There are some loose ends therein article that are price some a lot of detail, thus during this second half i would like to form a stronger and a lot of careful case on why standalone / statistic momentum tends to be an improved quite momentum strategy overall, and clear up some issues that may have arisen from my use of a three month look-back amount in determinant the simplest and worst playacting currency pairs.
Why “Best of” Momentum Works
Academic studies have found that the foremost profitable mercantilism strategy that may probably be made primarily based upon historical value information alone, may be a statistic momentum-based mercantilism strategy. this may be enforced by momentum traders just by choosing a varied universe of tradable instruments and shopping for those increasing and commerce those taking place. this can be truly a way that tends to provide bigger profits overall than adding a “best of” filter, however the draw-downs are larger and then it always makes a lot of sense to feature a filter like “best of” though there's no reason why elementary analysis or alternative filters couldn't be used productively instead.
There has been abundant tutorial speculation on why momentum “works” and there's no accord on this question. my very own opinion is solely that for one thing to induce from one hundred to two hundred in its value, it's to travel up, and attribute is specified crowds tend to pile into moves at tipping points, creating the momentum even stronger.
Now let’s communicate any issues that may are raised over my alternative of three months as a look-back amount for determinant that pairs to trade.
Look-Back amount for choosing Currency Pairs
I used a three month look-back amount in my previous article just because it made the simplest overall results of all potential look-back periods. If you're a momentum merchant involved that the conception doesn't look terriblystrong till another look-back periods are measured, you're fully right! so as to deal with this i'm reproducing below the results for each look-back amount at two weekly intervals from 2 weeks to 24 weeks (equating to sixmonths), followed by another graph showing the common of all the samples.
Of the twelve samples, only one of them completes the check with a positive come back, compared to eleven with a negative come back. so the three month look-back generation of a positive result may be a applied mathematics fluke. you may say that since might 2012 the strategy overall has been slightly profitable, however not by abundant. Let’s cross-check the common performance of all of the twelve samples now:
The average performance is kind of powerfully negative, albeit marginally positive since might 2012.
Time Series Momentum
If these results cause you to feel nervous concerning employing a “best of” Forex momentum strategy, you may instead think about using an easy statistic momentum strategy.
Here, momentum traders simply choose some Forex pairs, and for the needs of our back check go long every week the value is beyond its own price of X time past (X representing the look-back period), or short if the value is below its own price of X time past.
The obvious question we have a tendency to run into initial once attempting to follow this type of strategy is that Forex pairs to use? will we need to be mercantilism all the Forex pairs all time, while not discriminating between them?
It is sensible to start out by observing the four major pairs: EUR/USD, GBP/USD, USD/CHF and USDJPY. Below are the results of a back check over a really long amount of your time – from January 2002 till early 2015, that represents quite thirteen years.
This check has some completely different parameters: the trades are taken solely at the start of calendar months, trades are control for one month, and therefore the look-back periods are previous calendar months. The look-back periods used were 1, 3, 6, and 12 months:
This is shocking, as all the look-back periods used were profitable. a mean of all 4 ways would have made a come back in far more than 100%, and presently it's solely the one year amount that's at intervals a significant draw-down.
Trade USD and monetary unit Currency Pairs
The two biggest international currencies are the USD and therefore the EUR. they're most susceptible to trending steady and this can be one in every of the explanations why statistic momentum with the four major pairs has worked well: they're all USD currency pairs. Why ought to momentum traders be particularly fascinated by these currencies?
Simply because they're the 2 largest currencies by volume and importance. It takes time to show around an enormous ship.
Let’s conclude with some information showing however the USD and therefore the EUR like to trend. Over a amount of six years – from Apr 2009 to Apr 2015 – if you checked out the 28 most significant currency pairs and went long or in need of every hebdomadally relying upon its look-back periods of 13 or 26 weeks, the sole currencies manufacturing positive results were the EUR and therefore the USD.
each currencies would have made a come back of one hundred and tenth every primarily based upon the 26 week look-back amount(corresponding to six months).
victimization the look-back amount of 13 weeks (corresponding to three months) made a positive results of 161% for the USD and 82 for the EUR.
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