Forex Automaton

Our primary goal is to create a public information service providing financial markets forecasts, based on our proprietary forecasting tools: an automated trading system -- a Forex Automaton™. Our secondary goal is to quantify and monitor the very existence of sustainable opportunities for arbitrage profit-making. Or simply put, to monitor the degree to which these markets are more predictable than a "fair game" -- to a trader without access to insider information.

While it is true that past performance does not indicate the future, the only reliable information we have is about the past. A few important things make a difference between unbiased trading-system testing and self-delusion. Here I summarize my current understanding.

Fig.1:A martingale market synthesized from hourly returns in AUD/JPY, over time. Time axis is labeled in MM-YY format. By construction, there is no predictable trend other than the long-term trend created by the tiny positive deviation from zero of the average hourly return. Are you a chartist? Do you believe in moving averages or Elliott waves? Do you feel you could day-trade this market? This is a particular example of what we refer to as "fair game" and for all practical purposes take to represent the embodiment of the efficient market hypothesis.

To synthesize such a chart, you first obtain a distribution of returns from the real time series. Then you histogram the returns. Then you start with an arbitrary number (1 was used in this case) and generate a random number according to the distribution of returns you got (a software package such as ROOT lets you do that). Having a starting price and a return, you obtain the next price in the series. You can continue this random walk process as long as you want. It may be counterintuitive to some that a random walk looks like this (Fig.1). Indeed you see a chart where you might be tempted to identify trend lines, points where the trend changes, and possibly even lines of support and resistance. From this standpoint you can understand the source of our Olympian attitude towards all kinds of current news: the pseudo-random market in Fig.1 could generate a very rich stream of news reports and "current analysis" -- all totally content-free by construction. Chartists and reporters must admit: tools and concepts that let one distinguish between predictability and randomness are peripheral to their method of operation. However these tools and concepts are central to the Forex Automaton™ approach. Martingale is one of such concepts.

Swiss Franc/Japanese Yen and Euro/Swiss Franc are negatively correlated currency pairs. For the period under study, the correlation is limited to the 1-hour wide 0 time-lag bin. Therefore this study does not reveal a stable pattern suitable for intermarket-correlation-based trading.

Swiss Franc/Japanese Yen and Euro/Australian Dollar are weakly positively correlated currency pairs. This pair of exchange rates shows a leader-follower relationship with CHF/JPY, a cross-rate of two carry-trade funding currencies being, surprisingly, the leader and EUR/AUD -- the follower.

Australian Dollar/Japanese Yen and Swiss Franc/Japanese Yen are correlated currency pairs. For the period under study, the correlation is limited to the 1-hour wide 0 time-lag bin. Therefore this study does not reveal a stable pattern suitable for intermarket-correlation-based trading.

Australian Dollar/Japanese Yen and US Dollar/Japanese Yen are positively correlated currency pairs. The non-zero time lag features of the correlation function seen in this currency pair combination appear to be only marginally significant with the hour-by-hour time scale.