Looking back on what seemed like a rocky trading year, what actually happened to Cable?

Looking back on what seemed like a rocky trading year, what actually happened to Cable?

This article is from a special edition of Forex Trader Magazine is dedicated to looking back over 2013 for a review of what happened in the trading life of the GBPUSD or “Cable” as many traders know it. It is no secret that this pair is my favourite and the favourite of many of the people who follow my trading techniques. It is my favourite for three very simple reasons. Firstly, it has sufficient volume of trading and price volatility to make it easily tradable. Second, I know it inside out; living in the United Kingdom and being a frequent visitor to the USA I am close to the news and the machinations of the two economies involved. And thirdly, the main volume and price action takes place at a time of day that suits my lifestyle.

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I am sure that there are other candidate trading pairs that could very legitimately by your favourite for very good reasons. Hopefully, you will still find this special edition interesting and you may even be prompted to undertake some similar analysis of your favourite pairs. Feel free to get in touch if you would like to share your analysis with me and your fellow readers.

A note for new readers – this edition of Forex Trader Magazine is a free, special edition. The writing style and format are very similar to those used in the paid editions and training material. However, the paid material is far more extensive. A typical bi-monthly edition of the magazine has around 15 to 20 articles and each is normally over 1,000 words with appropriate illustrations. I hope you enjoy this extended article and are inspired to develop your trading through the ongoing development and training that a Forex Trader Magazine subscription provides.

 The Big Picture GBPUSD 2013 Overview

How was 2013 as a trading year for you? Did it feel like a bumpy ride on a rollercoaster, or perhaps it was a smooth ride and all went well? Personally, I did hit some rough patches and had some tough times as many other traders probably did also.

But let’s start our analysis of 2013 with an overview of the price trends that occurred. Pulling back to a chart that has one Candlestick representing a whole week (Figure 1) we can see that there were very few significant trends to pick up on or to follow.

fig1yearchart

Below, in Figure 2, I have added the main trend lines as I see them:

fig2charttrends

From my perspective, there were as few as six significant trends in the year. I do accept that others may have a different take on this but it does depend on how a trend is defined. However, six significant trends seem reasonable to my eye.

2013 started with a nine week down trend. Arguably, this was the continuation of a 16 week downward trend that started in mid-September 2012 from a price high of 1.6308. This 25 week down run bottomed out at 1.4865 on 11 March 2013. That was a fall of 1,443 Pips or 8.85% from the opening exchange rate – a big move by any measure!

A clear eight week up trend followed across most of March and all of April 2013. This topped out on 1 May at 1.5605.  The recovery was therefore of 740 Pips.

Interestingly, that meant the pair recovered 51.28% of the downward movement – not good for Fibonacci followers who would have forecast a recovery of about half as much again.

The down trend that followed lasted for four weeks until 29 May 2013 and saw the price fall to 1.5008 a fall of 597 Pips.

Then the last of our major trends for 2013 started. The price climbed fairly steadily for the rest of the year. I say “fairly steadily” because the price action flattened out about four times. Effectively, the trend took a couple of “breathers” as it climbed.

The year ended with the highest price seen all year when it went to 1.6577 on 31 December 2013 after an upwards run of 26 weeks, yes six months! During that period there were however 10 weeks in which the price fell overall.

After a couple of trading days in 2014 the price has fallen back and is at 1.6370 as I write. However, that price could still be “in trend” within a long term up trend.

 Overall GBPUSD Price Movement in 2013

If we drew a single Candlestick to represent the GBPUSD price movement for 2013 it would look something like this (Figure 3):

fig3yearcandle

Over 80% of the total area of the Candlestick was a long tail extending from the bottom of the Candlestick. In other words the year opened and the price fell strongly (1358 Pips) before recovering and going on to close up modestly (322 Pips). That is a net change in the exchange rate across the year of just 1.98%.

Incidentally, the average of all the daily prices for 2013 was 1.5669 but I don’t think that knowing this carries us forward in any useful way.

With so little net movement over 2013 the GBPUSD was actually in a continuation pattern that has been ongoing since around April 2009. The price fell from the 2.057 high of July 2008 to a brief low of 1.3503 in January 2009 before settling into a band between 1.50 and 1.67 which it has spent very little time outside of since it entered.

So, all of the economic movement, statistics, EU crisis, recession, bail outs, changes of Government, spending cuts, and Tea Party shenanigans since the banking crisis of 2008 have not made a great deal of difference! However, being radical, another way of looking at these figures suggests that the economic world order has not recovered from 2008 and who knows, it may never do so!

The Rule of Thirds

Next, I want to look at how the main trading tools that I use and advocate faired in 2013 starting with the Rule of Thirds.

