Mechanical Forex

Several days ago I wrote a post about JPY crosses and why it has been so hard for me to find long term inefficiencies on these currency pairs. I talked about the fact that lack of liquidity makes this pairs exceedingly hard to trade and the finding of price action based inefficiencies was always a difficult and fruitless endeavor. During the past few weeks I have been dedicating some time to the analysis of these currency pairs and the way they have traded for the past 10 years and I arrived to some very interesting conclusions that allowed me to get my first 10 year profitable backtests on this “hard to tame” currency pairs. On today’s post I will share with you my analysis of these currency pairs as well as my first likely long term profitable results on JPY crosses.

What did I find out after a ten year analysis ? A long term analysis of these pairs reveals some very interesting characteristics. The first and most important one is that their trading character changed abruptly in 2008 time after which they started to behave in a much less directional and much more volatile manner. The cause of this is mainly the huge change in interest rates that started in 2008 and ended in mid 2009. This made the JPY crosses stop behaving as simple carry trade currency pairs and start to behave in a much more “speculative” manner. Before 2008 the consensus was clear – while interest rate differentials remained – the JPY would depreciate against the EUR, GBP and CHF. After 2008 the interest rates shifted and this was no longer the case. Right now trading on these instruments seems to be determined by speculation regarding future interest rates which may start another 2000-2007 “like” period in which the carry trade is the main factor.
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The conclusion from this analysis was pretty simple, since the fundamentally determinant factors of currency movements changed so drastically, any attempt to exploit short term strategies before 2007 fails in 2008-2010 and vice versa. The key here seems to be to find an approach that allowed the exploitation of an inefficiency that remained constant through the whole 2000-2010 period regardless of the deep changes caused by the 2008 world economic crisis.

My first thought about this was to evaluate strategies that attempted to follow trends using very large indicator periods. I figured out that if the currency pairs’ short term price action was so “blurry” averaging it over significant periods of time and then entering trades based on this process would yield much better results. For this reason I decided to try Watukushay No.1 which is simply an ATR-adjusted moving average cross system on the EUR/JPY and the GBP/JPY. The results of a 10 year backtest from Jan 01 2000 to Jan 01 2010 are shown below.
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As you can see the trading system achieves profitable results for the 10 year period with actually quite good results on the EUR/JPY with an average maximum draw down to average compounded yearly profit ratio of about 1:0.8. The results for the GBP/JPY are not as good but results still show that long term profitability is achieved. This shows that despite the fact that it is very difficult to find short term exploitable inefficiencies, the use of a slow moving average cross with a long period (200-300) with a very fast MA (15-30) allows us to reach profitable levels for a 10 year trading period going from a carry-trade phase to a net speculative phase. It is interesting here to note that forex majors give no profitability or much less profitable results with this same strategy.

I believe that these findings are very significant since they are the first results I have been able to achieve for likely long term profitability with the same system on both the EUR/JPY and GBP/JPY. It shows that these currency pairs may be exploitable with systems that attempt to follow trends with long periods of averaging on the hourly charts. I am currently testing some other ideas but certainly we already have some very encouraging results.

If you would like to learn more about automated trading and how you too can build your own systems based on sound trading tactics with adaptive money management please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !