Yeah, it’s a sad read, likewise the IMF downgrade on global economic growth, a reassessment caused, they said today, by “slower recovery in advanced economies and a further slowdown in emerging nations.”
On a side note the discussion re Euro strength, I see that Eurostat report that unemployment has fallen to it’s lowest in 3 years, helped by good numbers from Italy.
The unwinding of USD/JPY longs seemed to have helped the Euro, lets see if there is some more strength there tomorrow after some more selling there today.
All that discussion set me thinking about algo’s and their effect on intermarket intraday.
Algo setups are super secret, info is extremely hard to get, but when you look at price behaviour it’s possible to sense the likely code, thus the ‘spreading’ of effect from S&P to FX Yen, Euro and USD.
I know they also use volume in the futures, will post some ideas in a couple of days on the recent S&P ‘bounce’ - check the eod volume on the E mini or SPY on Aug 24.
Anyways, I feel that many of the algo’s are attempting to gauge risk.
I’ve been researching this idea to build on Mike’s concept and strategy that he has been trading with us. The second reason is that my own strategy is suffering big time this year, for a reason I was hoping to test one day…high volatility.
Now The idea of my system is that you capture a trend early in its first pull back. But in times of high volatility prices rarely pull back before extending in the direction of the trend.
Now I’m not saying there is no trend, what I’m saying is that it seems in times of high volatility the trend manifests itself in a way different to that of Elliot Wave principals. We can discuss this in more details later.
Mike’s idea was based on finding which currencies were “trending high” and trade them against currencies that are trending low.
Now I have been investigating the idea of relative currency strength and found three possible uses for it:
Mike’s method of trending high vs.trending low (I’ve added a bit of an entry signal for it and gave it some mechanical rules to make it even easier to trade.)
Spotting potential shifts in trend.
Confirming that an anticipated COT report turnaround has occurred.
I remember BB and FE discussing this feature before so no need to explain it. The line on the top is the strongest currency in 2015. At the bottom is the weakest. Mike’s idea is to trade the top line against the bottom line. Targeting 100 pips and risking 200 pips.
I have created a system, a modification of Larry Williams’ used to turn 10,000 to 1,000,000. It is aimed at maximizing win rate and picking the highest probability periods to trade. Now based on the comparative strength our favorite trade would be short NZDUSD.
The rules are:
Daily chart of NZDUSD.
5-period %R. OB= -15, OS= -75.
We wait for price to get Overbought. We enter short at the first close out of the overbought area. Our target is the first close at oversold or a 100 pips, which ever comes first.
Our stop is a close above the highest high achieved during the overbought period.
Here is a chart of the trades that would have been triggered of NZDUSD this year. The green vertical line is where the entry took place, the orange horizontal line is where you would exit.
So based on this system you would have entered a total of six trades so far this year. Only one of them, the last one would have been a loser (-150 pips). But 500 to 150 win to loss ratio is not bad.
Advantages of system
You only have to look at the chart once a day.
Very high winning probability in your favor.
Disadvantages
No chance of riding the trend, so you leave plenty of pips on the table.
The ratio of one winner to one loser is low.
Next I want to cover a very important aspect of Comparative strength that I have seen has worked, but for some reason is rarely mentioned.
Now this is a picture of USD (black), CAD (Brown) and Yen (Yellow). The first circle, the red one, showed Cad about to cross above USD, before immediately changing its mind on June 30. This told us that we should look for long opportunities starting June 30, probably using the system I recommended above or your own system.
The second crossover is the green one, occurred on September 3 telling us to look for USDJPY long opportunities. The final one is the blue one, occurred on October 30 telling us to look for CADJPY long opportunities. Now I would share a chart to show what happened, but we were all working together and know very well what happened.
Now I looked at using that cross as an entry signal in itself, but found that it was very susceptible to fake outs. So it is much better to use the crossover as a sign of a shift in trend. Once you spot that potential shift wait for an entry signal to occur using the system.
Now the magical thing about this, is I think it solves the timing issue of the COT report.
Based on my COT analysis, EUR showed long extremes back in January 26. However going long Euro starting that date (like I usually do) ended up extremely painful. However if use the comparative chart with all the currencies (You should do that as the picture I’d share will be too messy for anyone to make sense of).
