Forex Blog

Dollar rose today against the euro but EUR/USD pair still remained in a mainly sideways trend. A good report on CPI and a rather low decline in the initial jobless claims were mostly ignored during today’s trading session. EUR/USD is currently trading near 1.4901.

Seasonally adjusted CPI rate was at 0.8% in July — that’s below June’s 1.1%, but above the average forecast of 0.4%.

Initial jobless claims declined to 450,000 last week down from 460,000 a week before. Average estimate for this indicator was at 436,000.

EUR/USD rose slightly today, probably as a result of the technical correction processes that should have followed the recent rapid growth of the dollar. Today’s fundamental releases from U.S. were average and they couldn’t move the currency pair too far up or down. EUR/USD is currently trading at 1.4937 with the daily high still below the important level of resistance located at 1.5000.

Export and import prices gained 0.8% and 0.9% respectively in U.S. in July. That growth followed the 0.9% advancement on both indicators in June.

Retail sales dropped 0.1% in July. Although it’s quite a negative result, the markets were ready for it, because the average forecast was also at 0.1% decline. In June retail sales gained 0.1%.

Business inventories rose faster than expected this June — they advanced 0.7% after 0.3% in May and 0.6% growth forecast for June.

U.S. crude oil inventories decreased by 0.3 million barrels last week after gaining more than 1.6 million barrels a week earlier.

Although, EUR/USD moved slightly above its opening level, this currency pair remained highly volatile today and reached a new minimum record since February 26 at 1.4815. The bullish spiked reached 1.4964 level. It failed to break above the 1.5000 resistance which may form a new psychological roof level for the next couple of weeks.

Trade balance deficit shrank in June as the exports grew significantly faster than imports. The deficit decreased to $56.8 billion — down from $59.2 billion in May and below the pessimistic $61.9 billion forecast.

Treasury budget report for June showed $50.7 billion surplus compared to $36.4 billion deficit in June 2007. Economic strategists expected the widening of the deficit to $86.8 billion.

Earlier I’ve described the statistical Forex systems and introduced the problem of choosing the right timeframe to gather the statistics for such systems. Today I will try to describe the problem of choosing the right information that is collected for the statistical trading system.

Gathering the statistics over a chosen period of time for the given market instrument is the next step to create a successful statistical Forex strategy. But what data should be used for this statistics? Is it a good idea to record bare chart data? Should you gather any additional information? Here is my view on all possible statistics type that can be used in the process:

Pure market quotes. This includes high, low, close and open rates for bars and bid or ask rates for ticks (if you think that tick-based statistics is a good idea). This method of statistics gathering is the most obvious. You gather the market quotes then compare them with the current situation and decide whether to buy, sell or hold. But there is a problem with the changing of quotes range. For instance, 1 year ago EUR/USD was in 1.4000-1.5500 range, a month ago it was far above 1.5500 level, so the data gathered in another price range would be completely useless. Alternatively a normalization of some sort can be used to store such statistics — e.g. store not a quote like 1.5404 but its relation to the next bar’s open price — 1.5404/1.5423 = 0.998768073. This way you’ll have data that is informative in any price range, but still uses no indicators or other complex calculations.

Indicators. These are probably the best data to be recorded as the statistics. Even standard MetaTrader indicators allow recording a lot of information and then using it to compare with real-time current market situation. With a large part of the indicators the normalization similar to the one used with the raw market data will be necessary. It’s probably a good idea to use indicators that change in the certain range — like RSI, DeMarker, Stochastics, Larry William’s Percentage Range, Money Flow Index, etc. The length of the arrays of the indicator values recorded for each tick or bar is also an important parameter of the statistics gathering. Remember that the longer this length is the more uninformative this statistics becomes. Ideally, it’s better to use single value of each indicator that is unique for the current bar or tick.

Additional information. It can include the time of the day to capture the trends and patterns that are specific for some trading sessions only. Another parameter that fall into this category is the day of the week — trading usually differs depending on the busyness of the day (often with less price action on Fridays). The statistics can also note if the day is some major holiday, current daylight saving time mode for the major countries and the volumes of the trades (although in Forex they are not very informative).

Complex calculations. This can include not only calculations based on the market data and indicators, but incorporate the additional information such as time and the day of the week into the calculations. In this case the produced number-formatted statistics would be easy to compare to the real market data. Considering the current development level of the PC industry it wouldn’t be a hard task to incorporate even the most complex calculations in the MetaTrader expert advisor that utilizes a statistical Forex strategy. Additionally these calculations can be accompanied by the various pivot points and resistance/support levels to help with choosing the position’s parameters.

In one of the previous posts I’ve introduced the statistical Forex system definition and marked up the important problems that should be solved in the process of its creation. Here I will try to explain more about the problem of the statistics gathering.

Choosing the timeframe for the statistics that will be gathered for your system consists of two parts — choosing the chart timeframe discreteness and choosing the length of the period over which the statistics will be gathered.

