Big Banks Forex Trading Strategy || Mid-Term
First of all I would like to recommend a great document out there - "DB Guide to Exchange-Rate Determination" which was written by Deutsche Bank in 2002 and is overfilled with FX rate determination, forecasting methods which can be used for all short term, mid-term and long term trading. If you haven't read it, look for it, download to your Kindle and take the time. It is worth reviewing. :)
In the documents several FX trading strategies are described with reference to many academical papers and literature. One of them - the Forward-Rate Bias strategy. Its results are stunning for longer term FX trading and its sharp ratio has beaten the S&P500 twice. As the DB says: "This is the bedrock of Deustche Banks's Forward-Rate Bias trading system".
- Forward Premium and Discount
It is necessary to understand what Forward Premium and Discount is before diving deeper in to this.
Premium - Situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, but any expected future exchange rate suffices.
Discount - situation where the domestic current spot exchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period.
N - represents the maturity of a given forward exchange rate quote
d - represents the number of days to delivery
P - is the premium (if positive) or discount (if negative)
F - is the forward exchange rate
S - is the current spot exchange rate
- Forward Bias Strategy - Trading the Bias
"Favorite approach to trading the forward-rate bias is to adopt a diversified strategy to exploit the fact that currencies trading at a forward discount tend to outperform those currencies trading at a forward premium".
The recommendation is "going long the three highest-yielding currencies in the industrial world and going short the three lowest-yielding currencies in the industrial world. Net long/short positions are put on at the beginning of each month and then closed at the end of each month. This process is repeated each month over time".
- Long Run Track Record for USD-Based Investors
This is truly old backtest and I would be really interested whether it can perform this good in todays market. So if there was a demand for it, I would dive into that ;o) Write a comment if you want to see it.
A death cross is one of the most popular bearish moving average crossovers in the trading world. It is a bearish signal that means the stock market is in a downtrend and could go much lower when the 50-day simple moving average crosses under the 200-day simple moving average from above. It shows a loss of price momentum to the upside and that the current path of least resistance is to the downside. It is a longer term trend following type of signals and is used by some to sell their long positions due to the risk of more losses, sell short, or use it as all overall bearish market indicator. Here are the time periods over the last 20 years where the $SPY ETF was under a death cross: May 16, 2002 to May 11, 2003 August 25, 2004 to October 26, 2004 July 25, 2006 to August 28, 2006 December 28, 2007 to June 17, 2009 July 07, 2010 to October 12, 2010 August 17, 2011 to January 23, 2012 September 3, 2015 to December 9, 2015 January 15, 2016 to April 20, 2016 December 12, 2018 to March 25, 2019 The below backtesting data shows a chart with the crossover entry signals and cross under exit signals, these statistics are for using it as a signal to go to cash, and the time periods you would be long if used it as a trend filter going long when the 50 day simple moving average crossed back over the 200 day simple moving average and had the inverse ‘golden cross’.
$SPY made a new all time high on Friday then closed under Thursday’s high of the day. $SPY is currently still triggering all bullish moving average long signals. Thursday’s breakout to new highs was on increasing volume while Friday’s reversal at the 70 RSI was on even higher volume. $SPY ran into resistance Friday at the 70 RSI to close at 68.27 on the week. The 70 RSI held as previous resistance on August 29th. The MACD had a new bullish crossover last week. The average true range remains tight at a 1.84 (ATR) so no increase in the trading range. $VIX at 11.68 is very low historically. VIX is finding support at 11 and not decreasing beyond that level. $VIX is also under a bearish 10 day ema 30 day ema cross under. The $290 price level is the previous resistance which could be the new support. New longs at this current price level in $SPY do not present good risk/reward ratios. All signals point to bullishness on the $SPY chart so opportunities to buy dips back to key levels of price support or key moving averages will continue to be a high probability set up.
Here is a very basic overview of a role of a Stochastic indicator in the Forex trading. Knowing exactly what to expect from Stochastic, if you ever plan to add it to your own system, will affect trading results dramatically. For this trading method: Currency pair: Any.Time frame: Any.Indicator: Stochastic (14, 3, 3) Entry rules: Buy when the faster moving Stochastic line crosses above and up over slower moving stochastic line. Exit rules: Sell when the opposite situation (next crossover) occurs and right after that open an opposite position. It is again recommended, once the first touch of Stochastic lines (possible future crossover) has been spotted, to wait until the following price bar on the chart has closed and only then take actions. Advantages: can give entry and exit rules, easy to use. Disadvantages: Stochastic is a lagging indicator – with this lines crossover system it can create a lot of false signals. Traders may want to change Stochastic regular settings for each particular currency pair to eliminate as many false signals as possible. Stochastic crossover system is good when used in combination with other indicators.