If you just place all the currencies since the start of the year (its actually the very first picture I shared), You will see that EUR crossed above NZD on June 2. Then crossed above AUD on July 8 and two days later above CAD.
Now we mentioned recently how CAD and NZD where at extreme long. We can start going long NZD once it crosses above a particular currency (at the moment is dead last). As for CAD, it has crossed above NZD and AUD, so we can go NZDCAD short and AUDCAD short.
you just put together within 3 posts a complete system! Not even that, but it is trend following, using the COT Report and looks for technical confirmation. What else does someone need? This time I must agree (even hurts to write this down) 100% with you Really cool work and sounds completely logical. Also I like it more than some fundamental analysis where we all have our own story, but a system like this is clear and there are no “if”-s.
And as you know, I am a big fan of comparing currency strength so I liked the idea right in the beginning. Only a little correction, the conversation was between Mike and me about it. (Just as a sidenote.) I do think strong vs. weak are always the very best setups.
So, a question about buying NZD. I am looking since a longer time to buy NZDCHF. Of course I do not buy until it falls but compared to historical data is is extremely a good opportunity to buy long-term because of the great carry trade. I will not miss this one out. Fundamentals also line up slowly for it.
I thought maybe we can check this particular setup based on your system. There is only one drawback. How do we use the COT Report for crosses? We have seen from our own analysis that our cross currency COT Report do not function good because open interest is different for NZD (less) than for CHF (more) vs. the USD so the result to analyse this cross with the values vs. USD is not useful.
I am interested in testing your system,
FE
PS: I am also interested in NFP, expecting a disappointing result today
Well I’m sorry I thought it was BB and yourself. I wanted to go back to those posts but of course its a tough find.
You asked a very, very difficult question. The problem is CHF is so far THE strongest currency. Of course this isn’t because the strongest, it is because of that crazy unpeg day which has masked the true performance of CHF. All currencies are still down on the year compared to CHF.
What we can do is rely on Mike’s data and wait for the cross there. However I’m sensing a bottom-catching desire in your NZDCHF. Unfortunately this system cannot do that. I’ve worked on it in a way that it tries to catch the easiest 100 pips possible rather than catch the biggest trend possible.
But rest assured that it won’t be too late by the time the two currencies cross.
EDIT: As for NFP, I think it can be one of the easiest trades. The only thing I don’t want to see is a number in line with expectation. I want either a very strong number or a very weak number just so the market can get a sense of direction.
EDIT: As for your COT-related question, it is still early day to get an answer on that. My hypothesis so far is that we only need the COT index. So once NZD hit the buy extreme we wait for the shift. I think the open interest will not matter because I remember Williams used it more as a timing/confirmation method. But the idea is that relative strength should play that role now.
I do not try to catch the bottom, that is why I am observing and not in it. I want to look into it with you. SNB wants the currency to weaken, I believe they are in recession so fundamentally for me the CHF run is only a risk off move.
Oh, but I do one thing different in the strategy. With catching such a good entry in the trend, I will not aim for 100 pips. This way even both of the 2 disadvantages are solved
Philip, you are a genius, and because of that I’m definitely going to sit down and digest what you got there.
You have understood exactly what I’ve been trying to do. Finding the trend and capitalizing on some pips, sacrificing more of the risk/reward for a winning %. All better than riding out a big trend.
One thing to remember if trading chf, the snb recently acknowledged that they are still active in the fx market, maybe even more so since the numbers released for august consumer pirices will cause some concern - biggest fall in 56 years.
If I was betting I would bet on soft NFP even if hawkish noises are made pre release.
I was playing around with a similar idea in the past, except I used Stochastic instead of W%R. Problem is, when the trend is changing (or there’s none), you’ll get washed out.
Just like the last NFP report. This is a non-event for my taste. Weak NFP number with strong correction from last month. Average hourly earning is positve, unemployment rate down. This again helps no one for clear view on what will happen. Still I maintain my earlier version which was discussed by many of you that September rate hike is not likely.
I wonder was it really ever justifiable, we have discussed many things in the past one of which is the fact that copper can be used as a barometer of global economic health in general and Chinese economics in particular.
We talked about that long before the recent difficulties that surfaced there - perhaps now the fed will keep up with our thread in the future
BTW, nice work Philip, that will keep the grey cells churning.
I totally agree with your post and FE’s. It also shows how good our group really is. Because if I remember correctly, even last year we thought that talks of a rate hike is overrated.
