) + F(Y), and the utility function we mentioned earlier would have the following features:

– Separation of earnings.

– Grouping of losses.

– Grouping small losses with larger profits (to overcome risk aversion).

– Separate small gains from larger losses (the profit of a small gain exceeds the profit of reducing a large loss by a small amount).

An example of the first rule is the possibility of winning a pool with a prize of 75,000 euros, against winning two pools of 50,000 and 25,000 euros respectively. According to the work done by Richard H. Thaler, 64% of the surveyed population prefer the second option. The examples for the other rules are as intuitive as the one mentioned. Regarding the second section, we prefer to pay a purchase of 50 € with a credit card in which we will group all the purchases of the month and will be included within the total invoice of supposing 790 € to pay the 50 € in cash at the time of the purchase.

Opening and Closing of Accounts

One of the most useful components for mental accounting trading is the decision when to leave an account open and when to close it. Consider the purchase of 1,000 shares of telephone to 10€, the initial investment is 10,000€ but the value of the same will fluctuate with the movements of the market, producing gains or losses in paper until we sell the securities. The mental accounting of these losses and gains is misleading and depends on the time variable, one of the basic intuitions is that an effective loss produces more pain than a loss on paper and because closing an account with losses produces pain, Mental accounting induces us to delay the decision to close losing trades and to advance the decision to close winning trades to feed our ego.

Decision-Making: Grouping and Past Events

When we think of decision-making processes as a set of events that we can group together or dissociate, we must consider the importance of parenthesis localization in grouping together these events, because the pain produced by a loss is less if we can combine this loss with a higher gain, thus blurring its total effect.

Just as important are past events for decision making, if we are operating in the market and we are going to open a position, the results of past decisions will always affect the mental process of the new position. I would like to focus on the importance of real money, it is not the same to do this test sitting in the living room while we have coffee, that operating in the market while we gamble our savings.

The first question in the survey gives us the vision of how a gain can stimulate us to look for more risk in the same account, a este fenómeno se le denomina ‘house money effect’ o ‘efecto del dinero de la casa’ o ‘efecto del dinero arrebatado al mercado’ y debe su nombre a los jugadores de casino que llaman ‘la casa’ al casino y por consiguiente, The money from the house would be the one they’ve previously taken from the casino. This mental account of our money and that of the casino or financial market is reset to zero every day if we dedicate ourselves to an intraday operation. In this case, we have a clear example of how mental accounting is a problem for our operation since we should treat in the same way the money with which we start the operation of the money taken from the market, that should be treated as our money and not put you at greater risk.

The second conclusion of the study is provided by the second and third questions, past losses do not stimulate the search for risk, unless the new move offers us the possibility of compensating for the previous loss (break-even point), any trader, whether professional or amateur, can corroborate this conclusion through their personal experience.

Conclusion

During the presentation of the examples and works carried out in the field of mental accounting, it has been tried to demonstrate the importance that the processes of mental calculation have in our real operation, starting from the great ignorance that exists on this matter. The more knowledge we have of these processes, the greater our capacity to fight against the market and its greatest enemy, which is within each of us.

The trading industry knows that the mental structure of future traders is right for them to lose money, the difference in lost money between novice traders will be defined by how long it takes the trader to realize that the enemy is at home and that he has to try to change his beliefs, the next thing is to have a good system, a stable rules of money management and above all, being well-capitalized, a lot of discipline and a high dose of patience.

From now on, when you open a position, think about what has been developed in the article and try to decipher the mental registers that are being created while we are in the market and adopt the following rules:

– Avoid counting the money until you have closed the position.

– Treat in the same way the money taken from the money market with which it began to operate (house money effect).

– Never forget the influence that the previous operations have in the decision-making process of the present operations.

– Risk aversion leads us to make the suffering caused by a loss greater than the satisfaction caused by a gain of an amount equivalent to that of the loss.

– Do not be carried away by the illusion of measuring money in relative terms.

– Do not let your ego win the game by delaying the closing of the losing trades and accelerating the winning trades.

Categories
Forex Daily Topic Forex System Design

Building a Trading System: Why do you need a trading plan?

The necessity of a trading system has been discussed many times. Still,  new traders don’t consider it important when, in fact, it is a crucial element.  Could you conceive building a bridge without a project, playing tennis, or chess, with no strategy?

The necessity of a trading system has been discussed many times. Still,  new traders don’t consider it important when, in fact, it is a crucial element.  Could you conceive building a bridge without a project, playing tennis, or chess, with no strategy?

The necessity of a trading system has been discussed many times. Still,  new traders don’t consider it important when, in fact, it is a crucial element.  Could you conceive building a bridge without a project, playing tennis, or chess, with no strategy?

 

 

 

 

 

The trading profession is alike. If you take this business seriously, you’ll need to have a plan. Else, you’ll be in the loser team, in which are 90 percent of traders.

Reasons for a trading plan

1.- The financial markets are not deterministic

A market is a strange place where you cannot predict an outcome. An engineer can design a bridge, knowing that he can predict the bridge’s strength and behavior under heavy loads with proper calculations.  In the financial markets, you don’t have the benefit of an analytical formula to success. All you can expect is a small edge. Not following your plan is comparable to random trading; thus, losing the edge.

2.- Not following a plan weakens you psychologically

When you buy a lottery ticket or play roulette, you’re entering a bounded game. You know the cost of your ticket, the reward associated with a successful bet, and you don’t need to make any other decision. All parameters of the play, including the exit time, are fixed.

The financial markets are different. Everything there is unrestricted. The trader decides when, how much, exit time, stops, and target levels.  With so many parameters, a trader needs to define his rules and stick to them. Otherwise, he will be shattered by his emotions and lose money.

3.- The need to measure

Traders need to record and analyze their trades for many reasons.  The first is the need to analyze their performance and see if it has improved or not. Also, if the system performs as expected or lags its past performance. The most important reason is that traders need to know the strategy’s main parameters: percentage of winners, reward/risk ratio, the average profit and its standard deviation.

A trading plan that fits you

New traders don’t know much about statistics, and trading is about odds and their properties. One of them is streaks. There are winning streaks and losing streaks. The point is, streaks are mathematically linked to the ods of the system.

Let’s think of a system as a loaded coin, in which the odds of a winner can be different from 50 percent. Let’s say the odds of a system is 60 percent instead.  That means there is a 60 percent chance the next trade is a winner, and, consequently, a 40 percent chance it is a loser.

But what are the odds of a loser after a previous losing trade (a two-losing streak)? For the second trade to be a loser, the first one should also be a loser.  So the odds of two consecutive losing trades in a row is 0.4 x 0.4 = 16%. The odds of three successive losers would be 0.4×0.4×0.4 =6.4%, and so on.

The general formula for the probability of a losing streak is

n-losing-Streak = prob_lossn

which is the probability of one loss to the power of n, the size of the losing streak.

What we have shown here is that streaks are inherent to trading. In fact, inherent to any event with uncertainty. Golf pros, football players, and spot teams are subject to streaks, which are entirely expected. Trading systems are no different.

So, what’s the problem?

There are a variety of trading systems. Some, such as the well-established Turtles Trading System, which is trend-following, have less than 38 percent winners, although with average reward/risk ratios over 5. Other systems show over 70 percent success but reward/risk ratios of less than 1.

The odds of a 10-losing streak on the Turtles system, assuming 38% winners or 62% losers, is about 0.84%. That means we can expect ten losers in a row every 120 trades.

On a 70% winner system, the odds for ten losers in a row are one every 200 thousand trades.

The rationale behind the turtle is to lose small and profit big. When a Turtle trader sees they are right, they add to their position, and on and on, following the trend.

People who use the later system are scalpers that jump for the small profit and get our fast before the movement fades.

Nobody is wrong. They trade what best fits their psychology. You need to know your limits, as well. Many wannabe traders move from system to system after only a five-losing streak, discarding a sound strategy when its first perfectly normal streak occurs. Also, most traders use sizes inconsistent with the expected streaks and lose their entire account.

By now, you should have learned the importance of having a plan that fits your psychology and trading tastes.

In the coming article, we will discuss the components of a trading strategy or system. Stay tuned!

Categories
Forex Elliott Wave Forex Market Analysis

Is US Dollar Index Ready for a Rally?

The US Dollar Index reveals exhaustion signals of its bearish trend. A trend that remains in progress since the currency basket topped at 102.992 pm mid-March 2020. Follow with us what signs show the Greenback to expect a rally during the first quarter of the year.

The US Dollar Index reveals exhaustion signals of its bearish trend. A trend that remains in progress since the currency basket topped at 102.992 pm mid-March 2020. Follow with us what signs show the Greenback to expect a rally during the first quarter of the year.

The US Dollar Index reveals exhaustion signals of its bearish trend. A trend that remains in progress since the currency basket topped at 102.992 pm mid-March 2020. Follow with us what signs show the Greenback to expect a rally during the first quarter of the year.

Technical Overview

The big picture of the US Dollar Index (DXY) illustrated in the next weekly chart reveals the downtrend that remains active since the price found fresh sellers at 102.992 in mid-March 2020. The following figure also exposes the market participants’ sentiment represented by the 52-week high and low range.

The previous figure shows the extreme bearish sentiment dominating the big participants’ bias since mid-March 2020. Nevertheless, the long-tailed candlestick corresponding to the last trading week that was closed above the yearly opening, suggests the bearish trend’s exhaustion in progress.

On the other hand, the reading -4.26 observed in the EMA(52) to Close Index suggests the currency basket is oversold; thus, a potential corrective rally could occur in the coming weeks.

The mid-term Elliott wave view of the US Dollar Index exposed in the next 8-hour chart suggests completing an extended third wave of Minute degree labeled in black, when the price found support at 89.209 on January 06th.

Once the price found support, the price started to bounce, developing an incomplete wave (a) of Minuette degree identified in blue, which belongs to wave ((iv)) in black. Finally, the momentum and timing oscillator suggests that the bearish pressure persists, and the current upward movement could correspond to a corrective rally.

Technical Outlook

The mid-term outlook for the US Dollar Index unfolded in the next 8-hour chart shows the incomplete wave ((iv)) in black, which advances in wave (a) identified in blue. In this context, the current climb experienced by the Greenback could be a corrective rally.

According to Elliott Wave theory, the fourth wave in progress could retrace to 50% of wave ((iii)),  and reach 91.205. Likewise, considering that the second wave was a simple correction in terms of price and time, the current fourth wave should be complex in terms of price, time, or both. 

On the other hand, if the price extends beyond 50%, this could indicate weakness in the bearish pressure. If the price action advances above 92.107, the bearish scenario will be invalidated leading us to expect more upward movement.

In summary

The US Dollar Index completed a bearish third wave of Minute degree at 89.209 on January 06th, when it began to bounce, starting an upward corrective rally that remains in progress. The current intraday movement could reach 91.206 where the price could complete its wave (a) of Minuette degree labeled in blue. On the other hand, considering the alternation principle, the current corrective formation, the structure should be complex in terms of price, time, or both. Finally, the bearish scenario’s invalidation level locates at 92.107, corresponding to the end of wave ((i)) in black.

Categories
Forex Fundamental Analysis

EUR/CHF Global Macro Analysis – Part 3

EUR/CHF Exogenous Analysis The EU and Switzerland Current Account to GDP differential The ratio of the current account to GDP helps us determine the level of a country’s participation in the international market. When a country has net exports, it means that it will have a current account surplus; and, the larger the surplus, the […]

EUR/CHF Exogenous Analysis The EU and Switzerland Current Account to GDP differential The ratio of the current account to GDP helps us determine the level of a country’s participation in the international market. When a country has net exports, it means that it will have a current account surplus; and, the larger the surplus, the […]

EUR/CHF Exogenous Analysis

  • The EU and Switzerland Current Account to GDP differential

The ratio of the current account to GDP helps us determine the level of a country’s participation in the international market. When a country has net exports, it means that it will have a current account surplus; and, the larger the surplus, the higher the current account to GDP ratio. Conversely, a country with higher imports than exports; it means it has a current account deficit, and its current account to GDP ratio will be lower.

The domestic currency will be in higher demand in the forex market when a country is a net exporter.

In 2020, the Swiss Current Account to GDP is projected to reach 7.5% and that of the EU 3.4%. Thus, the current account to GDP differential between the EU and Switzerland is -4.1%. That means we should expect that the CHF will be in higher demand than the EUR. Thus, we assign a score of -5.

The interest rate differential for the EUR/CHF pair determines which of these currencies is preferable to investors and carry traders in the forex market. When the interest rate differential is positive, it means that investors will earn more by buying the EUR. Similarly, carry traders will be bullish on the EUR/CHF pair, thus driving the exchange rate higher. A negative interest rate differential implies that the Swiss Franc will be preferable to investors, while carry traders will be bearish on the pair.

The Swiss National Bank has maintained the interest rate at -0.75% throughout 2020, and the ECB interest rate has been at 0%. The interest rate differential for the EUR/CHF pair is 0.75%. We assign a score of 2.

  • The EU and Switzerland GDP Growth Rate differential

The GDP growth differential is the difference between the rate at which the EU and the Swiss economy are growing. This will help us identify which economy is growing faster. A positive GDP growth differential between the EU and Switzerland will result in a higher exchange rate for the EUR/CHF pair. A negative one will lead to a drop in the exchange rate for the pair.

In the first three quarters of 2020, the EU economy has contracted by 2.9% while the Swiss economy contracted by 1.5%. The GDP growth rate differential is -1.4%. We assign a score of -3.

Conclusion

The exogenous factors between the EUR/CHF pair have a score of -6; which implies that the pair can be expected to be on a downtrend in the short term.

As you can see above, the Technical analysis shows that the weekly chart for the EUR/CHF pair has failed to breach the upper Bollinger band successfully and has bounced off of it supporting our fundamental analysis. All the best.

Categories
Forex Fundamental Analysis

EUR/CHF Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

In conducting the global macro analysis of the EUR/CHF pair, we’ll focus on endogenous economic factors that contribute to the growth of GDP in the EU and Switzerland. Exogenous factors that influence the exchange rate of the EUR/CHF in the forex market will also be analysed.

Ranking Scale

A sliding scale of -10 to +10 will be used to rank the impact of endogenous and exogenous factors.

The ranking of the endogenous factors will be based on their correlation analysis with the GDP growth rate. A negative score implies that they resulted in the contraction of the economy hence depreciating the domestic currency. A positive score implies that they led in economic expansion hence appreciation of the domestic currency.

The exogenous factors are ranked based on their correlation with the EUR/CHF exchange rate. A positive score means that the pair lead to an increase in the exchange rate, while a negative ranking means that the exchange rate has decreased.

EUR Endogenous Analysis – Summary

The EUR’s endogenous analysis has a score of -3. This implies that the Euro had marginally depreciated in 2020.

CHF Endogenous Analysis – Summary

The change in the level of employment covers the quarterly developments in the labour market in Switzerland. The statistic includes the changes in both fulltime and parttime employment. Typically, changes in employment is a result of changes in business activities.

In Q3 of 2020, 5.08 million people were employed in Switzerland compared to 5.02 million in Q2. The employment level is still below the 5.11 million registered in Q1. We assign a score of -4.

  • Switzerland GDP Deflator

Switzerland GDP deflator is used to calculate the change in real GDP in terms of prices of all goods and services produced within the country. This is a comprehensive measure of inflation compared to measures like CPI and PPI, which only focus on a small portion of the economy.

In Q3 2020, Switzerland GDP deflator rose to 98.8 from 98 in Q2.  Up to Q3, the GDP deflator has increased by 0.8 points. The increase in inflation can be taken as an indicator that the economy is bouncing back from the economic shocks of the coronavirus pandemic. We assign a score of 3.

  • Switzerland Industrial Production

This indicator shows the changes in output for firms operating in the manufacturing, mining, quarrying, and electricity production. Although Switzerland is not heavily dependent on industrial production, it is still an integral part of the economy.

In Q3 2020, the industrial production in Switzerland increased by 5% from a drop of 9% in Q2. The YoY industrial production for Q3 was down 5.1%. For the first three quarters of 2020, the industrial production is down 3.8%. We assign a score of -3.

  • Switzerland Manufacturing PMI

This is an indicator of the economic health of the Swiss manufacturing sector. The purchasing managers are surveyed based in a questionnaire which covers the output in the sector, suppliers’ deliveries, inventories, new orders, prices, and employment. A PMI of above 50 shows that the Swiss manufacturing sector is expanding, while below 50 shows that the sector is contracting.

In November 2020, Switzerland manufacturing PMI rose to 55.2 from 52.3 in October. This is the highest reading since December 2018 and the fourth consecutive month of expansion since July. We assign a score of 7.

  • Switzerland Retail Sales

The retail sales measure the consumption of final goods and services by households in Switzerland. The expenditure by households drives the aggregate demand in the economy, which results in the changes in GDP.

In October 2020, Switzerland retail sales increased by 3.2% from a drop of 3.2% in September. YoY retail sales increased by 3.1% in October from 0.4% in September. Up to October 2020, the average retail sales has increased by 0.84%. We assign a score of 1.

  • Switzerland Consumer Confidence

About 1000 Swiss households are surveyed in January, April, July and October. They are evaluated based on their opinions about the economy, job security, financial status, inflation, and purchases. Consumer confidence tends to be higher when the economy is expanding and low during recessions.

In Q4 2020, the Swiss consumer confidence dropped to -12.8 from 12 in Q3. Although it is higher than it was in Q2 at the height of the pandemic, it is still lower than in Q1. The expectations on households’ financial situation also dropped to -6.6 from -4.2 in Q2. Households were increasingly pessimistic about the labour market and their job security. this can be attributed to the uncertainties that surround the ongoing coronavirus pandemic. We assign a score of -2.

  • Switzerland Government Gross Debt to GDP

This is the total amount that the Swiss government owes to both domestic and international lenders is expressed as a percentage of the GDP. It helps us to understand and evaluate the size of the debt relative to the size of the economy. At below 60%, the government is seen as being able to service its debt obligations and have room to acquire more debt without straining the economy.

In 2019, the Switzerland government gross debt to GDP was 41% same as in 2018. In 2020, it is expected to range between 49% and 51% due to aggressive expenditure to alleviate the shocks of coronavirus pandemic. We assign a score of -1.

In the very next article, you can find the exogenous analysis of the EUR/CHF Forex pair. Please check that and let us know if you have any questions below. Cheers.

Categories
Forex Basic Strategies Forex Indicators Forex Service Review Forex Services Reviews-2

Market Profile Singles Indicator Review

Today we will examine the Market Profile Singles Indicator (we could also call it a single print indicator or gap indicator), which is available on the mql5.com market in metatrader4 and metatrader5 versions.

