Trading the CPI release with the OmiCronFX Mandelbrot algo routine | Playing the numbers

The Consumer Price Index (CPI) report, which measures inflation, is released by the US Bureau of Labor Statistics once a month. The latest one came out at 13:30 GMT yesterday. Given the importance that the Federal Reserve has placed on inflation in their considerations of when it will be appropriate to raise core interest rates, these releases are closely watched by the Forex and other markets. OmiCronFX, and the Mandelbrot algorithmic routine are no exception.

It is important to realise that it is never going to be possible to predict exactly what will happen to exchange rates when a release like this takes place. The best we can do is to carry out the research so that we get probability on our side. Yesterday’s release, when compared with the previous one, in May, gives an idea of what this means in practice. The trade that Mandelbrot put on when the report was released last month is shown in the chart above. It lasted just two hours and cleared a profit of 1.80% of equity. Pretty good.

Mandelbrot was ready again yesterday, at the right time. On this occasion, however, it was a somewhat different story:

The trade on this report incurred a loss, of 0.51% of equity. The exchange rate did not go anywhere and the trade was stopped out about thirty minutes after entry.

The combined result of both trades indicates the value of having a positive expectation. The profitable trade returned some 3.53 times what was lost in the losing trade. This was expected because we had carried out the research going back over a large number of CPI reports, and the software is designed so that a positive expectation always exists.

Playing the numbers

Sometimes these trades work, and sometimes they do not. What is important is that we have probability on our side and not with the other players in the market, our counterparties. Forex trading, like all such trading, is a zero-sum game - in order for us to win, someone else has to lose. To make sure that we have the advantage of an edge, we need to be using well developed trading (algorithmic) software, which enforces trading discipline, is always ready to enter a trade and which ensures that profits are maximised and any losses made as small as possible. We also heed to have carried out the historic research. The same software allows us to do that.

Mandelbrot also determines the direction of the trade. In the case of yesterday’s release above, it can be seen by the longish upward pointing tail on the price bar that the initial impetus was to the upside. In retrospect this was correct, because inflation came in lower than expected, which would be a negative for the Greenback as it would tend to put off the day when interest rate rises will begin.