Friday, May 20, 2016

The effective use of computer algorithms for Forex trading

It is generally accepted that a computer program for trading Foreign Exchange (Forex) cannot be allowed to run unsupervised, as a so-called “Black Box” system, in the expectation that it will make consistent profits in this way. Such systems have often been advertised in the past, and have even shown success for a period after they have been let loose on the market. But they always come to grief, and when that happens the total loss of one’s account is not at all out of the question.

Automatic versus systematic

 The reason for this is the complexity of the markets. The former chairman of the US Federal Reserve, Ben Bernanke, made exactly the same point in relation to central banking. He said that the management of the national economy cannot be automated – it is too complex to expect that a robot would ever be able for the task. However, at the same time he also said that national economic management should be systematic.

So what is the difference between automatic and systematic? We believe it is a question of degree, but that is no trivial matter. Systematic operation is automation raised to an enormous power. Perhaps our automated systems have the capacity to reach that level of sophistication at some time in the future, but we have a way to go. In the meantime, for Forex trading, we bridge the gap by making sure that a human is on hand to monitor and manage the operation of the algorithms. The automation then becomes a very powerful tool. Just as power tools enhanced the productivity and accuracy of carpentry, so our algorithms give a significant edge to our Forex trading.

Thursday, January 7, 2016

OmiCronFX moves on | The daily commentary gives way to systematic research and analysis

The OmiCronFX Mandelbrot algorithmic Foreign Exchange trading routine is now complete. It has taken somewhat longer than was expected at the outset to bring it to fruition, and even longer to test it and make the fine adjustments necessary to ensure that there is consistency in terms of low losses and high wins.

The objective has always been to design the trading system so that the use of the software would mitigate the risk that is associated with high gearing (otherwise known as leverage). I am now confident that this has been achieved, and I have started to trade using a high level of gearing.

The daily commentary gives way to systematic research and analysis

The operation of the software for putting on, managing and closing out Forex trades is not, of course, the whole story. The system also calls for a significant amount of ongoing historical research and analysis, to be applied in the configuration of the software. Mandelbrot is the tool of choice for this too.

To allow for this work to be undertaken in a consistent and systematic manner, I have decided to suspend the daily commentary. I have written it on a daily basis since early 2013. I am grateful for the loyal readership that has built up, and for the very valuable feedback I have received. I also enjoyed doing it, but we must move on.


Thanks again to everybody.


Thursday, December 17, 2015

Merry Christmas and a Happy New Year | The commentary will be on holidays from today

OmiCronFX and Seamus wish all readers, wherever they may be, a very Happy Christmas and a Prosperous New Year in 2016

We will be on holiday from today, and look forward to being back in the New Year.

Wednesday, December 16, 2015

No surprise: US Fed raises rates | Will inflation take over from jobs as the key indicator to watch?

The first interest rate rise in nearly a decade took place in the US yesterday, after being really well-signalled in advance. Now the focus of market participants and commentators must turn to the expected size and frequency of rate rises each time the Federal Open Market Committee (FOMC) meets through 2016 and beyond.

Many commentators expect that there will be a new rate rise after every second meeting of the committee, making for a total of four rises expected during next year. Experience would dictate, however, that fundamental economics are not normally that well-mannered and predictable. And the Fed is on record as saying, many times, that its decisions on interest rates and stimulus in general will be “data dependent”. That, of course, is good news for currency traders, who thrive on the levels of uncertainty that can lead to long-term volatility in Forex.

The rate rise yesterday had a tentative feel to it. Economic stimulus, in the form of the re-investment of the proceeds from maturing bond holdings that are left in the Fed’s treasury as an overhang from Quantitative Easing, will continue. Interest rate projections as far out at 2018 have been lowered by the Fed, and all the talk is of a very gradual and careful path back to normality. Expectations for GDP rises have also been curtailed slightly.

Inflation takes over from jobs as the key indicator to watch

But the biggest caveat of all has to do with inflation. The U.S., and the developed world as a whole, are a long way away from the 2% across-the-board rate of inflation that all would like to see. The downward pressure on consumer prices will continue for as long as energy and other commodities continue to fall, and yesterday oil took another sizeable hit (see chart above). A barrel of oil on the NYMEX exchange is now well below the $40 that many saw as a floor not too long ago.

The Fed has a dual mandate – it is responsible for controlling inflation as well as for stimulating and maintaining jobs. Up to now the U.S Non-Farm Payrolls figure each month has been the statistic that was most closely watched by the markets as the indicator of what the Fed might do. Are we likely to see the Consumer Price Index take over this role?


Tuesday, December 15, 2015

Single currency plunges ahead of FOMC | U.S. core inflation news will comfort the Fed

Yesterday saw a dramatic fall in value of the Euro against the U.S. dollar, as traders positioned themselves in anticipation of the Federal Open Market Committee (FOMC) interest rate decision later in the global day today. A rise of 25 basis points is widely expected by all markets and commentators, so the U.S. dollar was being bought across the board during the North American session yesterday.

