Group 2

MS&E 448 Project 8:
Trend Following in Forex Market
Chenxu Shao, Enming Mao, and Zheming Zheng
May 6, 2014
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
1 / 11
Introduction
Overview
Overview
Introduction
Methodology & Strategy
Discussion & Results
Further steps
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
2 / 11
Introduction
Overview
Introduction: Forex Market
Liquidity
Promptness & Availability
Leverage
Market Trend
Etc.
Figure :
Graph reproduced from CITYINDEX.
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
3 / 11
Introduction
Objectives & Procedures
Objectives and Predicting Procedures
Objectives:
Study the basics about the Forex market
Build a trend following model (technical analysis, machine
learning, etc.)
Develop a working trading strategy
Make profit!
Procedures (current):
Predict bid prices with machine learning model
Use intuitive strategies
Trading based on predictions
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
4 / 11
Introduction
Methodology & Trading Strategy
Typical Forex Time Series
22:00
20:00
18:00
16:00
14:00
12:00
10:00
08:00
06:00
04:00
02:00
Bid
Ask
00:00
Price (EUR/USD)
1.373 1.374 1.375 1.376 1.377 1.378 1.379
Intraday bid and ask prices
Time
Figure : Bid and ask prices in March 3, 2014
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
5 / 11
Introduction
Methodology & Trading Strategy
Methodology
Figure : Machine Learning Diagram.
Methodology: A machine learning approach
Determine trading nodes ( starting from 10 min from the first data
point, and set one trading node every 5 min)
Use ν−support vector machine to build the prediction model
(train & predict)
Features: bid, bid size, ask, ask size and tier
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
6 / 11
Introduction
Methodology & Trading Strategy
Intuitive Trading Strategy
Strategy A:
two classes of assets: cash and forex shares (EUR USD)
Bidp > Bidc , use all the cash to purchase forex shares
Bidp ≤ Bidc , sell all shares and short 10000 extra shares
Strategy B:
Calculate training error: if εtrain > 10−4 , then hold
Bidp > Bidc &Bidp > Askc , long forex shares with cash
Bidp > Bidc &Bidp ≤ Askc , then hold
Bidp ≤ Bidc &Bidp > Askc , sell all shares, use the cash to purchase
and short an extra 10000 shares
Bidp ≤ Bidc &Bidp ≤ Askc , sell all shares, and simply short an
extra 10000 shares
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
7 / 11
Results & Discussions:
Results
Prediction Accuracy
Daily Mean Absolute Error
4.0
4
Absolute error of the predictions
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2.0
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Error (*1E−4)
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140
Trading nodes
5
10
15
20
25
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Trading dates
Figure : Left: Daily absolute error, March 3rd, 2014 Right: Monthly mean-absolute
error, March, 2014
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
8 / 11
Results & Discussions:
Results
Strategy Returns
1.5
Daily Return
Cumulative Daily Return
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7
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1.0
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Percentage (%)
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0.5
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−0.5
Percentage (%)
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6
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−1.0
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1
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Strategy B
Strategy A
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0
−1.5
Strategy B
Strategy A
5
10
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25
30
5
Trading dates
10
15
20
25
30
Trading dates
Figure : Left: Daily return, March, 2014 Right: Cumulative daily return, March, 2014
Monthly, the Sharpe ratios are 0.2778 and 0.4416 for strategy A and B,
respectively.
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
9 / 11
Further steps
Improvements
Try different machine learning models (improve
accuracy)
Introduce new features, such as relative strength index,
moving average, etc. (lower model bias)
Build new trading strategies (hedging risks)
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
10 / 11
Further steps
Thank you!
Chenxu Shao, Enming Mao, Zheming Zheng
Trend Following in Forex Market
May 6, 2014
11 / 11

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