Nice Chart to Wake Up To

If you were short the EUR/USD today, that is - which as luck would have it I was.


I haven't seen volatility like this in quite a while...over 200 pips of movement. Hope you're all short the Euro today as well!

Finally a little EUR/USD action! I was about to fall asleep...

So I've been sitting on a long EUR/USD trade all week getting more bored by the minute, and finally today the pair exploded upward through my limit order following the Federal Reserve's decision to keep US interest rates at 5.25%, based the weak US economic indicators and continuing inflationary pressures. The US stock markets are way up today as well, with the Dow Jones up over 1% at the moment.

Here's a picture of today's EUR/USD action from my daily charts, a dramatic contrast with the range-bound meanderings of the past several days.

And to think I was about to post about how bored I am with forex these days. Well, it's moments like these that keep it interesting. Now let's see if the market goes back to its tedious ping-pong match across a 50 pip range for the rest of the week. (Note to self: stop jinxing your trades by mocking the market.)

An Easy Signal Using Minimum Prices

This is an extremely simple short signal I came across while prospecting for new indicators to add to my EUR/USD trading system. Here's how it works:

Timeframe: Daily (24 hours)

Signal: If the previous trading day's minimum price is greater than or equal to the closing price the trading day before that, a short signal is generated for the next trading day.

These conditions occur disproportionately often during US weekends, with price gaps occurring between Friday's closing price and the minimum price in Sunday trading. So let's say it's the end of trading in the Sunday session. Sunday's minimum EUR/USD price never fell below Friday's closing price. Therefore, this signal indicates you should go short the EUR/USD on Monday.

I tested this little signal out on over 4 years of daily price data going back to September 2002, and in that time it would've generated 37 short trades (selling the EUR/USD pair) and 506 pips in profit after subtracting a 3 pip spread. Of those 37 trades, 23 would've ended positively, for 62% accuracy. Here's a chart of its performance:

So it's not the commonest signal, occurring less than once a month, and it doesn't yield gigantic profits. But on the other hand, it's extremely simple and has a fairly consistent track record, so it might be worth adding to your trading system.

So why does it work? (Keeping in mind that past performance doesn't guarantee anything, anytime, anywhere.) My theory is that it's a type of overbought signal - basically you're spotting a point when the market spikes upward without dipping back even slightly, and in those conditions a correction back downward becomes more likely the next day. This is especially true after the weekend break, when traders return to the markets anticipating a correction or reaction to the previous week's activity.

If nothing else I hope this gives you some ideas for creating your own signals using minimum price data. Stay tuned for a similar long signal using maximum prices...

Related topics:
Signals Using Maximum/Minimum Prices
Simplest. Signals. Ever.

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

My Bad Day with the Euro

Today's EUR/USD trade turned out pretty ugly - my system's technical analysis pointed to further declines in the Euro, but then some nasty economic news from the Philadelphia Fed sent the EUR/USD pair spiking dramatically upward, sending my short position into the toilet and way too close to my stop-loss for comfort. (If my trade's in the toilet that must put my stop-loss somewhere down in the sewer.) I guess this is what I get for predicting further declines in the Euro in my earlier post!

Right now I'm down 94 pips on this trade, and while I'm telling myself that these kinds of losses are statistically unavoidable, it still hurts. And it certainly doesn't help that I've been checking on this position every 15 minutes, exactly the sort of overanxious, system-sabotaging behavior that I've advised against in the past. (In an effort to make myself feel better, I just calculated how often a trade this bad occurs in my system. Answer: just under 6% of the time, or about once a month. So I better get used to it.)

If nothing else, a bad day like this is good practice in maintaining a disciplined trading strategy...and frankly it feels good to be able to look past this trade and focus on executing the next one as precisely as possible. For all the other unlucky Euro shorts out there, I feel your pain!

Related topics:
Limiting your emotional exposure to the markets
Sticking to your trading system

My Best EUR/USD FX Engine: 3994 Pips

I thought I'd share the recipe for the best EUR/USD engine I've come up with for trading on FX Engines. It relies on timing of market activity in this currency pair to help identify high-probability trades. In over three years of backtesting on historical data it racked up 3994 pips, or around 1300 pips a year. Here's how to put it together if you'd like to take it for a spin. [Register here to set up your FX Engines account if you don't already have one.]

First you'll have to create a new signal in the Breakouts signal menu with the following parameters:

Name: whatever you like
Signal interval: 60 Minutes
Signal type: Entry
Signal activates: choose option 3, and complete with the following numbers:
Price breakout below the low minus 5 pips for the last 1 periods

Now just hit Save at the bottom and you're done and ready to use this signal in your engine.