Today we will examine the Market Profile Singles Indicator (we could also call it a single print indicator or gap indicator), which is available on the mql5.com market in metatrader4 and metatrader5 versions.

Today we will examine the Market Profile Singles Indicator (we could also call it a single print indicator or gap indicator), which is available on the mql5.com market in metatrader4 and metatrader5 versions.

The developer of this indicator is Tomas Papp, who is located in Slovakia, and currently has 7 products available on the MQL5 market.

It is fair to point out that four of his products are completely FREE and are in a full-working version. These are: Close partially, Close partially MT5, Display Spread meter, Display Spread meter MT5. So it’s definitely worth a try.

Overview of the Market Profile Singles 

This indicator is based on market profile theory. It was designed to show “singles areas.” But, what exactly is a singles area?

Theory of the Market Profile Singles

Singles, or single prints, or gaps of the profile are placed inside a profile structure, not at the upper or lower edge. They are represented with single TPOs printed on the Market profile. Singles draw our attention to places where the price moved very fast (impulse movements). They leave low-volume nodes with liquidity gaps and, therefore, the market imbalance. Thus, Singles show us an area of imbalance. Singles are usually created when the market reacts to unexpected news. These reports can generate extreme imbalances and prepare the spawn for the extreme emotional reactions of buyers and sellers.

The market will usually revisit this area to examine as these price levels are attractive for forex traders, as support or resistance zones. Why should these traders be there? Because the market literally flew through the area, and only a small number of traders got a chance to trade there. For this reason, these areas are likely to be filled in the future.

The author also adds: “These inefficient moves tend to get filled, and we can seek trading opportunities once they get filled, or we can also enter before they get filled and use these single prints as targets.”

The author points out: Used as support/resistance zones, but be careful not always. Usually, it works very well on trendy days. See market profile days: trend day (Strategy 1 – BUY – third picture) and trend day with double distribution (Strategy 1 – SELL- third picture).

Practical use of the Market Profile Singles Indicator

So let’s imagine the strategies that the author himself recommends. Of course, it’s up to you whether you use these strategies or whether you trade other strategies for the singles area. Here we will review the following ones:

  • Strategy 1: The trend is your friend
  • Strategy 2: Test the nearest level
  • Strategy3: Close singles and continuing the trend

The author comments that these three strategies are common and repeated in the market, so it is profitable to trade them all.

The recommended time frame is M30, especially when using Strategy 2.

It is good to start the trend day and increase the profit, but be aware that trendy days happen only 15 – 20% of the time. Therefore, the author recommends mainly strategy 2, which is precise 75-80% of the time.

 

Strategy 1 – BUY :

  1. A bullish trend has begun.
  2. The singles area has been created.
  3. The prize moves sideways and stays above the singles area.
  4. We buy above the singles area and place the stop loss under the singles area.
  5. We place the profit target either according to the nearest market profile POC or resistance or under the nearest singles area. We try to keep this trade as long as possible because there is a high probability that the trend will continue for more days.

Strategy 1 – SELL :

  1. The bear trend has begun.
  2. The singles area has been created.
  3. The prize goes to the side and stays under the singles area.
  4. We sell below the singles area and place the stop loss above the singles area.
  5. We will place the target profit either according to the nearest market profile POC or support or above the nearest singles area. We try to keep this trade as long as possible because there is a high probability that the trend will continue for more days.

 

Before we start with Strategy 2, let’s explain the Initial Balance(IB) concept. IB is the price range of (usually) of the first two 30-minute bars of the session of the Market Profile. Therefore, Initial Balance may help define the context for the trading day.

The IBH (Initial Balance High) is also seen as an area of resistance, and the IBL (Initial Balance Low) as an area of support until it is broken.

Strategy 2 – one day – BUY:

This strategy will take place on a given day.

  1. There is a singles area near IB. (a singles area was created on a given day)
  2. The price goes sideways or creates a V-shape
  3. We expect to return to the singles area or IB. We buy low and place the stop loss below the daily low (preferably a little lower) and place the target profit below the IBL (preferably a little lower).

 

Strategy 2 – one day – SELL:

This strategy will take place on a given day.

  1. There is a singles area near IB. (a singles area was created on a given day)
  2. The price goes sideways or creates a reversed font V
  3. We expect to return to the singles area or IB. We sell high and place the stop loss above the daily high (preferably a little higher) and place the target profit above the IBH (preferably a little higher).

 

Strategy 2- more days- BUY:

This strategy takes more than one day to complete (Singles were created one or more days ago)

  1. After the trend, the price goes sideways and does not create a new low (or only minimal but with big problems)
  2. Nearby is a singles area (Since the price cannot go to one side, there is a high probability that these singles will close).
  3. We buy at a low, placing a stop-loss order a bit lower. We will place the target profile under the singles area.

 

Strategy 2- more days- SELL:

This strategy takes longer than one day (Singles were created one or more days ago)

  1. After the trend, the price goes to the side and does not create a new high (or only minimal but with big problems)
  2. Nearby is a singles area ( Since the price cannot go to one side, there is a high probability that these singles will close ).
  3. We sell at a high, and we place a stop-loss a bit higher. We will place the target profile above the singles area.

Strategy 3 – BUY:

  1. The current candle closes singles.
  2. Add a pending order above the singles area and place the stop-loss under the singles area or the candle’s low. (whichever is lower)
  3. Another candle must occur above the singles area. (If this does not happen, we will delete the pending order) .
  4. We will place the profit-target either according to the nearest market profile POC or resistance or under the nearest singles area.

 

Strategy 3 – SELL:

  1. The current candle closes singles.
  2. Add a pending order under the singles area and place the stop-loss above the singles area or candle’s high (whichever is higher).
  3. Another candle must occur under the singles area. (If this does not happen, we will delete the pending order) .
  4. We will place the profit-target either according to the nearest market profile POC or support or above the nearest singles area.

Discussion

These strategies look really interesting.  As the author himself says:

It’s not just a strategy. There is more to it in profitable trading. For me personally, they are most important when trading: Probability of profit, patience, quality signals with a good risk reward ratio (minimum 3: 1) and my head. I think this is the most important.

In this, we must agree with the author.

 

Service Cost

The current cost of this indicator is $50. You are also able to rent the indicator. For a one-month rental, it is $30 per month. There is also a demo version available it is always worth testing out the demos before purchasing. Though.

After purchasing the indicator, the author sends two more indicators to his customers as a gift: Market Profile Indicator and Support and Resistance Indicator.

Conclusion: There are only 2 reviews for the indicator so far, but they have 5 stars and are very positive.

For us, this indicator is interesting, and it is a big plus that the author shares his strategies. The price is also acceptable since the indicator costs 50 USD = 5 copies (10-USD / 1 piece), and since the author sends another 2 indicators as a gift, this price is really worthwhile.

The author added:

By studying the market profile and monitoring the market, I came up with an indicator and strategies we would like to present to you. Here you can try it for free :

 

MT4: https://www.mql5.com/en/market/product/52715

MT5: https://www.mql5.com/en/market/product/53385

 

And here you can watch the video:

 

 

Also, a complete description of the strategies and all the pictures can be seen HERE :

Other completely free of charge tools:

https://www.mql5.com/en/users/tomo007/seller#products

 

Categories
Forex Elliott Wave Forex Market Analysis

USDCAD Bullish Divergence in a Complex Corrective Formation; What’s next?

The big picture of the USDCAD pair shows a bullish divergence suggesting the exhaustion of the current bearish trend that remains active since past March 2020 when the price topped at 1.46674 and began to decline in a complex corrective pattern. Follow with us what’s next for Lonnie.

The big picture of the USDCAD pair shows a bullish divergence suggesting the exhaustion of the current bearish trend that remains active since past March 2020 when the price topped at 1.46674 and began to decline in a complex corrective pattern. Follow with us what’s next for Lonnie.

The big picture of the USDCAD pair shows a bullish divergence suggesting the exhaustion of the current bearish trend that remains active since past March 2020 when the price topped at 1.46674 and began to decline in a complex corrective pattern. Follow with us what’s next for Lonnie.

Technical Overview

The long-term Elliott wave view of the USDCAD pair unfolded in its 2-day chart and log-scale, illustrates a downward movement that began on the second half of March 2020 when the price found fresh sellers at level 1.46674. Once the price topped, the Lonnie started to decline in a complex corrective formation identified as a double-three pattern (3-3-3) of Minor degree labeled in green.

According to the textbook, the double-three pattern characterizes itself by following an internal sequence subdivided into 3-3-3, each “three” a complete corrective formation. In this regard, the previous figure shows the price action moving in the third segment of the double-tree pattern corresponding to its wave Y. Also, the lower degree structural sequence reveals the progress in its wave ((c)) of Minute degree identified in black.

On the other hand, the technical indicators support the bearish bias that dominates the downtrend, persisting since March 2020. Both the trend and the momentum oscillators confirm the downtrend in progress. Nevertheless, the timing oscillator shows a bullish divergence plotted in green. This reading suggests the exhaustion of the bearish trend. In this context, the candlesticks formations observed in the last chart remains weighting declines over rallies.

Technical Outlook

The short-term outlook for USDCAD exposed in the next 8-hour chart reveals the incomplete downward advance corresponding to wave ((c)) of Minute degree identified in black, suggesting a potential new decline.

The figure illustrates the downward channel in play that connects the extremes of waves (i)-(iii) and (ii)-(iv) Minuette degree identified in blue. The Elliott Wave theory suggests that the penetration below the base-line between waves (i) and (iii) could reveal the end of wave (v). In this regard, a potential new decline could strike the area bounded between 1.2585 and 1.2425. Likewise, the gap between momentum and timing oscillators supports the likely additional downward move in the USDCAD pair. 

In summary, the USDCAD advances in a downward complex corrective sequence identified as a double-three pattern of Minor degree, which looks running in its wave Y. Simultaneously, the internal structure reveals the progress in its wave ((c)) of Minute degree, which could see a new drop to the potential target area between 1.2585 and 1.2425. Finally, the bearish scenario will invalidate if the price soars and closes above 1.27980.

Categories
Forex Psychology

Psychology and Mathematics in Forex: Control and Calculations

Obsession with control is an exceptional feature in the animal world. Humans develop more or less complex systems to direct each and every facet of our lives, or so we try. The illusion of being in charge reassures us, and when it comes to handling our money, much more. Is that why professional traders are […]

Obsession with control is an exceptional feature in the animal world. Humans develop more or less complex systems to direct each and every facet of our lives, or so we try. The illusion of being in charge reassures us, and when it comes to handling our money, much more. Is that why professional traders are […]

Obsession with control is an exceptional feature in the animal world. Humans develop more or less complex systems to direct each and every facet of our lives, or so we try. The illusion of being in charge reassures us, and when it comes to handling our money, much more. Is that why professional traders are so upset that Forex trading is compared to casinos?

In part, yes; but what really irritates us is that equating gambling with trading is the same as saying: Hey, you don’t control the situation, everything is a product of chance! Certainly, there are factors that cannot be assumed in a casino’s bets, as much or more than in trading. Obviously, there are subtle differences. The first is that, in gambling, we call that uncontrollable factor ‘luck’. In Forex, we call it ‘strong hands.

Without euphemisms, the reality is that there is a degree of uncertainty that is impossible to calculate accurately. And its weight is of such magnitude that it can destroy any trading strategy, no matter how elaborate. You can’t predict the movement of the market, just as you can’t guess at what number the roulette will drop the ball. Of course, when it comes to decision-making, Forex offers us a much more attractive illusion of control.

Forex: A Matter of Psychology

Certainly, a lot of decisions have to be made when we talk about investing in currencies, many more than putting a lot of chips on a number or a color. The problem is that most novice traders focus on building extremely elaborate systems, thinking that the important decisions are those that have to do with the application of indicators. It is clear that technical analysis is important, but it is not the control of the chart that should worry a good trader.

The real challenge of the initiative is self-control. In fact, psychological decisions often determine the future of small investors. The reason is obvious: when you enter the jungle, you will live hard times for which you have to prepare mentally. When you dive into the market, no matter which one, you have to go with a lesson learned: you’re going to lose money and a lot. If you’re not psyched for that, stick to something else.

Forex isn’t built to make easy money. What’s more, to make a profit by trading in foreign currency, you have to go through a tortuous path of profit and loss that can undermine anyone’s mood in a few months. It sounds exactly like what happens in casinos, so why are we still determined to put a dividing line between bookmakers and Forex? Surely, because once the psychological work phase is over, luck is a negligible element in the equation.

Forex and Probability Calculation

In reality, rather than luck, the risk that can be assumed is the variable that defines bets and investments. In both cases, and greatly simplifying the matter, there is a chance of losing and a chance of winning. Just take as an example a short transaction with CFDs: the price can go down (profits) or up (losses). The difference is that decisions are made based on in-depth market analysis, the development of a strategy, and certain probabilistic calculations.

This is not to say that, in general terms, it is not possible to operate with CFDs following the same philosophy as the bookmakers. Trading with a casino mentality means adopting one of the fundamental premises of trading: minimize losses and maximize profits, increasing the probability of success above 50%. Casinos get it by adapting their games; experienced traders, choosing strategic zones on trend lines, resistance, and support.

Finding these points is not easy. It requires a study of the market and an exhaustive search for patterns; but, in addition, it implies not being carried away by emotions, enduring astronomical losses, and cutting profits early because of anxiety. Anyway, trading in the currency market may not be the same as playing roulette; but, as Mr.Khoo says, you can (and should) do trading thinking like a casino.

Categories
Forex Risk Management

Measuring Trade Risk Levels with VaR and CVaR

Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a […]

Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a […]

Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a high degree of accuracy. 

Another important issue that has enabled us to improve the study of risk, among those associated with our operation, has been the exponential increase in the computing capacity we currently have. Currently, as a trader, you have at your fingertips, from your laptop or smartphone, databases with all the necessary price history information for almost any financial asset you want to trade.

When developing a trading strategy or system we should not only focus on clearly establishing the rules for entering and leaving the market, but we should also objectively analyze the results of our trading system.

To achieve an objective analysis, a wide variety of metrics have been developed that evaluate different aspects of our operation. In this article, we will teach you to use two metrics based on risk control: Value at Risk (VaR) and Value at Risk (CVaR). These risk assessment measures have different methodologies and techniques for their estimation.

Before entering directly into the study of them, it is important that we have some basic concepts, such as what is financial risk and what are the types of risk.

What is Financial Risk?

In the investment context, the risk is the probability of loss due to events that can produce significant changes, and that affect a financial asset. Therefore, it is important that when we decide to make an investment, we identify and quantify the various types of risks to which we will be exposed when making the investment.

All investments carry an associated risk, but when we manage risk well we can find great opportunities for significant returns. Surely you’ve heard of “risk aversion”. Risk aversion refers to an investor’s attitude or preference to avoid financial uncertainty or risk. This leads him to invest in safer financial assets, even if they are less profitable.

Types of Financial Risk

Although there are many risks in the investment world, financial risk can be classified into three main categories:

Market risk: this type of risk refers to loss risk arising from price movements of a financial asset or the market in general.

Credit risk: the inability of a party to respond with the obligations of an issue or with the strict terms of the issue (amount, interest, etc.), thus producing a loss for the counterparty.

Operational risk: This type of risk is defined as loss risk due to insufficiencies or failures of processes, personnel, and internal systems.

Now that we have clarified these basic concepts, let’s see what VaR and CVaR are all about.

Value at Risk (VaR)

Value at Risk is a statistical metric used to assess the risk of a given asset position or portfolio. VaR is the maximum expected loss, under normal market conditions, in a portfolio or trading system, with a probability (usually 1% or 5%) and a known time interval (usually a day, a week, or a month).

The VaR is measured through three variables: amount of loss, probability of such loss occurring (confidence level), and the time interval of occurrence. It is important to note that VaR does not seek to describe or predict worst-case scenarios, but rather to provide an estimate of the range of potential gains or losses.

Ways to calculate VaR

There are three main methodologies or approaches to calculating VaR:

Parametric method: when we calculate the VaR using the parametric method, we assume that profitability has a normal distribution and the portfolio is a linear function of the factors. For the parametric calculation, it is necessary to have the main statistical parameters (mean, variances, covariance, standard deviations, etc.) of the financial asset or portfolio that we are analyzing.

The formula for calculating VaR using the parametric method is as follows:

VaR = F * S * σ *

Where:

F = Value determined by the confidence level (also known as Z value).

S = Amount of portfolio or financial asset at current market prices.

σ = Standard deviation of asset returns.

t = Time horizon in which the VaR is to be calculated.

Historical simulation method: uses a large amount of historical data to estimate VaR, but makes no assumptions about probability distribution. One of the greatest limitations of this approach is that it assumes that all possible future changes in asset prices have already been observed in the past. The value of the VaR will depend on the source of the data and the size of the series (time frame of the data).

Monte-Carlo VaR Model: The calculation of VaR using the Monte-Carlo method is based on generating hundreds or thousands of hypothetical scenarios based on the series of initial data entered by the user. The accuracy of the VaR will depend on the number of scenarios we simulate, the higher the accuracy. The validation of the model is fundamental, for this it is recommended to carry out backtest tests to verify that the estimated VaR is verified with the historical series.

A practical example of how to calculate VaR:

I will do this by setting an example to calculate in VaR in actions to simplify calculations of pips and lots:

Suppose we have a portfolio composed of 1000 shares of the company ABC and the current price per share is 12$, the daily standard deviation is 1.8%. How can we calculate VaR with a 95% confidence level for a day?

The formula for calculating VaR is:

VaR = F * S * σ *

To calculate the value of F, we use the “DISTR.NORM.ESTAND.INV (probability)” function of the Excel spreadsheet.

F = DISTR.NORM.ESTAND.INV (confidence level) = DISTR.NORM.ESTAND.INV (95%) = 1.6448

S is the total amount invested in the portfolio and is calculated as follows:

S = share amount * market price = 1,000 shares * 12$ = 12,000$

The standard deviation σ is equal to 1.8%.

As we want to calculate the VaR for a day, then t = 1.

We replace the values in the VaR formula and have:

VaR = 1.6448 * $12

This VaR value tells us that the investor has a 95% confidence level that their investment will not lose more than $355.28 in a day.

What if we increase the level of confidence to 99%? In this case, the VaR would be:

VaR = 2.3263 * $12,000* 1.8% * = $502.48

This VaR value tells us that the investor has a 99% confidence level that their investment will not lose more than $502.48 in a day, or what’s the same, the probability of suffering losses greater than $502.48 during a day, is only 1%.

