Explaining the output of Danica trading system

Written by Forex Automaton   
Thursday, 24 December 2009 14:21

This document explains the output of Danica -- an experimental free (payless but closed-source) ForexAutomaton day-scale forex forecasting system.

What data are published.

Raw output of the ForexAutomaton forecasting engine, automatically updated around (but not before) 9am Eastern Time (EST or EDT, whichever applies) Monday through Saturday, is published along with sliding average figures of merit.

What this is not.

This system does not tell you how to trade on the basis of these forecasts. The output of the forecasting component ought to be considered as a first stage to a trade-idea evaluation and money management system, yet to be created. The data presented are believed to be of non-negligible, but limited value and should be considered along with daily information found elsewhere in the media universe when contemplating the daily state of the forex market. The user is expected to apply own critical judgment when evaluating the data presented here. Pearson correlation coefficient between prediction and reality for daily close, measured by running forecasts (no access to future) on past data, is of the order of a few percent. This implies that an uncritical application of the forecast found here, especially when the stake (percentage of capital at risk on a trade) is too high compared with the degree of predictability -- see Kelly Criterion -- is a sure way to ruin.

explain trading system output

Fig.1 Graphical illustration of the system output. Magenta, pink and cyan vectors show quantities reported as "next-current" for daily close, high and low, respectively. The forecast is shown as a ligh blue candle.At the moment of time labeled "next", the next forecast will be issued, and the figures of merit for the light blue forecast will be updated.

Explanation of the daily output.

Each daily forecast is an HTML document having a fixed structure, communicating certain pieces of information. Here is an explanation of these:

  • Forecast headline. Starting with version 1.0 of the system, the most significantly bullish and the most significantly bearish forecasts are identified to include the respective currency pairs in the forecast headline. In order to do that, forecasts with inconsistent directions of predicted moves in daily high, low and close are filtered out. Then, the remaining forecasts are sorted in two groups, the bullish group and the bearish group. Within each group, the forecasts are further sorted according to the magnitude of the product of predicted moves in all three components of a day candle. The currency pair with the largest such product in the bull group and in the bear group are identified. These are mentioned in the headline. Example of a forecast headline for a day with an anticipated high risk appetite: "Danica forecast for 2010-06-15 09:00:00: bullish on AUD/JPY, bearish on USD/CHF".

  • System Name. A unique release of the trading system forecasting engine, coupled with an optimized set of strategy parameters is given a personal name. Names starting with a D denote systems with decision-making frequency once a day; names starting with an H -- once an hour. This experimental system launched in late 2009 is called Danica.

  • Validity date. A point of time for which the forecast is given, labeled as "next" in Fig.1. Normally this point is a few minutes less (by the time span it takes the system to digest daily data, formulate the next forecast and post it on the Web) than 24 hours in the future at the time the data appears on the Web -- except on Saturday when it refers to the next Monday. Validity date is given in Eastern time, unless stated otherwise.

  • Execution date. A point in time when the forecast was run. Labeled as "current" in Fig.1. Note: back-testing forecasts for the chosen version of the system are also archived on the Web. They contain appropriate disclaimer to distinguish them from "production" forecasts run in real time. For the back-testing forecasts, the execution date is a later date than the vaility date.

  • High, close, low (of the forex rate). In the table, these are arranged vertically in this order. High and low do not demarcate any fixed confidence range; they are simply time series forecasts just like the forecast for close.

  • Next: the essence of the forecast; forcast quantity characterizing the next day "candle" (day high, close or low), see Validity date above.

  • Current: characterizes the "candle" for the day which is just over, the 24-hour period ending just before the forecast is generated.

  • Next-Current: the arithmetic difference between Next and Current. If it's positive, we have a "bullish" forecast; if negative -- bearish.

  • Pearson(forecast,reality): moving average of the Pearson correlation coefficient between the forecast and actual logarithmic returns. Currently this is the main figure of merit for the portfolio-free trading system.

    By construction, this correlation coefficient is a quantity bounded between -1 (the forecast move and reality are total opposites) and 1 (the forecast is perfect). 0 (zero) would correspond to a typical worthless system. We report weekly and monthly moving averages and a "since inception" integral of this quantity. The latter one always includes the back-testing period.

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Last Updated ( Monday, 14 June 2010 13:34 )

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