Marabuzo means “shaven head” in Japanese and describes a candlestick which consists of a long body and very small ‘wicks’ at either end. A typical marabuzo is above average length and represents the predominance of one force – either buying or selling – over the other.

In theory the marabuzo is a continuation candle, meaning that a green marabuzo in an up-trend signals higher prices whilst a red marabuzo in a down-trend signals a continuation lower. This article, however, seeks to put to the test  the marabuzo’s fabled powers of indicating continuation using data for the EUR/USD currency pair.

In the diargram below I have highlighted the marabuzo bars in blue. There is no hard and fast definition, but for a candlestick to be termed ‘marabuzo’ it must embody the characteristics of long filled- in body and short wick. (more…)

The MACD indicator – pronounced “ MAC – dee“ or “M-A-C-D“ – is a popular and versatile tool, which generally appears as a histogram at the bottom of charts, with a line following it called the signal-line and a second horizontal line through the centre called the zero-line, above and below which the MACD oscillates.

Traders use the MACD to analyse momentum and measure the strength of the trend. They look for divergences and convergences between the MACD and price to indicate potential market turning points, and use the MACD crossing its signal-line for trade entry and exit signals.

The MACD is calculated  by subtracting a long exponential moving average of the price from a short exponential moving average. The signal-line is itself an exponential moving avergae of the MACD and the zero-line is the point at which the averages would cross if seperated. (more…)

One of the most popular indicators used by Forex traders is the RSI, or ‘relative strength indicator’. It is particularly favoured by intraday traders and scalpers. The indicator is a measure of price momentum – or to be more precise the relative strength of a security against itself.

How can something’s strength be measured against itself- that sounds illogical doesn’t it?
Well it can, sort of, by distinguishing between its up-days and down-days and comparing the one set against the other. The RSI does just that, by comparing the average of up-day closes versus the average of down-day closes over a certain time-span, using the following formula:

RSI = 100 – 100/1 +RS

Where RS = average of x day’s up closes/average of x day’s down closes.

RSI is an oscillator which always gives a result between 0 and a 100. The default time-span is 14
but other favourite spans I have seen in use include 6 and 7 – especially for shorter-term horizon traders.
(more…)

A lot has been said of the ‘Santa clause’ effect in the equities markets, by which is meant a rally in  stocks in the run up to Christmas – I decided to test whether there was anything behind the claim.

Data

I used data from the S&P 500 looking back over 60 years from 1950 – 2010.

Weekly data was used. The week prior to Christmas was checked and if it showed an increase in the SP-500 then it was considered a ‘Santa Rally’ if not then it was a fail. If Christmas Eve fell on the Monday, Tuesday or Wednesday than the prior week was checked instead.

Results

The Results showed that there was in fact a ‘Santa clause rally’ in most of the years from 1950 to present, with 39 out of the 60 showing a rise in stocks and only 21 a fall. It passed the generally excepted rule for statistical significance, which is less than a 5% chance the bias could have been generated randomly. In this case the probability that the results could be put down to chance, was small at only 1.5%.

Recent poor run a sign Santa gone away?

Recently the Santa Rally has not worked very well, however, with only 8 out of the last 13 years showing the effect. However, there have been losing runs of up to 4 years in a row such as happened between 1985 and 1988.

No Xmas present for the Dollar

For FX traders the Santa rally should have a dampening effect on dollar pairs given the negative correlation with the dollar.
(more…)

This paper looks at a contrarian trading strategy which takes a classical technical analysis set-up and turns it on its head, trading it in the opposite way.

The Japanese hammer candlestick is a famous reversal candle. It occurs when the market is in a down-trend, opens a new day and falls even lower. A recovery later on means that it closes within the top half of the candle again. Received wisdom says the hammer signals the start of a new bull-trend.