Advantages of VaR

Some very significant benefits of using VaR for the quantification of financial risk without the following:

-The VaR is a highly recognized standardized risk measure among traders and regulators. It has become a standard in the financial industry.

-It adds all the risk of an investment into a single number, making it very easy to assess the risk.

-It is probabilistic and provides us with useful information about the probabilities associated (confidence level) with a specific amount of losses (maximum loss).

-It can be applied to any kind of management and also allows you to compare risks of different portfolios regardless of their composition, whether fixed income or equities.

-The VaR allows you to add risks from different positions taking into account the way in which they correlate with each other, the different risk factors.

-It takes into account multiple risk factors and can focus not only on individual components but also on the overall risk of the entire portfolio.

-Because it is expressed in the loss of money (base currency; dollar, euro, etc.) it is simpler and easier to understand than other indicators that measure financial risk.

Disadvantages of VaR

But VaR, like any other metric used for trading systems, has its disadvantages:

-Generally depends on the quality of the historical data used for its calculation. If the data included is not accurate or correct, the VaR will be of little use.

-Although the interpretation of the values of VaR is very simple, some methods to calculate it can be very complicated and expensive, for example, the Monte Carlo method.

-It can generate a false sense of security in traders. Any measure of probability should not be construed as a certainty of what will happen. Remember that as traders, we only handle uncertainty scenarios never certainty scenarios, we do not make predictions.

-It does not calculate the amount of the expected loss remaining in the probability percentage.

Conditional Value at Risk (CVaR)

The conditional risk value (CVaR) is the mean of observations in the distribution queue, that is, below the VaR at the specified confidence level. Therefore CVaR is also known as expected deficit (Expected Shortfall, ES), AVaR (Average Value at Risk), or ETL (Expected Tail Loss).

The CVaR is the result of taking the weighted average of observations for which the loss exceeds the VaR. Therefore, the CVaR exceeds the VaR estimate, as it can quantify riskier situations, thus complementing the information provided by the VaR.

CVaR is used for the optimization of portfolios because it quantifies losses that exceed VaR and acts as an upper bound for VaR.

Properties of CVaR

CVaR stands out for having better mathematical properties than VaR, being a consistent measure of risk because it meets the criteria of:

Mono tonicity: If one financial asset performs better than another in any time horizon its risk is also lower.

Positive homogeneity: Refers to the proportionality between position size and risk.

Invariance to Transfers: By adding capital to a position your risk decreases in direct proportion to the capital added.

Sub-additivity: Asset diversification decreases the risk of a global position.

In summary, the most important message that CVaR is a consistent measure of risk is the following: the risk of two or more assets that make up a portfolio is less than the sum of the individual risks.

Interpretation of the conditional value at risk (CVaR)

The choice between CVaR and VaR is not always straightforward, since the conditional value at risk (CVaR) is derived from the value at risk (VaR). Generally, the use of CVaR rather than just VaR tends to lead to a more conservative approach in terms of risk exposure.

While VaR represents a maximum loss associated with a defined probability and time horizon, CVaR is the expected loss if you cross that worst-case threshold (maximum loss). In other words, CVaR quantifies the expected losses that occur beyond the VaR breakpoint.

As a rule, if an investment has maintained stability over time, the risk value could be sufficient for risk management in a portfolio that keeps the investment active. However, we must bear in mind that the less stable the investment, the greater the chances VaR will never display a complete image of the risk. In practice, trading systems rarely exceed VaR by a significant amount. However, more volatile systems may exhibit a CVaR many times larger than the VaR.

Finally, if we create a trading system and calculate your VaR, this VaR tells us what the maximum loss is with a certain level of confidence and time horizon. But if the loss is greater than VaR, how much should we expect to lose? This is where the conditional-at-risk value (CVaR) comes into play, which will tell us what the conditional average expected loss is if more is lost than the VaR.

Categories
Forex Psychology

Why Do We Sabotage Ourselves Emotionally in Trading?

We spend our entire childhood and adolescence learning to control and develop appropriate responses to our emotions. We learn from our teachers, from our parents, from society, and from our idols through observation and comparison. Therefore, we might think that most people have some control mechanism when they start trading. However, in practice many of […]

We spend our entire childhood and adolescence learning to control and develop appropriate responses to our emotions. We learn from our teachers, from our parents, from society, and from our idols through observation and comparison. Therefore, we might think that most people have some control mechanism when they start trading. However, in practice many of […]

We spend our entire childhood and adolescence learning to control and develop appropriate responses to our emotions. We learn from our teachers, from our parents, from society, and from our idols through observation and comparison. Therefore, we might think that most people have some control mechanism when they start trading. However, in practice many of us when we operate find ourselves struggling with our own emotions and losing control. While there are a wide variety of reasons that depend on each trader, these are the most common.

Unresolved Personal Problems

This is one of the main reasons why we always say that trading is a way by which we know ourselves. If there is a past problem that we have not solved or that we are not even aware of because the conditions have not been met for it to emerge, I can guarantee that by operating in the markets that problem will appear. In fact, until you identify him and confront him, the problem will resurface again and again. I’m sure you will. A fairly common situation that indicates the presence of a problem is that of a trader who wins consistently over a period of time and then returns everything to the market in a matter of minutes.

Self Reprobation

Simple but dangerous, self-deprecation puts us into a vicious circle that often begins with the mistake of not preparing properly to operate every day. You don’t prepare, you do something stupid and possibly avoidable, you’re angry at the time of surgery, you get depressed, you lose confidence in your abilities, and you make the mistake of not preparing for the next time. In trading, constant effort and results are everything, not just a single trade or a session. Negative emotions can not only be demoralizing and demoralizing but can also physically and mentally exhaust us.

Immediate Effect

When we are operating and need to perform some kind of action, it is often the strongest emotions that come into action just before executing our entry or exit order. This is perhaps the least easy aspect of overcoming without effective strategies to deal with it. When we suddenly have an emotion of any kind, we are inclined to act on it. The problem is that markets don’t care and, in fact, they move in a way that often aggravates the problem. Emotions distort the reality of what is happening and drive us to act in a way that is often counterproductive.

Based on these reasons we can find in our trade situations like the following (sure to sound to more than one!):

Greed leads us to risk more than we should, leveraging ourselves excessively and ruining the account quickly after a streak of winning operations that has led us to trust too much. It confirms a pattern we have studied but we are afraid to enter the operation and we end up joining the movement too late, buying or selling at the end of the movement.

When a trade goes against us, we decide not to assume the loss and expand or remove the stop loss thinking that the position will return to our favor, thus breaking with our trading plan. The reasons behind all these behaviors are the biases of the mind, some of which we have already seen in other articles on Psychology and Trading. In the case of emotional sabotage, three are the biases that fundamentally affect us:

Bias of Confirmation: This is the tendency to favour, seek, interpret, and recall information that confirms one’s beliefs or hypotheses, giving disproportionately less consideration to possible alternatives. Applied to trading, it would be the tendency to ignore the evidence that our strategies will make us money or the opposite: trust patterns not properly analyzed thinking that we will win when they are actually losers.

Bias of Recent Experience: It is a bias of our mind that comes to keep a sharper and more intense memory of the information we have received more recently, which implies that the context that we apply to our way of thinking at a given moment assumes the sum of memories or previous experiences weighted according to the closeness in time of such experiences or memories. This bias clearly explains why traders rely on excess if they have a winning streak, They hesitate to open a new position if they have had a bad streak or make bad decisions when they are not focused enough and chain several mistakes.

Media Bias: It is the tendency of the media to select the news and information with which it is intended to distort, distort, or lie about a certain fact. Applied to trading, the consequence would be to get carried away by the news published by the media, buying the trendy values, or following the new guru who appeared on television.

How to Overcome Emotional Sabotage?

I’m sure you’re tired of hearing it, but apart from the fact that this is a highly recommended practice to overcome emotional sabotage, it’s absolutely necessary: KEEP A TRADING JOURNAL! In that diary, you will have to tell things as they happened, which requires an important exercise of honesty with ourselves. Don’t blame the market and those who move it. Document what really went wrong and whether we were responsible for it.

The exercise of keeping such a diary honest with ourselves may involve encountering uncomfortable revelations but without a doubt, it is the best (and fastest) way to improve our trading since if we identify and correct the problem we detect (before we merge our account!), this could be a real change in our career as traders.

Additionally, an excellent idea is to create a checklist of our trading plan and make sure you have it in front of you all the time. It’s certainly hard to break the rules if we have them in front of us. By doing this we have another powerful tool to identify the root of the problem that causes emotional sabotage and allows us to correct it in real-time before we go ahead and make more mistakes that ruin our account.

Finally, another important recommendation is to learn to know yourself and how we act as traders. If we tend to make certain mistakes, are prone to be victims of certain biases, are confused by the excess of information, or let fear and greed cloud our judgment, then it will be necessary, to be honest with us and admit how we are, for better or for worse. Surely there will be some traits of our character that we will have to learn to correct if we want to succeed in trading but knowing who we are will allow us to make the most of our capabilities and minimize the impact of our weaknesses, thus minimizing the impact of emotional sabotage on our account.

Conclusion

In trading and in life, many times the key to success is knowing what is not to be done, so if bad habits and mistakes are costing us money, then like many traders you are struggling with emotional sabotage. And as if it were a disease, the sooner we detect emotional sabotage, the sooner it will be treated and we will avoid further damage.

A properly studied and analyzed strategy is our best weapon on the market, so once we have one we must let it work. Use your trading journal to detect emotional sabotage and be honest with yourself. Remember: just because the market does things that defy reason, doesn’t mean we have to do them too!

Categories
Forex Indicators

RSI: The Best Forex Indicator?

Far from being something that will help you operate profitably, the usual use of Forex indicators really causes more losses than gains among inexperienced traders. However, if you are going to use them, then you should know that the best Forex indicator is the RSI (Relative Strength Index). What is the RSI (Relative Strength Index)? […]

Far from being something that will help you operate profitably, the usual use of Forex indicators really causes more losses than gains among inexperienced traders. However, if you are going to use them, then you should know that the best Forex indicator is the RSI (Relative Strength Index). What is the RSI (Relative Strength Index)? […]

Far from being something that will help you operate profitably, the usual use of Forex indicators really causes more losses than gains among inexperienced traders. However, if you are going to use them, then you should know that the best Forex indicator is the RSI (Relative Strength Index).

What is the RSI (Relative Strength Index)?

The RSI reflects the momentum and it is well known that following the momentum in the foreign exchange market increases the chances of profits. The RSI is an indicator of momentum in the Forex market and, in fact, it is the best indicator of momentum. If you are willing to use the RSI, probably the best way to use it is to go long when it is above 50 in all time frames, and operate short if it is below 50 in all time frames. It is best to always operate with the trend of the last 10 weeks or so. The formula of the relative strength index was created in the 70s, as were many other concepts of technical analysis. 

Relative Strength Index – Forex Indicators

The calculation of the relative force is performed by calculating the ratio of upward changes per unit of time to downward changes per unit of time during the review period. The actual calculation of the indicator, however, is more complex than we need to know here. What is important to know is that if we look back over a period of, say, 10 units of time and each of those 10 candles closed upwards, the RSI will show a number very close to 100. If each and every one of those 10 closed candles, the number will always be very close to 0. If the financial asset is fairly balanced between drops and raises, the RSI will show 50. The relative force index is defined as a pulse oscillator. Shows whether bulls or bears are winning in the review period, and this period can be adjusted by the trader.

Technical Analysis of the Relative Force Index

The RSI indicator is normally used in forex trading strategies in the following ways:

  1. When the RSI is above 70, a price drop should be expected. A drop below 70 after having been above 70 is taken as confirmation that the price is starting a downward movement.
  2. When the RSI is below 30, a price increase should be expected. A rise above the level of 30 after having been below 30 is taken as confirmation that the price is starting an upward movement.
  3. When the RSI crosses above 50 after being below 50, it is taken as a sign that the price is beginning a bullish movement.
  4. When the RSI crosses below 50 after being above 50, it is taken as a sign that the price is beginning a bearish movement.

Methods 3 and 4 described above in relation to crossing the level of 50 are generally higher than the first and second methods concerning 30 and 70. That’s because more long-term Forex earnings can be achieved by following trends instead of always expecting prices to bounce back to where they were: just be careful not to move the stop loss to the break-even point too quickly.

Forex Indicators

This is a point where we will pay more attention – if it is better to follow trends, or “diminish” them by doing trades against them. There are many outdated tips on this subject, most of which were in the years prior to 1971, at a time when exchange rates, although they were fixed at the price of gold or other currencies. In this era, trading was mainly in shares or, to a lesser extent, in raw materials. It is a reality that commodities and stocks tend to show markedly different pricing behaviour from the exchange rates of Forex currency pairs – stocks and commodities show trends more often, are more volatile, and follow longer and stronger trends than Forex currency pairs, which show a stronger tendency to return to average.

This means that when making Forex trades, most of the time, using the RSI to trades against directional moves using methods 1 and 2 described above, will work more often, but it will generate less utility than the use of Methods 3 and 4 to track trading trends in the direction of the strong prevailing trend, where such a trend exists. Although it may seem attractive to try to earn smaller amounts more often and use money management to increase profits quickly, It is much more difficult to build a cost-effective medium-reversion model than to build a cost-effective trend tracking model, even when trading with Forex currency pairs. The best way to operate at RSI 50 level crossings is to use the indicator in multiple time frames for the same currency pair.

Crossing The 50 Level In Various Time Frames

Open several charts of the same currency pair in several time frames: weekly, daily, H4, up to the minute. Open the RSI flag in all charts and make sure the 50 level is checked. Virtually all forex graphics programs or software include the RSI, so it should not be difficult to use it. A good period to use in this indicator is 10. It is also important that the market review period is the same in all different time frames.

If you can find a currency pair that in all the higher time frames is above or below 50, and in the lower time frames is on the other side of 50, then you can expect the lower time frame to cross again above 50 and should accordingly open an operation in the direction of the long-term trend.

The higher or lower the RSI, the better the operation. In the forex markets, it is a universal law: strong trends are more likely to continue and a reversal that then turns tends to move very well in the direction of the trend. This method is a smart way to use a forex indicator because it identifies setbacks within strong trends and tells you when the setback is likely to end.

Categories
Forex Technical Analysis

Quantitative Trading and Its Differences with Technical Analysis

Today’s article is about definitions. Maybe for those who read us regularly, it is not necessary, but every day new readers approach for whom all this subject of quantitative trading, technical analysis, backtesting, chartismo… etc sounds more or less Chinese. Quantitative trading is my way of understanding trading today. It’s what I do and what […]

Today’s article is about definitions. Maybe for those who read us regularly, it is not necessary, but every day new readers approach for whom all this subject of quantitative trading, technical analysis, backtesting, chartismo… etc sounds more or less Chinese. Quantitative trading is my way of understanding trading today. It’s what I do and what […]

Today’s article is about definitions. Maybe for those who read us regularly, it is not necessary, but every day new readers approach for whom all this subject of quantitative trading, technical analysis, backtesting, chartismo… etc sounds more or less Chinese. Quantitative trading is my way of understanding trading today. It’s what I do and what I work with. So today I will provide my definition on the subject.

Quantitative Analysis: Talk of Numbers

When we refer to quantitative analysis we are talking about examining numerical variables. In the case of investment or speculation on the stock exchange, we are talking about quotes, volume, indicators, correlations, etc. Other aspects that cannot be reliably quantified, such as the change of the CEO of a company or the results of the presidential elections, are not taken into account. Working on the basis of these numerical variables, quantitative analysis uses mathematical and statistical methods to establish models for developing trading systems.

A quantitative trading system can be very sophisticated and trades highly complex derivative instruments, or it can be a simple system that trades shares. The asset type does not qualify for the type of trading. You need to work with models. I don’t know if you’ve ever heard the phrase: “All models are wrong, but some are useful.” When we refer to quantitative analysis, this is the case. So, indeed, you need to work with models. Why?

I personally have several reasons:

-On the one hand, the models are more accurate than our discretionary judgments. The psychological aspect has an important weight in our decisions.

-We are human and cognitive biases affect our perception of reality. Finding ways to master them is always positive

-They streamline decision-making. Using systems allows you to have a much faster reaction.

-It allows several approaches to be addressed.

-Models or systems give you the framework to work with.

But remember that models are simplifications. In order for a system to be efficient, it needs to cover only part of reality. There is no all-terrain system that never fails and is perfect. Hence, the plan to follow is the use of a portfolio of systems combining different strategies: pairs trading, arbitrations, mean-reverting until even tracking trends.

Working With Odds

In a quantitative trading strategy, you work with probabilities. There are no certainties but probabilistic models to explain the behavior of the market. In algorithmic trading, everything is written. There’s no algorithmic trading without computers.

Quantitative trading, also called algorithmic trading, is a systematic way of trading. It is said that a system does not exist unless its rules are written. Well, in algorithmic trading all rules are written in the computer code of the system. Metrics are used when quantitative trading systems are developed. These metrics and ratios help in the development and use of the system to make decisions.

HFT (high-frequency trading) is quantitative trading, but not all quantitative trading is HFT. It’s understood, right? Quantitative trading is not synonymous with high-frequency trading, nor does it necessarily mean intraday trading. Quantitative analysis can be used perfectly in larger time frames such as daily or even weekly.

What happens is that trading systems that operate in very short periods of time are automatic systems. It is an algorithm that sends the orders to the market and hence the association with algorithmic trading /quantitative.

A trader using a quantitative system may or may not transmit orders automatically to the broker. Transmitting orders automatically is the norm, but it is not mandatory. An automatic system retrieves quotes in real-time directly from the broker or other data provider, executes an algorithm leading to trading signals, and sends orders directly to the broker for execution.

A semi-automatic system, for example, can run the algorithm and generate the input or output signals, but it is you as a trader who is responsible for sending the orders to the broker. The advantage of the automatic system is the reduction of human error. Especially, that kind of human error that causes you as a trader to break the rules of the system. Does it sound like you have made this kind of mistake? It’s impossible to break the rules here. In addition, the obvious advantage is the increase in execution speed, so for systems that work in short time frames, a fully automated system is indispensable.

Quantitative Versus Technical Analysis

Quantitative analysis and technical analysis have commonalities, but also fundamental differences in their principles. To clarify the terms, we start by defining what is the technical analysis

The main idea of the technical analysis is that “the price discounts everything”. All the information you need to make your trading decisions is based on quotes, and in some cases also on volume. From quotes, the technical analyst tries to look for recurring patterns that can predict future price behavior.