In truth, the Single Currency had got more than a little bit ahead of itself, on the back of the so-called “failure to deliver” on the part of the ECB in its monetary policy statement of December 2nd, when it did actually accelerate Quantitative Easing (QE), only not to anything like the extent that the Forex market had been expecting. Prior to that particular meeting, the Euro was well on course to fall to 1.05 dollars. At its peak yesterday it touched 1.1060 (see chart above).

Because of the Fed meeting later, today has the potential to deliver extreme short-term volatility in the Forex markets – when and if the U.S. main interest rate is increased, it will be the first time this has happened in over nine years. So great care is called for in trading.

U.S. core inflation news will comfort the Fed

Official inflation figures released yesterday show that core U.S. inflation, the Consumer Price Index (CPI) with volatile energy and food prices excluded, showed a satisfactory annual rise of 2%, which is the Fed’s target inflation rate for a sustainable economy. The full inflation story is less benign, with the headline rate coming in at only 0.5% rise year-on-year. However, most economists believe that the fall in the price of oil and other commodities will eventually come to an end, and headline inflation will then start to move closer to the core rate. In the meantime consumers are experiencing something of a windfall because of lower prices for fuel and other related consumables. That, in itself, cannot be bad for the economy.


Monday, December 14, 2015

Bankers worry in New Zealand | … and Texas

The Reserve Bank of New Zealand, the country’s central bank, has published an article entitled ‘An updated assessment of dairy sector vulnerabilities’.

The article investigates the severity of cash flow pressures currently facing dairy farmers in NZ, and assesses the potential financial stability implications if the payout (for which read prices for Dry Powdered Milk) remains low for an extended period. The article estimates that around half of dairy farmers are now facing a second consecutive season of cash losses, placing the sector under considerable financial pressure. The authors find that the majority of farms would remain viable in a sustained low payout environment, although some highly-indebted farms would face considerable difficulties. Losses for the banking system are estimated to be manageable even under a severe stress scenario.

All of this is of very high importance for the central bank in its assessment of whether or not it should raise interest rates. It would like to do this to head off a property bubble in the cities, most noticeably Auckland, but will not want to further increase the hardship for its many dairy farmers.

Meanwhile, losses for the Kiwi (NZDUSD) seem to have stabilised, with the pair seeing a rising wedge pattern on the weekly chart that extends back to the middle of the third quarter of 2015.

Bankers are also worried in Texas

This time it is not the US central bank, the Federal Reserve, that is raising the alarm, but rather Wells Fargo bank, the largest US commercial bank by market capitalisation, according to the Financial Times. It has announced that many of its clients in the energy sector, most notably in Texas, are facing significant problems because of the low price of oil.

This situation is not likely to be improved any time soon as Saudi Arabia, in particular, is known to be willing to pump oil for as long as it takes to increase such pressure, and this announcement must be telling the Saudis that their cunning plan is working, at least to some extent.

The low price of oil will also be on the minds of the members of the FOMC as they meet today and tomorrow. It is not likely to make any difference to the expected increase in US core rates tomorrow, but it could and probably will impact greatly on the speed and size of future rate rises.


Sunday, December 13, 2015

All eyes are on the U.S. Fed this week | The argument for a continuously strengthening dollar

The Forex and other markets have been well-prepared for the initiation of a new interest rate cycle of rises in the U.S. The first of these is widely expected to be announced at the end of the December Federal Open Market Committee meeting, which concludes on this coming Wednesday, the 18th. This rise will crystallise the divergence between U.S. monetary policy and that of the next most important global currency bloc, the Eurozone. This divergence began with the so-called tapering of U.S. Quantitative Easing, which was finally accomplished in October of 2014. The Eurozone, while also employing the low interest rate tool of economic enhancement, is only now getting into its stride in terms of Q.E.

This divergence can be seen as the driver of continuing weakness in the Euro as against the US dollar. However, the Fed has also been at pains to emphasise that once the rate tightening cycle starts, it will only be implemented very slowly and in small increments. There is also nothing to say that it might not even be put into reverse from time to time. Such a climate can only provide a brake to Single Currency depreciation against the U.S. dollar.

The argument for a continuously strengthening dollar

But now a closely argued piece in the Australian “Business Spectator”, by Victoria Theiberger, entitled “The Fed’s tightening path may jolt sanguine investors” (it is behind a paywall but readers might think it worthwhile to pony up the small amount required) maintains that the rate rise regime in the U.S. is going to strengthen during the coming year rather than weaken. This is based on the belief that the rotation of voting members of the FOMC will bring far more hawkish members into a position where they can directly influence events; that U.S employment growth is robust and improving to a degree that might be underappreciated at present; and that low interest rates are actually now a drag on the economy rather than a stimulus. Thieberger rationalises this last thesis by stating that the near-zero rates have sharply increased the cost of retirement, meaning that the very many retirees in the US have had to save harder and for longer in order to achieve the same income when they finish their working careers. Some economists, such as Drew Matus of UBS, believe, for this reason, that “… the first few rate hikes may cause an acceleration in economic activity rather than acting as a restraint”.

If this turns out to be the case, the Fed will grasp the opportunity to get interest rates back quickly to what had been regarded as “normal”, prior to the establishment of what many are seeing as the “new normal” of near-zero rates (When you hear that term becoming mainstream, you can be pretty sure that the market is getting ready to create yet another surprise for the unwary).