Saturday 26 March 2011

110326 - The Week In Pictures

Main observations this week have been the continuing uptrend of AUD, plus a little bit of volatility and uptrend in JPY at the end of the week. This is the most JPY has moved since the Sendai earthquake (has it already been a week?). As far as Watcher goes, now is the time to start monitoring JPY pairs more closely so we don't get any runaway trending. Circuit breakers are in place to limit losses if I happen to be asleep at the time! As for AUD, Watcher is not configured to sell AUD because of the negative swap implications, so looks like all 4 pairs that are set up will be dormant for a while. Once a limit is reached, however, I may consider switching sells back on (and I maybe will get burnt!).

Lots of TP lines evident this week. Its time for yours truly to take a break for a week. Whenever I move location, I turn off cloaking as a precaution. Once back in location, on it goes again.

AUDCAD

AUDCHF

AUDJPY
AUDUSD

The AUD family trending nicely, swing and SRIFT indicator showing lots of intra-day opportunities.

CADCHF
CADCHF reverting to nDay mid-point.

CADJPY
 CADJPY showing possible topping out, both Swing and SRIFT confirm trend move down.

CHFJPY
CHFJPY reverting to nDay mid-point.

EURCHF
EURCHF showing strong uptrend. Need to watch this one more closely.

EURGBP
EURGBP moving to new level range.

GBPCHF
GBPCHF showing some excellent ranging.

USDCAD
USDCAD showing some late bullish activity, but CAD remains strong.

USDCHF
USDCHF showing increasing trend with 5 day and 3 day regression channels. Excellent intra-day from swing and SRIFT.

USDJPY

Saturday 19 March 2011

110319 - The Week In Pictures

No prizes for guessing the theme of this weeks round-up. Harmonic enthusiasts may even invent new names for the .... (is it a rat/crocodile/peacock/dragon?) pattern which was the result of the frantic buying of yen last week. Luckily, the Watcher circuit breaker prevented a potential disaster, and also allowed a massive US$3K recovery the following few hours. The only other point of interest to me was those pairs that I trade that were NOT correlated (or were inversely correlated) with USDJPY:









Seems the event passed EURGBP right on by ...


USDCAD was inversely correlated.

Thursday 17 March 2011

Sendai - Economic Aftershocks

Following the recent devastation in Japan caused by the earthquake and resultant tsunami, one surprise was the resultant increase in Yen strength. Now, repatriation of funds by Japanese companies occurs annually at this time of year for accounting purposes, and this effect has been magnified possibly by insurance companies repatriating funds to pay for claims. This does not, however, provide sufficient explanation for the magnitude of the increase.

Effect on stock markets.

The stock market bore a large part of the brunt of the perceived increase of risk in holding Japanese equities, with both Nikkei 225 and Topix indexes suffering their third worst daily declines in history (the second worst was Black Monday in 1987, and following collapse of Lehman Brothers in 2008). In these markets, "circuit-breakers" are set up to prevent economic ruin, and these were activated when, for example, Tokyo Electric Power, Asia's biggest power generating company, fell by the daily limit of 25 per cent.

Effects on business

The main risk to Japan’s manufacturing comes from the earthquake’s impact on the technical supply chain. The quake may trigger a supply shortage for electronic components including batteries and memory chips. Japan makes 44 percent of the world’s audiovisual equipment, 40 percent of electronic components, 19 percent of semiconductors and about 20 percent of all technology products. Toyota closed 12 plant and loses US$72M for each day of closure. Nissan and Honda may also each lose US$24M per day.Total economic impact is estimated at US$240B.

Possible further economic aftershocks

If ever any major holder dumped their US treasury holdings, the world-wide consequences would be devastating. It has often been mooted that such an act by China would cripple the worlds economic structure. The fact is that it would not be in China's interest to do so. Japan, however, may have a reason for selling some of its holdings, in order to pay for the massive rebuilding of infrastructure destroyed by the earthquake and resultant tsunami.

The US's own Pacific Investment Management company which runs the worlds biggest bond fund) last month dumped ALL of its government related debt. How long before similar companies do the same?