This is a common point with quantitative analysis, which can also be based (but not necessarily exclusively) on quotations and look for patterns in them. But what differs is the method and the form.

In technical analysis, one way of identifying patterns is chartism. By chartism, we mean figures such as shoulder-head-shoulder, triangles, Elliot waves, etc. Well, chartist analysis based on graphs has a subjective component incompatible with quantitative analysis.

Technical analysis is mainly based on visual examination of charts or charts. By looking at the graphs, trends are established, the points of support and resistance, the crossings of indicators, etc. The technical trader makes his decisions, usually discretionary, looking at the charts and trading according to what he sees.

On the other hand, quantitative trading is not based on what you see in the chart. If you want, you can illustrate your system by plotting the signals on a chart, but it is not essential to generate the input and output signals to the market. Your signals come from the trading system you’ve programmed, not from what your eyes see.

Discretionary or Non-Discretionary

Quantitative trading is not discretionary. Trades are taken according to pre-established rules. The trader who operates on the basis of technical analysis does make discretionary decisions. I’ll tell you about my experience when I only operated by following technical analysis. Perhaps you are familiar with it.

1- You’re in front of the screen.

2- You are convinced that now is a good time to do a trade.

3- You look for any sign on the chart. You look, you look and you look.

4- In the end, you end up performing an operation, but based on the emotion and your previous belief that conditions you.

5- Evidently, then you try to justify the operation by arguing technical reasons: that if it looked like a certain figure, that if the resistance X would break, all this only to justify a decision not 100% rational and influenced by your cognitive biases.

Down Theory

The second idea on which technical analysis is based is Down theory. According to this theory, prices are driven by trends. The trader that operates on the basis of technical analysis tries to take advantage of these trends to obtain profitable trades.

Quantitative analysis is not based on this theory. It does not blindly accept that prices follow trends. What you are looking for is to analyze for each asset and time frame how its behavior is. From the results of the analysis, look for the best way to take advantage of the behavior studied.

Backtesting is something that distinguishes quantitative trading from discretionary trading. When you operate a quantitative trading system it’s because you’ve done a backtest before. Discretionary trading cannot backtest because the entry and exit conditions are not the same over time.

Conclusion

Remember that we already said at the beginning of this article, the main characteristic of quantitative trading is that it is based on mathematical and statistical models. Chartist figures, Elliot waves, and hunches are not incorporated here. It is not worth it if in the graph I see a flag or a bat, if I am in wave 4 of the extended third or if it is an ABC. There is no place at all for a subjective opinion. Only data matters. Then we can already say that it is the opposite of discretionary trading.

In quantitative trading, decisions to buy and sell assets, whether shares, ETFs, futures, forex, etc- are based on a computer algorithm. Hence quantitative trading is also known as algorithmic trading. The starting point of a quantitative trading system is data. What types of data? The system can incorporate quotation data such as price and volume, global economic data such as interest rates or inflation, asset financial ratios such as cash flow, income, DTE, EPS, etc.

A technical analysis strategy can be part of a quantitative system if it can be coded. However, not all technical analysis can be included in the quantitative, for example, some chartist techniques are subjective, cannot be quantified, and need candles in the future for the confirmation of the figure. Let’s say one of the differences is in the quality of the analysis. Many technical analysts look for patterns that they say repeat themselves, but cannot prove how often statistics these patterns precede certain price movements.

Categories
Forex Fundamental Analysis

EUR/JPY Global Macro Analysis – Part 3

EUR/JPY Exogenous Analysis

EUR/JPY Exogenous Analysis

EUR/JPY Exogenous Analysis

  • The EU and Japan Current Account to GDP differential

The current accounts have three basic components: net exports, the difference in incomes that countries pay each other, and transfer payments that countries make to each other. A country that has a surplus in international trade has a higher current account to GDP ratio. Since its domestic currency is in higher demand, it tends to appreciate. Conversely, a country with current account deficits will need to buy more foreign currencies to finance its imports – which weakens the domestic currency in the forex market.

In 2020, the Japanese currency account to GDP ratio was expected to drop to 3.5% while that of the EU 3.4%. This means that the 2020 current account to GDP differential between the EU and Japan is -0.1%. In this case, we expect a bullish JPY; hence, we assign a score of -2.

The interest rate differential between the EUR/JPY pair is used to determine whether traders are bullish or bearish. If the interest rate differential is positive, it means that traders can receive higher returns by selling the JPY and buying the EUR since the EUR offers higher returns. Thus, they are bullish on the pair. Conversely, if the interest rate differential is negative, it means that traders can receive higher returns by selling the EUR and buying the JPY, which means they will be bearish on the EUR/JPY pair.

In 2020, the Bank of Japan maintained the interest rates at -0.1% while the ECB maintained at 0%. Therefore, the interest rate differential for the EUR/JPY pair is 0.1%. We assign a score of 2.

  • The EU and Japan GDP Growth Rate differential

The rate at which an economy is growing impacts the strength of the domestic currency in the forex market. Since it is impractical to compare countries’ economic performance using absolute GDP numbers, we will use their growth rate. In this case, if the GDP growth rate differential is positive, it means that the EU economy has been growing at a faster pace than that of Japan hence a bullish outlook for the EUR/JPY pair. Conversely, when negative, it implies a bearish outlook for the pair.

The Japanese economy contracted by 3.5% in the first three quarters of 2020, while the EU economy contracted by 2.9. Thus, the GDP growth rate differential is 0.6%. Thus, we assign a score of 2.

Conclusion

The exogenous factors have a cumulative score of 2. That means we can expect a short-lived bullish trend for the EUR/JPY pair. The weekly EUR/JPY chart shows that the pair has crossed the 200-period MA for the first time since August and attempting a breach of the upper Bollinger band.

We hope you find this article informative. In case of any questions, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

EUR/JPY Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

The global macro analysis of the EUR/JPY forex pair will involve the analysis of endogenous and exogenous economic factors. The endogenous analysis will cover indicators that drive economic growth in the EU and Japan. Exogenous factors will cover the analysis of factors that impact the exchange rate between the Euro and the Japanese Yen.

Ranking Scale

We will use a scale of -10 to +10 to rank the impact of these factors. When the endogenous factors are negative, it implies that they resulted in the depreciation of the local currency. a positive ranking implies that they led to an increase in the value of the domestic currency. The ranking of the endogenous factors is determined by their correlation with the domestic GDP growth.

When the exogenous factors get a negative score, it means they have a bearish impact on the EUR/JPY pair. A positive score implies they’ve had a bullish impact. The ranking of the exogenous factors is determined by their correlation to the exchange rate of the EUR/JPY pair.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has an overall score of -3. Based on the factors we have analyzed, we can expect that the Euro had marginally depreciated in 2020.

JPY Endogenous Analysis – Summary 

A score of -12 implies a strong deflationary effect on the JPY currency pair, and we can conclude that this currency has depreciated this year.

  • Japan Employed Persons

This indicator measures the changes in the number of workers over a particular period. It only tracks the section of the labor force that has attained the minimum working age. Changes in the labor market are seen as leading indicators of economic development.

In October 2020, the number of employed persons in Japan increased to 66.58 million from 66.55 million in September. The number of employed persons in Japan is still lower than the 67.4 million recorded in January. We assign a score of -5.

  • Japan GDP Deflator

The GDP deflator is used to measure the comprehensive changes in the overall inflation of the Japanese economy. Since it measures the price changes of the entire economic output, it is used as a key predictor of future monetary and fiscal policies. An increase in GDP deflator means that the economy is expanding, which may lead to the appreciation of the JPY.

In Q3 of 2020, the Japan GDP deflator dropped to 100.4 from 103.5 in Q2. Up to Q3, the Japan GDP deflator has marginally increased by 0.2 points. We assign a score of 1.

  • Japan Industrial Production

This indicator covers the changes in the output value of mining, manufacturing, and utility sectors. The Japanese economy is highly industrialized. The industrial sector contributes approximately 33% of the GDP. That means the GDP growth rate in Japan is sensitive to the changes in industrial production.

The MoM industrial production in Japan increased by 3.8% in October 2020 while the YoY dropped by 3.2% – the slowest since February 2020. On average, the MoM industrial production in Japan is -0.15%. We assign a score of -5.

  • Japan Manufacturing PMI

About 400 large manufacturers are surveyed monthly by The Jibun Bank. These manufacturers are classified according to the sector of operations, their workforce size, and contribution to GDP. The overall manufacturing PMI is an aggregate of employment, new orders, inventory, output, and suppliers’ deliveries. The Japanese manufacturing sector is seen to be expanding when the PMI is above 50 and contracting when below 50.

In November 2020, the Japan Manufacturing PMI was 49 compared to 48.7 in October. The November reading is almost at par with the January levels. We assign a score of 1.

  • Japan Retail Sales

The retail sales measure the change in the monthly purchase of goods and services by Japanese households. Since it is a leading indicator of consumer demand and expenditure, it is best suited to gauge possible economic contractions and expansions.

In October 2020, Japan retail sales rose by 0.4% from 0.1% recorded in September. YoY retail sales increased by 6.4%, which marks the first month of increase since February 2020. The growth of retail sales is mainly attributed to an increase in motor vehicle sales, machinery and equipment, and medicine & toiletry. On average, the first ten months of 2020 have had a 0.4% increase in MoM retail sales. Thus, we assign a score of 2.

  • Japan Consumer Confidence

This is a monthly survey of about 4700 Japanese households with more than two people. The survey covers the households’ opinion on the overall economic growth, personal income, employment, and purchase of durable goods. An index of above 50 shows that the households are optimistic, while below 50 shows that they are pessimistic.

In November 2020, Japan’s consumer confidence was 33.7 – the highest recorded since March. It is, however, still lower than the pre-pandemic levels of 39.1. We assign a score of -3.

  • Japan General Government Gross Debt to GDP

Prospective domestic and international lenders use the government debt to GDP ratio to determine the ability of an economy to sustain more debt. Among the developed nations, Japan has the highest government debt to GDP ratio. However, it has minimal risk of default since most of the debt is domestic and denominated in Japanese Yen, which poses a low risk of inflating the domestic currency in the international market.

In 2019, the general government gross debt to GDP in Japan was 238%, up from 236.6% in 2018. In 2020, it was projected to hit a maximum of 250%. We assign a score of -3.

In our upcoming article, we have performed an Exogenous analysis of the EUR/JPY Forex pair and gave our optimal forecast. Make sure to check that out. Cheers.

Categories
Forex Fundamental Analysis

EUR/CAD Global Macro Analysis Part 3

EUR/CAD Exogenous Analysis

EUR/CAD Exogenous Analysis

EUR/CAD Exogenous Analysis

  • The EU and Canada Current Account to GDP differential

When a country has a high current account to GDP ratio, it means that it is running a current account surplus. That implies that the country is highly competitive in international trade as the value of its exports is higher than its imports. Conversely, a country with a low or negative current account to GDP ratio, is running a current account deficit. It means that the value of its imports is higher than exports.

In 2020, Canada’s current account to GDP is expected to hit -2.7% while that of the EU 3.4%. Thus, the current account to GDP differential between the EU and Canada is  6.1%. This means that the EUR is in higher demand in the international market than the CAD. We assign a score of 5.

In the forex market, interest rate differential helps to show investors and traders which currency will earn them higher returns. In a carry trade, forex traders tend to be bullish on the currency that offers a higher interest rate differential. This means that the currency with the higher interest rate will have a higher demand than the lower interest rate.

The European Central Bank has maintained interest rates at 0% throughout 2020, while in Canada, interest rates were cut from 1.75% to 0.25%. Thus, the interest rate differential for the EUR/CAD pair is -0.25%. We assign a score of -2.

  • The EU and Canada GDP Growth Rate differential

Since countries vary in the economy’s size, it makes it hard to compare them based on absolute GDP. However, the GDP growth rate helps filter out the effects of the economy size and instead compares countries based on their growth.

From January to September 2020, the Canadian economy has contracted by 4.3% while the EU economy has contracted by 2.9%. That means that the GDP growth rate differential between the EU and Canada is 1.4%. i.e., the Canadian economy has contracted more than the EU economy. We assign a score of 4.

Conclusion

The exogenous analysis of the EUR/CAD pair has a score of 8, which means we can expect a bullish trend for the pair in the short-term. This is supported by our technical analysis, which shows the weekly chart bouncing off the lower Bollinger band, implying that an uptrend is looming.

We hope you find this article informative. In case of any queries, please let us know in the comments below. All the best.

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Forex Fundamental Analysis

EUR/CAD Global Macro Analysis Part 1 & 2

Introduction

Introduction

Introduction

The global macro analysis of the EUR/CAD pair will analyze endogenous factors that drive the domestic GDP in the EU and Canada. We’ll also analyze exogenous factors that affect the dynamics of the EU and Canada economies, hence affecting the EUR/CAD exchange rate.

Ranking Scale

We’ll rank both endogenous and exogenous factors on a sliding scale from -10 to +10. When the endogenous factors are negative, it means they caused the domestic currency to depreciate. A positive ranking means they resulted in an appreciation of the currency during the period under review. The endogenous scores are based on correlation with the domestic GDP growth.

Similarly, when the exogenous factors get a negative score, they resulted in a drop in the exchange rate. A positive exogenous score means it increased the exchange rate of the EUR/CAD pair. The exogenous scores are based on a correlation with the price of the EUR/CAD pair.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has presented a score of -3. Based on the indicators that we have analyzed, we can conclude that the Euro has depreciated marginally this year.

CAD Endogenous Analysis – Summary

This economic indicator shows the monthly change in the number of Canadians who are employed. It covers both full-time and part-time employment. Normally, employment changes correspond to an increased business activity, which corresponds to changes in the GDP.

In November 2020, employment in Canada increased by 62,000, down from the 83,600 increase registered in October. The November employment change was the lowest since May 2020, when economic recovery from the effects of the coronavirus began. Up to November 2020, the Canadian economy has shed about half a million jobs. We assign a score of -6.

  • Canada GDP Deflator

The GDP inflator is a comprehensive measure of the change in the inflation rate in Canada. It is comprehensive since it reflects the changes in the prices of all goods and services produced within the economy. This contrasts with other measures of inflation like the CPI, which only measures changes in the price of a select basket of goods and services.

In Q3 of 2020, the GD deflator in Canada rose to 111.6 from 108.8 in Q2. Q3 reading is the highest ever in the history of Canada. This shows that the Canadian economy is bouncing back from the economic downturn brought about by the pandemic. We assign a score of 2.

  • Canada Industrial Production

This indicator measures the total output from businesses operating in the industrial sector. Canadian industrial production comprises mining, manufacturing, and utilities. It is the backbone of the Canadian economy, with crude oil production alone accounting for almost 10% of the GDP.

In September 2020, the YoY Canadian industrial production dropped by 7.9%, while the MoM increased by 1.41%, up from the 0.13% drop in August. Up to September, the overall industrial production is down 5.54%. We assign a score of -5.

  • Canada Manufacturing PMI

This indicator measures the Canadian manufacturing sector’s performance from the perspective of firms’ purchasing managers in the sector. The PMI aggregates the following indexes; inventories, employment, new orders, output, and suppliers’ deliveries. The sector is expanding if the index is above 50, while a reading below 50 shows contraction.

In November 2020, the Canada Manufacturing PMI rose to 55.8 from 55.5 in October. This marked the fifth consecutive expansion in the manufacturing sector from July 2020. Thus, we assign a score of 4.

  • Canada Retail Sales

The Canada retail sales data measures the changes in the value of final goods and services purchased by households over a particular period. It is a critical leading indicator of the overall economic growth since households’ consumption is considered the primary driver of GDP growth.

In September 2020, the MoM retail sales in Canada increased by 1.1%  compared to a 0.5% increase in August. YoY retail sales rose by 4.6% compared to 3.7% in August 2020. Up to September 2020, the retail sales figure has risen by an average of 1.38%. We assign a score of 3.

  • Canada Consumer Confidence

Canada consumer confidence is calculated from an aggregate of 11 questions from the survey of households. This survey estimated the current situation to that expected by households in about six months. The questions touch on the areas of the economy, personal finances, job security, household purchases, and savings vs. expenditure goals. Their confidence is measured on a scale from 0 to 100.

In November 2020, consumer confidence in Canada rose to 44.5 from 42.08 in October. It is, however, still lower than during the pre-pandemic period. We assign a score of -5.

  • Canada Government Gross Debt to GDP

In 2019, Canada had a government debt to GDP ratio of 88.6%, down from 89.7% in 2018. The 2019 ratio was the fourth consecutive year since 2016, when the government debt to GDP ratio dropped.

In 2020, it is projected that the Canadian government debt to GDP ratio will increase to 97%. This increase is due to the increased expenditure to alleviate the economy during the coronavirus pandemic. Over the long term, Canada’s government debt to GDP ratio is expected to stabilize around 90%. We assign a score of -2.

In the next article, you can find the exogenous analysis of the EUR/CAD forex pair where we have qualitatively forecasted the future price movement of this pair. Cheers.

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Forex Risk Management

A Risk Management Model to Forecast the Margin Level

Margin call and Stop Out are some of the trading conditions that are infallibly indicated in the trading account conditions. Margin call is a warning sign, which the broker sends to the trader to deposit new funds into the account when losses on open transactions have approached a critical level. If the trader does not […]

Margin call and Stop Out are some of the trading conditions that are infallibly indicated in the trading account conditions. Margin call is a warning sign, which the broker sends to the trader to deposit new funds into the account when losses on open transactions have approached a critical level. If the trader does not […]

Margin call and Stop Out are some of the trading conditions that are infallibly indicated in the trading account conditions. Margin call is a warning sign, which the broker sends to the trader to deposit new funds into the account when losses on open transactions have approached a critical level. If the trader does not make a new deposit into his account and the losses continue to increase, the broker may affect a forced closure of the trader’s transactions.

Stop out is a notice of auto-close of transactions, which occurs when there is an insufficient margin level to keep account positions open. Brokers indicate in their agreements the percentage of this level, which may be different in each case.

Control of the margin level is one of the essential rules of risk management. In order to make this process very optimal, professional traders often create models, which allow estimating the level of the minimum margin required with specified leverage and volume of transactions. For more information on how to create models, how to calculate the margin level, and how to manage leverage, read this article.

Margin Call and Stop Out: Concepts and Calculation Rules

Terminology is the first thing the trader has to study before testing his strengths in Fórex. Without it, it is impossible both successful trade and collaboration with your broker. For some reason, in most cases, beginners believe that it is enough to download a strategy from the Internet, follow the recommendation point by point in the demo account to be able to start earning “a goose paste”.