For new readers I need to explain briefly what the Rule of Thirds is. It is a trading tool which divides the trading screen into three areas. An upper area in which I am only prepared to enter sell trades, a lower area in which I am only prepared to enter buy trades and a middle area in which I am equally prepared to enter buy or sell trades. The division of the trading price range into the three “zones” follows a huge statistical exercise using ten years of data and a spreadsheet that now extends to over two million cells.

The idea is simple; we only want to sell when the price is high and we only want to buy when the price is low. However, there is a “safe” area in the middle price range where we can’t do too much damage whether we buy or sell!

The tool does not take away from other important trading disciplines such as keeping trade sizes small relative to the equity in a trading account.

This tool has a fantastic track record and has never yet failed to work. As always the jury is still out on current trades that have been opened since the price last changed zones. That last occurred 15 November 2013 when the price moved back to the sell only zone after a brief spell in the buy or sell zone. Therefore, all trades entered prior to this date have been into profit but some entered after that date are still in play.

The Rule of Thirds trading tool was explained in much greater detail in issue No1 of Forex Trader Magazine which is still available. Email me at editor@forextradermagazine.co.uk if you have any trouble obtaining it.

We also sell a plug-in which displays the trading zones on the MT4 platform. This comes with a short video explaining the very quick and simple installation process. Once installed the trading screen looks something like the illustration below (Figure 4) with the sell only area coloured pink, the buy only area coloured green and the buy and sell zone in white.

fig4ruleofthirds

So, what happened to the Rule of Thirds across the rest of 2013?

The price action spent a total of 66 days in the buy only zone and this represents 24.53% of the available trading days. Of course these did not occur in a single continuous run but were actually contained within 6 periods. However, 56 of the days were in one long continuous run making each of the other buy only periods very short indeed. In addition, ALL of the time spent in the buy only zone was in the first half of the calendar year. Obviously, this means that ANY buy trade entered within the buy zone had the potential to be very, very, profitable! Not a single trade opened in the buy zone would be in loss now.

There were 85 days, or 31.60% of the available days, when the price action was in the middle “buy and sell” zone. These occurred in 10 periods with the longest being 21 days. Some 60 of the days spent in the middle area have since been followed by periods in both the upper and lower areas. This means that any buy or sell trade made on any of these 60 days could have been closed for a profit when the “border” was next crossed.

However, it also means that of the remaining 25 days when trades could be opened in the middle area only ANY buy trade could be guaranteed to have been closed in profit.

Any sell trade could still be open and waiting for the price to fall to bring it into profit. As long as no over trading had taken place this would not necessarily be a problem.

There were 118 or 43.87% of days when the price was in the sell only zone. These occurred in 5 blocks with the longest being 63 days and almost all of the sell only days occurred in the second half of the year.

A total of 79 of the sell only days were followed by moves into the other zones and could therefore have been closed in profit. All of these occurred before 15 November 2013.

Sell trades entered on or after 15 November within the sell zone could still be open, there were 39 of these. The price at that time was 1.6048 which is around 350 Pips below where the current price is. So, not great, but certainly still likely to come out on top in due course.

In overall terms the signal provided by the Rule of Thirds on 204 (75.84%) of the year’s 269 trading days were able to be closed in profit if they were closed when the price crossed a border between zones. That leaves 65 (24.16%) of the trading days where a signal could have been taken that may have left the trade open if a zone border crossing was seen as the signal to close.

This is definitely a worst case scenario but it beats the often made claim by Forex trainers that they give trainees a 55:45 edge. Please bear in mind that the Rule of Thirds is only one indicator and that on many of the “not yet in profit” days no trades would have been placed.

While not all of the trades signalled by the Rule of Thirds may yet be seen as successful, it is hugely important to note that the tool would not have prompted a buy anywhere near the top of the price range or a sell anywhere near the bottom. Imperfect it may be but I consider the Rule of Thirds also to be invaluable.

The Ups and Downs of Trading

Going away from trends and periods in zones, I also looked at individual trading days. I found that, of the 269 trading days in the year, 141 or 52.42% of them were days with a rising Candlestick and 128 or 47.58% were days with a falling Candlestick. To me, given the movement over the year that is pretty close to a 50:50 situation.

I also looked at the “runs” that occurred in terms of the number of consecutive days that the Candlesticks continued to move in the same direction. Given the trends that have already been pointed out it is very surprising that the average number of consecutive daily rising and falling Candlestick runs was only 2.01 and 1.83 respectively. For both rising and falling Candlesticks the biggest run of consecutive days on which they occurred was just seven. In previous years I have seen this figure well up into the thirties which may well indicate that the year as a whole was quite volatile.

The table below shows the number of consecutive daily runs that occurred in the year and emphasises just how little difference there was between the length of runs for rising and for falling Candlesticks:

fig4Anumbers

Before leaving the analysis of individual Candlesticks I decided to have a quick look at the range that they fell within.

