Is Trading on Rollbacks Effective? Part 3. Eurozone

21 June 2022 262

The first two parts of the study of trading on rollbacks have revealed the usefulness of such a strategy for a number of economic events in the US and Australia. Now let's see if trading on rollbacks is suitable for Eurozone events.

Hypothesis

A positive change in the newly published economic indicator compared to the value for the previous period forms a trading signal for a growth in the quote of a financial instrument. A negative change in the indicator, in turn, generates a signal to reduce the quote.

Trading on rollbacks is profitable for Eurozone events.

If the current value of the indicator is greater than the previous one, then an order is placed

If the current value of the indicator is less than the previous one, then an order is placed

SellLimit = Open1 + k*Open1

where k is the percentage of rollback from the opening price at the time of the publication of the Open1 indicator,

k = 0,05; 0,1; 0,15; 0,2; 0,25; 0,3.

We wait for 8 hours. If the pending order has not worked, we cancel it.

Closing a position:

1) on close 4, 8, 12, 16, 20, 32 of candlesticks after entering the market;

2) by order TakeProfit (TP):

• ТР (1) = BuyLimit * (1 + k)
• ТР (1,5) = BuyLimit * (1 + 1,5*k)
• ТР (2) = BuyLimit * (1 + 2*k)
• ТР (2,5) = BuyLimit * (1 + 2,5*k)
• ТР (3) = BuyLimit * (1 + 3*k)

for selling:

• ТР (1) = SellLimit * (1 - k)
• ТР (1,5) = SellLimit * (1 - 1,5*k)
• ТР (2) = SellLimit * (1 - 2*k)
• ТР (2,5) = SellLimit * (1 - 2,5*k)
• ТР (3) = SellLimit * (1 - 3*k)

If TakeProfit has not worked within 8 hours after the publication of the indicator, then we close the position ourselves at the end of these 8 hours.

A total of 66 entry/exit combinations.

Data used

Economic calendar: MarketCheese

Timeframe: 15 minutes (M15)

Historical data: 01/01/2015 – 09/30/2020

Country Eurozone: 22 events, including 3 important ones (detailed list is in the appendix)

5 currency pairs with EUR have been taken as financial instruments:

• EURUSD
• EURGBP
• EURJPY
• EURAUD

A total of 21,970 market entries

Analysis of the obtained results

Closing a position on close 4, 8, 12, 16, 20, 32 of candlestick after entering the market

We will evaluate the results according to the following criteria:

• The rate of return reflects the relative change in the quotations of financial instruments in percentage. A positive value of the rate of return indicates the profitability of the strategy, negative - about the loss.

Let's accept the notations for combinations of entry and exit from the market by the number of the candlestick:

 Exit \ Entry 0 – pending order 4 0-4 8 0-8 12 0-12 16 0-16 20 0-20 32 0-32

Candlestick 4 - exit from the market an hour after the entry.

Candlestick 8 - exit from the market 2 hours after the entry, and so on.

The results are presented in diagrams:

The rate of return of the rollback trading strategy for all events in the Eurozone, as well as for a group of important events at any percentage of rollback, except for 0.05, is below -0.09% when exiting the market after 2 hours or more. This happens due to such events as the “ECB Interest Rate Decision”, “Deposit Facility Rate”.

Let's see which of the events and at what combination of the percentage of rollback and exit from the market have shown a rate of return close to 0.09% and higher:

k = 0,05 %

 Event The best Entry - Exit Rate of return of the best Entry - Exit Number of entries ECB Interest Rate Decision 0--4 0,258 5

k = 0,25 %

 Event The best Entry - Exit Rate of return of the best Entry - Exit Number of entries Industrial Sentiment 0--32 0,093 101

k = 0,3 %

 Event The best Entry - Exit Rate of return of the best Entry - Exit Number of entries Industrial Sentiment 0--32 0,130 82

The following events have shown a significant rate of return:

•  ECB Interest Rate Decision – with a small rollback percentage (0.05) and exit from the market 1 hour after entry. The number of transactions on this event is small and equal to 5, which indicates the rarity of changes in the interest rate in the Eurozone. And despite the significant result and the well-known influence of monetary policy on the foreign exchange market, it should be more careful when working with this indicator.
• Industrial Sentiment - with a rollback percentage from 0.25 to 0.3 and exit from the market 8 hours after entry.

These events are worth paying attention to.

Closing a position on a TakeProfit order

The Take Profit orders are placed because there is a possibility that, having rolled back after the publication of the event, the price will return to the opening level.

We will evaluate the results according to three criteria:

• The rate of return reflects the relative change in the quotations of financial instruments in percentage. A positive value of the rate of return indicates the profitability of the strategy, negative - about the loss.
• % TP - the probability of triggering a Take Profit order, %
• SPP - share of profitable positions, %

The results are presented in diagrams:

In the first part of our study of trading on rollbacks when exiting the market on a TakeProfit order, we have settled on a rollback percentage of k = 0.1 and Take Profit coefficients: TP = 1.5 and TP = 2.

The rollback percentage of 0.1% has been chosen due to higher rate of return, the probability of triggering Take Profit orders and the share of profitable positions.

Similarly, Take Profit (TP) coefficients equal to 1.5 and 2 have been chosen.

The rollback percentage of 0.05 has been excluded from consideration due to the widening spread at the time of the publication of events, the delay in reflecting data in the economic calendar, and, as a result, the low rate of return of the strategy.

For the coefficient TP = 1, the following has been observed.

After the publication of events, the price may roll back in the direction opposite to the economic meaning of the published events. However, within the next 8 hours, it tends to return to the opening price at the time of the publication of events. And the lower the price rollback percentage, the more likely such a result is.

The results for the Eurozone events confirm these findings.

A significant rate of return for the selected parameters, as well as for US and Australian events, will be considered a rate of return of 0.04% or more.

Let's see for which of the events in the Eurozone the effectiveness of rollback trading has been identified.

Let's summarize:

The model of trading on rollbacks and exiting the market 8 hours after entry is suitable for the event:

• Industrial Sentiment.

The model of trading on rollbacks and exiting the market an hour after entry is suitable for the event:

• ECB Interest Rate Decision.

However, the number of transactions on this event is small and equal to 5, which indicates the rarity of changes in the interest rate in the Eurozone. And despite the significant result, it should be careful when working with this indicator.

The model of trading on rollbacks and exiting the market on a Take Profit order is suitable for the following events:

1. Decisions of the Central Bank and the labor market:

• ECB Interest Rate Decision;
• Deposit Facility Rate.

The number of entries on these events for the period under review is 5 and 15, respectively, which means infrequent changes in the interest and deposit rates in the Eurozone. Therefore, despite the significant result, it is worth being careful when working with these indicators.

2. Consumption and inflation:

• Core CPI (MoM);
• CPI (MoM).

• Industrial Sentiment;

4. GDP and Industrial production:

• GDP (YoY);
• GDP (QoQ);
• Industrial Production (MoM).

The model of trading on rollbacks and exiting the market on a Take Profit order is not suitable for the Eurozone event, which belongs to the group of important ones:

• CPI (YoY).
Conclusion

After the publication of events, the price may roll back in the direction opposite to the economic meaning of the published events. However, during the next 8 hours, it tends to return to the opening price at the time of the publication of events. And the lower the price rollback percentage, the more likely such a result is.

The effectiveness of rollback trading for events in the Eurozone has been revealed.

Detailed results are shown in the Appendix:

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