Forexyard intraday trading
In this case we would take into consideration of time difference between the observations. For the period of EMA to have same average time delay as in case of simple moving average we take 2 in the integral. Second option is to treat our unevenly spaced time moments in the same way the discrete time case. This would result in all values of the same time period having exactly the same weight in the average.
As a consequence, even the values from the beginning of period would influence the average value equally as most recent observations. Price based trading strategies Trading strategy Trading strategy is defined as a set of rules, or fixed plan, which is designed to perform a trading in market in order to achieve profitable result.
Depending on the qualities and complexity of a trading strategy, trading strategy could consist of few features as entry and exit points to the market, portfolio allocation or complicated set of order management and risk exposure control rules. Further on trading strategy will composed by three parts of different section of technical analysis tool, while some might be overlapping and working with each other, the main parts will be: technical analysis price based indicators, volume based indicators analysis, and orders flow analysis.
In study of the strategy performance, the various combinations of different strategies will be implemented, in order to find proof that combinations of the different technical indicators can result in profitable trading outcome. Often it is acknowledged, that single indicator can provide not justified indication of buying or selling signals, therefore combinations of several indicators are considered to be effective Technical indicators While technical analysis dates back to as early as 17th century, the most significant changes and real surge of technical analysis happened during the past few decades.
Due to the increasing use of computers in analysis and technical progress the advances of technical analysis resulted in increased number of tools and different possibilities to implement them. The very fundament of technical analysis is based on the idea that: if A preceded B several times before, B is likely to happen now when A has occurred. As A is an indicator that B will happen. This comes from inductive idea, as humans repeat behavior, patters also tend to repeat, or as well deterministic machines repeat patterns Rockfeller, The key task is to find the blueprint for the repeating patters, to spot that A which will result in B and try to profit from their relationship.
An indicator is described as a mathematical calculation that can be applied current asset price or volume fields in order to future changes in that asset s prices. Obviously the research relies heavily on the belief that technical analysis can be productive and yield in successful trading.
While Efficient Market Hypothesis by Fama contradicts the very essence of technical analysis stating that prices in the market already incorporate and reflect all information relevant to the asset. And this means that one is not able to constantly to earn higher returns on the market, as movements of prices are unpredictable as Kendall found in and follow random walk.
Opposing to this, there are recent evidence that using technical analysis provides higher returns and can be effective when constructing trading strategy. With wide range of various technical analysis devices available it might be rather complicated to select the most suitable ones. While all of them are aimed at the same goal - indication of profitable opportunities to take preferred actions in the market, the difference and 13 14 purpose of each has to be considered while building a trading strategy.
Since each tool alters in its purpose for which it is designed, the abilities and usage also has to be carefully checked when adding them to the strategy. Generally indicators are divided according to the market data that they are using, usually its prices of assets and trading volume. Since the data which was available and used in this work provides not only information about prices and volume, but also material about the market micro structure in the intraday trading, the analysis of the order flow will be examined as well later on.
Starting with price related indicators, further on briefly will define all the analysis tools that are going to be used in the trading strategy. One important thing to be mentioned is the way the trading signals will be executed.
After the indicator provides a buying selling signal the trade will happen immediately at the best ask bid price available. Once the trade is executed, the position in the asset is held until a time moment when the opposite trading signal is developed. During the period until the opposite signal emerges no trading is done, all the other signals in that period are ignored Relative strength index RSI The Relative Strength Index was developed by J.
Welles Wilder in the s. It is considered to be useful and gained its popularity for the ease of understanding and implementation. RSI compares the magnitude of assets recent gains to the magnitude of its recent losses, giving indication whether the asset is considered to be overbought, or oversold.
Increasing value of RSI reflects increasing momentum in stock price, proving the uptrend until the levels when asset is considered overbought, and vice versa. Momentum in the stock price is the empirically observed tendency for rising stock prices to rise further, and falling prices to keep falling. Relative Strength index is measured on a scale from 0 to , with bound from considered as an oversold levels, generating buy signal.
And contrary levels from 70 to are considered overbought levels, providing signal to sell. Other bounds for signal indication can be also used, and in empirical study we will test several of them. Commonly RSI is used on a 14 day timeframe Achelis, , while in this work it will be concentrated on using 10, 20 and 30 min period. We will be also testing results regarding shorter, 7min period, which is considered to be more effective for the intraday trading.
