» 2008 » May

German economy influences the eurozoneOne of the questions that I get regularly is this:

The reason that the German economy is so influential is because it is the largest economy in europe. The second largest is Britain, which is not part of the eurozone, so Germany has a great deal of influence on the eurozone economy.

When Germany is doing well, it tends to support the euro in forex trading by lifting the economy of the entire eurozone. When data from Germany is disappointing, it likewise weighs on the eurozone economy.

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• Learn About the Euro in Forex Trading
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Currency trading with the greenbackCurrency trading with the greenback should consider that it is seeing a bit of a rebound on the FX market. Indeed, the US dollar forex trading forecast has it marking gains against the euro for the second month in a row.

Indeed, things may be turning around for the US dollar in forex trading as worries over a recession recede a bit and optimism returns as stocks make gains and oil prices ease slightly.

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Currency trading on the FX marketThe euro is having difficulties in forex trading this morning (and the last few mornings). Thanks to recent German retail data, the euro is falling in currency trading on the FX market.

Indeed, with oil prices dropping a bit and relieving the US dollar in forex trading, and with the economy in the eurozone finally showing some problems, the euro is see difficult on the FX market.

Reuters reports on the euro in forex trading:

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• Euro Forex Trading
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Currency trading with the sterlingThe British pound is retaining support in forex trading on the currency market this morning. In forex trading news, the pound is gaining against the euro and remaining rather steady against the US dollar.

Currency trading with the sterling should keep in mind, though, that some are predicting that it will drop against the euro on the FX market in the coming months, according to Bloomberg:

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Confusion reigns

Releases from Europe:

April                                      Forecast     Actual
German Retail Sales    (MoM)    +0.6%     - 1.7%
German Retail Sales     (YoY)    - 2.0%     - 1.0%
French Producer Prices  (MoM)    +0.6%     +0.7%
French Producer Prices   (YoY)    +5.1%     +5.4%

Following yesterday’s remarkable retail PMI’s from Europe it is rather difficult to reconcile April’s crash in German retail sales. The PMI numbers were for May but the contrast is so stark it almost begs asking whether they published last year’s PMI stats! Very clearly the numbers do reflect the cut backs in household spending in order to pay for energy and food related products.

The French producer price figures also suggest there is no let up in inflationary pressure but there may even being comments offered once again that the ECB could now consider a rate hike which could see the seesaw route the Dollar is taking extend for some while to come…

The following economic releases are due today:

April
Italian Producer Prices              (MoM)    +0.7%
Italian Producer Prices               (YoY)    +6.5%
Euro-zone Unemployment Rate                7.1%
U.S. Personal Income               (MoM)    +0.2%
U.S. Personal Spending             (MoM)    +0.2%
U.S. Core PCE                          (MoM)    +0.1%
U.S. Core PCE                           (YoY)    +2.1%

May
Euro-zone CPI (est)                   (YoY)     +3.5%
Italian CPI                               (MoM)    +0.3%
Italian CPI                                (YoY)    +3.3%
Swiss KOF Leading Indicator                      1.09
U.S. Chicago Purchasing Manager              48.8
U.S. University of Michigan Confidence        59.5

The market seems to have interest rate fever under the skin today. The Dollar moves higher following treasury yields edging upwards. However, yesterday’s Dollar strength began much before the interest rate move began so the correlation is slightly strained.

Just what caused the move appears to have eluded the market and frankly this promises further erratic trading, probably reacting to numbers as they are released. The problem with economic releases right now is that they are volatile, demonstrated quite clearly this week with poor European stats until last night.

The rebound in the retail PMI was nothing short of astounding considering prior confidence numbers were also creaking under the strain of inflation. But yesterday’s confidence numbers, with the exception of the consumer confidence, mostly recorded solid gains.

And yet the Dollar went up.

U.S. numbers have begun to show a semblance of stability, still subject to the odd wobbler that undermines, but this is a common factor at turns in growth and perhaps points to the fiscal stimulus cheques being more likely to provide a lift.

Still, it’ll not be a one-way street while employment numbers show such weakness so the outlook is probably the same for the Dollar over the coming month.

Today shouldn’t see the same degree of directional move but should cause a little more Dollar buying later in the day.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res:  106.41-82    1.5594-16    1.0592-23    1.9849-80
Res:  105.86-04    1.5536-73    1.0526-64    1.9770-01

Spt:   105.00-05    1.5447-71    1.0470-00    1.9671-84
Spt:   104.29-66    1.5397-09    1.0405-31    1.9604-47

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The stunning truth behind one of the market’s favorite signals…

How many times have I read about moving average crossover signals? How many times have I been asked what are the best two averages to use?

More to the point, how much money are traders prepared to lose using this strategy?

OK, I vented some frustration. Let me explain why I feel so negatively about moving average crossover signals.

I put together a very basic system which bought at the close when the shorter average crossed above the longer and sold at the close when the shorter average crossed below the longer. I could optimize this and come up with a magical result that would have traders drooling and anticipating which sports car they would buy with the profits.

However, here’s the first problem. Optimization really means very little. I’m sure you all know that we can all claim 20:20 hindsight and that reality is that we have to trade without the benefit of knowing how moving averages will optimize before data has developed over a period.

OK, that’s easy to understand but let’s just look at exactly what happens.

What I did was take a daily USDJPY chart from 1995 to 2006. Each year I optimized the data and then applied the resultant optimized parameters to the following year. I optimized the short average for periods between 3 and 15 and the longer average between 15 and 40.

I know this doesn’t really provide the best sample period for an optimization but I can assure you that it does also represent the same testing methods using a longer testing period.

Here are the results:

The column at the very left is the year I optimized and is followed by the number of points profit and the optimum moving average lengths. I then applied the strategy using the optimum lengths to the following year’s data and recorded the profit.

As you can see the actual results after applying the optimum lengths to the following year are really quite disastrous! The total of the optimized results and the actual trading results actually turn a very strong profit into a loss…

To highlight why this is, look at the optimum moving average periods running from year to year. The shorter average ranges from a 3 period average in 2003 to a 15 period average seen three times in 1995, 1997 and 2005.

The longer moving average ranges from a 16 period average in 1996 & 1998 to a 37 period average in 2001.

There is no pattern to the numbers and no way of knowing quite what it will turn out to be the following year. This means that the stability of the parameters is very poor. To explain what I mean by this, as an example, I took 1999 which had an optimized profit of 12.24. I optimized only this average and not both and placed the results in a simple bar chart:

You can see that only 4 period actually made any profit at all. What is more, the optimum period was more than twice the next highest profit. This means that a small change in market patterns will cause a significant drop in profitability.

When you consider in more than half the years the optimum parameter was above 10 it makes the selection of what parameter to use totally impossible to anticipate.

Is there any way to get around this problem? Well, as far as I have tested, not with moving averages. It is possible to add take profit and stop loss but frankly they are optimized as well and the more variables you add to the system the more unstable it gets.

With systems based on other entry & exit criteria all you can do is optimize and walk forward as I have suggested above. A better period would be to optimize for 5 years and apply the results for the following 6 months. When looking at the results make sure that the optimum parameters do not suffer volatile ups and downs around the optimum. This provides a little more confidence that while you may not get the best result, you won’t get a really bad one either.

Good luck

Ian Copsey

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