Choosing the right chart timeframe is a matter of balance between the uninformative short-term data with many samples and the small quantity of the more specific information. If you choose a tick or 1-minute timeframe discreteness you’ll have to face a large amount of data and a lot of CPU power used up on gathering, calculating and finding this data; finding some patterns in these vast arrays of information wouldn’t be an easy task and the further strategy building will very complicated in this case. On the other hand, using daily or weekly periods will give you too little information. For example, one year of the market analysis of D1 charts will give you just a little more than 200 data samples. In my opinion, considering the 24 hours a day and 5 days a week nature of the Forex market, the best choices here are M30, H1 or H4 timeframes as they give you a fair amount of samples with a decent informativity, because such samples will have a greater variation. Alternatively you can use multi-timeframe statistics, but that would lead to a really complex system, which, of course, will have a better potential.

Sampling period’s length is an important parameter of the statistics gathering. Using a small period will allow you to recognize the most up-to-date rate patterns and your strategy will probably benefit from them in the short to medium term. Unfortunately, short sampling period can contain too little of these patterns and if the market changes they will probably fail to help with the recognition of the changed price dependencies. Long sampling period will give a very wide array of patterns which can be used in comparing. But the difference between the market today and the market several years ago can bee too large, so those patterns can lead your system to a high inaccuracy ratio. Getting statistics over the past 2-3 years is a balanced decision here. You catch more than one long-term trend and you get a lot of the medium- and short-term trends caught into your statistics with such period, while really outdated data isn’t spoiling your statistics.

Of course, these decisions should also depend on your system, the nature of the data you will be collecting and the timeframe that it will use in the actual trading. But don’t forget the negative and positive sides of the different data timeframe and the sampling periods — try to avoid the extreme values that could possibly ruin your strategy.

EUR/USD trend: sell.
GBP/USD trend: sell.
USD/JPY trend: buy.
EUR/JPY trend: sell.

The  U. S. dollar rose against euro at a fastest pace since early 2004 today. Although, the growth is mainly attributed to the euro’s weakness, caused by they commantery made by ECB President Jean-Claude Trichet yesterday, the dollar has also a surge of power, rising against all other major currencies today. EUR/USD lost 270 pips already and is now trading near 1.5016 — level not seen since February.

Productivity in the nonfarm business sector of the U.S. economy rose by 2.2% in the second quarter of 2008. It failed to meet the 2.5% growth forecast and came in below 2.6% growth in previous quarter.

Wholesale inventories increased by 1.1% in June — above the expected 0.6% increase. In May they rose 0.8%.

EUR/USD declined today to its new minimum level since June 13 after a bearish commentaries by Jean-Claude Trichet that followed ECB’s rate decision. Even bad reports on U.S. employment and housing couldn’t save the currency pair from falling. It is now trading near 1.5326 level.

Initial jobless claims rose to 455,000 last week, up from 448,000 a week before. Analysts estimated a decline to 420,000 claims for the last week.

Pending home sales rose by 5.3% in United States in June. This growth followed 4.9% decline in May. Median forecast for the June was at 1% decline.

Consumer credit rose by $14.3 billion in June. That’s above the recorded $8 billion May growth and exceeds $6.4 billion analytics’ estimate for June.

Statistical Forex system is a system that relies on the information which was previously collected from the market and the amount of this information is proportional to the period of time, on which the market is analyzed. Common input parameters optimized over the period of time aren’t considered as the statistical information, thus not every optimized system or expert advisor is statistical. Statistics is collected into a special file in a format that is recognized by the system; optionally the system may update this statistics. Designing a statistical Forex system is a complex problem that involves market analysis, rules developing and real-time evaluator building.

If you want to build such trading system, you need to answer these questions first:

What period of time to use for statistics gathering? Intuition suggests that the longer the period the better will be statistics, but in fact there could be some problems if system collects the information from the time periods that due to some reasons are unrelated to the current market’s mechanics.

What information will get into statistics data? This is probably the most important question if you want to create your own statistical expert advisor. Will you record raw quotes, indicators values or some custom calculations? What indicators or calculation methods to use? What else should be recorded?

How will your system compare current market situation with the statistical data? You have some data that is associated with the rising market, some — with the falling market and the rest of your statistics is associated with the sideways market. What methods can you use to compare current market data with your statistics to make your next trading decision?

Will it learn or will it be taught? The statistical Forex system doesn’t have to collect statistics, but it may be designed to do so. This addition has its advantages and disadvantages.

How complex will it be? Statistical Forex EA can be a very simple program, but it can be also developed as a powerful analyzing and comparing program. It can be capable of recognizing not only price action patterns, but also correlation with the days of the week and the trading hours, as well as look into the past to see the start of the trend or the previous price patterns.

MT4 expert advisor built as statistical Forex system can be very profitable, but its creation is not a trivial task. I’ll try to elaborate more on these questions and the details of their solutions in the next posts.

EUR/USD had a very big drop today as the stock markets grew in U.S. and the Forex traders expected positive decision from the FOMC monetary policy. ISM report also supported the greenback today with an increase in its index, but the main news was the interest rate decision and (more important) the statement released by the Federal Reserve. After the release of the report, dollar began to go down slightly, but overall it had a very good day against the euro today. EUR/USD went down from 1.5570 to 1.5446 today — the lowest since June 16.

FOMC left the federal funds rate unchanged at 2.00% today. The statement said that the economic situation improves but the employment, housing and financial sectors are still at risk. Nevertheless, inflation uncertainty remains a significant concern for the Federal Reserve. This will probably mean that there will be no further rate cuts or increases during the next meeting or two.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

ISM non-manufacturing index rose from 48.2% to 49.5% in July — this growth exceeds the median experts’ estimate by 0.8%.