RSI is a tool used to provide both market entry or exit signals, and to indicate strength of the trend. Though the description and from the sight it appears quite simple, the mathematical part of RSI is a bit more complicated. In later combinations with several other strategies will be also considered Simple moving average SMA Simple moving average arguably is one of the most popular technical analysis indicators used by traders Ming, Simple moving average calculated as simple mean of n number of values of previous asset prices.
Basically it is arithmetical average applied for previous n values of asset prices, which have no weight factors applied. That formulation holds for SMA in uniformly distributed time. In our model we will have SMA for specified period in minutes, and we compute the average by formula described in section Notes on computing averages in unevenly spaced data. Usually the SMA is used in combination, of few, most commonly two options of different period s averages.
Moving averages crossover consists of setting one moving average for longer, and one for shorter period, their intersections are assumed to be market action indicators. When shorter period SMA crosses longer period SMA from below - buy signal is generated, and when from the top of it - sell signal is set up. For intraday trading the advised and common combination is 10 and 20 periods SMA s Droke, , while the different combinations can be adjusted by each trader preferences.
Since reducing time period of shorter period SMA will increase the quantity of signals, invoking increased number of trades the profitability of that must be inspected. As SMA is lagging indicator signals are delivered already after the trend have changed, so the signal is rarely generated at the most profitable point for market entry. This formula is usually used for calculations when daily stock price information is analyzed.
TRB being more a rule than an indicator is widely tested when analyzing technical trading and proved to return more profitable outcome than simple buy and hold strategy in US index market according to Brock, Lakonishok, and LeBaron Nartea , therefore the rule will be included in the work for testing as well. Trading range breakout works as a rule when to enter the market or to liquidate the position regarding the value of the price in respect to predefined range.
Support and resistance levels of the asset price trading range to indicate whether a trade should be done. Trading range of the price can be defined as spread between high and low prices for a period of time. With support level being a historical level for which price was able to bounce back in downward trend, and resistance level being exact opposite of support. The resistance support level is defined as a local maximum minimum price over a given period of time, with a buy sell signal generated when the price moves through the resistance support level.
Situation when trend breaks the previous support level is considered by investors to result in indication for an upcoming uptrend and is used as buying signal. Conversely, the selling signal is generated when price crosses the resistance level. Local maximum and minimum points are defined based on chosen past period, in daily data 50, , days periods are used commonly Yu, et.
In our intraday trading system we will try 10, 30, 60, minutes ranges for deciding on support and resistance levels, since in different works the wide range of intervals from 30min to 3h are used. It is described as one of the 16 17 simplest and most effective momentum indicators available. In literature mixed results can be found by implementing MACD, some stating MACD to outperform buy and hold strategy, while other findings does not find any evidence in profitable use of indicator.
Used for several things, such as strength, direction, momentum and duration of trend of assets price. In most common cases, indicator is consisting of three parts: MACD line, signal line and divergence, or simply bar chart. MACD line is a difference between to different length exponential moving averages. The longer term exponential moving average is subtracted from shorter one to produce MACD line.
Traditional the length of the longer term average is taken as 26 periods, and the shorter one is set to Then, the signal line is a product of MACD line, since it is taken as exponential moving average, with length of 9 periods, of it. In the analysis we will concentrate only on signals generated by MACD and signal lines. The settings of MACD 12, 26, 9 where originally suggested by Appel and we will not be testing different combinations.
In our case these will be periods of minutes that are used. The signals can be produced by MACD in several ways, by one line, or crossovers of theirs. Since MACD oscillates in areas above or below the center line, the market trend can be spotted rather easily, and mathematically, positive MACD corresponds to uptrend, or increasing upside momentum.
Conversely, the negative MACD corresponds to downtrend and increasing downside momentum; therefore crossings of zero line are used as momentum indicators. Another way to get market signal, is to use combination of MACD and signal line crossovers. Similarly to simple moving averages, the buying signal is generated when MACD line crosses signal line from below, indicating recent increase in uptrend momentum. And vice versa, when the MACD line crosses signal line from above, goes under it - the downward momentum occurs indicating to sell the asset.
