theforexwriter’s Weblog

After being whipsawed for much of the previous week, I’ve started testing a new technical forex trading strategy, similar to the one discussed in “Time Passages,” below. You’re welcome to follow along or paper-trade it for yourself if you have a mind.

Because risk aversion and market jitters are shrinking trading ranges and reversing price action with little warning, I’m trying this as a day-trading strategy on thirty-minute charts, to grab a few pips from a chronically choppy market. Because this is a trial session, I’m concentrating on only one currency pair, the AUD/JPY, selected because it’s very sensitive to fundamental market shocks. (The carry traders panic and exit fast if some announcement scares them, and I expect that to continue at least until the Freddie and Fannie crisis abates. Of course, there’s likely to be another crisis after that one, but hey, that’s life.)

The proposed system consists of two exponential moving averages (EMAs) of shorter duration than I normally use, both calculated on closing prices, plus the accelerator oscillator used in a non-traditional way. I also actively mark support and resistance levels and track volume.

The moving averages are:

1. a three-period EMA (the blue line);

2. a twelve-period EMA (the brown line); and

3. a 200-period simple moving average (SMA) also calculated on the close (the grey line).

The accelerator oscillator is designed to measure changes in the momentum of a currency pair’s price action. Results are displayed as a histogram, similar to the MACD, in an indicator window below the chart, with green bars indicating acceleration and red bars indicating braking. Traditional use is to buy on two consecutive green bars above the zero line or three consecutive green bars below the zero line, and to sell on two consecutive red bars below the zero line or three consecutive red bars above the zero line. This is an involved way of saying, go with the trend. (We’ve all heard that before, right?)

For this plan, though, what I’m going to concentrate on is the height of the bar. Unless the acceleration or braking pressure is great enough to convince me the market means business, I’m not gonna play. So using the MetaTrader 4.0 platform, I changed the indicator settings so that the accelerator oscillator displays a little grid behind the histogram, at 0.05 intervals, both above and below the zero line. (Use the hyphen as a minus sign, MT4 understands.) Unless the histogram bar touches the grid, it’s not an entry alert.

With moving average crossovers, of course, you buy when the shorter period crosses above the longer one (in this case, when the blue line crosses above the brown) and sell when it crosses back. I like to see a lot of daylight between the lines when they cross—a little niggling cross where they almost parallel each other just doesn’t count.

The SMA(200) indicates the long-term trend. I find it easier to track if it’s an ever-present graphic.

A long entry alert will be the blue EMA(3) crossing above the brown EMA(12) with a good, clean cross. The actual signal will be when a green histogram bar touches the first grid line above the zero.

A short entry alert will be the blue EMA(3) crossing below the brown EMA(12), also with room between them. The actual signal will be when a red histogram bar touches the first grid line below the zero.

The exit strategy is still a little hazy. In this choppy market, an exit will probably take place whenever my gut dictates. When this becomes clearer, I’ll let you know.

Take a look at some of my back-testing:

There are three trades on this chart that meet the criteria, with entry points marked by light blue vertical lines. All three would have been profitable.

I’ve gone back farther than that with the back-testing, of course, but I prefer to test new systems live on my paper-trading account. So I’ll try this one when the market opens tomorrow.

One thing this choppy market is teaching me is to be flexible. Have a strategy, yes—but be willing to try new ones, too.