British Pound Hits 26 Year High Vs. US Dollar

While I'm not currently trading the GBP, I thought this was an interesting bit of news - on Wednesday, April 18 the British pound hit its highest level versus the dollar since 1981, breaking $2.010 for the first time in 26 years. And here I am looking at daily, weekly and monthly highs and lows - sorta puts your own little trading timeframe in perspective.

The big rise against the dollar followed data out of the Bank of England showing inflation in the UK at 3.1%, which is way above the bank's goal of holding inflation at 2%. Traders are now guessing that the bank will raise interest rates to try and bring the inflation rate down - and with those higher interest rates will come more profitable carry trade opportunities for those buying the GBP. (The pound has long been a key component of most forex carry trading strategies.)

Hence this dramatic spike upward. Hope you GPB/USD traders out there made some pips off it!

Risk/Reward Ain't Always What It Seems

It's very easy to get caught in the illusion that a tight stop-loss and a generous take-profit/limit order are going to earn you profits in that ratio. You know, setting your stop at 20 pips, your take-profit at 50 pips, and waiting for those consistent profits to start rolling in. This is a newbie error I made plenty of times before learning my lesson. What I've found since then is that a very generous stop-loss and a conservative take-profit strategy is often more consistently profitable.

A case in point: I'm currently running a GBP/USD trading system that features timed exits of around a week, take-profit at 100 pips, and stop-losses set at 300 pips. Yes, 300 pips. Sounds a bit weird, I know, but the key here is that those stop-losses almost never get hit. What's far more likely is that the price will advance 100 pips in that week, or the trade will time out if it doesn't (and sometimes with a profit). In fact, I could probably run the system without a stop-loss at all and the results would be similar, thanks to those timed exits - I'll have to backtest that notion soon, though the idea of trading without any stop-losses makes me nervous.

In general I've found that stop-losses work best for me in extreme emergencies, when the market is acting wilder than usual and hence could lose me more than usual. So for my trading style it makes sense to set them at the outer limits of the likely trading range, rather than squarely in the middle of the range where they're likely to get hit by a whipsaw or retracement.

The BunnyGirl Trading System

One of the best-known free trading systems available was invented by the (charmingly named) BunnyGirl, who posted her strategies in the MoneyTec forums and in so doing started one of the liveliest forex discussions ever.

The core of her trading system is a 5 period x 20 period weighted moving average (WMA) cross on a 30-minute chart. The main currency pairs traded are EUR/USD, GBP/USD, and USD/CHF, and she goes both short and long on all pairs. However, it's the filtering that goes into identifying each trade that really makes the system successful...and according to BunnyGirl it's been extremely successful, to the tune of 90% trading success and a 45 trade winning streak at its peak performance.

So how does the filtering work? Here's what BunnyGirl says to look for:

• WMA crosses around the key trading period of 00:00 GMT (Greenwich Mean Time)
• A breakout of at least 20 pips for the EUR/USD and 25 pips for other pairs, plus spread if going long. This helps minimize those nasty whipsaws that can saw away your funds in a hurry. (Get it...whipsaw, saw away...I just made that up. Oh, the wit. Please, save your applause for the end of the post.)
• Avoid trades when the 100 period WMA is near the cross and the price is heading in that direction.
  
• Don't trade in the last 5 minutes of a 30 minute chart period - wait for a breakout in the next 30 minute period.
• Don't enter trades near points of strong price resistance or if they're going against the prevailing daily trend.
• Multiple lots: BunnyGirl traded a sophisticated mix of 4 lots with trailing stops set at various levels. I won't summarize this system here but you can read all about it in her complete strategy, which you can download below.

There are a lot of other rules and filters you'll want to review before trying this system, and rather than copy them all verbatim here, I'll just cut to the chase and show you where to download it. I've come across two versions of the system which differ in a few details, and one of which has a lot more helpful charts. On the other hand, the other one's half as long. So I'd download them both and compare them to see which works best for you:

• BunnyGirl Bunny Cross Trading Framework (Longer, More Graphical Version from MoneyTec.com)

• BunnyGirl's FAQ (Shorter Version from ForexBasic.com)

Related topic:
Chart-Based Trading Systems

Starting up live FX Engines GBP/USD trading

I had a really mediocre November, with very few trades going my way...and that was before I got caught flat-footed by the huge declines in the dollar around Thanksgiving. In the meantime one of my automated FX Engines was quietly cranking away earning hundreds of (demo) pips trading the British Pound. It managed to catch a lot of the action I missed while I was traveling and sleeping off turkey dinners. So I've decided to give this engine a shot at the big time (well, the pre-big time), and am allocating 20% of my trading capital for it to buy pounds with.