Boxes such as “I have read and accept the terms” are automatically marked. It is that the merchants ignore the concept “offer”, where they have described all the conditions of the trade in mole type of accounts. In the end, this can lead to losses and disputes between the trader and the broker. Today, you will know two important concepts, Margin call and Stop out, whose parameters brokers always indicate in the commercial terms of each account.

In this article I will explain:

  • What are Margin call (margin call) and Stop out with practical examples (already defined above).
  • How to create a model to control the required minimum margin level and how to apply it in trading.
  • How to avoid stop-out (forced closure of open positions).
  • Stop Out and Margin Call: how not to run out of deposit at an inconvenient time.

This story happened on December 30, 2015, when miracles occur and one can ask for new magical desires. On that day Denís Grómov, a private merchant, also expected miracles. If we want to explain otherwise it would be impossible how in just 4 and a half hours and with the deposit of 5.6 million roubles (approximately € 64,400) he made more than 5,000 transactions of purchase and sale of currency for a total value of 42 billion roubles (about € 483,000). Later the 38-year-old merchant will say that he did not understand what happened. It’s just that the price of the dollar was growing and winning on the stock market was the best option if you looked at it from the point of view of spending on the margin. The result was sad: having lost all his deposit, the trader was left in debt to the broker and now owes him 9.5 billion roubles (about 110,000 euros).

The trader operated with a specific asset USDRUB_TOM, whose exchange rate today is set as the official tomorrow by the Central Bank of Russia (TOM – tomorrow). Grómov noted that compared to USDRUB_TOD (today) the US currency cost a little more. In 38 minutes he made more than 2,500 operations buying the US currency with the official rate for today (today) and selling it with the official rate for tomorrow (tomorrow). As it seemed to Gromov, the deposit was insufficient, so he applied the broker’s leverage. The general purchase/sale position of the asset did not exceed the margin requirement (the sum of the deposit retained by the broker as a guarantee for the opening of commercial operations), but at that time the volume of operations was already about 23.7 billion roubles (about € 2,724,000).

At that time he was called the manager of the broker, warned him of so-called “margin call” and proposed “reducing leverage (borrowed funds) by opening up opposite positions”. The trader’s mistake was simple: he did not take into account the price for arbitration (carrying out complementary transactions at the same time in the price difference between different markets on the same financial asset). Any leverage increases the volume of the transaction for which an interest charge (swap) is charged when a trading day is terminated for keeping the transaction open for more than one day. The operations with the asset USDRUB_TOD were executed on December 31 while the operations with the USDRUB_TOM, only on January 11. For all those days a swap was charged from the merchant’s account, which was larger than his deposit. This was what the broker manager told the unfortunate trader, who had only to close the open-to-loss transactions.

The merchant tried to solve the problem through the court, but without success. However, this story serves as a compelling example of how relevant it is to know the terms “margin call”, “stop out” and “swap”.

What are Margin and Margin Call Operations?

Margin operations are leveraged or leveraged operations offered by the broker. The margin allows opening positions for a total amount of ten, one hundred, and even one thousand times larger than that of the entire merchant deposit on condition that this amount is returned.

Each broker has its own leverage: 1:1 (the broker does not have it); 1:10 (the trader can open trades with a volume ten times larger than his deposit), 1:100, and even 1:2000. According to the recommendations of European regulators, before the permitted minimum limit of leverage was 1:200 and now, from 1:50 with the prospect of decline to 1:30, although this does not stop offshore licensed brokers. Therefore there is still leverage of 1:1000 and even 1:2000.

No one from the company representatives will tell you where the broker gets so-called leverage, on the pretext that they protect trade secrets.

There may be several options:

Aid to liquidity providers. Liquidity providers are investment banks whose liquidity depends on the deposit of investors through which the merchant’s deposit can be increased. Although there is one question: what do liquidity providers gain? Perhaps, brokers share the spread with them. But if, in fact, it’s so obvious, what is the reason why providers hide the leverage mechanism?

Technical multiplier. Regardless of the leverage offered the trade is done with merchant funds. The merchant, who buys a currency, will sooner or later sell it to regain balance. Broker leverage is only a digital instrument that is offset in opposite trades. The total volume of transactions with this type of digital instrument is much larger than the amount of the real currency in the broker’s accounts. But the system maintains the balance since after each purchase transaction there is a sale transaction and vice versa. If one merchant wins, the other loses.

Broker – “kitchen”. The manipulation of figures is carried out within the same company. The aim of the broker is to offer the trader the largest leveling so that he can lose his funds as quickly as possible.

In theory, they very often say that leveraged transactions are “a virtual loan with a deposit guarantee from the trader” or “bilateral transactions in which the trader who bought the asset with borrowed money is forced to sell it later”. Actually, it’s not entirely true. In any credit transaction, the lender also runs the risk of not getting the loan back. In margin transactions, the broker does not assume this risk.

Leverage Examples

No leverage – The trader has $1000, of which $600 wants to invest in oil. Oil volatility is small: – 0.1-0.3% per day. Suppose the trader performs intraday trade and in the oil market, a force majeure is produced and, as a result, instantly the oil price drops by 5%, that is, from $ 60 to $ 57 per barrel. If the merchant has opened a long position with his $ 600, the losses will be 600*0.05=$ 30. The deposit of $1000 is a small amount.

With leverage – Suppose the trader is confident that oil prices will rise and makes the decision to apply the 1:1000 leverage. The broker retains $600 of your deposit as collateral and $400 of the free margin (uncommitted balance) will serve as insurance. Thus, the trader opens a position worth 600*100 = $60,000. Force majeure spoils the investor’s plans and the loss of $30 becomes $3000. The merchant does not have this money in his account, so all his transactions will be closed by force before oil prices drop to the level of $57. It is easy to calculate that the guarantee of $ 600 with the indicated leverage is able to withstand just a 1% decrease in price ($ 0.60), the unencumbered balance ($ 400) – $ 0.40 more.

Margin Call (margin call) is a situation in which the broker informs the trader of the need to deposit new funds into the account in the event of a reduction of the sum below the established level. It is a kind of warning that the merchant’s deposit under the current conditions will soon end.

Stop Out is a forced closure of the trader’s open transactions at the current market price when the proportion of the deposit amount and the current loss to the amount of the guarantee for the positions opened at this time (margin level) is lower than the corridor has established. Open operations are closed one after the other until the free margin exceeds the established limit.

Example: The runner places the margin call in Fórex at the level of 20% and the stop out, at 10%. The merchant deposits $300 and applies the leverage of 1:100 by opening a deal worth $20,000. The amount of own funds needed to open this type of operation is 1/100 out of 20,000, or $200. The 20% of the guarantee amount is $40 and 10% is $20. Then when the trader loss is $260 a warning signal will be sent; when the trader’s account drops to $20, the forced closure of open trades will be generated.

Important! By setting limits on maximum leverage, European regulators are struggling not with brokers, but with the psychology of traders. The size of the leverage on Fórex carries no risk. Since there is no difference if the merchant with a deposit of $ 300 will open a position with leverage of 1:100 (the guarantee is $ 200) or with leverage of 1:200 (the guarantee of $ 100). It will continue to operate with available funds of $300. The volume of the position matters! If in this case, the volume is the target ($20,000), then in practice the emotions push operators to open large volume operations with greater leverage, which can lead to losses.

On the MT4 platform, the data on available funds and the margin level are indicated in the menu below in the “Trade” tab.

Specific Terms

Deposit is the amount of funds deposited into the trading account.

Balance is the amount of funds of the merchant at the present time, which remains in the account after the transactions have been executed. It is equal to the current adjusted profit or loss balance. If the amount of loss on unprofitable open transactions exceeds the profit on profitable transactions, in this column the figure will be less than the amount of loss. For example, the deposit is $100. One of the two trades was profitable and reported a gain of $32. The second operation has been closed to losses: $ 43. 100+32-43=89.

Margin (also known as “guarantee”) is a short-term loan service provided by the broker while his position is open. If the merchant buys the euro for a value of $10,000 and with leverage of 1:100, the loan will be $100.

Free margin is the capital not involved in the trade that the trader can use at his discretion. It is calculated as “balance”-“margin”.

Margin level serves as the indicator that reflects the account balance and is expressed as a percentage. For the trader, you will have something to look at. If its value falls below the stop out set by the broker, the closing of operations begins. The following formula will help us to do the calculation: “Funds”/”Margin” * 100%.

Example: The merchant deposits $100 into the account and is about to open a position with a volume of 0.01 lots at the price of 1.4500 with the leverage of 1:100. 1 lot is 100,000 units of a conditional currency, therefore, to buy 0.01 lots you need $14.5. (Total: $1,450). “Deposit”: $100. “Balance”: before the opening of operations is also $ 100. “Margin”: $ 14.5. “Free margin”: $ 85.5. “Margin level”: (100/14.5)*100 = 689%.

How to Calculate the Approximate Margin Level?

Any theory is necessary not only to be able to apply it in practice but also to be able to make forecasts with your help. The risk management system shall involve the development of several risk management models that allow current amendments to the table in a matter of minutes according to the market situation, and to see how the future outcome changes.

The management of the level of deposit allows to foresee in which quotes of the pair with the established volume of a lot can occur the stop out in Fórex. With averaged volatility data, an individual strategy can be created to increase (decrease) the volume of positions according to the rate of change in price and the level of leverage.

Peculiarities of Margin Operations in Forex

Unlike other types of loans, the merchant does not pay a percentage for the use of the loan on a regular basis. Any broker has swap, a commission that is charged for keeping a position open at the end of the day. The swap is charged against all open positions, including those in which the loan funds are involved, and deducted from the trader’s own funds, thus accelerating the reduction of the balance.

In most cases, margin operations are short-term. The trader takes advantage of leverage only when he is completely confident that the trend will not change. After making a profit from short-term positions, the trader again operates on their own funds only. In most cases the trader will not lose more than what he has deposited in his trading account, that is, the account balance will not be negative.

A clarification on the last point. The broker who lends his money for one day is not at risk, as in the event of a sudden price reversal he will have time to automatically close all the trader’s transactions. The situation is different if the transactions are transferred to the next day or in the case of serious force majeure.

Example: In mid-January 2015, the Swiss Central Bank allowed its national currency to fluctuate. In one night the franc shot up against the dollar and the euro at 30%.

That decision was unexpected to many. On the first day, due to the existence of high volatility trading conditions were amended: some suspended operations, some changed the margin requirement. Almost all brokers suffered losses on the illiquid market, and the British department of Alpari (UK) even went bankrupt, whose official version is that. “due to the volatility the company lacked liquidity. The losses of the clients exceeded the funds deposited, and the broker was forced to reward them on his own”. It’s a perfect example of how the exception confirms the rule.

How to Avoid Margin Call and Stop Out?

  1. Read the offer where the trading conditions of each trading account are indicated in detail.
  2. Comply with comprehensive risk management standards. The theory is that the sum of simultaneously opened positions should not exceed 10% (rarely 15%) of the deposit amount.
  3. Use the example of the table given in the article.
  4. Be cautious when using leverage. Set a target in the volume of positions and do not try to open the maximum position possible.
  5. Estimate the share of leverage and volatility. The higher the volatility, the lower the leverage in margin operations.
  6. Set the stops.

Conclusion

You should not be afraid of leverage, any instrument in the hands of professionals is capable of delivering benefits. Leverage is the individual choice of each, so in this article, I do not give a uniform recommendation applicable to all traders. Strict observation of risk management and control of unprofitable positions is one of the most effective methods of avoiding stop-out.

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Forex Fundamental Analysis

EUR/AUD Global Macro Analysis – Part 3

EUR/AUD Exogenous Analysis

EUR/AUD Exogenous Analysis

EUR/AUD Exogenous Analysis

  • The EU and Australia Current Account to GDP differential

The current account to GDP shows the percentage of a country’s international trade that makes up the GDP. Countries with higher current account surplus have a higher current account to GDP ratio while those running deficits have a negative current account to GDP ratio.

In this case, if the GDP differential is positive, it means that the exchange rate for the EUR/AUD pair will increase. But if the differential is negative, then the exchange rate for the pair will drop.

In 2020, the current account to GDP ratio in the EU is expected to hit 3.4% and -1.5% in Australia. Thus, the current account to GDP differential is 4.9%. We assign a score of 3.

Typically, investors put their money into financial instruments that offer higher interest rates. Therefore, the country with a higher interest rate should be expected to have more inflow of funds than that with a lower interest rate. Note that when foreign investors invest in the local economy, they have to convert their money into the domestic currency. This conversion increases the demand for the domestic currency in the forex market hence increasing its value.

In forex trading, if the EUR/AUD pair has a positive interest rate differential, it means that the exchange rate of the pair will increase. Conversely, a negative interest rate differential implies that the pair has a bearish outlook.

In 2020, the Reserve Bank of Australia cut the cash rate from 0.75% to 0.1%, while the ECB has maintained interest rates at 0%. Therefore, the interest rate differential for the EUR/AUD pair is -0.1%. We assign a score of -3.

  • The EU and Australia Growth Rate differential

In any economy, the value of the domestic currency is mostly determined by the growth of the local economy. Therefore, a country whose economy is growing faster will see its domestic currency appreciate faster.

If the growth rate differential is negative for the EUR/AUD pair, we can expect a bearish outlook. If it is positive, it implies that the exchange rate for the pair will rise.

For the first three quarters of 2020, the Australian economy contracted by 4% and the EU economy by 2.9%. The GDP growth differential is 1.1%. We assign a score of 2.

Conclusion

The EUR/AUD exogenous factors have a score of 2. If the conditions observed in the exogenous factors persist, we can expect that the pair will adopt a bullish trend in the short-term.

The technical analysis of the EUR/AUD shows the weekly price chart bouncing off the oversold region of the lower Bollinger bands. More so, the pair is still trading above the 200-period MA. All the best.

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Forex Fundamental Analysis

EUR/AUD Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

Global macro analysis of the EUR/AUD pair will focus on the endogenous analysis of fundamental factors driving economic growth in the EU and Australia. It will also involve exogenous analysis that will focus on factors that influence the EUR/AUD pair’s exchange rate.

Ranking Scale

This analysis will assign a score between -10 and +10, depending on the endogenous and exogenous factors’ impact.

A negative score for the endogenous factors means that the local currency shed some value. When positive, it means that the domestic currency has appreciated. The endogenous score is determined through correlation analysis between the endogenous factors and the GDP growth rate.

On the other hand, when the exogenous factors have a negative score, it means that the exchange rate between the EUR and the AUD will drop. A positive score means that the exchange rate will rise. The exogenous score is determined via a correlation analysis between the exogenous factors and the EUR/AUD pair’s exchange rate.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has an overall score of -3. Based on the factors we have analyzed, we can expect that the Euro has marginally depreciated in 2020.

AUD Endogenous Analysis – Summary

As you can see in the below image, according to the Endogenous Indicators of AUD, we can conclude that this currency has depreciated as well in 2020.

The employment change in Australia tracks the monthly number of people who are gainfully employed or engaged in unpaid work. The fluctuation in the number of those employed on a full-time or parttime basis helps to show economic growth.

Between September and October 2020, the number of those employed in Australia increased by 178,800. This shows that the economy is recovering and adding more jobs to the labor market. However, from January to October, the Australian labor market has lost about 190,100 jobs. Hence, we assign a score of -6.

  • Australia GDP Deflator

The GDP deflator measures the overall inflation for the economy. It is a comprehensive measure of inflation rate compared to other measures since it accounts for the changes in the prices of all goods and services produced within Australia. Changes in the prices often correspond to changes in economic growth.

In the third quarter of 2020, the Australia GDP deflator rose to 102.03 points from 101.64 in Q2. Up to Q3, the GDP deflator in Australia has dropped by 0.07 points. We assign a score of -2.

  • Australia Industrial Production

Industrial production measures the quarterly changes in output from the manufacturing sector, utilities, and mining. Note that the Australian economy is heavily dependent on commodity exports, which means that industrial production changes significantly impact economic growth.

In Q2, the industrial production in Australia dropped by 3.3%, while the YoY Q3 industrial production dropped by 2.02%. The drop in Q2 is the largest quarterly drop in over 25 years. We assign a score of -6.

  • Australia Manufacturing PMI

This PMI is from a survey of companies operating in the industrial sector. The index shows whether the manufacturing sector in Australia is expanding or contracting. In Australia, the Ai Group surveys the changes in new orders, employment, inventory, output prices, and production levels. When the index is above 50, it means that the manufacturing sector is expanding and contracting when it’s below 50.

In November 2020, the AIG Australian manufacturing PMI dropped to 52.1 from 56.3 in October. Despite the drop, the Australian manufacturing PMI points to growth in the industrial sector. Hence, we assign a score of 6.

  • Australia Retail Sales

The retail sales data in Australia tracks the monthly change of the consumer expenditure on goods and services. Consumer goods include items of clothing and footwear, food, and household items. Purchases made in restaurants, departmental stores, and hotel services and deliveries are also included as retail sales.

In October 2020, the MoM retail sales increased by 1.4% from a 1.1% drop in September. In 2020, the average MoM retail sales have grown by 0.97%. We assign a score of 2.

  • Australia Consumer Confidence

The Melbourne Institute and Westpac Bank survey about 1200 households in Australia and constructs the consumer confidence index. The index is based on households’ evaluation of their financial condition for the preceding year and in the next 12 months. It also includes their economic expectations in the next one and five years. When the index is above 100, it shows that households are optimistic and pessimistic if the index is below 100. Note that consumer confidence about their finances and the economy determines their level of expenditure; hence, it drives the rate of GDP growth.

In December 2020, consumer confidence in Australia rose to 112 from 107.7 in November, which is the highest in over ten years. We assign a score of 5.

  • Australia Government Debt to GDP

The government debt to GDP determines the ability of the economy to service its debts. It also impacts the ability of the government to take on more debt to advance an economic agenda. A debt level of below 60% of the GDP is preferable since it ensures that the government can take on more debt without over-leveraging the economy.

In 2019, the Australian government debt to GDP rose to 45.1% from 41.5% in 2018. In 2020, it is expected to reach 50% on account of increased government expenditure during the coronavirus pandemic. We assign a score of -3.

Please check our following article where we discuss the Exogenous analysis of the EUR/AUD Forex pair. Cheers.