Immediately the Lehman Brothers collapse occurred, a friend called to say that this was "Financial Armageddon". Largely, world economies went through a time of huge volatility and loss, but seemed to be recovering nicely. Recently, I read a post from a trader who returned to the forex markets after several years of absence, and was asking why there was so much change in the way markets were behaving. To me, it is simple, the answer is FEAR. During the past few months, pre-Sendai, it seems like the "Risk on/Risk off" mentality has oscillated with increasing frequency, sometimes appearing to be a weekly phenomenon. In "Risk on" mode, commodity currencies do well, and the short-term speculation turns to wherever interest rates are highest, or where they will potentially increase. In "Risk off"mode, their is a marked flight to whatever seems to be the flavor of the month. Right now, Swiss Franc is particularly strong against most pairs.

"Swissy", along with US dollar and the Yen, has always had a reputation as a safe-haven currency.The country has had a robust economic recovery and there are expectations that Swiss interest rates could rise sooner than those in other major economies. So the Franc is seen to be safer and likely to earn more in the near future. The expectations of interest rate rises, however, conflict with the fact that Swiss inflation is currently around 0.5%. SNB is unlikely to find the need for increases at these levels.

In a beauty contest of currencies, however, the Yen is still not seen as "the most ugly".

Saturday 12 March 2011

110312 - The Week In Pictures (Sendai Tsunami effects)

Continuing strength of CAD and CHF, plus the dramatic events in Japan, were responsible for some interesting happenings this week. It is sometimes easy to take a position, however right or wrong, on the major currency pairs, but the crosses remain a little more inscrutable. Yen for instance, started to fall as soon as the news of the 7 metre high tsunami was broadcast. The market then surprised with a huge rally, which continued for another 8 hours. The initial position is usually negative on bad news, with astute traders knowing that any dip or rally, once overdone, usually retraces. So the question is how do events like this effect, say, AUDJPY, CADJPY or CHFJPY? The fortunes of Australia, being a major trading partner with both Japan and China, are inextricably linked to both number 2 and 3 economies, but what about another commodity currency like CAD, how will that react? Read on ....


AUDCAD showing an initial dip, followed by a strong rally starting at 0700 on the chart (the 8.9 magnitude quake that hit Japan started at 02:46 local time).



AUDCHF exhibiting similar effect, great signals from Swing indicator.



AUDJPY zoomed in to show the multiple take profits executed by Watcher.



AUDUSD chart showing high correlation with AUDCAD.




Tsunami effect on CADCHF shows less of a retracement after an initial fall, indicating the bigger detrimental effect on CAD.



This is backed up by the greater downward swing effect seen here in CADJPY. A 38.2% retracement upwards is then exhibited.



CHFJPY showing an almost, but slightly lower retracement.



USDCAD remains in the doldrums (Google it!) after reaching a new nDay low on Wednesday of 0.9677.


USDCHF similarly bound to the lower end of the allowed grid, after rising significantly off recent lows. For both these latter pairs, the decision has to be made daily as to whether to cut older out of the money trades in order to allow the take profits from new trades to happen. Generally, if there are less than the maximum number of trades, and at least one trade looks like it has a chance of making a profit, then I leave it until the next day. USDCHF has recovered well enough, now I am only watching USDCAD closely each day.

Sunday 6 March 2011

110306 - This Week In Pictures

This week continues the risk-off mood of the market, and provides further opportunity to study the grid strategy, with some aside notes on the excellent manual opportunities presented this week. Again, I only discuss those currencies of interest to my strategy, but would love to hear from anyone who has spotted something I have missed.


With both USDCAD and USDCHF being the main pairs of interest this week, as they both are peaking right now, some of the other crosses are showing that they can continue to provide PL whilst the majors are making up their minds which way they will go next. Here we can see at least 7 TPs from AUDCAD as it moves virtually sideways for the whole week.




AUDCHF also is moving in a slightly bearish channel. Note how the 3 day regression channel backs up the 5 day, whereas the 24 hour regression channel shows the price completing the latest downward leg. Ideal grid trading opportunities.

