AUDJPY: Progress on shaved candle system

This is a follow-on from this post.

My sample size is now 251. I did some more tinkering and discovered that a time-based filter seemed more useful than a range-based filter. This is the equity curve for all trades taken between 00:00 and 14:00 GMT, which roughly cover the Asian, European and Europe/US overlap sessions. It seems to do poorly during the US session, which shouldn't be too surprising.

Reward-to-risk = 1.75:1. Risking 1% per trade.

Now this is starting to look interesting. Max drawdown is currently 11.9%.

2013 in review...

With 2013 drawing to a close, I think it might be a good time to reflect over the last 12 months...

The Good

+ Officially going pro. My biggest achievement for this year. I finished the Australian financial year in profit (end of June 2013), so I had to register myself as a sole trader to the tax office to declare my winnings, and hire a professional accountant. I have my own Australian business number (ABN) certificate which I proudly hang on my wall. I'm officially in business, although my capital reserves aren't sufficient to live off full time (yet).

+ System development. I developed quite a few mechanical systems over the last year, especially on the weekly charts (Daikoku, Al-Kutbay, Ek-Chuah, Cernesus and Set).

+ Integrating fundamental analysis and discretion. I think this is another major development. My faith in a 'holy grail' or pure mechanical trading has subsided over the last 12 months as I witnessed for myself the pitfalls of mechanical trading. Price moves because of fundamentals (which ultimately determine order flow). Technicals are useful in determining entries and exits. I think combining both is key to becoming a professional trader.

+ Finding my favourite currency pair (the AUDJPY). The AUDJPY is sexy. It's one of the most volatile pairs during Asian trading hours, and it's excellent for carry trades (although it has been eclipsed by the NZDJPY). The spread is also competitive. Living in Australia, I also have a good grasp on the AUD side, and can make fundamental plays more easily than other pairs.

+ Quietly accumulating capital from my day job. I've been dollar-wise and avoided big expenditures, but I've also been penny-foolish (main culprit = energy drinks and food courts). 

The Bad

- My performance has been way below expectations for the past six months, primarily due to me experimenting outside mechanical trading and putting my systems aside. For the last six months, I haven't been using the mechanical systems I've created throughout the year. Between July and December 2013, I've been at breakeven trading discretionary and/or experimenting on the lower timeframes.

- Putting backtesting / system design ahead of actual trading. I think if you spend too much time on backtesting or designing systems, you begin to forget about 'live' trading. I found myself slipping back into rehearsal mode and trading 0.01 microlots, if that makes sense, even though I've designed some trading methods that look profitable and are ready to trade live.

- Realising my data is a bit more dirty than I thought. I mainly use Forex Tester 2 for my backtesting, and discovered that Forexite shaves at least an hour off Friday. This doesn't really matter on the weekly chart but it has made me less confident in mechanical trading (dirty data was one of the pitfalls that I'd observed, and why you shouldn't be completely reliant on mechanical trading).

The Ugly

- The lower timeframes aren't as scary as I thought. Many gurus like to label the lower timeframes as 'noise' but there is still market structure. I haven't found a way to trade the lower timeframes profitably, though. I've also found the return on time very poor. 

- I'm beginning to think that it's going to take alot longer to achieve financial freedom. This means that I have to set my financial goals lower. So instead of fantasising about my own million-dollar penthouse, I'd be happy to buy a decent RV to travel and live in. This has kinda sucked the passion and excitement out of me.

Overall, the last 12 months have been good. Not as great as I envisioned, but I think better than most noobie traders. Here's to 2014. :)

Little update on AUDJPY 1H shaved candle system

I spent most of today backtesting a new idea on the AUDJPY 1H charts and it seems to show a little promise. 

The sample size is only 100 so it's much too early to give it a green tick. What we're looking for is a 'shaved candle' where the short wick makes up less than 10% of the candle's size. Plus the candle must be at least moderately big. For purposes of the backtest, the candle's range must be over ATR(24). (ATR(24) simply means the average range of the last 24 candles).

Here are a few examples:

For the backtest, I put the entry as the break of the short wick + a 1 pip buffer, and my stop loss as the opposite end of the shaved candle with a 1 pip buffer.

This is the equity curve at 1% risk per trade, with a reward-to-risk of 1.75:1.

