January 13, 2017

13- Jan2017
Posted By: adminwmk

Inside Bar Momentum Strategy

New year, new system! I spent a good part of the holidays cooking up a pure price action-based forex mechanical strategy and I think it’s ready for tasting… I mean, testing!

As you’ve probably gleaned from its name, this trading system hunts for inside bar formations, which are dual candlestick patterns in which the second bar is completely contained by the high and low of the first bar. These typically reflect a period of consolidation within a trend before making another strong move in the same direction, but they can also indicate potential reversals off inflection points.

Without further ado (or technical indicators and settings), here are the entry and exit rules:

Long position

The first candlestick must be bullish (green or white) and if the second candlestick is completely contained by the first, set a buy stop order at the first candle’s high plus 10% of its range (high minus low).

Place the stop loss at the first candle’s high minus 20% of its range and set the target at the first candle’s high plus 80% of its range.

Short position

The first candlestick must be bearish (red or black) and if the second candlestick is completely contained by the first, set a sell stop order at the first candle’s low minus 10% of its range (high minus low).

Place the stop loss at the first candle’s low plus 20% of its range and set the target at the first candle’s low minus 80% of its range.

Additional rules

If another inside bar pattern forms, the current position should be closed or the pending buy/sell order must be canceled and entry orders must be updated to the latest candles.

Sound confusing? Here are a few examples on USD/JPY’s 4-hour time frame:

The empty red and green boxes highlight the inside bar formations whose sell or buy orders weren’t triggered while the filled ones indicate the ones with long or short positions. It does take some time and a sharp eye to get used to spotting inside bar patterns and valid signals, but it can be a breeze once you get the hang of it!

Now let’s zoom in to the opened positions for the entry and exit levels:

Buy stop order = 116.39 + 0.10*(116.39 – 115.66)
Stop loss = 116.39 – 0.20*(116.39 – 115.66)
Profit target = 116.39 + 0.80*(116.39 – 115.66)

Sell stop order = 114.24 – 0.10*(116.87 – 114.24)
Stop loss = 114.24 + 0.20*(116.87 – 114.24)
Profit target = 114.24 – 0.80*(116.87-114.24)

I’m still ironing out some of the kinks of this system and might come up with more early exit rules in my next posts, but do share your initial thoughts in the comments section below! As practice, can you determine the entry and exit levels for the second valid long signal on January 11?

13- Jan2017
Posted By: adminwmk

What FOMC Members Said This Week

It’s only the second trading week of the year, but some Fed members have already hit the newswires to share their two cents on the economy.

If you recall, FOMC members have foretasted a median of not one, not two, but THREE interest rate hikes this year. Do they still feel the same way at the start of 2017?

Here’s a quick rundown of what the monetary policymakers had to say in the last couple of days:

Dennis Lock hart: Time for the Fed to shift to a “support role”

  • Atlanta Fed President (NOT voting this year)
  • Retiring at the end of February
  • Recovery from the economic crisis is “largely done” with the economy near full employment, inflation close to the Fed’s 2.0% goal, and Uncle Sam set for a steady growth of around 2.0% annually.
  • Wants the Fed to shift to a more “supportive role” and focus on boosting productivity and investment.
  • Believes that it’s still “too early to make any judgement” about how Trump’s policies will change the path of the economy.
  • Sees two rate hikes in 2017 though Trump’s fiscal stimulus could warrant three interest rate increases.

Eric Rosengren: THREE rate hikes “seems reasonable”

  • Boston Fed President (NOT voting this year)
  • Three “gradual but somewhat more regular” interest rate hikes “seems reasonable” provided that the economy grew faster than its 1.8% potential rate.
  • Forecasts that the Fed will meet its employment and inflation goal by the end of the year.
  • The Fed should consider trimming the balance sheet to allow long-term rates to rise without pushing up the dollar.
  • “Economic circumstances have evolved and now imply the need for a different stance of monetary policy.”

James Bullard: No need to dramatically raise rates right now

  • St. Louis Fed President (NOT voting this year)
  • Still favors ONE rate hike in 2017, though he hasn’t factored in Trump’s potential fiscal policies yet.
  • Does not see Trump’s plans having much impact this year.
  • Says that after two rate hikes, the Fed “may be in a better position” to use its balance sheet to tighten policies
  • without emphasizing higher interest rates.

Charles Evans: TWO rate increases penciled in for 2017

  • Chicago Fed President (VOTING this year)
  • Penciled in two rate hikes in 2017, but three rate hikes is “not implausible” if outlook solidifies.
  • Expects real GDP to grow by 2.0% – 2.50% this year with unemployment declining and inflation moving up to the Fed’s 2.0% target.
  • Trump’s policies should focus on increasing labor supply and boosting productivity to achieve a 3.0% or higher growth rate.

Patrick Harker: THREE rate hikes is appropriate

  • Philadelphia Fed President (VOTING this year)
  • Sees “three modest hikes as appropriate for the coming year, assuming the economy stays on track.
  • Believes that “the labor market is strong, and we’re creating jobs at a good pace,” adding that “inflation is moving back up to our 2.0% goal and growth is solid.”
  • Hasn’t factored in Trump’s potential policies, but believes that the economy is already “displaying considerable strength” without any extra government help.

Robert Kaplan: In favor of gradual rate hikes

  • Dallas Fed President (VOTING this year)
  • In favor of “gradually and patiently” removing monetary policy accommodation in 2017.
  • In favor of trimming the Fed’s balance sheet this year.
  • On a wait-and-see mode on Trump’s policies, especially on immigration, trade, and repealing Obamacare.

Janet Yellen: No “serious obstacles” in the short-term

  • Fed head honcho (VOTING, of course!)
  • Believes the economy is “doing quite well” and that it’s not facing “serious obstacles” in the short-term.
  • In a speech, she detailed that “unemployment has now reached a low level, the labor market is generally strong and wage growth is beginning to pick up,” adding that “inflation has moved up from a very low level, and it’s a little bit under our 2% objective, but it’s pretty close.
  • Shared that the economy must deal with long-term challenges of low productivity and growing inequality.
  • Says key regulatory changes in the 2010 Dodd-Frank law—including higher capital standards and enhanced supervision for big banks and new tools to help regulators deal with potential bank failures—should not be rolled back, adding that it was a “very important road map” for strengthening the financial system and mitigating the chance of another financial crisis.

That’s it for our recap this week! Take note that of seven listed above, only four of them are voters who can actually affect the Fed’s policies. Read our 2017 FOMC voting member cheat sheet if you’re still trying to remember who you should listen to this year!

As the December FOMC meeting minutes suggested, the voters are generally optimistic with minimal apprehension over Trump’s potential fiscal policy changes.

Aside from watching the impact of Trump’s policies on investment and consumer spending, another common theme among the voting members is the inclination to discuss trimming the Fed’s $4.5T balance sheet this year.

See, now that the economy is gaining momentum, the central bank can afford to take back some of its moolah and effectively tighten the economy at the same time without discussing interest rate hikes. Look out for more details in their next policy meetings!

Do you think the Fed members are right to be hawkish this time of the year? More importantly, do you think Trump’s stimulus plans (implemented or not) will affect the direction of the Fed’s policies?