Intermarket Analysis and John Murphy Studies

 Automated trading is an excellent tool for building startegies that are based on divergences/convergences between corrrelated markets. Intermarket analysis is a market-driven branch of technical analysis that studies the price relationships between different asset classes.

Automated trading is an excellent tool for building strategies that are based on divergences/convergences between correlated markets. Intermarket analysis is a market-driven branch of technical analysis that studies the price relationships between different asset classes. This is a pure Macroeconomic analysis that studies the dynamics behind all major Intermarket correlations of the past 50 years. 


Introduction to Intermarket Analysis

As world financial markets are getting closer to its other, new Intermarket correlations are emerging. Any modern financial market analysis should incorporate an Intermarket approach. However, Intermarket correlations are not static, and change over time, according to the macroeconomic environment. Inflation and interest rates are the key factors behind any relationship shifting. Intermarket relationships become particularly stronger during periods of a financial crisis. 

The important role of interest rates

The level of interest rates is linked to inflation and plays a significant role in every financial market. Let’s see an example of how Intermarket relationships can create a macroeconomic cycle of events.

An example of how the Macroeconomic Cycle Works

The FED unexpectedly lowers interest rates and that has an immediate negative impact on the exchange rate of the US dollar. A weaker dollar provides a boost to commodity prices. Rising commodity prices are pushing inflation higher. Higher inflation forces FED to re-adjust interest rates higher. This is the middle-cycle phase. As interest rates are now rising, bond prices and stocks are falling. Investment projects are postponed. Consumption is getting lower and unemployment is getting higher. Higher interest rates also push the dollar exchange rate higher. The prices of commodities are declining as the dollar gets stronger. Inflation is diminishing and the central bank has now many good incentives to lower interest rates once again. The cycle is complete.

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Forex Trade Setups

Trade Setups -The Art of Waiting

If you investigate financial markets from a historical perspective, you realize that history tends to repeat itself. There is a never-ending circle that commences with fear and ends with greed. A circle that leaves a lot of room for profitable trading. However, in order to take advantage of these opportunities, you need to have the right setups. A trade setup refers to a specific configuration that includes some basic entry rules and a couple of confirming conditions.


The Importance of Trade Setups

A setup aims to deliver positive average performance in a high proportion of trades. Once you have the right trade setup, it is important that you wait until the market comes to you, not the other way around. Remember, there is no risk when someone is out of the market. Trade setups are particularly important for a number of reasons:

(1) Recognize the exact levels where you should enter and exit the market. Time perfectly your trades (avoiding early entries)

(2) Recognize the true trading range and calculate accurately the Risk/Reward of each trade

(3) Place the right pending orders for limit losses and take profits

(4) Trade with discipline, by eliminating fear and greed, and optimize your trading results in the long-run

General Examples of Trade Setups:

These are some popular trade setups:

  • Breakout Setup
  • Continuation setup
  • Price Reversal setup
  • Range-Boundary setup
  • Triangle Setup
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Selecting, Managing, and Backtesting Automated Trading Strategies

Selecting, Managing, and Backtesting Automated Trading Strategies 

What is an Automated Strategy?

An automated trading strategy is a set of rules and conditions that are capable of creating and entering trading orders without human intervention. Usually, an automated-strategy refers to a software code that is designed to plug into an automated trading platform such as MetaTrader, cTrader, and NinjaTrader. An automated trading strategy basically contains three modules:

  • An analysis module that is usually based on technical analysis and market statistics
  • A decision-making module that is able to select positions and then decide position sizes (Money Management)
  • An execution module that is able to enter trading orders, and if needed, to modify or close these orders

Two Different Approaches to Automated Strategy Building

There are two main approaches for building an automated-trading strategy:

(1) Model-based strategy building

Model-strategies are based on a market theory that is attempted to fit in the market data. This type of strategy includes extended experimentation and ‘Trial and Error.’ Model-based strategies can be easily implemented as they don’t require enormous technical resources for data analysis. These are some common variables when creating a model of the market:

  • Mean Reversion
  • Market Correlations
  • Seasonality
  • Volume Clusters
  • Order Book
  • Price Patterns
  • Price Gaps 

(2) Data-driven strategy building

Data-driven strategies are based on historical market analysis and data-mining. Following the analysis of massive amounts of market data, this type of strategy aims to identify rules and recognize predictive patterns. Data-driven strategies are considerably complex and require significant technical resources for efficient data analysis.

The platform StrategyQuant may be the ideal solution for retail traders aiming to apply a data-driven strategy. StrategyQuant provides the tools of professional quants and hedge funds in order to create a portfolio of trading strategies in a quantified way. ► StrategyQuant on ForexAutomatic

The Decision-Making Module

Efficient automated strategies should incorporate a decision-making module that is capable of answering the following questions:

  1. What assets/asset classes should be traded?
  2. In what direction should these assets be traded (Long/Short)?
  3. What is the overall cost of trading (spreads, trading commissions, overnight SWAPS)?
  4. Are there any hidden risks (slippage, market correlations, etc.)?
  5. What is the optimal time to trade these assets?
  6. What is the optimal position sizing (money-management)?
  7. What types of trading orders should be used (pending orders, take-profit, stop-loss)?
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Forex Rollover (SWAP) Rate

Forex Trading Rollover Rates (Forex SWAP)

The Rollover Rate or Forex SWAP rate is the net interest return on any position held overnight and can be positive or negative for the trader’s account balanceDifferent currencies pay different interest rates and the Rollover Rate is a method of balancing these differences. The Rollover Rate or Forex SWAP rate is the net interest return on any position held overnight and can be positive or negative for the trader’s account balance.


What is the Forex Rollover Rate or Forex SWAP?

A Forex SWAP or Rollover Rate is a formula for converting annual currency interest rates into daily cash returns. This rate applies to all Forex trading positions that are held overnight. The Rollover Rate is based on the interest rate differential between the two currencies involved in a Forex pair and can be either positive or negative.

How does the Rollover work for Weekends?

As the Foreign Exchange market is officially closed during weekends, there is no rollover rate on Saturday and Sunday. To balance that, most Forex brokers charge a 3-day rollover rate on Wednesdays. In simple words, the rollover rate is tripled (X3) on Wednesdays.

Normal SWAPs Rate: Monday, Tuesday, Thursday, Friday

Triple SWAPs Rate: Wednesday

No SWAPs Rate: Saturday, Sunday

How does the Rollover work for Holidays?

There is no rollover rate on holidays. To account for that, Forex brokers charge an extra rollover two (2) business days before the holiday. If that day is Wednesday, then that means four (4) days worth of interest on a single day.

Key Points:

  • The Rollover Rate is paid at midnight according to each broker’s time server
  • On Wednesday the Rollover Rate is tripled (X3) in order to cover the weekend
  • During Holidays there is no Rollover Rate (that is covered two days before the holiday)
  • The Rollover Rate can be positive or negative, according to the interest differential between the two currencies involved in any Forex pair
  • A positive Rollover Rate is a gain for the trader and a negative Rollover Rate is a cost
  • Depending on the Forex Broker, the Rollover Rate of the same currency pairs may differ significantly
  • Some currency pairs may show negative Rollover Rates on both sides {both ‘long’ and ‘short’}
  • There are SWAP-free accounts, that meet the needs of Islamic traders
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