Intraday Forex Trading Based on Sentiment Inflection Points

These inflection points are captured by consulting a set of sentiment indexes that measure the trailing sentiment on both scheduled and unscheduled economic and geopolitical news events.

The sentiment index is proven to predict intraday price moves in the EURUSD for up to few hours after an inflection point.

The RavenPack U.S. macro sentiment Index predicts EURUSD price movements following Sentiment Inflection Points :

• With a 10 hour holding period, a cross-over strategy between short (1-week) and long-term (3-month) sentiment generates an annualized Information Ratio of 1.61 based on monthly P&L.

• With a 3 hour holding period, a cross-over strategy between medium (1-month) and long-term (3-month) sentiment generates an annualized Information Ratio of 1.29 based on monthly P&L.

• Introducing a stop loss mechanism can improve trading performance for the cross-over strategy between short (1-week) and long-term (3-month) sentiment when considering holding periods of up to 4 hours.

Introduction

In this study we propose a short-term foreign currency trading strategy that uses the principles of technical analysis to create buy or sell signals based on data derived from fundamental news. Typically, technical analysis is applied to continuous data sets like price and traded volume, while fundamental analysis is based on discrete observations of the state of an economy which are updated at a much lower frequency.Purist technical or fundamental analysts will not mix the two techniques, but many market participants use the two in combination – often with fundamentals determining direction and conviction and technicals confirming the timing of entry and exit.

RavenPack’s news analytics data allows us to use technical and fundamental analysis rather uniquely – applying technical analysis to a traditionally fundamental data set (news). RavenPack tracks and analyzes information on over 138,000 key geographical entities, more than 2,200 government organizations, and all major currencies and traded commodities. For any news record that can be matched with an event category, RavenPack generates an Event Sentiment Score (ESS) signaling its potential impact on any given economy or financial market (see Appendix A for details). RavenPack covers over 1,200 events of which 895 relate to unscheduled news such as political events, natural disasters, wars, etc., as well as scheduled news such as the release of important macroeconomic indicators.

In this paper, we present a simple cross-over strategy that tracks the short and long term sentiment trends for a given economy in order to detect cross-over events identified as sentiment inflection points. We take a “bullish” view on a currency when the short term sentiment trend crosses above the long term sentiment trend and a bearish view when the short term sentiment trend crosses below the long term sentiment trend. In the next section, we describe this cross-over strategy applied to the EURUSD. In later sections, we discuss the performance of the strategy over the period of January 2010 to June 2012, examine the signal consistency, and present our findings and conclusions.