From the November 01, 2012 issue of Futures Magazine • Subscribe!

Flying high with forex

We segregate girth as upward or downward (see “Categorizing girth,” below). Upward girth refers to when the trend still is building; downward girth refers to when the trend is fading. We have found that exiting on upward girth is most profitable for the euro positions and exiting on downward girth is most consistently profitable for the Australian dollar positions. 

Additionally, girth may be both static and bifurcated. Static is a single girth for both the long and short positions. A bifurcated girth employs a different exit strategy for the long and short positions. We have successfully backtested and have implemented a bifurcated euro girth of 35 for long trades and 45 for short trades, but employ a static girth of 20 for all Australian dollar positions as of Sept. 26. 

One interesting feature of our new model has been the proof of the link between daily historical price volatility and euro girth readings. Higher daily historical volatility of the underlying usually produces a much higher girth number for a more profitable trade exit. From 2007 to the present, we have found that the historical euro 20-day rolling volatility average is 9.47%. We can optimize our girth exit by increasing the exit indicator when volatility is greater than the average. Our average static girth for our euro standard style model is 28. In this current period, the euro spot daily historical volatility is greater than 9.47%, so we widened out our girth exit to 35 for a long and 45 for a short position. As of yet, we have not tested this relationship for the Australian dollar.

Both of the standard style models have individual trade stop-losses. Through backtesting, we have derived the optimal stop loss of 300 pips for the euro positions and 100 pips for the Australian dollar positions. Because the manual execution of our trading position could result in the possibility of operation errors, we also utilize a global stop loss. We have a global stop of 8% in the case of an extreme loss situation and the market adversely moves against us within a four-hour period.

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