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Forex Fundamental Analysis

EUR/NZD Global Macro Analysis – Part 3

EUR/NZD Exogenous Analysis

EUR/NZD Exogenous Analysis

EUR/NZD Exogenous Analysis

  • The EU and New Zealand Current Account to GDP differential

An economy’s current account comprises the balance of trade, net transfer payments, and net factor income. In international trade, a country with a higher current account surplus experiences higher demand for its domestic currency. That means the value of its currency will be higher. Typically, a higher current account to GDP means that the country has more current account surplus.

For the EUR/NZD pair, if the differential of the current account to GDP is negative, it means that the pair’s exchange rate will fall. If it’s positive, we can expect the pair’s exchange rate to increase.

In 2020, New Zealand’s current account to GDP is forecasted to reach -0.8% while that of the EU 3.4%. Thus, the current account to GDP differential between the EU and New Zealand is 4.2%. We assign a score of 4.

The prevailing interest rate in a country determines the flow of capital from foreign investors. Naturally, the country that offers a higher interest rate will attract more foreign investors who seek higher returns. Similarly, a country with lower interest rates will experience an outflow of capital by foreign investors. In the forex market, a currency pair with a positive interest rate differential tends to be bullish since traders are buying the base currency – which offers a higher interest rate and sell the quote currency – which has a lower interest rate. Conversely, a currency pair is expected to be bearish if the interest rate differential is negative since investors will sell the base currency and buy the quote currency.

In 2020, the Reserve Bank of New Zealand cut the official cash rate to 0.25%, while the ECB maintained the interest rate at 0%. Hence, the interest rate differential for the EUR/NZD pair is -0.25%. We assign a score of -3.

  • The EU and New Zealand GDP Growth Rate differential

The value of a country’s domestic currency is impacted by the growth rate of the local economy. Thus, comparing the growth rate between countries’ GDP growth rates helps determine which currency appreciated or depreciated more than the other.

The New Zealand economy contracted by 3.2% in the first three quarters of 2020 and that of the EU by 2.9%. The GDP growth rate differential is 0.3%. We assign a score of 2.

Conclusion

The EUR/NZD exogenous analysis has a cumulative rank of 3. This means that the pair is expected to trade in a bullish trend in the short-term.

The bullish trend can also be observed from the technical analysis of the weekly price charts. The pair is trading above the 200-period MA and the weekly price rebounding from the lower Bollinger Band.

We hope you found this analysis informative. If you have any questions, please let us know in the comments below. Cheers!

Categories
Forex Fundamental Analysis

EUR/NZD Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

In conducting the global macro analysis for the EUR/NZD pair, we will analyze the endogenous factors that impact the EU and New Zealand economic growth. We’ll also analyze exogenous economic factors that affect the EUR/NZD pair’s exchange rate in the forex market.

Ranking Scale

We will rank the effects of the endogenous and exogenous factors on a sliding scale of -10 to +10. The endogenous factors will be ranked based on correlation analysis with the GDP growth rate. When the endogenous ranking is negative, it means that the domestic currency will depreciate and appreciate when positive.

Similarly, the exogenous factors are scored based on correlation analysis with the EUR/NZD pair’s exchange rate. A positive score means that the EUR/NZD pair’s price will rise and drop if the score is negative.

Summary – EUR Endogenous Analysis

Based on the factors we have analyzed, we have got a score of -3, and we can expect the Euro to be marginally depreciating in 2020.

Summary – NZD Endogenous Analysis

A score of -4 on NZD Endogenous Analysis implies that in 2020, the NZD has depreciated as well.

Employment change measures the quarterly change in the number of people who are gainfully employed. It can be used as a comprehensive measure of the labor market changes, which corresponds to economic growth.

In Q3 of 2020, Employment in New Zealand dropped by 0.8%, from a 0.3% drop in Q2 to 2.709 million. The Q3 reading is the largest drop in QoQ employment since Q1 of 2009. We assign a score of  -6.

  • New Zealand GDP Deflator

This indicator measures the quarterly changes in the price of all economic output in New Zealand. It is regarded as the most specific inflation measure since it covers price changes for every good and service produced.

In Q2 of 2020, the New Zealand GDP deflator dropped to 1238 points from 1242 in Q1. This shows that the economy contracted in Q2. Hence, we assign a score of -3.

  • New Zealand Manufacturing Sales

New Zealand manufacturing sales track the change in the volume of total sales made in the manufacturing sector. The indicator tracks the sales in 13 industries, which comprehensively represents New Zealand’s economy. The changes in the volume of sales are directly correlated to the growth of the economy.

In Q3 of 2020, the YoY manufacturing sales in New Zealand increased by 3.1% after dropping by 12.1% in Q2 and 1.9% in Q1. The increase in Q3 is the largest recorded since January 2017. However, since the overall industrial production is still at multi-year lows, we assign a score of -6.

  • New Zealand Manufacturing PMI

This index is aggregated from a survey of purchasing managers in the manufacturing sector. It is a composite of scores regarding output in the sector, prices, expected output, employment, new orders, and inventory. When the PMI is above 50, it means that the manufacturing sector is expanding. A PMI score below 50 shows that the sector is contracting. Naturally, these periods of expansions and contractions are leading indicators of changes in the GDP growth rate.

In November 2020, the New Zealand manufacturing PMI rose to 55.3 from 51.7 in October. The rise was due to increased new orders, inventory, production, and deliveries, as uncertainties surrounding COVID-19 decreased. We assign a score of 4.

  • New Zealand Retail Sales

The retail sales track the changes in the quarterly purchase of final goods and services by households in New Zealand. Although retail sales are often affected by seasonality and tend to be highly volatile, it is a significant measure of the overall economic growth since consumer expenditure is one of the primary drivers of GDP growth.

In Q3 of 2020, New Zealand retail sales increased by 28% from 14.8% recorded in Q2. Historically, the Q3 retail sales increase is the largest rise recorded in New Zealand since 1995. The increase was driven by increased expenditure on groceries, vehicles, and household goods. On average, the QoQ New Zealand retail sales figure has grown by 4.1%. We assign a score of 4.

  • New Zealand Consumer Confidence

The New Zealand consumer confidence is also called the Westpac McDermott Miller Consumer Confidence Index. The index measures the quarterly change in consumers’ pessimism or optimism about the performance of the economy. When the index is above 100, it shows increased optimism by households, and that below 100 shows pessimism.

In the fourth quarter of 2020, New Zealand consumer confidence rose to 106 from 95.1 in Q3. The increased optimism was driven by higher readings in both the current and expected financial situation. We assign a score of 2.

  • New Zealand Government Net Debt to GDP

Investors use this ratio to determine if the economy is capable of servicing its debt obligations. Consequently, the government’s net debt to GDP affects the government securities yield and determines a country’s borrowing costs. Typically, levels below 60% are deemed favorable.

In 2019, the New Zealand Government Net Debt to GDP dropped to 19% from 19.6% in 2018. In 2020, it is projected to range between 27% to 32%, which would be the highest since 1998. We assign a score of 1.

In the next article, we have done the exogenous analysis of both EUR and NZD pairs to accurately forecast this currency pair’s future trend. Please check that out. Cheers.

Categories
Forex Elliott Wave Forex Market Analysis

GBPCAD Triangle Pattern Completion. What’s Next?

The GBPCAD cross shows the completion of an Elliott wave triangle developed in its wave ((b)) of Minute degree, which moves inside the incomplete wave 2 of Minor degree. 

The GBPCAD cross shows the completion of an Elliott wave triangle developed in its wave ((b)) of Minute degree, which moves inside the incomplete wave 2 of Minor degree. 

The GBPCAD cross shows the completion of an Elliott wave triangle developed in its wave ((b)) of Minute degree, which moves inside the incomplete wave 2 of Minor degree. 

Technical Overview

The big picture of GBPCAD cross under the Elliott Wave view exposed in the following daily chart shows the progress of a corrective structure that began on March 09th when the price found fresh sellers at 1.80531. Once the cross topped at 180531, the cross completed an impulsive wave identified as wave 1 of Minor degree labeled in green and began to develop its wave 2 of the same degree, which remains incomplete.

The previous chart also shows the price developed its wave ((a)) of Minute degree in black as a sharp decline, making its next path corresponding to wave ((b)) as a triangle pattern. This price context carries us to verify the alternation principle between waves inside a corrective pattern. In fact,  the speedy first corrective leg gave way to an elapsed second move in an extended time range compared with wave ((a)). Likewise, the next decline corresponding to wave ((c)) shouldn’t be as quick as wave ((a)).

On the other hand, the piercing below the base-line of the triangle that connects the end of waves (b) and (d) of Minuette degree labeled in blue suggests that the cross could see further declines in the following weeks. Additionally, considering that the price action didn’t surpass the end of wave (e), the likelihood of further drops increases.

Technical Outlook

The next daily chart exposes the time segment of the corrective sequence corresponding to wave 2 of Minor degree, in which waves ((a)) and ((b)) in black were moving for 259 days, starting when the cross topped at 1.80531 and till the end of wave (e) in blue. Additionally, the piercing of the base-line that connects the end of waves (b) and (b) suggests that wave (c) should be in progress.

In this context, the incomplete bearish sequence in progress corresponding to wave ((c)) could extend in a fraction of 259 days, for example, 50 percent of that time or approximately 130 days, which carries us to foresee a downward correction in the GBPCAD cross till early April 2021. Likewise, the potential bearish target zone can be found between 1.65562 and 1.63042.

In summary, the GBPCAD cross advances in an incomplete corrective sequence corresponding to wave 2 of Minor degree. Simultaneously, its internal structure reveals the progress in its wave ((c)). The potential bearish target for this segment extends between 165562 and 1.63042. Also, the downward sequence could elapse until early April 2021. Finally, the invalidation level of the current bearish scenario is located at 1.75549.

Categories
Forex Elliott Wave Forex Market Analysis

Is the US Dollar Index Finding A Bottom?

Technical Overview

Technical Overview

Technical Overview

The US Dollar Index (DXY) continues bouncing in the extreme bearish sentiment zone, testing the resistance at 90.983. The breakout of this resistance level could lead to expect further upsides in the following trading sessions.

The following figure shows the US Dollar Index in its 8-hour timeframe exposing the mid-term market participants’ sentiment unfolded by the 90-day high and low range, revealing the bearish trend’s exhaustion. In this context, the surpassing of the next resistance at 90.983 could warn about the Greenback recovery, which could boost the price until the next resistance is located at 92.236. Likewise, the exhaustion could imply the consolidation of the bearish trend.

On the other hand, the primary mid-term trend plotted in blue shows the bearish pressure that remains in progress and the current since DXY found resistance at 94.742 on September 25th. Likewise, the secondary trend identified with the accelerated green downward trendline shows a pause of the short-term downtrend started at 94.302 on November 04th. In this context, the pause in progress represented by the rising minor trend could develop a limited rally, which could carry the price to test the precious swing at 91.200 reached on December 09th.

Technical Outlook

The short-term Elliott wave view for DXY exposed in the next 4-hour chart reveals the end of the bearish wave ((iii)) of Minute degree labeled in black and the start of wave ((iv)) of the same degree, suggesting the possibility of a corrective rally, which could take until January 20212.

From the previous chart, we distinguish the start of wave ((iv)) identified in black, which began when DXY found support at 89.73 on December 17th, ending the third wave of Minute degree labeled in black. Likewise, the price action surpassed the short-term downward trendline plotted in green, suggesting the bearish sequence’s exhaustion that began at 94.302 on November 04th.

With the short-term trendline piercing, DXY developed the first segment of a corrective wave of Subminuette degree identified as wave a labeled in green, which found resistance in the supply zone between 91.014 and 91.200. Once topped at 91.018, the Greenback retraced, developing its wave b of the same degree, which found support in the intraday demand zone between 90.262 and 90.059. 

The textbook suggests that the price action should develop a third move identified as wave c in green, which could advance until the next supply zone bounded between 91.412 and 91.580. Once the US Dollar Index completes the third segment, the Greenback will complete the wave (a) of Minuette degree identified in blue corresponding to the first segment of the wave ((iv)) in black.

In summary, the US Dollar Index looks starting to develop the first segment of the fourth wave of Minute degree, suggesting the pause of the primary trend’s downtrend, which could last up until January 2021. In this regard, DXY currently found temporary support at 89.730, and the price could develop a new decline corresponding to the fifth wave of Minute degree. The potential next decline could pierce the previous low, being its potential next bearish target located at 88.864. Finally, if the price action surpasses the invalidation level placed at 92.107, the Greenback could start to show recovery signals, which could carry to expect a bullish reversal move.

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Forex Fundamental Analysis Forex Technical Analysis

Fundamental Analysis Vs Technical Analysis: Know the Differences!

Traders make decisions about when and what to trade based on several different factors. Fundamental and technical analysis are two different methods that one can use to predict what will happen with any given instrument by looking at different types of data. As a forex trader, you’ll need to understand the differences between these key […]

Traders make decisions about when and what to trade based on several different factors. Fundamental and technical analysis are two different methods that one can use to predict what will happen with any given instrument by looking at different types of data. As a forex trader, you’ll need to understand the differences between these key […]

Traders make decisions about when and what to trade based on several different factors. Fundamental and technical analysis are two different methods that one can use to predict what will happen with any given instrument by looking at different types of data. As a forex trader, you’ll need to understand the differences between these key schools of thought so that you can make more informed trading decisions. Both fundamental and technical analysis can give you an edge in the markets, but you’ll need to decide which one sounds the most appealing or consider using both methods. 

Fundamental Analysis

Fundamental analysis aims to measure the intrinsic value of a stock by looking at several different factors about the company. This method considers earnings, outgoing costs, assets, liabilities, the overall business model, the status of those in charge, and many other things about a company in order to get the best idea of where prices will go. Some of these things can be measured in simple numerical terms, while others can’t.

For example, you’ll find statistics and numbers when it comes to things like earning reports but evaluating the company’s business model is more of a personal interpretation. Real-time events can also affect the company evaluation. If a scandal goes down involving a certain company, for example, you can expect its revenue to fall. All of these things are taken into consideration when one measures the intrinsic value of a company through fundamental analysis. 

Technical Analysis

Technical analysts exclusively consider a stock’s price and volume, with no need to calculate extra factors. Traders using this method look at charts in order to identify the history of patterns and trends for an idea of what they will do in the future. Some examples of the most popular forms of technical analysis include simple moving averages, support & resistance, trend lines, and other indicators. There are three main types of technical analysis – bar, candlestick, and line charts. Each of these is created using the same price data but will display the data in different ways. This school of thought believes in the idea that charts are great for predicting the past. 

The Bottom Line

While fundamental and technical analysis both aim to predict where a stock’s price will go, each school of thought uses very different methods to come up with its prediction. Fundamental analysts aim to measure the intrinsic value of a company by taking several factors into account, including hard numbers and some personal interpretation. Technical analysts study charts from the past with the stock’s volume and price being the only information considered. While technical analysts look at more complex information about companies that affect a stock’s price in the present and future, technical analysts study charts from the past to get an idea of where the price will go in the future. Both methods have been proven to be effective, so one would need to personally decide which to use.

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Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 3

EUR/GBP Exogenous Analysis

EUR/GBP Exogenous Analysis

EUR/GBP Exogenous Analysis

  • The EU and the UK Current Account to GDP differential

This indicator is used to measure how competitive an economy is in the international market. When a country has a higher trade surplus, the current account to GDP ratio is higher. Conversely, if a country has a lower trade surplus or deficit, the ratio is smaller.

Typically, economies with a higher surplus in terms of the balance of trade tend to have more exports than imports. That means that their value on exports is higher than imports, implying that the domestic currency is in high demand in the forex market. Similarly, a running deficit means lower demand for the domestic currency in the forex market since it is a net importer.

In 2020, the EU current account to GDP is expected to hit 3.4% while that of the UK -4%. The differential is 7%. Based on the correlation with the exchange rate of the EUR/GBP pair, we assign a score of 6. That means we expect a bullish trend for the pair.

This helps determine where the most investor capital will flow. Expectedly, investors will direct their capital to the country with a higher interest rate to earn superior returns. In the forex market, traders tend to be bullish when a currency pair has a positive interest rate differential and bearish if it has a negative interest rate differential.

In the EU, the ECB has maintained interest rates at 0%, while the BOE cut interest rates from 0.75% to 0.1%. Therefore, the interest rate differential for the EUR/GBP pair is -0.1%. Based on the correlation with the EUR/GBP exchange rate, we assign a score of -2.

  • The EU and the UK GDP Growth Rate differential

The differential in GDP growth helps to efficiently compare economic growth by eliminating the aspect of the size of different economies.

For the first three quarters of 2020, the EU economy has contracted by 2.9% while the UK has contracted by 6.8%. That makes the GDP growth rate differential between the two economies 3.9%. It means that the EU economy contracted at a slower pace than the UK. Based on the correlation with the EUR/GBP price, we assign a score of 5.

Conclusion

The exogenous analysis of the EUR/GBP pair has a score of 9. This inflationary score means that we can expect a bullish trend for the pair in the short-term.

Our technical analysis shows the pair trading above the 200-period MA. More so, notice that the EUR/GBP pair bounces off the lower Bollinger band crossing above the middle band, supporting our fundamental analysis. Happy  Trading.

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Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 2

GBP Endogenous Analysis – Summary

GBP Endogenous Analysis – Summary

GBP Endogenous Analysis – Summary

The GBP endogenous analysis has a score of -9. We can therefore understand that the GBP has depreciated in 2020.

  • United Kingdom Employment Change

The UK unemployment change measures the changes in the number of people who are above 16 years and employed. This data is a 3-month moving average of the change in employment, which measures a general trend in the labor industry changes, which typically corresponds to fluctuations in the economy.

In the three months to September 2020, the number of employed people in the UK dropped by 164,000. The YoY employment change shows a drop of 247,000 jobs, which is the worst in ten years. Based on correlation analysis, we assign a score of -7.

  • United Kingdom GDP Deflator

The UK GDP deflator is used as a measure of the comprehensive change in inflation. It filters out any nominal price changes in the entirety of the goods and services produced within the UK.

In Q3 of 2020, the UK GDP deflator dropped to 109.12 from 111.9 in Q2 – the highest ever recorded in UK history. The UK GDP deflator has increased by 6.41in 2020. We, therefore, assign a score of 4 based on its correlation with the GDP growth.

  • United Kingdom Industrial Production

This indicator tracks the changes in all the firms operating under the industrial sector in the UK. The manufacturing sector accounts for about 70% of the total industrial output. The major components of the manufacturing sector are food, tobacco, and drinks, which account for 11%. The manufacture of transport equipment and basic metals account for 17%, pharmaceuticals and non-metallic 6% each. Quarrying and mining activities account for 12% of the industrial production, with 10% for oil and gas extraction.