It looks okay. But with it being on the 1H chart, the frequency of trading is relatively high. I only backtested two months to get 100 trades, so that's over a trade per day. I'll become more confident once I've compiled 300 samples, which might take 3-4 days. 

Scalping session review: 18th, 19th & 20th December 2013

I'm not sure if my scalping methodology has an edge. I'm using price action, primarily engulfing candles, as entry signals along support and resistance levels. 

18th December 2013

Only took a single trade that day because of work. 

Trade #1

Pips won = 1.1 - 0.5 = 0.6 pips

I went short after seeing a strong bearish engulfing candle. Price fell to only a few pips from my TP but then rebounded upwards. I decided to get out once price neared breakeven and only won 0.6 pips.

19th December 2013

Trade #1

Pips won = 0.6 - 0.5 = 0.1 pips

Looking back, this was a stupid trade. I saw two small bullish candles bounce off 103.900 and decided to go long here. I ignored the strong bearish action that had occurred in the last hour. My main mistake was going long way too early. When you want to trade against the trend, you want to see price move horizontally for awhile first. This means that the trend is dying, and thus increases the probability of success for a counter-trend trade. Fortunately I got out when I saw that price wasn't moving up as quick as I anticipated.

Trade #2

Pips won = 1.2 - 0.5 = 0.7 pips

The entry signal was better this time: a tiny doji at support followed by a bullish engulfing candle. I went long at the close of the engulfing candle, but exited when the next candle closed as a pinbar. The pinbar formed just below 104.000, a round number, so I played it safe and exited. I missed out on the up move that followed. 

Trade #3

Pips lost = -2.8 - 0.5 = -3.3 pips

This trade went wrong. I held on to it longer than I should've. I saw a very strong bullish engulfing candle and went long on the close. I was a little burnt about the fact that I missed the upmove in my previous trade so I resolved myself to hold on to this trade until my hard SL was hit (placed just below the engulfing candle). 

The next candle was a small pinbar. If I was trading with discretion, I would've got out at a minimal loss. The next candle after the pinbar continued to move downwards. At this time I could detect that the pinbar was forming a swing high, and closed my trade when price momentarily moved back up a bit. As you can see, this was a good decision as price would've eventually taken out my stop loss. 

20th December 2013

Trade #1

Pips won = 1.6 - 0.5 = 1.1 pips

I nearly won this trade. Went short after seeing an engulfing candle near resistance, and place my TP at 142.320. Price fell within a pip of my TP before turning upward, at which point I got out. This was the correct move as price eventually broke resistance.  

Thoughts

Intuitively I seem to be practicing  the philosophy that good trades should happen quickly. If price isn't moving in my favour shortly after I open a position, then I get out with a tiny nominal win or loss. I've also noticed that price moved within a pip or two of my TP before reversing, so I might need to tighten up my TP. 

Scalping session review: 16th December 2013

I spent over four hours scalping the 5M AUDJPY chart today. A screenshot of of my trades is below. My entries and exits were drawn on the chart by hand, so they're not exact. Click on it to enlarge. :)

Trade #1

Pips won = 3.5 - 0.5 commission = 3 pips

Entry signal = Engulfing candle. Went short shortly after the close of the engulfing candle. There seemed to be quite a bit of space left until 92.000, so I set my TP just above it (around 92.010). Price then stalled around 92.020. At that point, my SL was 10 pips away, so I asked myself why risk 10 pips just to win an extra pip? Price hummed around 92.020 so I manually closed it. Price turned upward shortly after so it was the correct decision.

Trade #2

Pips won = 0.7 - 0.5 commission = 0.2 pips

When I opened my short, price didn't fall as quickly as I liked. When price turned upward, I closed my trade for a very tiny profit. It was a conservative play. Price would've eventually fell and hit my TP.

Trade #3

Pips won = 3.3 - 0.5 commission = 2.8 pips

Saw a pinbar form, followed by a solid, engulfing bearish candle. Went short on the close of the engulfing candle. Took profit just above 92.000. I think this was a good trade.

Trade #4

Pips won = 1.9 - 0.5 commission = 1.4 pips

There was a strong, engulfing bullish candle from 92.000. Went long on the close of the candle. Price then stalled at 92.080 and couldn't break this level for a few candles, so I closed just below here.

