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This alternative data in action post looks at the power of bollinger bands trading strategy forex volume data. CLS has just published the first true global foreign exchange FX volume database. Commercially available for the first time via Quandl, this database is the most bollinger bands trading strategy forex, most comprehensive and timeliest gauge of currency trading volume ever published.
This is the first time we have been able to incorporate volume data into an FX trading strategy. The price of a financial asset is, precisely, what market participants are willing to pay for it.
The best systematic trading strategies in global equity markets today leverage volume information almost as much as price data, to the point that an algorithm would be crippled were volume data withheld. However, the same cannot be said of the FX market: Compared to their peers in equity, FX traders fly blind.
Trends are trivial to spot in hindsight. The art and science of trend following aka momentum investing requires an investor to detect a trend in its nascence. How exactly to do this is the stuff of passionate debate and indeed what separates the best investors in the world from the rest of us. For the purpose of testing the marginal impact of volume data on FX trend following we chose the classic Bollinger band breakout strategy. This approach is too simple to truly deliver good results in practice, but our purpose is to explore the marginal impact of volume information on systematic FX trading.
So we just needed a baseline. Bollinger Band breakout is a well-documented trend following strategy. The basic idea is that a trend begins if the price bollinger bands trading strategy forex an asset moves outside its recent price range. For example, one might define the breakout threshold to be twice the day volatility of the asset:. An investor buys or short sells the asset when a breakout occurs and holds the position as long as the price bollinger bands trading strategy forex above below the simple moving average SMA of its price.
We tested the strategy over the past 5 years. Our somewhat arbitrary parameters were:. Note the performance is poor. It is in fact better with different parameterizations, but we felt it prudent to use canonical parameter choices. What we really want to find out is what happens if we augment this strategy with volume data.
Volume promises to be helpful in a trend following strategy because the fundamental challenge of the strategy is avoiding false starts. Incorrectly concluding that a trend has begun will, at best, create unrewarded volatility and at worst lose money.
We can now finally use volume information to increase conviction around trends with the CLS Daily database. We can augment our trading rule to require not only a price breakout but also a meaningful increase in volume at the same time. Notice this is the same trend follow strategy as above, with an additional volume threshold that must be met before taking a position.
We reran the backtest for various values of these three parameters. For N we tried 22, 32 and For M we tried 1, 2, 1. Some of these 81 permutations are big winners and others are big losers in terms of returns and risk-adjusted returns. In 77 of 81 permutations, the volume-augmented variation of the strategy delivers higher risk adjusted returns in Sharpe ratio terms than the pure price strategy!
The above is not a rigorous analysis. But it is nonetheless an endorsement of the power of FX volume data in systematic currency strategies. We continue to dig deeper into this data as do a growing list of buy side subscribers. Your email address will not be published. Manufacturing bottlenecks continue to plague the Tesla Model 3.
Yesterday, Tesla pushed the target back again, to Q2after a disappointing quarter for production. Quandl clients had early warning of bollinger bands trading strategy forex shortfall thanks to our model-level insurance policy dataset. Read on for more details. That aggressive goal was subsequently scaled back substantially, to a seemingly more achievable One of the many interesting things about alternative data is how difficult it is to define.
Most people define it by what it is not: But very few are actually able to pinpoint what it actually is. The reason, I suspect, is that alternative data is a moving target. It comes from bollinger bands trading strategy forex sources, takes different forms, and offers insights on different verticals. For example, satellite imagery can predict oil inventories, online job listings can track company growth, and insurance records can track auto sales: This premier data event for investment professionals will help you keep your finger on the pulse of the rapidly evolving alternative data ecosystem.
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CLSForeign Bollinger bands trading strategy forex. Price Confirms Volume The price of bollinger bands trading strategy forex financial asset is, precisely, what market participants are willing to pay for it. Leave a Reply Cancel reply Your email address will not be published.