Forex Report - Predicting Price Movement.pdf - Forex - Ryjufka

The Forex Report – DATA BRIEF

NOVEMBER 2004

Predicting Price Action

By Scott Owens with Omer Lizotte

Price action is the foundation of all technical

indicators, yet most traders do little to

understand it. Within trades, price action

creates the most important element of context,

defining inflection points that affect market

entry and exit. The sophisticated investor

understands price action and uses it to frame

every trading decision.

ANALYSIS

• How likely is a price move continuation given varying conditions?

DATA

• See the probability of price move continuation in assorted tables.

ACTION

• Use breakouts to incorporate price action probabilities.

• Implement price action informed strategies in your trade exits.

RELATED MATERIAL

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ABOUT THIS REPORT

The Forex Report is a periodic publication that investigates advanced strategies

for superior trading performance in the foreign exchange markets. These

reports utilize advanced statistical and econometric modeling techniques to

create new insight into the trading strategy of the average trader. This Data

Brief, Predicting Price Action, is intended for traders with moderate forex

trading experience and technical analysis understanding.

www.fxengines.com

To learn more about The Forex Report or to register for delivery of all future

reports by email, including Case Studies & Data Briefs, please visit

www.fxengines.com.

The Forex Report November 2004

ANALYSIS

What happens when one of the major currency pairs moves 10 pips? 25

pips? 50 pips? How likely is it that it will continue for 10 more pips? 20

more? 50 more?

To find out, we took tic data for the four majors and analyzed it by trading

interval and breakout level to see what the probability of these price move

continuations would be.

The results of this study are insightful, but they do not substantiate any

particular trading strategy specifically. Although we believe the price

action of a particular currency is a major element of every trade, we leave

it to each trader to determine how, if at all, these results are to be

integrated with his/her trading strategy.

The goal of this study is to arm the trader with more information about

price action than is currently available. When a trade has moved 10 pips

in your favor, what is the general probability that it will continue to

another level? We believe this is valuable in formation for all traders.

However, there are a number of caveats that we feel compelled to state:

• These probabilities are by no means hard and fast rules for trading.

They represent a snapshot of data, some longer than others, and

employ a very specific entry strategy which may be difficult to

replicate in live manual trading.

• These probabilities are affected by seasonality and many other

statistical conditions that may render them inaccurate in specific

trading situations. In general, the shorter the interval, the greater

the chance for these anomalies to occur.

• No representation is made regarding the accuracy of the prices used

in this study or the probability values that result. We reiterate: this

report is intended to enlighten the trader’s “sense” of the market,

not inform any specific trading application.

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The Forex Report November 2004

To create this brief, we employed the following assumptions:

• The data is tic data from January 2000 through May 2004. Day

intervals include data through October 2004.

• Each interval includes at least 5,000 observations except the day

interval. In that case, we included each daily closing price from

January 2000 through October 2004.

• We studied the following intervals, in minutes: 5, 30, 60, 120, 240,

1440.

• We studied the four major currency pairs: EURUSD, USDJPY,

GBPUSD, USDCHF.

• We used a “trigger value” to set the entry condition for each

simulated trade. To do this, we took each interval close and

observed the next 24 intervals. If the trigger was hit in either

direction, we entered the market. From that point we measured the

probability of hitting our continuation price targets within the 24

periods.

• We employed a stop value of 20 pips for every simulated trade.

• No spread is taken into account.

RELATED MATERIAL

For other advanced studies on the forex market, go to www.fxengines.com

and see:

The Forex Report: The Six Forces of Forex

The Forex Report – Data Brief – When to Trade

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The Forex Report November 2004

DATA

The tables below show the probability of price move continuation

according to the trigger used to create entry. See the notes and examples

in each section for more information.

PREDICTING PRICE ACTION: EURUSD 10 pip trigger

When price moves 10 pips in either direction, what is the probability that

it will continue to the following values with the currency and interval

shown?

For example, when EURUSD moves 10 pips up or down on the 60 minute

interval, the probability that it will continue to +80 (+70 net) is 32.4%.

PAIR: EURUSD

INTERVAL: 5 MINUTE CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

47.5% 21.9% 12.8% 7.0% 3.7% 2.0% 1.6% 1.5% 1.2%

INTERVAL: 30 MINUTE CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

83.8% 66.7% 52.7% 38.5% 28.7% 20.5% 16.1% 12.3% 9.2%

INTERVAL: 60 MINUTE CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

87.5% 77.6% 67.9% 57.6% 48.3% 39.9% 32.4% 24.5% 19.8%

INTERVAL: 2 HOUR CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

89.8% 81.5% 75.1% 67.8% 62.2% 55.6% 50.2% 43.7% 38.5%

INTERVAL: 4 HOUR CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

91.4% 85.3% 79.8% 74.8% 70.8% 66.6% 63.3% 58.7% 54.7%

INTERVAL: DAY CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

94.1% 88.3% 83.3% 78.1% 74.5% 71.6% 68.4% 65.4% 61.4%

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The Forex Report November 2004

PREDICTING PRICE ACTION: USDJPY 10 pip trigger

When price moves 10 pips in either direction, what is the probability that

it will continue to the following values with the currency and interval

shown?

For example, when USDJPY moves 10 pips up or down on the 30 minute

interval, the probability that it will continue to +40 (+30 net) is 35.7%.

PAIR: USDJPY

INTERVAL: 5 MINUTE CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

41.6% 17.5% 9.8% 6.9% 4.5% 3.1% 2.5% 2.2% 1.8%

INTERVAL: 30 MINUTE CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

74.1% 50.8% 35.7% 25.7% 18.5% 14.0% 10.6% 8.3% 5.7%

INTERVAL: 60 MINUTE CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

85.4% 68.0% 55.0% 44.7% 34.9% 28.4% 22.7% 17.8% 14.1%

INTERVAL: 2 HOUR CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

89.4% 80.1% 71.7% 63.4% 53.8% 47.0% 41.2% 35.1% 29.7%

INTERVAL: 4 HOUR CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

93.6% 87.5% 82.7% 77.7% 71.8% 67.1% 61.2% 56.4% 51.4%

INTERVAL: DAY CHART

+20 +30 +40 +50 +60 +70 +80 +90 +100+

94.6% 89.8% 85.5% 80.6% 75.5% 71.2% 67.3% 64.5% 61.7%

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Forex Report - Predicting Price Movement.pdf

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