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.

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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.

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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.

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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…)

In an ideal world, traders want to be able to pick a trend, enter a trade and ride the wave until its conclusion. The strategy outlined below aims to help investors achieve this by offering a high probability setup for entering an uptrending market.

This strategy is based on the observation that, in an uptrending market, the negative days tend to have smaller real bodies (open to close) than the positive days and that their ‘session closes’ tend to occur nearer the highs. These characteristics are noted on the chart below. (more…)

In this study I have attempted to go back to the very basic elements of price – open, close, high, low, daily range, daily change – and attempted to analyse these phenomena statistically.

Latter I discuss my conclusions and possible ways in which they can be used in trading.

The study was undertaken using the EUR/USD pair, using daily data only. (more…)

Short term cycle

I have made some preliminary investigations on GBP/USD. The diagram below shows the various cycles up until today. As you can see we reached the peak of the most recent cycle 8 days ago and have since rolled over, particularly after yesterday’s below expectations GDP result. The other waves in the cycle have been marked with perforated dividers and their lengths written in days. It’s interesting how we are rolling over at about the time you would expect to by following the cycle. (more…)

An Introduction to Cycles in the Forex Markets

It is now generally accepted that cycles of all kinds occur in nature and that they also occur in financial markets although with less formality than in the natural world.

The 4-year (41-month) Kitchin cycle is probably the best known financial cycle and it measures highs and lows in business activity. Other cycles include the 54-year Kondratieff wave and the 18 and 9.2 year cycles in equities. (more…)

In Elliot wave theory the fourth wave is a correction before the final fifth wave in a trend. Wave 4s are characterised as being longer and more complex than the other waves in the cycle and can appear as triangles or complex ‘3s’, double or treble flats or double or treble zigzags. (more…)