In September 2020, MoM industrial production in the UK rose by 0.5 while YoY dropped by 6.3%. Despite the growth and recovery of industrial activity from the coronavirus pandemic, the output is still 5.6% lower than the pre-pandemic levels. Thus, we assign a score of -3 based on correlation with GDP growth.

  • United Kingdom Manufacturing PMI

This index is a result of a survey of about 600 companies in the industrial sector. It is a composite of new orders, which accounts for 30%, output 25%, employment 20%, deliveries from suppliers 15%, and inventory 10%. When the index is above 50, it shows that the manufacturing sector is expanding. Below 50, the manufacturing sector is expected to contract, which impacts the GDP output.

In November 2020, the UK manufacturing PMI was 55.6 – the highest recorded in three years. This was mainly driven by increased inventories and increased new orders as a result of Brexit. We assign a score of 3 based on correlation with the GDP growth rate.

  • United Kingdom Consumer Spending

Consumer spending in the UK shows the amount of money that households spent on the purchase of goods and services in the retail sector. Note that expenditure by households is among the primary drivers of GDP growth.

In Q3 of 2020, the UK consumer spending rose to £304.5 billion from £258.32 billion in Q2. This increase is attributed to the restriction imposed at the onset of the coronavirus outbreak, resulting in the economic slowdown. It is, however, still lower than the pre-pandemic levels. Thus, we assign a score of -5 based on correlation with the GDP growth rate.

  • United Kingdom Consumer Confidence

In the UK, GfK surveys about 2000 households to establish their opinions about the past and future economic conditions, their financial situation, and prospects of saving. The survey period covers about 12 months into the future, which makes it a leading indicator of consumer spending, and by extension, the overall economy.

In November 2020, the UK consumer confidence dropped to -33 edging closer to yearly lows of -34 registered at the height of the pandemic. We assign a score of -5 based on its correlation with the GDP growth rate.

  • United Kingdom Public Sector Net Debt to GDP

This ratio tracks the indebtedness of the UK economy. Based on the economy out, both domestic and foreign investors use the ratio to determine whether the UK can be able to service its debt obligations in the future comfortably.

In the financial year 2018 – 2019, the UK’s public sector net debt to GDP was 80.8%, down from 82.4%. In 2020, it is expected to hit 100% with a longer-term average of 91%. We assign a score of 4 since the increased net pubic debt managed to avoid a deeper recession in 2020.

In the next article, we have performed the Exogenous analysis of the EUR/GBP pair and concluded what trend to expect in this currency pair in the near future. Cheers.

Categories
Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 1

Introduction

Introduction

Introduction

A global macro analysis attempts to analyze the endogenous factors that influence the value of a country’s domestic currency and exogenous factors that affect how the domestic currency fairs in the forex market. The endogenous analysis will cover fundamental economic factors that drive GDP growth in the UK and the Euro Area. The exogenous factors will analyze the price exchange rate dynamics between the EUR and the GBP.

Ranking Scale

Both the endogenous and the exogenous factors will be ranked on a scale of -10 to +10. A negative ranking for the endogenous factors means that they had a deflationary effect on the domestic currency. A positive ranking implies that they had an inflationary impact. Similarly, a negative score for the exogenous factors means the EUR/GBP is bearish and bullish when the score is positive.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has an overall score of -3. Based on the factors we have analyzed, we can expect that the Euro has marginally depreciated in 2020.

This is a quarterly measurement of the changes in both part-time and full-time employment in the EU. It includes individuals working for profit or pay and those who perform family work unpaid. Changes in employment help put economic growth in perspective since an expanding economy corresponds to increased employment opportunities and a contracting economy leads to job losses.

In the third quarter of 2020, employment in the EU increased by 0.9% compared to the 2.7% drop in Q2. Up to Q3 2020, employment in the EU has dropped by 2.1 %. Based on correlation with GDP, we assign a score of -5.

  • European Union GDP Deflator

The GDP deflator is an in-depth measure of the rate of inflation. It measures the changes in the price levels of all goods and services produced in an economy. Therefore, it is the perfect measure of the changes in real economic activities. i.e., it filters out any nominal changes in price.

In Q3 of 2020, the EU GDP deflator rose to 107.17 from 106.37 in Q2. Cumulatively, the EU GDP deflator in 2020 has increased by 2.45. We assign a score of 3 based on the weak correlation between the inflation rate and GDP.

  • European Union Manufacturing Production

In the EU, manufacturing production accounts for about 80% of the total industrial output. With most EU economies heavily reliant on manufacturing, the sector forms a significant portion of the GDP and the labor market.

In September 2020, the YoY manufacturing production in the EU decreased by 6.1%. This is an improvement from the decline of 6.3% in August. The overall industrial production reduced by 5.8% during the period.

We assign a score of -5 based on its correlation with the GDP.

  • Euro Area Manufacturing PMI

Markit surveys about 3000 manufacturing firms. The Markit manufacturing PMI comprises five indexes: new orders accounting for 30% weight of the index, output 25%, employment 20%, delivery by suppliers 15%, and inventory 10%. The Euro Area manufacturing is seen to be improving when the index is above 50 and contracting when below 50. At 50, the index shows that there is no change in the manufacturing sector.

In November 2020, the IHS Markit Eurozone Manufacturing PMI was 53.8, down from 54.8 registered in October. The October reading was the highest ever recorded in the past two years. Despite the November drop, the manufacturing PMI is still higher than during the pre-pandemic period. We, therefore, assign a score of 5.

  • European Union Retail Sales

Retail Sales measures the change in the value of goods and services purchased by households for final consumption. In the EU, food, drinks, and tobacco contribute to the highest in retail sales – 40%. Furniture and electrical goods account for 11.5%, books and computer equipment 11.4%, clothing and textile 9.2%, fuel 9%, medical and pharmaceuticals 8.9%, non-food products and others 10%.

In October 2020, the MoM EU retail sales increased by 1.5%, while the YoY increased by 4.2%. Based on our correlation analysis with EU GDP, we assign a score of 3.

  • Euro Area Consumer Confidence

The consumer confidence survey in the Euro Area covers about 23,000 households. Their opinions are gauged from issues ranging from economic expectations, financial situation, savings goals, and expenditure plans on households’ goods and services. These responses are aggregated into an index from -100 to 100. Consumer confidence is a leading indicator of household expenditure, which is a primary driver of the GDP.

In November 2020, the Euro Area consumer confidence was -17.6, down from -15.5 in October. It is also the lowest reading since May – primarily because of the new lockdown measures bound to impact the labor market. Based on correlation with GDP, we assign a score of -3.

  • Euro Area Government Debt to GDP

This is meant to gauge whether the government is over-leveraged and if it might run into problems servicing future debt obligations.

The Euro Area Government Debt to GDP dropped from 79.5% in 2018 to 77.6% in 2019. In 2020, it is projected to hit 102% but stabilize around 92% in the long run. Based on correlation with GDP, we assign a score of -1.

In our very next article, we have performed the Endogenous analysis of GBP to see if it has appreciated or depreciated in this year. Make sure to check that and let us know in case of any questions in the comments below. Cheers.

Categories
Forex Elliott Wave Forex Market Analysis

AUDNZD: Profiting from its Intraday Triangle Pattern

The AUDNZD cross seems to start a movement in wave 3 of Minor degree labeled in green after completing its second corrective wave of the same degree, which found its bottom at 1.04181 on December 01st.

Technical Overview

The big picture of the AUDNZD cross and under the Elliott Wave perspective and illustrated in the following daily chart reveals the bullish sequence of Minor degree that began last March 09th, when the price pierced the parity level, dropping to 0.99906.

Once the price found fresh buyers, the Oceanic cross climbed in five internal movements of Minute degree, identified in black, until 1.10438, where the cross completed its first wave in green. After this completion, AUDNZD dropped in a complex corrective formation identified as a double-three pattern, which found support at 1.04181 on December 01st. From there, it bounced up to the current levels. 

On the other hand, the breakout of the short-term descending trendline that connects the end of wave ((x)), in black, with the end of wave (b), in blue, suggests the end of the second wave of Minor degree.

Short-term Technical Outlook

The intraday view unfolded in the next 2-hour chart shows the rally that remains in progress since December 01st when the cross found fresh buyers at 1.04181 suggesting further upsides in the following trading sessions.

The previous chart shows the wave (iii) movement of the Minuette degree labeled in blue, which currently looks consolidating its internal structure in a potential running triangle pattern. 

According to the Elliott Wave theory, practically all running triangle patterns tend to be confused with ending diagonals driving retail traders to open trades in the opposite direction to the current trend instead of considering the pattern as a continuation of the trend. Therefore under this scenario, our main bias remains on the bullish side. In this regard, this triangular pattern makes us think that the Oceanic cross might continue extending its movement until the potential target zone between 1.0758 and 1.0816, where the price could complete its third wave, in blue.

In summary, the AUDNZD cross completed its second wave of Minor degree subdivided in a descending three-wave sequence calling for a new upward movement in favor of the first rally, which should follow a five-wave sequence. In this context, the internal structure shows the progress in the third wave of an impulsive wave, which looks consolidating in a running triangle pattern. The potential target of the current rally is located between 1.0758 and 1.0816. On the other hand, the bullish scenario’s invalidation level is set at 1.04181, corresponding to the origin of the current upward sequence.

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Forex Fundamental Analysis

NZD/USD Global Macro Analysis – Part 3

NZD/USD Exogenous Analysis

NZD/USD Exogenous Analysis

NZD/USD Exogenous Analysis

To effectively compare the US and the New Zealand economies, we will conduct exogenous analysis using the following fundamental aspects;

  • The US and New Zealand balance of trade difference
  • GDP growth differential in the US and New Zealand
  • The US and New Zealand interest rate differential

The US and New Zealand balance of trade difference

A country’s participation in international trade tends to determine the demand for its domestic currency. If a country is a net exporter, its currency will be in high demand in the forex market, increasing its value against other currencies.

In October 2020, New Zealand’s trade deficit was NZD 500 million compared to the US trade deficit of $63.1 billion. Although New Zealand’s trade deficit is improving, it is still lower than the balance of trade in January. On the other hand, the US trade deficit has been widening throughout the year. The difference between the two countries’ balance of trade is the trade deficit differential. Based on its correlation with the price of the NZD/USD pair, we assign a score of 4.

GDP growth differential in the US and New Zealand

GDP growth differential is the difference between the rate at which the US and New Zealand economies are expanding. It will help to show which economy is growing at a faster pace hence impacting the exchange rate between the two countries. A country whose GDP is expanding faster will enjoy favorable domestic macroeconomic conditions. Hence its currency will appreciate.

In Q3 of 2020, the New Zealand GDP contracted by 12.2% while that of the US expanded by 33.1%. That represents a GDP growth rate differential of 45.3%. If this trend continues, we should expect that the USD will strengthen against the NZD hence a bearish NZD/USD pair.

Based on our correlation analysis, we assign the GDP growth differential between the US and New Zealand a score of -4.

The US and New Zealand interest rate differential

The interest rate differential is the difference between the prevailing interest rates in New Zealand and the US. The country with a higher interest rate tends to attract more capital, inceasing the value of its currency.

At the onset of the coronavirus pandemic, the Reserve Bank of New Zealand cut its official cash rate from 1% to 0.25%. During the same period, the US Federal Reserve cut the interest rate from 1.75% to 0.25%. Presently, the interest rate differential in NZD/USD is 0%.

Based on the correlation with the price of the NZD/USD pair, we assign a score of 1.

Conclusion

The NZD/USD pair has an exogenous score of 1. That means we should expect that the pair will continue on a mild bullish trend in the short-term. Note that this trend is also supported by technical analysis.

As seen in the above 1-week chart, the NZD/USD has successfully breached the upper Bollinger band indicating bullish momentum. This supports our fundamental analysis, as well. All the best.

Categories
Forex Fundamental Analysis

NZD/USD Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

The global macro analysis of the NZD/USD pair will involve the endogenous and exogenous analyses of the US and New Zealand economies. The endogenous analysis will focus on domestic macroeconomic factors that drive the economy. The exogenous analysis will focus on economic indicators that comprehensively compare both the US and New Zealand economies.

Ranking Scale

Both the endogenous and exogenous factors will be ranked on a scale of -10 to +10. A negative ranking for the endogenous means that the factor had a negative impact on either the currency, while a positive ranking had a bullish impact on the currency.

Similarly, when the exogenous factor is negative, it has a bearish impact on the currency pair, while a positive ranking means it had a bullish impact.

Summary – USD Endogenous Analysis

From the above table, a clear deflationary effect can be seen on the USD currency and implies that USD has depreciated in its value since the beginning of 2020. For the complete USD Endogenous Analysis, please check here.

Summary – NZD Endogenous Analysis

The NZD endogenous analysis has a total score of 4. This shows that the NZD appreciated in 2020.

  • New Zealand Inflation Rate

The CPI is the most commonly used measure of inflation in New Zealand. Here are the top categories included in the CPI: Housing with a weight of 24.2%; food and non-alcoholic drinks 18.8%; transportation 15%; recreation 9.4%; alcoholic drinks 7%; clothing, household goods and services, health, and education all have a combined weight of 18.2%.

In September 2020, New Zealand CPI increased by 0.7%. Based on the correlation with the GDP, we assign a score of -1.

  • New Zealand Unemployment Rate

This rate shows the number of New Zealand’s working population out of work and actively looking for gainful employment. As an economic indicator, it can be used to show the economy’s ability to add new jobs to the market.

In Q3 of 2020, the New Zealand unemployment rate increased to 5.3% from 4% in Q2. This shows that the labor market is yet to recover from the economic shocks of the coronavirus pandemic. Based on correlation analysis, we assign a score of -5.

  • New Zealand Manufacturing PMI

This is an index that measures the growth in the manufacturing sector in New Zealand. It is a composite of new orders, employment, inventories, and orders delivered from the manufacturing sector. When the index is above 50, it means that the manufacturing sector in New Zealand is expanding. The sector is seen to be contracting when the index is below 50.

In October 2020, the index declined to 51.7 from 54. However, the index is above the pre-coronavirus levels. That implies the manufacturing sector is recovering swiftly. Based on the correlation analysis with GDP, we assign it a score of 3.

  • New Zealand Business Confidence

In any economy, business confidence goes hand-in-hand with business confidence. In New Zealand, the business confidence index is based on a survey of about 700 businesses. The index is the difference between the number of businesses that anticipate economic improvements and those that expect the economic conditions will decline. The index covers export intentions, profit expectations, employment intentions, activity outlook, and capacity utilization.

In November 2020, the ANZ Business Confidence was -6.9 compared to -15.7 in October. Although in the negative territory, the November reading is the highest since September 2017. This shows that more businesses are becoming optimistic about the future operating environment, mostly thanks to the aggressive expansionary monetary and fiscal policies.

Based on correlation analysis with the GDP, we assign ANZ business confidence a score of 4.

  • New Zealand Retail Sales

In New Zealand, retail sales data is aggregated quarterly. It measures the change in the value of goods and services purchased by households. Remember that consumer expenditure is the main driver of economic growth, which makes the retail sales data a leading indicator of GDP growth.

In Q3 of 2020, the New Zealand retail sales increased by 28% from a drop of 14.6% and 1.2% in Q2 and Q1, respectively. The 28% increase is the largest quarterly increase in 25 years. The YoY retail sales increased by 8.3% in Q3 compared to a 14.2% drop in Q2. Based on our correlation analysis, we assign the New Zealand retail sales a score of 6.

  • New Zealand Consumer Confidence

In New Zealand, consumer confidence tends to correlate with households’ willingness to spend in the economy. The Westpac McDermott Miller Consumer Confidence Index gauges the optimist of New Zealand households regarding the economy. The index covers households’ views on their finances, purchases in the economy, and the overall economy.

A score of above 100 shows an increasing level of optimism, while below 100 shows increasing pessimism.

In Q3 of 2020, the New Zealand consumer confidence index dropped to 95.1 from 97.2 in Q2 and 104.2 in Q1. Q3 reading is the lowest in New Zealand since 2008. Based on its correlation with GDP, we assign a score of -4.

  • New Zealand Government Net Debt to GDP

Gross national Debt to GDP helps both local and foreign creditors gauge a country’s ability to service its debt. This indicator shows the level at which the domestic economy is leveraged. A lower ratio is preferable since it means that the country has a higher GDP compared to its debt. This means that it can be able to access cheap debt in the future.

In the 2018/2019 fiscal year, the New Zealand government debt to GDP dropped to 19% from 19.6% in the 2017/2018 fiscal year. In 2020, the New Zealand government debt to GDP is projected to increase to 27% on account of the government’s aggressive spending to ease the economic pressure from the coronavirus pandemic. Based on correlation analysis with GDP, we assign New Zealand government debt to GDP a score of 1.

In the very next article, let’s analyze the exogenous indicators and forecast if this currency pair seems to be bullish or bearish in the near future.

Categories
Forex Elliott Wave Forex Technical Analysis

EURJPY Consolidates Expecting Further Upsides

Technical Overview

Technical Overview

Technical Overview

The EURJPY cross consolidates in the extreme bullish sentiment zone, suggesting a bullish continuation of the strong upward movement developed in early December.

The following daily chart exposes the EURJPY cross developing a consolidation pattern, which looks like a flag pattern bounded between 125.77 and 126.70. According to the chartist analysis, the formation suggests the continuation of the previous movement. In this case, the cross could extend its gains surpassing the next resistance corresponding to the 52-week high located at 127.075.

The mid-term overview for the EURJPY cross reveals its primary trend plotted in blue, supporting a rally that remains in progress since the price confirmed its bottom at 114.397 touched on last May 07th. The secondary trend traced in green and minor trend drawn in black supports the price acceleration, which currently consolidates carrying to expect the bullish continuation for the following trading sessions.

Technical Outlook

The big picture for the EURJPY cross under the Elliott wave perspective unfolded in the next 12-hour chart shows the incomplete corrective rally corresponding to wave ((b)) of Minute degree labeled in black. This corrective rally remains in progress since the price found fresh buyers at 121.617 on last October 29th and could reach new yearly highs.

The upper degree structure of the EURJPY cross illustrated in the previous chart exposes the progress in wave B of Minor degree labeled in green, which began when the cross completed its wave A at 127.075 on last September 01st. Currently, the price advances in its wave ((b)) in black. Likewise, its internal structural series shows the development in the wave (c) of Minuette degree labeled in blue, which at the same time, looks starting to develop the wave v of Suminuette degree identified in green.

