05 October 2022

Trading FX where Risk aversion seems to have the upper hand

Hello readers,

As mentioned in the previous article several improvements have been made to the trading system. These have paid off as it seems for now. We'll go into this in more detail after looking at the development of the markets. Trading in the 4-hour chart has been reversed until it can be better implemented in the trading system. It is being tested on a Demo account. Once there is enough history this will be discussed in more detail in another subsequent article.


The Markets

To research the markets and save time, but still get a good general idea, I use 2 charts. The S&P500 and the USDJPY. It is impossible to extract all market information from this, but being aware of the latest market developments can help to go a long way.


S&P500 Weekly


The chart still shows a down trend. I have indicated these moments with yellow arrows. The price there is below the Ichimoku Tenkan-Sen and Kijun-Sen, the MACD is falling and the Stochastic is also showing downward momentum.

Compared to my article from last month, there are 5 Weekly bars added to the chart but the last bar is of the current week that is not finished yet. The MACD is showing signs of bottoming out, but it's too early to draw any conclusions. The Stochastic is in oversold territory, but the best sign of a low is when the Stochastic comes out of the oversold area with momentum. Again, it is too early to draw conclusions.

In the best-case scenario, the S&P500 will consolidate in the coming period with the possibility of bottoming, let's see. The Index may rebound towards the horizontal yellow line representing a resistance level around 3900. This is also close to the Ichimoku Tenkan-Sen. Risk aversion is still in the driving seat so it seems.


USDJPY Weekly


The vertical blue lines correspond to the lines in the S&P500 chart, this is for reference only. This chart clearly indicates that the USD is still in an uptrend for the time being. However, in the last period, the Weekly bars could not succeed to continue making new Highs.

For now, it seems that in the worst case there will be some consolidation in the coming period but there are no signs of topping yet. The pair may find then some support around 140 where the yellow horizontal line is and also near the Ichimoku Tenkan-Sen.

Also here, risk aversion seems to be in the driving seat. The USD is seen as a safe haven and is very strong against most currencies but especially against the JPY. 
Only with full risk aversion will the USD fall along with the S&P500.
So as it stands, there is risk aversion but no complete risk aversion and this means that the markets are not in panic and the USD remains a safe haven.


The strategy

In my previous article, the improvements to the strategy were discussed. These have been applied and the result from last month was good. This is of course not only because of the improvements made, but hopefully in the long run it will play a role and bring more stable and good results.

The first improvement to the strategy is a higher Take profit from 2 ATR to 3 ATR. This ensures that a position remains open longer if conditions remain positive for the trade.
The second improvement is the ability to close positions if conditions become worse.

Below are the trades closed in the past month. In all cases, the Take Profit (TP) and Stop Loss (SL) were hit. It means that the rule for closing positions, meaning the second improvement, was not used as conditions remained positive for the trades. This made it possible to generate big profits due to the higher Take Profit of 3 ATR now in effect because of the first improvement. Both improvements are mutually reinforcing as gains can now continue until conditions become worse. In that case, positions will be closed with the generated profit or loss generated so far.

One may wonder why the Take Profit is 3 ATR and not for example 4 or 5 ATR? The answer is that when optimizing it appears that the Take Profit is then not being hit so often, so the positions are then closed on the basis of the second improvement and the results are therefore less. The second improvement should only be used as a fallback and not as a profit target. This is how it works with my strategy, but it doesn't say anything about other strategies that have a completely different setup.


The trades


The USD, GBP, NZD and JPY were well represented during the last period in my Strategy. For more detailed information check my trading history on MyFxBook and the screenshot here above. A profit of 10% was made last month and this was very welcome after the drawdown in August.

The trades clearly profited from the Risk aversion during the last month by going long on the USDJPY because of the USD being a safe haven and by going short on the NZDUSD because of the NZD being a Commodity currency. Besides that, the development of the GBP was an opportunity and profit was made by going short on the GBPUSD and GBPJPY.

The Expert Advisors(EA) taking the trades should be optimized in such a way that curve fitting is minimized. The EA's will function most of the time very well with unexpected situations and take profit from there. This was clearly the case with trading the GBP last month. 

I included here below some trading statistics, if you are interested and like to know more details then check MyFxBook by the link provided here above.



The pairs traded in the coming period

For the coming period the following pairs are traded:

NZDJPY until Jan 1, 2023
GBPJPY until Jan 1, 2023
GBPUSD until Jan 1, 2023
NZDUSD until Jan 1, 2023
USDJPY until Jan 1, 2023

Depending on the monthly analysis, the end dates can be extended. It seems that just like last month, the USD, GBP, JPY and NZD are well represented for the coming period.
The profit generated in the past from these 5 currency pairs is 27.90% since the start on October 18, 2021, see the chart below.


I hope you liked this article; this is it for now. If you have any questions and I can answer them, I will do so in the next article. For more information about the development of FxTopSystem you can visit my blog FxTopSystem.info by clicking here or just send me a message. Are you interested in the performance then check here. I wish you a happy trading in the coming period.


DISCLAIMER

This article is my personal opinion, not recommendations, FX trading is risky and not suitable for everyone. The content is for educational purposes only and is aimed solely for use by ‘experienced’ traders in the FX market as the contents are intended to be understood by professional users who are fully aware of the inherent risks in forex trading. The content is for 'FX Trading Journal' purposes only. Nothing should be construed as a recommendation to purchase any financial instruments. The choice and risk are always yours.