However, isn’t the fact that the yen refuses to go down a worry that may be some feel the hike is still on the table?
Stochs and W%R are basically the same. Like I said I can’t take credit for this system, I just tweaked a few things from Larry Williams’ system.
Personally I think getting “washed out” is a bit too much. I realize that there will be a turn in a currency preceding the cross. But we are only in the market for very brief periods for a very small amount of time. The market will not have a time to wash us out. As I shared in a previous post, NZDUSD generated only six signals, one of which was a loser, this year. That is an average of two trades per quarter.
But if you mean that we will lose trades. There’s nothing I can do about that The important thing is always the consistency.
I am with Philip on the question of “wash out”. If you have a trend following strategy, your very last trade has to be a loser as trends do come to an end. But it is not a wash out. If you have proper risk and money management rules then you will definitely give back something to the market, but it is only a smaller part of your whole winning. You have to take it as a cost of riding the trend for a very profitable trade and most likely long-term. These costs are generating the drawdowns in trend following systems.
Phil,
I’ve noticed the same thing with your system and I went on about ways to fix the downfall after some failed attempts I started looking at short TFs in some ways it did the trick. But I trade a different system now, not entirely but suits me better.
The benefit with looking at shorter TF is although there can be some noise (so as they say I don’t know the accuracy of this statement it certainly hasn’t been the case for me) if you’ve got some experience looking at chart you’ll be able to tell where price is likely to move and therefore you can place your trades prior the big move occurs. This way you won’t miss out any big moves as opposed if you were trading from 4h chart. But realize that this alone won’t be sufficient for higher accuracy entries , I look at intraday sentiment along with the big picture, the price cycle and of course the data for that day. It may be a whole lot of work for you, but it works for me.
What you may be missing out could be intraday sentiment and lower TFs, that’s my take. Each to his own of course. Trading is personal you have to find out what works for you.
Yeah I agree with your post. One I get some free time I’ll start analyzing what happened with the system as volatility increased. In terms of the monthly chart, it works fantastic. It just seemed that as volatility increased, the 1 hr timeframe became more reliable than the 4 hr.
Higher-volatility pairs like Yen crosses are also much more reliable on the 1 hr than the 4 hr.
The problem with that is, it will be much more difficult relying on mental stops using a 1 hr timeframe. Because it basically means that you have to be looking at the chart all the time.
I have been re-reading an interesting chapter in John Murphy’s Intermarket Analysis. The chapter about the Business Cycle.
He discusses two main things: 1) The Presidential Cycle. 2) The six stages of rotational sequence of different asset classes within the cycle.
The Business Cycle: Lasts for four years and alternates between expansion and contraction. Normally, interest rates rise as they expand, and drop as the economy contracts. The movement of the economy and interest rates has an impact on Bonds, Stocks and Commodities. Note: based on the cycle, 2015 should have been a year of recession. However that four-year guideline doesn’t always work. In fact 50% of the time it doesn’t.
The six stages: So…The first stage is as the economy is contracting, the FED starts cutting rates. At one point during the decline, bond yields start to decline while stocks and commodities are falling. This is a leading indicator that the cycle is about to reach its trough [B](Stage 1)[/B]. Months later, stocks find their bottom and start moving up [B]stage 2[/B]. Then commodities move up as well [B]stage 3[/B] and that announces the beginning of the expansion phase.
Interest rates rise, bond yields start moving up [B]stage 4[/B]. Then months later stocks find a top and start to decline ([B]Stage 5[/B] . Then Commodities find a top and start to bottom and that signals the beginning of the contraction period.
[B]Why hiking interest rates doesn’t seem to make sense?[/B]
Well the argument is that US growth isn’t strong enough. We have international economic slowdown risk as well.
[B]Why those arguments fail[/B]
However, in terms of the business cycle, this is irrelevant. Just because growth is not strong enough, does not mean it has not reached its peak. In terms of the business cycle, we have been in the expansion phase and we are about to start the slowdown. Just because we think growth is low, it has to go up. It can go down and its the FED’s responsibility to have something in its locker to deal with it.
The next post I will share why it is possible that we are near the top of the business cycle.
Really cool work and sounds completely logical. Also I like it more than some fundamental analysis where we all have our own story, but a system like this is clear and there are no “if”-s.