As all indicators MACD possess its drawbacks - when price graph is flat for a period of time and doesn t have trend, the MACD is unreliable and doesn t give decisive signals. Furthermore, the different lengths of averages used might produce better signals when adjusted to separate assets, and traditional options may not provide most efficient results. The calculation of MACD consists of three computations: 1. The time intervals to be used in MACD calculation have effect on the number of trade signals generated and also profitability results, therefore they must be considered with cautiousness.
Stochastic oscillator SO Stochastic oscillator is very different momentum indicator from the ones that are described earlier. Being developed by George Lane in late s the indicator refers to the position of the current price in relation of the set period price range. What distance SO from other indicators, is the fact that indicator does not follow prices, or volumes directly, instead, it follows only the momentum of price. In a simple approach, one could say that stochastic oscillator delivers information about how close the current price of an asset is relation to the highs and lows of the price range of that asset in given period.
The basic concept behind the stochastic oscillator is the concept that prices of the assets tend to reach near recent range extreme values, before the reversal of the trend appears. Since the oscillator varies from value of 0 to , the bounds of 80 and 20 are frequently taken as overbought and oversold levels, respectively, since these bounds were initially suggested by Lane.
Same margins will be used in our trading strategy. One shortcoming of the indicator could be noted as the sensitivity to adjustment of parameters for the length of the averages and period considered. Originally 14 was look - back period trading days, weeks, or intraday trading period. Since that time, the oscillator gain substantial amount of popularity among investors, and can is used not only for trading commodities but equities, and other securities. CCI have the same target as Stochastic Oscillator, it is designed to measure current price value relatively to the average price value in the given period.
As well as SO, the CCI reaches high value when the prices are far above from their average, and low value when the 18 19 price is far below its average value. As most of oscillators, CCI have its ranges to identify buying and selling signals, with levels above assumed to be levels of overbought, and delivering market exit indication, and levels below regarded as oversold levels, giving market entry signal. The slight difference in construction of CCI is that it takes into account the deviation of the mean of the price.
And also instead of highest or lowest price, the typical is used in assessment. MD i - stands for mean deviation. A default setting for the CCI is 14 periods. In our empirical study we will hold to that setting, and we will be considering 14 periods of 5 min time intervals. We will not be testing other period settings for CCI, while smaller number of periods would produce more sensitive indicator giving more trading signals, and conversely longer less signals. To sum up all technical indicators based mainly on asset prices that we will be using in trading strategy, the table below gives full information when buy or sell signals are generated according to each indicator: ; 19 20 Table 1.
SMA e. Volume based indicators After discussing price based indicators, we are now turning to indicators related to volume. In general, volume is the number of shares or contracts traded in a security or in an entire market during a given period of time. In this work, volume will be related to the number of shares traded on a single security during specified period. Since our trades will be happening only with one security within one day, it is not the entire market, and the period will be not given in days or weeks, but selected number of minutes, depending on indicator used.
Volume is without doubt important element of technical trading. Following the prices and combining indications from their movements and volume movements can provide anticipated security s price changes. In the case of a strong and healthy trend increasing prices are expected to be accompanied by increasing volume. Otherwise, increasing prices, but decreasing volume signals that the trend is not strong and there might be possible reversal in a security movement. The heavier the volume appears in a security, the more likely it is in continuation of reaching new price levels, and proceeding movements in existing trend Baiynd, To put it shortly, volume provides clues as to the intensity of a given price movement Achelis, Very often without significant volume levels stock prices remain directionless and new trends do not appear.
Later we are focusing on following three patterns in volume: increasing volume, declining volume, and volume spikes. Further on we discuss several volume based indicators that we will use in the trading strategy Volume weighted Moving Average VMA The Volume weighted Moving Average differs from the previously described simple moving average by adding volumes of trades as weighting factor to the calculations.
The purpose of such use is to put more importance on the days, or trades in intraday trading which have heavier volume. VMA computes the average price per share while SMA computes the average price per trade, so in the case of VMA trades with larger volume receive more weight in the average. The moving averages crossovers are one of indications to be considered, where we take two different time period length averages.
When shorter period VMA crosses longer period VMA from below - buy signal is generated, and when from the top of it - sell signal is produced. Accounts ForexYard has several different accounts. These also have leverage of All three accounts allow trades in standard sizes of 1, base currency per one lot.
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