26 Nov 2014 Trades: EURJPY & EURNZD

Opened two trades today using my 'Plutus' system, although I adapted the system's rules to what I saw on the chart. This was a combination of discretionary and mechanical trading, and in both instances I won the majority of the move.

EURJPY

I spotted a low volatility, high volume candle off 147.000, a significant round number level. 

When I see an entry signal, I want a story behind it. In this case, I felt sell limit orders along 147.000 were being triggered, and went short. I took profit some distance above the previous major swing low, which was ideal. Shortly after I took profit, price turned upwards and would've taken me out. 

EURNZD

It's a similar story with the EURNZD. I spotted a  low volatility, high volume candle off 1.59000, and figured that a whole bunch of buy limit orders were hit. I went long and took profit just below the previous swing highs (marked on the chart below). Price turned shortly after and would've stopped me out, so my profit target was well-placed. 

Live calls: XAUGUSD, EURUSD, SGDJPY

My live calls for swing trades this week. I want to see how good my discretionary forecasting is. I'm using retail sentiment as a contrarian indicator, in conjunction with technical analysis (mainly Fib levels + big round numbers).

XAGUSD

Retail sentiment: Strongly bullish (from OANDA: blue is long, orange is short)

I expect price to turn south once it hits 17.000. Reasons: major S/R level, near 61.8% fib level, round number.

EURUSD

Retail sentiment: Moderately bullish (from OANDA)

Price will turn at 1.25000 and break support at 1.24000 on the back of Draghi's ECB speech.

SGDJPY

Retail sentiment: Extremely bearish (from Alpari)

This is an exotic cross-pair, but the price action and market structure look very clean. I expect a retracement to 90.000 (S/R, BRN + 50% fib level), and then price to rise.

Daily Highs and Lows - the importance of the first hour?

I've spent the last few weeks analysing the daily highs and lows of other pairs, and made an interesting observation. The 'midnight hour', or the first hour of the day, tends to contain the day's high or low. 

The following charts the distribution of the daily highs and lows for the USDJPY, AUDUSD, EURJPY, EURAUD, AUDNZD and EURUSD. I primarily focused on AUD and JPY pairs, being based in Australia.

If you look at the charts below, the midnight hour features prominently. 

This observation seems to hold true with the EURUSD, a non-Asian pair, although it isn't the most prominent in this case. 

My guess is that during a strongly-trending market, it's possible for price to move in one direction for the entire day, hence the prominence of daily highs and lows during the first hour. If you're daytrading an Asian pair, the high or low of the first hour looks like a good place to put your stop loss.

Distribution of AUDUSD's daily highs and lows

I spent today analysing the AUDUSD's daily highs and lows, and where we'd often find them over a 24 hour period. 

I looked at data from late October 2012 to February 2014. This is the distribution of the currency pair's daily highs and lows, sorted by hour. Just like the USDJPY, the daily highs and lows seem to be concentrated towards the start of the day, before the Tokyo session and during the first few hours of the Tokyo session. We then see a concentration during the US session, especially during the European / US overlap. 

What is the probability of finding a daily high OR low within each hour?

Overall, the results are similar to the USDJPY, which was what I expected. Again, you can probably build some sort of breakout strategy based on the first 4-5 hours of each day.

Preliminary backtest results on new USDJPY system

I'm currently backtesting a new system based on my research here. In my last entry, I observed that the USDJPY's daily high or low was most likely to be established in the first four hours of each day.

Suppose we looked on the 4H chart and traded the break of the first 4H candle that appeared for the day, with our stop loss located on the opposite end of the candle?

Example setup:

I basically looked for small 4H candles at the start of each day (a 'small' candle being defined as a candle with a range less than 0.75 * ATR(30)). If we're going to trade the day's move, we want to be entering just BEFORE the move, not after, hence why I only looked to trade the breakout of small candles. If the candle's large, then the day's move has probably already started and you'll be entering late. 

My preliminary backtest consisted of 534 trades from April 2009 to yesterday. Where I set my profit target didn't seem to matter. All TPs showed profit. The best TP though, was 1.25R. This yielded a profit factor of 1.51, which is very good. 

This is the equity curve with a $25k starting balance, at 2% risk per trade. 

R^2 is very good, at 0.93. The max drawdown was 21%. 

I tested most of the data between April 2009 to yesterday. I hope to finish the entire backtest in the next few days. The signs are looking very good, though.