The smallest range covered by a single daily Candlestick was just two Pips. This occurred on 10 November 2013 and it was a downward moving Candlestick that occurred in the middle of an upwardly rising trend. Perhaps surprisingly to some, this “Doji” was not a harbinger of a change in trend direction. This seems to have been a complete non-event of a day with an upward move of seven pips being followed by a downward move of nine Pips.

At the other extreme we saw the biggest single day range on 7 August 2013 and it extended to 326 Pips. This was in the same upward trend as the day with the lowest range. On the day, the price had been down a not too unusual 145 Pips before rising 181Pips and the cause seems to have been economic news.

By now you may be thinking that this is interesting but how does it inform our trading going forward? The point is that we continue to be in a very long period, over five years now, where the trading range has been narrow and daily price movements have been relatively small. In addition, we are seeing very short runs of consecutive days in which the price movement is in the same direction within much longer trends.

This suggests that we should be following either a long term trading strategy which tries to capitalise on trend runs of many weeks or go for very short, in and out quickly, trades that are based on hours and minutes rather than spending even days in a single trade.

Of course, it is also possible to combine these two approaches using part of our equity for each strategy and, on occasions, letting them interplay. In coming editions of Forex Trader Magazine we will be demonstrating how to do exactly that.

How did Jeff’s Lines Perform?

Other than the Rule of Thirds our main in-house developed trading tool is Jeff’s Lines.

Jeff’s Lines are a set of marker lines on the MT4 trading screen that act as levels at which price movements tend to halt, pause, “bounce” off or be slowed down by. The illustration of Jeff’s Lines below (Figure 5) shows them in place:

fig5jeffslines

In Figure 5 the day opened with the price at the level of the green horizontal line at the top of the screen shot. Notice how it used the next lower (narrow blue) whole number (price 1.58) level as a barrier. At different points in the day it then used the -50, -75 and -100 lines as points of support and resistance.

The use, by the price, of these levels in this way is extremely common and this can be used as a way of predicting both the direction and extent of price movements.

The high / low chart below (Figure 6) shows movements between opening prices and Jeff’s lines for the whole year of 2010.

fig6highlow10

From this diagram we ascertained that:

On 70% of trading days the price tends to move by 75 or fewer Pips in one direction.

On 20% of days the price tends to move by between 75 and 100 Pips in one direction.

On 10% of days the price tends to move by between 100 and 150 Pips in one direction.

Larger moves than 150 Pips in a day are rare and occur on around four days per year.

Now that we have a complete set of figures for 2013 it is possible for us to check to see if the above percentages are still valid. Here is the same type of diagram for 2013 (Figure 7):

fig7highlow13

What it tells us is that:

On 73.24% of trading days the price tends to move by 75 or fewer Pips in one direction.

On 11.52% of days the price tends to move by between 75 and 100 Pips in one direction.

On 10.41% of days the price tends to move by between 100 and 150 Pips in one direction.

Larger moves than 150 Pips in a day are rare and occur on around 13 days in the year.

It seems that in 2013 trading, a bit like the weather, had more extremes than were experienced in previous years. That is more days when there was little movement, fewer days when there was moderate price movement and more days (three times more days) when there was very high price movement.

Close observation shows that this change has not altered the validity of using Jeff’s Lines as a trading tool. It still seems to be true that:

The direction of price for a given day is not normally determined until the price has moved more than 50 pips away from its opening level. If it breaches the 50 Pip level further movement in the same direction up to, or close to at least the 75 Pip line, is likely.

If the 75 Pip line is significantly breached, rather than paused at or bounced off, further price movement to the 100 Pip level can be expected.

If the 100 Pip line is significantly breached, further movement to the 150 Pip level and beyond can be expected.

It seems that all continues to be well with the effectiveness of Jeff’s lines.

Jeff’s Lines were the subject of a full article in issue No2 of Forex Trader Magazine which is still available for sale. In addition, from http://cousesonforex.co.uk/shop it is possible to buy a tools pack that includes everything needed to put both Jeff’s Lines and Rule of Thirds shading on your MT4 trading platform. A short instructional video is also provided to ease the already simple installation process.

Looking forward

Of course we have already started to collect data for the analysis of what happens to the GBPUSD in 2014. We are collecting all of the data used in the above analysis and will therefore be able to provide a like-for-like comparison between 2013 and 2014.

In addition, for 2014 we are collecting daily information on the volumes traded and will record an observation of how Jeff’s Lines have performed on each and every day.

The point of collecting and recording all of this information is to allow it to inform our trading and to help us to develop new tools and to adapt and modify existing tools. In coming editions of Forex Trader Magazine we will be doing this. We have exciting plans to develop a live trading “watch” through which we can demonstrate many of the tools and techniques that we have written about and will write about.

The plan is to use a blog to report trades as they are opened and closed and to use the magazine to discuss these trades in order that we can extract learning points from them.

About The Author

Jeff Fitzpatrick

Probably the UK's most successful home Forex trader