06 November 2022

Trading FX with more Risk-On positions lately

Hello readers,

October was a strong month for the S&P500, but what will it bring in the coming period? What does this mean for FX trading? These 2 questions are enough to make a good article and we will also look at the FxTopSystem strategy after answering these questions.

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, just like last month. 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.
Chances are the next Lower Top made will fit in the sequence and the next lower Top will be around the yellow descending line.

In October, there was a rebound from the downside where the S&P500 had been for about 3 weeks before. The rally was impressive but appears to be a correction out of the oversold territory. This is confirmed by the Stochastic in the same chart. This makes it very likely that the short uptrend is only temporary. The last weekly bar in the chart is for the last week which is in November and this bar tentatively confirms this statement.
The MACD is showing bullish divergence, with higher bottoms in the MACD but lower bottoms in the S&P500. This is a sign of recovery, but it is too early to conclude that a trend reversal is imminent. After all, the price should also confirm this.
The best-case scenario is that the S&P 500 will bump into the yellow bearish resistance line in the chart. Depending on the speed to get there, the space available for the next short-term rising rally will be determined.


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.

As you may know, it seems very likely that the BOJ intervened twice in October and this has had some effect. While it is ultimately impossible to beat the market, it is possible to slow things down and, when very experienced even curve things for a while. This can be compared with the so-called Smart money trading. However, a dip in USDJPY is an opportunity for many traders to enter at a lower price.

The Stochastics is showing that the pair is overbought and started a correction 3 weeks ago. For now, this seems of no high importance because the pair seems to be stabilizing only. It may be digesting the latest performance.
Levels to return to are the yellow horizontal lines, which should ideally coincide with the latest horizontal periods in the Tenkan-Sen and Kijun-Sen.

There are no signs of topping yet but it seems also as if the USDJPY is in consolidation. Together with the S&P500 where for the coming period the decline seems to be paused, it looks like Risk aversion is losing ground and making a place for Risk appetite.

The answer to both questions at the start of the article is that the situation looks more favorable for the stock markets and commodity currencies and that there seems to be more room for Risk-On. 
For how long is the question that remains unanswered, however.

The strategy

Below are the trades closed in the past month. The close of the Long GBPJPY was caused by hitting the SL when the GBP plummeted on October 21 caused to several news events and developments having to do with the elections. The SL avoided a bigger loss.
The other 2 positions, Long NZDJPY was closed by the new rule implemented. This can be seen because no SL or TP was hit. See my previous article for more information about this new rule.
The screenshot also shows that last month was a small loss. For more information please visit this link

When looking at the positions taken we notice that these are all Long positions with the JPY as the Quote currency.
The strategy seems to be taking lately more Risk-On positions. If that is a good choice? We will find out and I will update you again next month.

The pairs traded in the coming period

For the coming period, the same pairs as last month have been selected for trading, and the period has been extended by a month. Depending on the monthly analysis, the end dates can be extended. 

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

The profit generated in the past from these 5 currency pairs is 30% over 1 year, see the chart below.

Update on the 4 Hours strategy being tested

The 4 Hours(H4) strategy was initially more or less a copy of the Daily strategy where the time frames for testing etc were placed in proportion as 6 H4 bars are the equivalent of a 1 Daily bar in time.
However, where the Daily strategy can easily determine the main trend based on the indicators used, it proved to be very difficult when using the strategy for the H4.
The approach for the H4 strategy is now by using a Multi Time Frame (MTF) strategy, where initially no optimization will be performed in the higher time frame, the daily chart.
The same indicators will be used, but the settings are determined by a benchmark based on history with Back and Forward testing. Unfortunately I won't reveal my strategy and I can't say much more than what you can read here.

The fixed variables for the Higher time frame

I can go into data details based on the indicators used and their Forward results. I will do that here.
First some background information about testing. The test results below are based on the daily chart where Backward and Forward tests were done for an amount of €10,000 and a risk per transaction of 1%. This is not practiced in real trading, but they are easy numbers to compare test results with.
Furthermore, the amounts mentioned say nothing about the profit of the strategy with Forward testing. It only says something about a variable setting of an indicator. No valid information can be derived from this about the overall performance of the strategy. All the more so because not all possible transactions will and can be done. This is partly because there would otherwise be too many duplicate trades, but also because some currency pairs have too few trades during the test period to be able to attach value to them. So there are several reasons why the numbers shown are only for analyzing the indicator settings.

The results are based on the forward testing for a period of 3 months on a monthly basis over a period of 10 years with 27 currency pairs.
Simply put, this means that the charts below show results of testing on a monthly basis over 10 years with 27 currency pairs. This makes the number of test results: 27 pairs X 10 Years X 12 Months = 6480 Forward test results for each indicator. Not to be confused with the total number of tests that must be done before these results are achieved.

There are 3 indicators used in my strategy and 2 of them have a certain preference for lower indicator settings for better performance. Since no optimization will be done on the higher time frame for determining the fixed variables, we will use this data and apply fixed variable settings to these 2 indicators. The third indicator has no bias, leaving the variable in the middle of the range that is normally being optimized.

The results of the 2 biased and 1 unbiased indicator are shown below.
I left the variable settings out but it goes on the X chart from left(low) to right(high).
On the left Y-axis, we see the filtered Profit. This is the sum of all profits if all trades had been made. The sum is not based on compound winnings, each month the test starts with € 10,000.
On the right Y-axis, we see the count of filtered profit. This is the total of transactions.

Indicator 1 (Biased)

Indicator2 (Biased)

Indicator3 (Unbiased)

The charts for Indicators 1 and 2 here above show that based on the lower (left X-axis) variable settings for the indicators more trades will be made with a higher total profit. Of course, the best results are based on optimization when trading the Daily chart but it is now being used as a Filter for trading the H4 chart.
The H4 chart is also being optimized for the best Variable settings while using the Multi Time Frame approach. However, using too many variables can cause Curve fitting, and to avoid this to happen the choice to determine the fixed variable settings is being used for the Higher Time Frame. The use of variables for optimizing and how many can be subject for another article.


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 sending me a message. If you are interested in the performance then check here. I wish you happy trading in the coming period.

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