
The AUDUSD
pair has continued its downward trend, as expected. As in all these cases a
currency pair will never move to its
price target in a straight line. There will always be deviations and
retracements, and one of the challenges of writing trade management Algorithmic
software is to be able to determine what is a retracement of this nature, and
what is the start of a trend change from one direction to the other.
As regular
readers will know, we set quite a bit of store by the 200 period Simple Moving
Average, or 200 SMA.
Earlier
this week, on Thursday (30th May 2013), the hourly chart of AUDUSD
observed the 200 period SMA on the hourly chart with the precision of a Swiss
watch. One of those really expensive ones, of the type we see advertised when
we visit our brokers in Geneva ,
Dukascopy Swiss Bank. A glance at the chart above will illustrate the case.
We have to
ask why this should be. The original idea of using moving averages, or any other
technical indicator, was that it would provide a statistical indication of where
price might go in the general case. Statisticians talk about margins of error
and confidence levels, which mean in reality that their determinations are the
very opposite of being precise. The kind of precision shown here has no
statistical basis whatsoever.
So we have
to postulate some other reason for this happening (for which we are very
grateful, by the way, and long may it last).
We have
mentioned before that the 200 SMA has a characteristic that other indicators,
such as MACD and Stochastics, do not. It requires only one parameter, the
integer 200, and this is common to all users. Where you have many
parameters, and where different traders have their own favourites for these
values, then the results will be all over the shop. On the other hand the 200 period SMA will
look the same on each and every chart on the planet for a particular currency
pair and time scale, and is therefore more likely to be... a self-fulfilling
prophecy.
Could there
be more to it than that? Could it be that some of the bigger players use the
200 hourly SMA as a programmed backstop in those cases where they are required
to make large, countertrend transactions, for example when putting on a hedge?
In this case the computers they use would always stop buying or selling, as the
case may be, when they come to the backstop. They would then let another head
of steam build up in the market, in the trend direction, before entering again.
If the positions were large enough, this would give us what we see. And then the
price action would have the very significant number of individual traders who
watch the 200 period SMA on all time scale charts to reinforce the tendency.
The computer placed hedge would also be more likely to be put into play at month end,
which we have right now.
No matter
what the reasoning behind it, it is an interesting, and significant, not to mention profitable phenomenon for us.
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