Whilst CADCHF doesn't show many gridding TPs, note how the swing indicator highlights some pretty profitable manual trade entry points, as the slightly bullish 5 day channel exhibits some sinusoidal movement. These entry points are all confirmed with the Smoothed RSI Inverse Fisher Transform Indicator, the 2 indicators working extremely well here.


I started a couple of new cross-pairs this week, CADJPY being one of them. Actually I already had this pair running on the small account, and it was proving a good PL provider, so I decided to put it on the big account where I can trade with bigger volume. Sometimes I feel that looking at the small account is a bit like watching paint dry, forgetting that the percentage increase on it is far more than I could make on any other investment I know of.


CHFJPY here showing another example of how the smaller crosses hedge the effect on margin drawdown of the bigger pairs.


EURCHF seen here in a bullish 5day channel, adding to the hedging effect, and also showing some pretty accurate manual trading opportunities from the Swing Indicator confirmed by the Smoothed Fisher RSI Inverse Fisher Transform Indicator.



Again, EURGBP shows massive manual trading opportunities indicated, as EUR strengthens across the board.


GBPCHF again exhibiting good opportunities for manual trades.


USDCAD again breaking nDay lows. Both indicators show good manual trading opportunities. All 3 regression channels agreeing on the trend, with the 24 hour channel showing the decrease in volatility exhibited here.


USDCHF completing another downward leg of the almost horizontal channel. Will it bounce or won't it?

USDJPY showing exactly why I like it as a gridding pair (except when BOJ starts throwing its weight around!). Also some great manual trading opportunities here.

Friday 4 March 2011

110304 - Thought Control or How (not) To Create A (losing) Winning System

As a systems designer/developer, I am often asked to validate certain client ideas. Leaving aside all judgement of the proposal for a while, I set out first to ensure I thoroughly understand it. Then, using my own experience, I think of all the possible reasons why the hypothesis is flawed. I treat all proposals as mission critical systems, which they are, since our hard-earned cash is at stake.

Should my negative-thinking be proved wrong, or the thoughts inconclusive, I then set up some experiments to assess the validity of the idea.

For automated trading, here be dragons. We code up a rudimentary prototype, with all the features hypothesized to give the design a successful outcome. We back-test, optimize, and then look at the results. If we can manage a decent-looking equity curve, our hypothesis is confirmed!

Or is it? Did we use typical data? Is our optimization (in terms of operating parameters) valid? Did we stumble across the one golden trade to the exclusion of others which gave us a huge balance? Did we need to make 1000 trades in order to get $100 profit? Was the account draw-down exhibited in our test results enough to make us think again? The fact is that the test results rely on the characteristics of the test data. If it is unfeasible that those characteristics will re-occur, then it is unlikely we will achieve the same profit.

Unfortunately, most of our critical thinking in this respect is clouded by what psychologists call Confirmation Bias. This, put simply, is our desire to believe arguments which reinforce our own. Instead of asking questions, or carrying out experiments, which would disprove our hypothesis, we seek out only those that reinforce it.

On the other hand, listening to opposing views and not dismissing unpalatable evidence may be the key to finding what we are looking for. By rejecting the negatives for a sound reason other than they don't confirm our own beliefs, we may be on the right path. By using the negatives to change our own thinking, we may save ourselves time and financial loss.

I love to read through the forums, and read them in the same style that I read my email, newest to oldest unread. In that way, I get the most recent, hottest information first, which allows me to take into context the (time) prior data, and evaluate it in another way. We have nearly 10 years of forum data online, and an amazing wealth of knowledge on tap, in terms of what real developers thought, how they acted, and what the results were.

I find the process of discovery and idea validation the most exciting aspects of my job, and so also provide consultancy along this line. Even if the client does not accept my proposal, or wishes to choose a more sympathetic vendor, I feel obliged to share with them my process and results. Should my own thinking be contradicted, I can always, at my own expense, revisit the counter-argument and reevaluate my position.

Learn like you will live forever. Live like you will die tomorrow, because one day you will be right ...

Further reading on Confirmation Bias