Trade #5

Pips won = 0.0 - 0.5 commission = -0.5 pips

This was a breakeven trade, but because of commission, I ended up with a nominal loss. Saw an engulfing bearish candle off resistance. When price refused to fall further after two candles, I decided to close my short for a very tiny loss. It was the correct decision as price eventually broke upwards.

Afterwards, price became choppy so I stayed out and called it a day.

Thoughts

Four hours is a long time to stay focused. The human brain takes alot of energy and I found myself losing focus towards the end. Even as I type, I feel quite sluggish. My eyes feel really dry and tired. 

There wasn't much action during the hours I traded (late Tokyo / early London). The market simply ranged but I think I did okay. 

Bitcoin investors - lambs to the slaughter

Bitcoin fell 50% in the last few days. Wow!

With no intrinsic value behind Bitcoin, it becomes impossible to agree on a price for Bitcoin, hence the volatility.

Win on AUDJPY using 'Ek-Chuah' carry trade system

The AUDJPY closed slightly positive yesterday, so I paper-traded a long using this system that I had created last week. My analysis suggested some bullish strength. Today, I took profit at 0.6R just before the market turned downward.

I've decided to call this system Ek-Chuah after the Mayan god of trade. 

RBA keeps interest on hold

This was today's major news item. No surprises here. The market initially fell in the first five minutes until bargain hunters entered at 93.500.

The market has been ranging since then. The RBA continued to talk down the Aussie dollar, calling it 'uncomfortably high'. In my opinion, talk is always cheap, and present a good opportunity to buy on the dips. The way I see it, if a central bank is talking, then it doesn't want to be doing. The other interesting bit about the RBA's statement is that it is still observing the full effects of two years of rate cutting. This suggests that the RBA is overly cautious about asset bubbles in Australia, a factor which should discourage further interest rate cuts.

AUDJPY Forecast for 2nd December - 6th December 2013

The support level at 92.000 seems to be holding. This level was tested twice last week but managed to hold. 

I haven't opened a new position yet, but if today finishes with a bullish close without touching the 21 EMA, I'd be very interested.

WEEKLY FORECAST FOR 2nd - 6th DECEMBER 2013

News / Fundamentals

AUD

Last week's AUD news releases were mainly favourable. The RBA tried to talk down the Australian dollar, but the effect seem to have been shortlived. Quarter-to-quarter construction beat expectations, expanding at 2.7% versus a predicted 0.6%. Capex also came out above forecast, expanding 3.6% for the quarter as opposed to a predicted -1.1% decline. However, month-to-month private credit only expanded 0.3% versus a predicted 0.4%, but the difference is small. On the sum of this news, it looks like the AUD's fundamentals have strengthened. 

JPY

It's been a relatively quiet week for the JPY, with the news somewhat bearish. Annual household spending and industrial production numbers came out below forecast, and inflation is above expectation. 

EUR

Nothing noteworthy that I can see. 

USD

USD news has been mixed. Tapering speculation continues, which should have a bearish effect on the JPY.

How it all fits together

AUD's fundamentals have strengthened in the face of the RBA talking the Australian dollar down. The RBA is making an interest rate announcement this week. While there is little expectation of a rate decrease, it's likely the RBA will use the opportunity to verbally bash the AUD's value. However, this will most likely be ignored in the face of good numbers, in my opinion. JPY's figures have disappointed the market. Fundamentals suggest bullish movement for the AUDJPY this week. 

News verdict: moderately bullish

Sentiment

According to last week's COT report, JPY shorts have increased to a 12-month high while AUD shorts have remained the same.

JPY

AUD

Sentiment verdict: moderately bullish

Technical Analysis

As illustrated, the AUDJPY seems to have re-bounced off support around 92.000-93.000. The ascending channel is holding. However, it isn't making new highs at the top of the channel.

It's also possible that the AUDJPY is also entering a horizontal range between 92.000 and 94.000. The 21 EMA suggests ranging action. 

Technical verdict: slightly bullish

Upcoming Events

This week should be volatile. The RBA is making an interest rate statement tomorrow (3rd December), plus retail sales, GDP and trade balance figures are coming out in the next few days. Friday is the usual USD Non-farm Payroll release. If the RBA talks the AUD down, I expect buyers to re-enter around 92.500. There are no major JPY news releases this week. 

Overall, fundamentals, technicals and sentiment suggest bullishness for the AUDJPY. I will like to see how today closes before I open a long.