Something I have occasionally looked at in the past.
We have to conclude that a price above a medium or long-term EMA has been rising. We can assume that it will now be more likely to rise than to fall. Conversely for prices below the same EMA. You could take this as a measure of “normality”.
But to what extent does this hold true at any given moment and how does the picture change over time?
Last week, of the 26 major forex pairs I watch, only 3 moved according to the principle above. So prices for 23 of the 26 were either above the 50EMA but moved lower or were below the 50EMA but moved higher.
Likewise, only one of the 11 major stock indices or commodities I watch moved “normally”, i.e. they were all either above the 50EMA but fell or were below the 50EMA but rose. The one that stood out was maybe not surprisingly the Nasdaq 100.
Generally, when these results fall to such a low extreme, we see a strong reversion to 50EMA-related “normality” in the following week. I expect to see most “high” markets (prices above the 50EMA) rise strongly and most “low” markets fall strongly. We shall see…
Last week, 23 out of the 26 moved in line with their intermediate trends over the week. That is, most of the pairs with upwards sloping 50EMA’s on 23/11 rose further last week, and most of the pairs with downwards sloping 50EMA’s fell further. This is the highest “normality” score over the last 11 weeks.
Maybe this was a valid signal to close all long-term trend-following positions? My weaker unrealised profit line suggests so.
As you said it’s only “indicating a sign” but it doesn’t necessarily mean it’ll translate or correlate to the signal we expect. You’re just raising your probability of being correct.
I remember a year back my indicators were all showing signs of a long USD/JPY buy just for it to literally come within 1 pip of my TP & did an immediate u-turn to my SL. Still one of my most memorable trades of the market showing me whose boss.
This week, only 11 of the 26 forex majors ended with a trend-following performance. This has certainly hurt my unrealised profit figure, and I would definitely have ended the week better off if I had closed after the London session close last Friday, or any time before the London session open on the Monday.
I’ve got to think that once the market has moved to an extreme, 23/26 (88%), its more likely to revert back towards the opposite extreme than continue rising, so profit riding on such a strong performance should justifiably be banked, disregarding the individual chart TA’s.
I’m resurrecting this thread in light of the “backwards” movement of the forex markets this last several days which has cost me some money. Most pairs have moved counter to their long-term trends in a market-wide correction and as my positions are always trend-following, many were quickly stopped out.
For the purposes of this monitoring I’m defining an uptrend as a chart that has the 20EMA above the 50EMA: a downtrend shows the 20EMA below the 50EMA.
A “normal” price move is when price closes higher on a daily chart which shows an uptrend, lower on a daily chart showing a downtrend.
The first 3 days of this week have all been “abnormal”, i.e. counter-trend. On Monday only 11 of the 28 significant forex charts were “normal”, on Tuesday just 4 and yesterday only 12. Let’s see what today brings.
Wednesday’s trend normality just managed to creep into positive territory for the first time this week, at 54%. April has been a lean month for trend-followers so far.
Hi Tommor
Interesting analysis. I think it may be good to gage the extreme periods in the market. That is, low score (eg below 10) would signal not to enter and a high score (eg above 20) would signal to close existing trend following positions.
Could be interesting to test. What do you think?
Yes, this is along the lines I’ve been thinking. The score won’t generate entry signals but it could be useful in signifying extra restraint would be appropriate, such as wider allowance on entry orders, fewer open positions, smaller capital risk per trade, no pyramiding, setting TP’s (or less ambitious TP’s) etc. Its possibly going to be useful as a “risk” weather-vane.
Normality score last week was 58 out of 140, i.e. price on the 28 major forex charts closed with-trend on only 58 occasions in the last 5 days, giving a score of 41%.
The week ended with normality, first time in April. In total, 82 of the 140 daily forex charts showed daily closes with-trend. That’s a respectable 59%. Perhaps our long-term trends are really resuming at last so this weekend I will be setting some entry orders, despite Monday being a public holiday in the UK etc.
I trade in general and always try to follow the trend. If I can follow the trend and maintain money management, I think it is possible to gain some profit at the end of the month.
Another week ends with positive normality, at a score of 56%, a little lower than last week but not worrying. Similar pattern across the 5 days as last week - 3 positive days, 1 neutral, 1 negative.
Some really good meaty moves over this week too, USD and JPY weakness coming together again and their pairs making the extremes of the score sheet.