This particular engine looks for upward breakouts of the GBP/USD pair at the opening of US East Coast trading, and jumps on them when they happen (invariably while I'm fast asleep). Interestingly it only racks up fewer than 40% positive trades, but its risk/reward ratio works out very profitably - over 3 years of backtesting its trading performance was over 5000 pips.

The fact that this engine can help hedge against losing EUR/USD trades is also appealing - the GBP and EUR are highly correlated, so on days when my primary system gets a short EUR/USD trade wrong, this engine can help limit the damage and grab some pips going in the opposite direction. I always used to enjoy trading the GBP/USD pair and lately I've felt I'm missing out on the potential profits offered by its higher volatility by confining myself solely to the EUR/USD...so this engine could help improve that situation as well.

Of course, its success depends to a huge degree on continued downward pressure on the dollar - for the time being this seems likely to continue, but if the dollar suddenly begins to strengthen I may find myself eating these words. Yum.

Related links:
FX Engines
FX Engines Update

My Best GBP/USD FX Engine - 3873 Pips, Anyone?

It's been a while since I've posted a recipe for a forex system that you can take out and start trading with today. So in the interests of making this blog useful, and perhaps improving the trading profits of you folks kind enough to read it, here's the formula for an FX Engine I created that raked in 3873 pips trading the GBP/USD pair in three years of backtesting. This made it my best-performing engine for trading the British Pound, and I think the key factor was that I used my market-timing studies to determine when it would enter its trades.

Without further ado, here's how to put it all together:

First off, you'll need to create your own custom signal. Actually, I'm getting ahead of myself...if you've never used FX Engines before you'll need to register. So, now you're registered and in the Signals section. Next, choose "Breakouts" and "Create a New Signal". Here are the parameters to enter:

Name: call it whatever you want.
Signal Interval: 60 MINUTE
Signal Type: Entry Signal
Signal Activates: Price breakout above the high plus 2 pips for the last 1 period

Now save it and you're done with the signal.

Next go to the Engines page and choose "Create a New Engine." Here's what to enter there:

Name: Whatever. Hey, how about "ForexForays.com Engine"? :-)
Currency pair: GBP/USD
Trade Direction: Long
Entry Signal to Select: Choose the one you just created from the menu.
Entry Settings: Market Entry
Entry Schedule: Choose "Activate my entry signals only during the times outlined below". For Sunday, select "No trades". For every other day, choose 8:00 AM as the start time and 9:00 AM as the end time - so just an hour window of time each day.

On the next page, you'll choose an exit strategy for this engine. Choose Fixed Stop & Limit Exit (the first one) with 100 pips as the stop and 200 pips as the limit exit.

And that's it - just scroll past all the other options and hit the Finish button at the bottom. Now you're ready to backtest the engine and find out if I'm full of it or not. You can do that by going to the Tests link, choosing your new engine from the menu and running a test. When selecting the Pip Spread, remember this is a GBP/USD engine so choose 5 pips. Now hit the Begin Test button and see what happens!

If you do end up trading with this engine, just keep in mind that while it certainly performed well in backtesting, there's no guarantee it'll continue to trade profitably in the future. Trade at your own risk!

PS - I have a EUR/USD engine that performed even better than this one. Maybe I'll feature it in a future post.

Related links:
FX Engines Home Page
FX Engines Registration

Big Breakout for the Euro and Pound

Just wanted to cheer on this week's impressive upswing in the EUR/USD and GBP/USD pairs - fortunately I was able to jump into the rally with both feet and am currently up 370 pips with my GBP trade and 240 pips with my Euro trade. The EUR/USD pair is now at its highest level since September 2005, and the GBP/USD its highest since January 2006.

According to predictions derived from my study of the Dow Jones Industrial Average, today's surge in the DJIA points to a further increase in the Euro-Dollar pair tomorrow. Likely to see similar movement in the GBP/USD, which is closely correlated with the EUR/USD.

One word of caution - there's likely to be pressure building among traders to grab some profits soon (I know it's crossed my mind) which may begin to moderate this uptrend. Good luck Cable and Euro longs!