Forex Trend Trading - Finding The Best Trending Currency Pairs
Measuring the trend: the 2nd experiment,
This article is a follow up to the first article I wrote on finding the strongest trending currency pair. In the first article, I attempted to measure how strong a trend was once the market was trending and defined an uptrend as the market closing higher than it closed 8 days ago, 20 days ago and 120 days ago; and I defined a downtrend as the market closing lower than it closed 8 days ago, 20 days ago and 120 days ago. In this article I will define the trend as up if it is above a certain value, and down if it is below a certain value so that there will always be a directional bias (or trend) to measure the strength of.
I aim to measure the strength of the trend/directional bias for all four major currency pairs (EUR/USD, GBP/USD, USD/JPY and USD/CHF) on a number of different time frames. The test will be as follows –
If (ClosingPrice > ClosingPrice X NumberOfDaysAgo) Then TrendStrength = Average((Close-Low)/(High-Low))
If (ClosingPrice < ClosingPrice X NumberOfDaysAgo) Then TrendStrength = Average((High-Close)/(High-Low))
The above formula will always produce a value between 0 and 1, with a value of 0.5000 indicating that there was no directional bias at all. The thinking behind the method is that when an uptrend is underway that market should be more likely to close nearer to the days high that the days low and vice versa in a downtrend. A reading on 1 from the formula above would therefore signal that the market was always closing at the highest point of the day during an uptrend or at the lowest point of the day during a downtrend. The results are as follows –
Currency Pair
40-Days
60-Days
80-Days
100-Days
120-Days
140-Days
Average
EUR/USD
0.5251
0.5294
0.5274
0.5253
0.5245
0.5217
0.5256
GBP/USD
0.5245
0.5238
0.5204
0.5255
0.5249
0.5207
0.5233
USD/JPY
0.5260
0.5290
0.5286
0.5246
0.5182
0.5149
0.5235
USD/CHF
0.5224
0.5236
0.5259
0.5215
0.5193
0.5182
0.5218
In this experiment the EUR/USD has come out best with the GBP/USD and USD/JPY around the same. The USD/CHF is last. I offer the results with no comment other than in my experience the EUR/USD is the best trending pair when it comes to the results of long-term trend following systems.