The ATG strategy takes this set-up and trades in the opposite direction expected. The trader bets on the hammer failing. He or she places a sell short order just below the hammer’s low. If  the bounce triggered by the hammer rolls over it will trigger the trader’s order at the lows. As illustrated below: (more…)

This research article forms part of an ongoing series investigating the profitability of the point and figure analysis technique in generating profits from trading in the foreign exchange market. I have already carried out research using the 50 pip box for euro-dollar and the 37 pip box for the Aussie and I have found in both cases the method to be very successful – but particularly for eurodollar.

One of the drawbacks of the earlier research, however, is that it generates signals relatively infrequently and profits can take a long time to accumulate. In summary the 50 pip box is great when trading for investment purposes but as a short term trading tool it doesn’t really work. (more…)

“Its hip to be square..” sang Huey Lewis and the News back in the 80′s but does ‘it’ work? By ‘it’ I mean, of course, the point and figure charting technique arguably the ‘squarest’ method of technical analysis in the canon.

In particular how reliable are point and figure (P&F) charts at generating accurate forecasts? Also know as ‘counts’ to P&F buffs. These are the targets generated on the boxy P&F charts which look like complex games of noughts and crosses.

(more…)

I have downloaded a EUR/USD chart overlaid with COT readings from an excellent analysis website on the subject at www.upperman.com, which shows that the indicator has worked reasonably well at highlighting trend exhaustion on long-term forex charts over a 5-year period.

Generally the indicator is used to by looking for extreme divergences between the positions of the large speculators or “Funds” and “Commercials” who hedge. However, another possible use could be to generate signals by overlaying price and Net Positions as in the chart below and looking for cross-overs, in the way that signals are generated from long-term moving averages.

(more…)

This research paper tests the application of the point and figure method as a trading strategy. It follows on from the analysis of the EUR/USD which showed that the method was successful using long-term counts for this currency pair. Here are presented the results for the same algorithm applied to the Aussie (AUS/USD).

In the case of the aussie I have elected to use a 37 pip box size which equates with the original 50 pip used for euro-dollar. A 3-box reversal was also used, as was a high/low daily interval, also both as in the original research.

(more…)

In his book, A Random Walk Down Wall Street, the author Burton Malkiel carried out an experiment in which he asked his students to toss a coin repetitively and mark down the results on a piece of graph paper. If the coin toss came up heads then they noted an increase, if tails then a decrease. After numerous coin tosses the chart constructed closely resembled the movements of a share price. The Princeton professor then showed the piece of graph paper to a Technical Analyst and asked him to give a forecast. The unsuspecting analyst assumed it revealed the price fluctuations of a security, and proceeded to analyse the chart and make recommendations. He concluded the share was about to go up and advised to buy right now. When Burton Malkiel told him the chart didn’t show the movements of a share price, but was actually the results of coin tosses the analyst was understandably very sore. However, to Malkiel it proved that technical analysis was a spurious practice and that markets moved randomly*.

Anyone who looks at the daily chart of the AUD/USD will see long series of green up- days, with sequences of 4, 5 or 6 green candles in a row. Compared to other securities the AUD/USD seems particularly prone to trending strongly. In fact since 2001 it has risen a staggering 122% from an all time low of 0.47750 to recent all time highs of 1.0582. Surely, given Malkiel’s experiment, this sort of bias to the upside would be unlikely to occur from the results of a toss of coin? If indeed financial market’s move randomly wouldn’t the price be expected to ‘revert to mean’ over time? Isn’t that also the theoretical underpinning of the sage Wall Street advice to ‘buy low and sell high’? If that is so how does this explain the Aussie’s relentless rise?

In this article we ask whether there is a significant bias towards a prevalence of up-days in AUD/USD or whether the random walkers are correct and the Aussie’s rise can be explained as a purely chance occurrence. This is part of a long standing debate between the school of thought who believe the art of technical analysis – or trend following – is of considerable merit in predicting market change and reverent critics like Malkiel, who refute the effectiveness and accuracy of this forecasting method. (more…)