Next find your way to the Create an Engine page and enter these parameters to create this engine.

Name: Whatever you'll remember

Currency Pair: EUR/USD

Trade Direction: Long

Entry Signal: Select the signal you just created from the menu.

Entry Settings: Market Entry

Entry Schedule: Select the last option and choose 2:00 AM through 3:00 AM EST for every day of the week listed. Yes, this is only an hour window of time - my research indicates that, curiously enough, a downtrend in this period correlates to an uptrend for that day.

Exit Settings: choose the Fixed Stop & Limit Exit option, with 75 pips as the fixed stop, and 160 pips as the limit exit.

Now just scroll past all the other options to the bottom and hit the Finish button, and you're done and ready to backtest your engine. Backtesting is a crucial step to make sure you've entered all the parameters correctly, and that I'm not just making this all up at random. You can run your backtests in the Testing section of the site. My tests of this engine ran for a date range of 01/01/03 - 03/24/06.

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!

Related topics:
My Best GBP/USD FX Engine
Divergence FX Engine

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!

Interesting Correlations Between the EUR/USD and the Dow Jones Industrial Average

The other day I got curious about what correlations (and potential causations) could be found between the daily movement of the Dow Jones Industrial Average (DJIA) of shares traded on the New York Stock Exchange (NYSE) and the activity of the EUR/USD currency market. And I found some...at least in the 3 year data set I was studying, an admittedly limited sample.

Here's how I did my research - first I downloaded daily EUR/USD price data available on the Metatrader forex platform, which I've discussed previously. Then I did the same thing for DJIA historical price data available from Yahoo! Finance.

Next I had to clean up the data a bit, since the EUR/USD pair trades on days the NYSE doesn't and so there isn't perfect overlap in their daily activity. Essentially this meant going through week by week and removing all the Sunday trading data from the EUR/USD data. With that done, I had nice sets of parallel data for each market. Then I started playing around with it, trying to determine if a bullish day for the DJIA equated to a bullish day for the EUR/USD, or the opposite. Same for bearish days for the DJIA. There seemed to be a good chance of it, especially since the NYSE market closes several hours before the EUR/USD hits its peak trading period. So it made sense (at least to me) that during this period between the close of the major US exchange and the kick-off of high volume EUR/USD trading, forex traders would analyze the DJIA trend and reach conclusions about its impact on the currency pair, and then place trades on that basis.

And that's what appears to happen on a statistically (and profitably) significant basis. A strongly bullish day for the DJIA correlates with certain trends in the following day's EUR/USD forex trading. And so does a strongly bearish day for the Dow Jones average. Now you may be thinking, enough build up, what are these correlations, exactly? Well, having put several hours into the project, I don't really feel like giving that information away just yet. Maybe someday. But hopefully I've given you enough clues to start figuring out some inter-market correlations yourself. Another market you may want to add to the mix is NASDAQ - you can find price data for this exchange on Yahoo! Finance as well.

Another Simple Long Signal for the EUR/USD

Here's a signal I came up with for predicting buy/long trades of the Euro-US Dollar pair. I've backtested it on almost 3 1/2 years of daily market data going back to September, 2002. In that time it generated 288 buy signals, making it a fairly selective indicator, at least by my standards. Remember, the fewer trades, the more you save on the spread.

The signal goes like this:

If the highest price on the previous trading day was more than 50 pips greater than the closing price, AND the highest price was NOT more than 130 pips above the closing price, then a long signal is generated for the next 24 hours, commencing at midnight Greenwich Mean Time. This is 4:00 PM in California, where I live.

Here's what it looks like in an Excel-style formula; obviously you'd need to tweak this to match the cells on your own spreadsheet:

=IF(AND(HIGH-CLOSE>0.005,HIGH-CLOSE<0.013),1,0)

In the testing period, this signal proved to be 59.72% accurate, and brought in 3865 pips before the 3-pip spread was taken into account. With spread costs, the total was 3202 pips. I reached this figure by counting all trades (288) then subtracting trades that occurred on successive days, since these would be rolled into the previous day's trade, saving on spread costs. I ended up with 221 trades x 3 pips, or 663 pips, which I then subtracted from 3865 for the final total of 3202 pips. So you're still left with a respectable pile of pips at the end of the day. (No, I didn't to figure out interest...I'll leave that to you.)

Here's a chart of its performance (before spread) over the ~ 3.5 year test period. One the left, vertical axis you see pips expressed as fractions of a dollar, where 1 pip = .0001, so .35 = 3500 pips.



You could also try combining this with other signals (such as the ones I described in this post) to see if you can boost its performance. Of course, I can't guarantee it'll continue to work in the future -- but it certainly was pretty reliable in the past. Good luck if you try it!