Momentum Trading Strategy: USD Pairs

I currently wrote an editorial explaining how it's far feasible for momentum investors to profitably implement a “pleasant of” the Forex market momentum buying and selling approach, which protected a back check conducted over a very current 6 yr length. There are some loose ends in that article that are well worth a few more detail, so in this 2d part I want to make a more potent and greater certain case as to why standalone / time series momentum tends to be a better sort of momentum strategy ordinary, and resolve some worries that would have arisen from my use of a 3 month look-lower back length in determining the first-rate and worst acting currency pairs.

Why “Best of” Momentum Works

Academic research have observed that the maximum worthwhile trading method which can probable be built based totally upon historic charge facts alone, is a time collection momentum-based buying, trading at and selling approach. This may be carried out via momentum investors absolutely with the aid of selecting a diverse universe of tradable devices and shopping for the ones going up and promoting the ones happening. This is truly a method that has a tendency to produce more profits universal than adding a “nice of” filter, but the draw-downs are larger and so it usually makes greater feel to add a filter out including “first-class of” despite the fact that there may be no purpose why essential evaluation or different filters couldn't be used profitably as an alternative.

There has been a lot academic speculation as to why momentum “works” and there's no consensus on this question. My very own opinion is honestly that for some thing to get from one hundred to 2 hundred in its price, it has to head up, and human nature is such that crowds tend to pile into moves at tipping points, making the momentum even more potent.


Now permit’s flip to any worries that would have been raised over my preference of three months as a look-returned period for determining which pairs to alternate.

Look-Back Period for Selecting Currency Pairs

I used a three month look-lower back period in my preceding article definitely as it produced the best general result of all viable appearance-back periods. If you are a momentum dealer involved that the idea does now not look very strong until a few other look-returned durations had been measured, you're truely proper! In order to cope with this I am reproducing below the outcomes for each appearance-back duration at 2 weekly periods from 2 weeks to 24 weeks (equating to 6 months), followed by way of some other graph displaying the average of all of the samples.

Time Series Momentum

If those outcomes make you feel apprehensive approximately the use of a “pleasant of” the Forex market momentum method, you could instead recall the use of a easy time series momentum method. Here, momentum traders just choose some the Forex market pairs, and for the functions of our lower back test go long every week the charge is better than its personal fee of X time in the past (X representing the appearance-returned duration), or quick if the price is decrease than its own rate of X time ago.

The apparent query we run into first while looking to observe this sort of method is which the Forex market pairs to apply? Do we need to be buying and selling all the Forex pairs all time, without discriminating among them?

It makes experience to start via searching at the 4 principal pairs: EUR/USD, GBP/USD, USD/CHF and USDJPY. Below are the effects of a back take a look at over a completely lengthy period of time – from January 2002 till early 2015, which represents greater than thirteen years. This check has some specific parameters: the trades are taken best at the start of calendar months, trades are held for 1 month, and the appearance-back durations are preceding calendar months. The appearance-returned intervals used have been 1, three, 6, and three hundred and sixty five days:

This is unexpected, as all the appearance-returned periods used were worthwhile. An average of all four strategies might have produced a go back in extra of a hundred%, and currently it is only the 1 year length this is within a severe draw-down.

Trade USD and EURO Currency Pairs

The  largest global currencies are the USD and the EUR. They are maximum prone to trending regularly and this is one of the motives why time collection momentum with the four primary pairs has worked properly: they're all USD foreign money pairs. Why should momentum buyers be especially interested in those currencies?

Simply due to the fact they're the 2 biggest currencies by way of quantity and importance. It takes time to turn round a massive deliver.

Let’s conclude with a few facts displaying how the USD and the EUR like to fashion. Over a period of 6 years – from April 2009 to April 2015 – in case you checked out the 28 maximum essential currency pairs and went lengthy or brief of every each week depending upon its look-returned durations of 13 or 26 weeks, the best currencies generating effective consequences have been the EUR and the USD. Both currencies could have produced a return of 110% each primarily based upon the 26 week look-lower back duration (corresponding to 6 months). Using the look-again duration of thirteen weeks (corresponding to 3 months) produced a positive result of 161% for the USD and eighty two% for the EUR. Using this form of momentum buying and selling method may be a great manner to show $10,000 into $1 million.