Sunday, August 3, 2014

US dollar strength | Our focus on risk of loss

The Forex market fixation with very short-term news persists, with the single number reported for US Non Farm payrolls last Friday causing a pull-back in US dollar rates. This is despite the fact that the Federal Reserve has made it clear that it uses the trend in payroll rises over a period, combined with the results from many other indicators, to determine its policy.

The market was “expecting” a Non-Farm payroll number of 230k. It got 209k. In the meantime the, already stellar, outturn for last month was revised upward, to 298k. This means that the average for both periods is 253k (of course this month’s figure is also subject to revision).

And the results for two other key US economic measures were in advance of expectations last week. Annual Gross Domestic Product (GDP) was 4%, a significant absolute number under any circumstances, and the Institute of Supply Managers’ (ISM) Purchasing Managers’ Index (PMI) was also ahead, coming in at 57.10 as against 56.00 expected.

One currency pair that well reflects US dollar prospects is the Dollar-Yen (USDJPY). Prior to the NFP report on Friday it was showing good strength, but took a sharp reversal on the release. We believe that this was an overreaction by the market and, sure enough, this morning it is clear that this pair rose again during the Asian session last night.

Our focus on risk of loss

We have often written about how we at OmiCronFX focus on the potential for losses and how to avoid them. It is a fundamental part of our strategy to never risk more than 2% of equity on any one trade, and this is one factor that is programmed into our Mandelbrot algorithmic routine. Of course, it is necessary to risk some amount in order to have the profits we expect.

We are always seeking to improve the software, and we have now developed an enhancement which allows us to take even less risk, while retaining exactly the same potential for profit as before.

After extensive testing on historical data it has been established that, under normal trading conditions, the improved routine never loses more than 1% of equity on a trade. This was borne out in one live trade last Friday, on the USDJPY when it went against our expectations, as discussed above. Instead of taking a loss of 2% of equity, the amount lost on the reversal was confined to half that.

We have now set Mandelbrot to re-enter USDJPY on the long side, when it gets a new signal.

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