Fx Guild Menses Every 2D A Predictor

Order catamenia is signed merchandise size, as well as it has long been known to survive predictive of futurity toll changes. (See Lyons, 2001, or Chan, 2017.) The problem, however, is that it is oftentimes quite hard or expensive to obtain such data, whether historical or live. This is specially truthful for unusual central transactions which hap over-the-counter. Recognizing the lucre potential of such data, most FX marketplace operators guard them every bit their crown jewels, never to survive revealed to customers. But of late FXCM, a FX broker, has kindly provided me with their proprietary data, as well as I produce got made purpose of that to testify a uncomplicated trading strategy using companionship catamenia on EURUSD.

First, allow us examine unopen to full general characteristics of the data. It captures all trades transacted on FXCM occurring inwards 2017, fourth dimension stamped inwards milliseconds, as well as with their merchandise prices as well as signed merchandise sizes. The sign of a merchandise is positive if it is the number of a purchase marketplace order, as well as negative if it is the number of a sell. If nosotros accept the absolute value of these merchandise sizes as well as total them over hourly intervals, nosotros obtain the usual hourly volumes (click to enlarge) aggregated over the 1 twelvemonth information set:

It is non surprising that the highest book occurs betwixt 16:00-17:00 London time, every bit 16:00 is when the benchmark charge per unit of measurement (the "fix") is determined. The secondary peak at 9:00-10:00 is of course of instruction the starting fourth dimension of the employment organisation twenty-four hours inwards London.

Next, I compute the daily full companionship catamenia of EURUSD (with the halt of twenty-four hours at New York's midnight), as well as I found a histogram of the concluding 20 days' daily companionship flow. I as well as thence produce upward one's heed the average next-day render of each daily companionship catamenia quintile. (I.e. I bin a next-day render based on which quintile the prior day's companionship catamenia barbarous into, as well as and thence accept the average of the returns inwards each bin.) The number is satisfying:

We tin run into that the average next-day returns are almost monotonically increasing with the previous day's companionship flow. The spread betwixt the top as well as bottom quintiles is nearly 12 bps, which annualizes to nearly 30%. This doesn't hateful nosotros volition generate 30% annualized returns, since nosotros won't survive able to arbitrage betwixt today's render (if the companionship catamenia is inwards the top or bottom quintile) with unopen to previous day's render when its companionship catamenia was inwards the reverse extreme. Nevertheless, it is encouraging. Also, this is an instance that fifty-fifty though companionship catamenia must survive computed on a tick-by-tick Earth (I am non a fan of the bulk book classification technique), it tin survive used inwards low-frequency trading strategies.

(One may survive tempted to also regress futurity returns against yesteryear companionship flows, but the number is statistically insignificant. Apparently solely the top as well as bottom quintiles of companionship catamenia are predictive. This province of affairs is truly quite common inwards finance, which is why linear regression isn't used to a greater extent than oftentimes inwards trading strategies.)

Finally, ane to a greater extent than sanity cheque before backtesting. I desire to run into if the purchase trades (trades resulting from purchase marketplace orders) are filled inwards a higher house the bid price, as well as the sell trades are filled below the enquire price. Here is the plot for ane twenty-four hours (times are inwards New York):

We tin run into that yesteryear as well as large, the human relationship betwixt merchandise as well as quote prices is satisfied. We can't truly await that this human relationship holds 100%, due to rare occasions that the quote has moved inwards the sub-millisecond afterwards the merchandise occurred as well as the alter is reported every bit synchronous with the trade, or when in that location is a delay inwards the reporting of either a merchandise or a quote change.

So instantly nosotros are ready to produce a uncomplicated trading strategy that uses companionship catamenia every bit a predictor. We tin merely purchase EURUSD at the halt of twenty-four hours when the daily catamenia is inwards the top quintile alongside its concluding 20 days' values, as well as concur for ane day, as well as brusque it when it is inwards the bottom quintile. Since our daily catamenia was measured at midnight New York time, nosotros also define the halt of twenty-four hours at that time. (Similar results are obtained if nosotros purpose London or Zurich's midnight, which suggests nosotros tin stagger our positions.) In my backtest, I produce got subtracted 0.20 bps commissions (based on Interactive Brokers), as well as I assume I purchase at the enquire as well as sell at the bid using marketplace orders. The equity plication is shown below:

The CAGR is 13.7%, with a Sharpe ratio of 1.6. Not bad for a unmarried element model!

Acknowledgement:  I thank Zachary David for his review as well as comments on an before draft of this post, as well as of course of instruction FXCM for providing their data for this research.

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