In this context, the EURJPY cross could extend its gains toward the potential target zone bounded between 126.96 until 128.08, where the cross could find fresh sellers expecting to drag the price to new lows developing the wave ((c)) in black. 

In this regard, if the price confirms its new bearish leg, the cross could complete the third segment of wave B in green. On the other hand, considering both the alternation principle and the wave ((a)) and ((b)) looks extended in terms of time, the wave ((c)) could be a sharp decline.

In conclusion, the EURJPY cross moves mostly upward in a corrective rally that belongs to wave ((b)), corresponding to the second segment of the upper degree wave B. If the price breaks the sideways consolidation structure developed since early December, the cross could strike the potential target zone between 126.96 and 128.08. Likewise, the invalidation level of the bullish scenario locates at 125.130.

Categories
Forex Risk Management

Best Trading Position Part 3 – Risk in Parallel Trades

If you are reading this article, you must be serious about trading. Did you know that curiosity and eagerness to learn are the two crucial components of being a successful trader in the long term? Since this is our part three discussion on the best trading position, we are continuing our journey of discovery, listing […]

If you are reading this article, you must be serious about trading. Did you know that curiosity and eagerness to learn are the two crucial components of being a successful trader in the long term? Since this is our part three discussion on the best trading position, we are continuing our journey of discovery, listing […]

If you are reading this article, you must be serious about trading. Did you know that curiosity and eagerness to learn are the two crucial components of being a successful trader in the long term? Since this is our part three discussion on the best trading position, we are continuing our journey of discovery, listing proven ways to achieve sustainable success. Now, of course, there can be many different approaches to trading, but here you can learn what actually works. If you happen to be seeing this title for the first time, make sure that you go back and read the story from the beginning, covering parts one and two as well, along with related exercises. 

Last time we talked about effective ways to protect your trades, deepening the story about the risk and introducing the topic of stop losses. What we did not talk about in the previous article is that traders often wonder about exiting trades, fearing that they might miss that one opportunity to preserve their assets. However, you will find that with the right system in place, you should always be notified before a particular trend or favorable period ends, so the price should not even hit your stop loss.

If the price ends up violently moving in a different direction from what you would want to, you still know that you would never lose more than 2% of your account if you set everything up the way we discussed earlier in this series. That is what the ATR indicator we previously talked about is about, helping you manage and adjust to volatile markets regardless of the circumstances. Now, besides general risk and exiting trades, there is another key question to ponder about if you really want to protect your assets.

How many individual trades can I have open at 2%?

When traders read about the 2% instruction, they often fall for the trap of overleveraging, which tends to lead to really bad consequences. To understand where most traders fail, imagine that you entered three trades involving the following currencies: the EUR/AUD long, AUD/USD short, and AUD/CAD short. You assume that by opening three trades at 2% each, you are doing the right thing. Unfortunately, your thinking would be faulty here and you would add more risk instead of controlling it properly. Since there are three trades involving one currency (AUD), you now have a 6% risk in one asset. Therefore, please note down the following rule in your notebook: You can have as many trades running at the same time as you please, but you must never have more than one trade at 2% risk going long or short with the same currency.

What should I do if I am getting several signals for one currency?

There are a few solutions that you can always use in trading if you find yourself in a similar situation. For example, you can choose only one trade to enter. You can either make this choice freely or, if you need reassurance, compare the other two currencies in the pair and measure them against other currencies. So, if you are weighing between the AUD/USD and the AUD/CAD, compare the USD basket and the CAD basket to see which seems to be a better option. 

Aside from this approach, you can also opt for entering both trades but at 1% risk each. This is not only a wise way to control the risk when you have multiple trades open at the same time but also a form of a hedge, as you have one currency against two different ones.

What should I do when I almost get another signal involving the same currency?

First of all, you do not have to necessarily ignore all signals of this type. If you happen to get one signal for a particular pair, followed by something that may turn out to be a signal soon, you can always choose to play smart – enter one trade at 1% and wait to see what will happen with the other pair the following day. With such “almost signals,” it is always wise to give yourself space to gather more facts before you make any decisions.

Should I always enter trades at 1% risk only?

No, by no means should you enter all trades at reduced risk. Overleveraging is as detrimental to your account and development as is being timid. This mindset will not get you far, so make sure that you avoid seeing this as a form of protection because it is will hinder your growth, both in terms of your trading skills and your finances.

Regardless of your market of choice, you must always put your risk under control no matter how many trades you decide to enter. Greed can be a funny thing, especially when we don’t know what situations trigger our hunger for more. To have control over your trades, you must consciously choose to follow a specific rule and do so in a disciplined manner. And, on this note, we are going to end today’s lesson, leaving you with the task of trying out these methods with your demo account as soon as possible.

As we promised, we are offering you the right solution to the problem given in the last article of this series:

RISK = TOTAL ACCOUNT x 2% = 50,263 USD x 2% (0,02) = 1,005.25 ≈ 1,005

ATR = 86

STOP LOSS = ATR x 1.5 = 86 x 1.5 = 129

PIP VALUE = RISK ÷ STOP LOSS = 7.79 ≈ 7.8

Upon the completion of this task, we know that one pip should equal the previously calculated amount, so we can estimate that the unit value is going to be 78,000 (usually 0.78 lots) for the EUR/USD currency pair. 

P.S. Practice note-taking whenever you test a new method or approach in trading and watch for Part IV to follow.

Good luck!

Categories
Forex Elliott Wave Forex Market Analysis

Will 1.24 be the Next EURUSD Yearly High?

The EURUSD pair continues extending its gains after surpass its psychological resistance of $1.22 for the first time since late April 2018. The common currency gained over 9.20% (YTD), encouraged by the US Dollar weakness.

The EURUSD pair continues extending its gains after surpass its psychological resistance of $1.22 for the first time since late April 2018. The common currency gained over 9.20% (YTD), encouraged by the US Dollar weakness.

The EURUSD pair continues extending its gains after surpass its psychological resistance of $1.22 for the first time since late April 2018. The common currency gained over 9.20% (YTD), encouraged by the US Dollar weakness.

Technical Overview

The following daily chart illustrates the long-term market participants’ sentiment unfolded within the 52-week high and low range. The figure shows the progression starting from 1.06359, which corresponds to the lowest level of the year. 

The long-term primary trend identified with the trend-line in blue reveals that bull traders remain the market control since last March 23rd when the price found and confirmed the bottom at 1.06359 after the massive sell-off occurred last mid-February. Moreover, both the secondary trend (green trend-line) and the minor trend (black trend-line) show the bullish acceleration that carries the cross from November 04th when the EURUSD found fresh buyers expecting further upsides. 

On the other hand, although the trend looks mostly bullish, the EMA(60) to close index is moving in its overbought zone; thus, we should be prepared fr the upward movement in progress to end soon. Under this context, the main bias for bulls should change from buy to hold. Also, Bearish traders should expect confirmation signals such as a significative breakdown before placing their short positions.

Technical Overview

The mid-term Elliott wave view of the EURUSD pair exposed in the next 12-hour timeframe chart reveals the price action is reaching its second target level of $1.22575 proposed in our previous analysis. Also, the chart illustrates its progress in an incomplete wave 5 of Minor degree labeled in green.

The lesser degree structure observed in the fifth wave in green shows the progression of the wave ((iii)) of Minute degree labeled in black, which simultaneously appears advancing in its internal fifth wave of Minuette degree identified in blue. The Elliott Wave textbook suggests that, currently, the common currency moves in an extended wave. In this context, once the pair completes its rally, it should start to consolidate in its wave ((iv)) in black. This corrective formation could find support in the demand zone between 1.21061 and 1.20586, which could bring the possibility to join the long-term bullish trend. The potential target for wave 5 in green is $1.2405.

In summary, the EURUSD pair moves in its third wave of Minute degree, which should complete its rally in the coming trading sessions. The next path corresponding to wave ((iv)) in black could drag the price until the demand zone between 1.21061 and 1.20586, where the common currency could start a new rally with a potential target at 1.2405. Finally, the invalidation level of the bullish scenario is $1.19201.

Categories
Forex Fundamental Analysis

USD/CHF Global Macro Analysis – Part 3

USD/CHF Exogenous Analysis

USD/CHF Exogenous Analysis

USD/CHF Exogenous Analysis

The exogenous analysis covers fundamental indicators that can compare the performance of the US and Swiss economies. Note that this comparison between the two economies is what drives the exchange rate of USD/CHF. They are:

  • US and Swiss interest rate differential
  • The difference in the GDP growth in the US and Switzerland
  • Balance of trade differential

Balance of trade differential

For each country, the balance of trade shows the demand for the domestic currency in the international market. When a country has a surplus of the balance of trade, it means that its currency is in high demand in international trade. The rationale behind this is that when a country exports more than it imports, other countries will need more of that country’s currency to participate in international trade.

The balance of trade differential measures the difference between the balance of trade in Switzerland and the US. If the Swiss balance of trade is higher than that of the US, the USD/CHF pair will be bearish.

In October 2020, Switzerland had a trade surplus of CHF 2.9 billion while the US a deficit of $63.1 billion. Throughout 2020, the US trade deficit has been widening from $37 billion in January, while the Swiss trade surplus has increased from CHF 2.8 billion.

Based on the correlation with the USD/CHF pair, we assign the balance of trade differential a score of -5.

US and Switzerland interest rate differential

Typically, the country with a higher interest rate attracts more foreign capital seeking superior returns. A higher interest rate increases the domestic currency demand, which makes it appreciate in the forex market. More so, forex traders tend to be bullish on the currency with the higher interest rate.

The interest rate by The Swiss National Bank is -0.75% since January 2015. In the US, the federal funds rate is 0.25%. That makes the interest rate differential 1% for the USD/CHF pair.

Based on the correlation analysis with the USD/CHF pair, we assign the interest rate differential a score of 3.

The difference in the GDP growth in the US and Switzerland

A country’s GDP is primarily driven by domestic consumption. Although the GDP size differs in absolute terms, we can compare the US and Swiss GDP in terms of growth rate. An expanding economy is accompanied by appreciating currency. Therefore, if the US growth rate is higher than Switzerland’s, we can expect a bullish trend for the USD/CHF pair.

In Q3 of 2020, the Swiss economy expanded by 7.2% and the US by 33.1%. It means that the US economy is recovering faster than that of Switzerland. We, therefore, assign a score of 2. This implies that the GDP growth rate differential between the US and Switzerland has led to a bullish USD/CHF.

Conclusion

The USD/CHF pair has an exogenous score of -2. This implies that we can expect the pair to continue with its current bearish trend in the near future.

Note that the USD/CHF pair has breached the lower Bollinger band. Therefore, we can expect the downtrend to continue for a while, which supports our fundamental analysis. All the best.

Categories
Forex Fundamental Analysis

USD/CHF Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

When conducting the global macroeconomic analysis, endogenous and exogenous factors are considered. These analyses can be used to explain the price dynamic of a currency pair. In this case, we will analyze the endogenous factors that drive the economy in the US and Switzerland. We will also analyze the exogenous factors that primarily drives the price of the USD/CHF pair.

Ranking Scale

A sliding scale from -10 to +10 will be sued to ranks the impact of the individual endogenous and exogenous factors on the currency. A negative ranking for the endogenous factors means that they had a depreciating impact on the individual currencies, while a positive ranking means they resulted in currency appreciating.

Similarly, a negative ranking for the exogenous factors implies that they’ve had a bearish impact on the currency pair, while a positive ranking means they’ve had a bullish impact.

Summary of USD Endogenous Analysis

From the above table, we can see a clear deflationary effect on the USD currency and implies that it has depreciated in its value since the beginning of the year. You can find the complete USD Endogenous Analysis here.

Summary of CHF Endogenous Analysis

Overall, the endogenous analysis of CHF has a score of -5. That implies that the CHF is expected to have depreciated marginally in 2020.

  • Switzerland Inflation Rate

The rate of inflation is used to measure the changes in the price of consumer goods in Switzerland over a specified period – usually monthly or yearly. Here are the components of the CPI in Switzerland: Housing and energy, which accounts for 25% of the total CPI weight; 16% for healthcare; Transport accounts for 11%; Food and non-alcoholic drinks 11%; hotel and restaurant services 8%; 4% for Household goods and services; and clothing 3%. Education, communication services, and alcoholic beverages cumulatively account for 7% of the total CPI weight.

In November 2020, the YoY CPI in Switzerland dropped by 0.7%, while the MoM CPI dropped by 0.2%. The fall in prices of the hotel and holiday packages contributed to the drop in the inflation rate. The Switzerland CPI is at the lowest point since January 2018.

Based on our correlation analysis, we assign the Switzerland rate of inflation a score of -3.

  • Switzerland Unemployment Rate

This economic indicator shows the percentage of the total Swiss labor force that is actively seeking a job. Note that not all unemployed portion of the working-age population are seeking employment; so, they are not captured by the unemployment rate.

The unemployment rate can also be used to show the rate at which the economy is adding or cutting job opportunities. This can be used to show economic growth.

In October 2020, the Swiss unemployment rate was 3.2%, down from highs of 3.4% in May, while the employment rate in Q3 2020 was 79.7%. Although it is higher than the 79.1% registered in Q2, it is still significantly lower than the pre-pandemic rate of 80.4%.

The Swiss unemployment rate has a high correlation with the GDP, but since it only increased marginally, we assign it a score of -2.

  • Switzerland Manufacturing PMI

The Swiss procure.ch Manufacturing Purchasing Managers’ Index surveys the executives in the manufacturing sector. The index is a measure of the Swiss manufacturing sector’s performance and serves as a leading indicator for business expectations.

The Manufacturing PMI is an aggregate of five components: new orders, which a weight of  30%, output 25%, employment 20%, supplies 15%, and inventory 10%. The manufacturing sector is expected to expand when the index is above 50 and contract when the index is below 50.

In November 2020, the Swiss procure.ch Manufacturing PMI increased to 55.2, the highest since December 2018. Based on the correlation analysis with the GDP, we assign a score of 7 since it shows a robust expansion.

The Swiss services industry employs over 60% of the working population and accounts for 73% of Switzerland’s GDP. This makes the services PMI a crucial indicator of the overall economy. The Services PMI is obtained through a comprehensive survey of 300 purchasing managers in the services sector to evaluate the changes in business activities.

The survey covers areas such as customer new orders, purchasing, and sales prices, and changes in the employment level.

In November 2020, the Swiss services PMI dropped to 48 from 50.4 in October, primarily attributed to new orders’ contraction. Although it is almost double the 21.4 recorded in April, it is still lower than the 57.3 recorded in January 2020. We, therefore, assign it a score of -4.

  • Switzerland Consumer Confidence

In Switzerland, consumer confidence is used to evaluate households’ opinion on the overall economy and their financial position. Typically, consumer confidence is higher when there is high GDP growth, and the unemployment rate is low.

In the fourth quarter of 2020, the Swiss consumer confidence was -12.8, better than Q2 -39.3. Consumer confidence is used to show the likelihood of how much households will spend in the economy. Hence we assign it a score of -2.

  • Switzerland Government Gross Debt to GDP

The Swiss government debt is the totality of the government’s amount owed to both domestic and foreign lenders. This debt is expressed as a percentage of the GDP o help determine the indebtedness of the economy. Lenders also use this metric to determine if there is a possibility of default by the government. Typically, government debt that is less than 60% of the economy is considered ideal.

In 2019, Switzerland’s government gross debt to GDP was 41%, and it’s projected to hit 49% in 2020 due to increased government expenditure to curb the economic slowdown brought about by the coronavirus pandemic. However, the Swiss government’s gross debt to GDP has been steadily declining since 2004, averaging at around 37%. Based on our correlation analysis and the fact that it has marginally increased in 2020, we assign a score of -1.

Now we know that both USD and CHF have depreciated according to their respective endogenous indicators. Please check our next article to know if this pair is expected to be bullish or bearish in the near future according to their exogenous indicators. Cheers.

Categories
Forex Technical Analysis

US Dollar Index awaiting FOMC Meeting in the Extreme Bearish Zone

The US Dollar Index (DXY) reached a new yearly low of 90.128, expecting the last FOMC interest rate decision meeting of the year. The analysts’ consensus anticipates the rate unchanged at 0.25% by the FED.

The US Dollar Index (DXY) reached a new yearly low of 90.128, expecting the last FOMC interest rate decision meeting of the year. The analysts’ consensus anticipates the rate unchanged at 0.25% by the FED.

The US Dollar Index (DXY) reached a new yearly low of 90.128, expecting the last FOMC interest rate decision meeting of the year. The analysts’ consensus anticipates the rate unchanged at 0.25% by the FED.

Source: TradingEconomics.com

Technical Overview

The short-term overview for the Greenback illustrated in the following 8-hour chart displays the short-term market participants’ sentiment unfolded by the 90-day high and low range, which shows the price action moving in the extreme bearish sentiment zone. Likewise, the bullish divergence observed on the EMA(60) to Close Index carries to expect a recovery for the following trading sessions.

On the other hand, the short-term primary trend outlined with its trend-line drawn in blue reveals that the bearish bias remains intact since September 25th, when the price topped at 94.742. The secondary trend plotted with the trend-line in green shows the acceleration of the downward movement that began on November 04th at 94.302.

Nevertheless, the breakdown of the last sideways range developed by DXY during the latest trading session, combined with the bullish divergence observed between the price and the EMA to Close indicator, makes us suspect a bounce, which could hit the resistance of the extreme bearish sentiment zone at 91.282.

Short-term Technical Outlook

The short-term Elliott wave view for the US Dollar Index unfolded by the next 4-hour chart exposes the bearish progression of wave ((iii)) of Minute degree labeled in black that belongs to the downward sequence that began on November 04th at 94.302. 

 

According to the textbook, the price action requires to confirm the third wave’s completion before acknowledging the start of the wave ((iv)) in black. In this regard, the internal structure of the wave ((iii)) added to the bullish divergence observed in the MACD oscillator; thus, suggesting the advance in wave (v) of Minuette degree identified in blue.

On the other hand, considering both the alternation principle and that the second wave of the same degree looks simple in terms of price and time, the next corrective structure should be complex in terms of price, time, or both.

In this context, the next DXY path could produce a bounce corresponding to the fourth wave of Minute degree, advancing to the supply zone between 91.014 and 91.200, and even strike the 91.580 level.

In summary, the US Dollar Index looks advancing in the fifth wave of Minuette degree that belongs to the third wave of Minute degree. In this context, the price action could experience a bounce corresponding to the fourth wave of Minute degree, which could move up to 91.850. Nevertheless, if the price surpasses the invalidation level located at 92.107, the Greenback could be showing the start of a reversal of the current bearish trend.