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Introduction

QuantForexTrading is the only quantitative analytical tool to analyze all news releases over the last week and make predictions regarding likely market movement over different price ranges. The tool does this by averaging large number of price predictions for different news releases for different forex pairs. The price predictions are made by looking at the forecasted, actual and previous reported value for an economic news release and considers the price movement since the news item was released.

Using advanced machine learning it is possible to predict whether a forex pair is underbought or oversold based on historic market reaction for a given news release over a given time period. Section Strategy Formulation gives a suggestion on how to build a profitable trading strategy around fundamental forex news predictions made by QuantForexTrading.


Averaging Price Predictions

As there are multiple news releases that effect a pair over any given time span, the tool will create a weighted average of each price prediction for all such news releases. Each price prediction is weighted by the probability of the price prediction and the historical accuracy of the model that made the price prediction.


Figure 1: Average Price Barrier

The above diagram shows the AUD_USD have an average price barrier of 94 pips (shown in blue box), meaning the AUD_USD pair is more likely to hit the top 94 pip barrier before the bottom 94 pip barrier.


Understanding News Heatmap

The news heatmap is designed to show price predictions over daily time ranges. This allows you to see probable price movements over different price ranges and different time frames. The news heatmap is constructed over a seven day time range, where the news release predictions are ordered top to bottom, so the most recent news release predictions are shown a the top of the heatmap. Consider the news heatmap for forex pair AUD_USD shown below in the blue box.

Figure 2: News Heatmap

We see over the shorter time range that the news released indicates a negative (red) market movement. However we see over the longer time frames the news released indicates a positive (green) market movement. Such scenarios indicate a conflicting set of news releases and we may wish to disregard such cases long term. Or if you were only trading on shorter time frames you would pay more attention to the most recent news releases. In this cases you would be biased towards selling on the shorter time frames and buying on the longer time frames for the AUD_USD pair.


Understanding Technical Heatmap

The technical heatmap is designed to show from a technical perspective when a pair is overbought or undersold. It does this by looking at the movement of a pair and comparing to historical movement over a given time frame. If the pair experiences a large positive movement when compared to the historical average over some time frame, then pair is considered overbought and therefore should be sold. Likewise if the pair experiences a large negative movement when compared to the historical average ove some time frame, the the pair is considered oversold and therfore should be bought.
Figure 3: Technical Heatmap

The above diagram shows the technical analysis for the AUD_USD in the blue box. We see for the AUD_USD that the pair is overbought on the shorter time frames (so sell) and oversold on the longer time frames (so buy). In this case, the technical analysis matches the fundamental news analysis for different time frames. If you were an intraday trader, you would be biased towards selling. If you wish to take a position over a longer time frame you would be biased towards buying.


Understanding Forex Pair Correlation

Currency pairs are highly correlated with one another meaning that certain currency pairs tend to move in the same direction (positive correlation) or they tend to move in opposite directions (negative correlation). To better understand currency pair correlation look at a currency pair correlation chart. QuantForexTrading uses currency correlation for fundamental news analysis and technical analysis by creating a weighted average of all currency pairs associated with the pair displayed. The weighted correlation analysis can be found in the Correlation Summary tab.

Figure 4: Currency Correlation

In the above diagram, we see that for the AUD_USD pair, the news heatmap when averaged with correlated pairs, tends to be overbought. This means that on average, the economic news for all pairs correlated with the AUD_USD pair tends to indicate a short selling position. The same is done for the technical analysis. In general it is better to look at the currency correlation summary when making a trading decision as it incorporates a larger number of price predictions.


Strategy Formulation

To better understand how you can use economic news release information in your trading, we will analyze a trading setup for the AUD_USD pair using a chart for the pair provided by Investing.com shown below. The chart in addition to showing price action also shows news releases for the pair shown as yellow circles.


Figure 5: Forex Chart Analysis

By looking at the news heatmap (shown below) for the AUD_USD pair, we know that on the longer time frames, the pair is biased towards a long position, but on the shorter time frames, the pair is biased towards selling. This is shown by the red and green arrows, in accordance with the news heatmap.


Figure 6: News Heatmap

In such conflicting cases where it may not be clear to place a long or short position, we can use a hedging strategy to capture both possible movements. To do this, we would place a short position with a stop (or trailing stop) above 0.7060 price point and a long position with a stop or trailing stop below 0.7010 price point. Trailing stops are generally preferred, as they better capture the upside of large positive price movements and require no take profit to be placed. Hence there is never a need to close out a position explicitly. They work particuarly well when using a hedging strategy as they better capture directional movements associated with news release momentum.

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