Thursday, October 11, 2012

Backtest on USDJPY and EURGBP complete, thoughts on EURGBP

I just finished gathering 200 more "pinbar" samples from the USDJPY and EURGBP. The USDJPY passed fine, but the system got completely annihilated on the EURGBP. Profit factor ranged from 1.0 to 0.5 with all reward:risk ratios up to 5:1. Above that, the system becomes profitable.
Half of Britain's exports go to Europe, according to this article. Generally, this should mean that the British and European economies will march in-step. Because of this high correlation, the EURGBP will tend to be range-friendly, or perhaps even whip-saw friendly (pinbars should be profitable in a ranging market if R:R is small enough, but I was getting stopped out so many times).
The EURGBP is somewhat liquid, making up 3% of all volume traded in the forex market.  Therefore the whip-sawish action isn't so much due to illiquidity, but perhaps more to do with Britain and Europe itself.
I suspect that the AUDNZD would follow similar behaviour, considering how tightly correlated both economies are (both economies are commodity export-driven and 23% of NZ's exports go to Australia).
I think there is something here to explore in future.

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