Fundamental analysis Macroeconomic indicators Technical indicators

Fundamental Analysis as a Filter of Technical Signals

Elena Berseneva 29 june 2022 24

Working in financial markets, traders tend to predict the direction of price movement of financial instruments.

 

Some use technical analysis for this, which involves a visual analysis of charts, indicators, the search for candlestick patterns, graphic figures, and so on.

 

Others prefer fundamental analysis based on the study of the economy of a country, its political situation, monetary policy, employment and unemployment, inflation, and the like.

 

In this, the trader is helped by the economic calendar, where the economic data of different countries are published and updated.

 

There is no consensus on which approach is better: technical or fundamental.

 

Each trader chooses a convenient approach to forecasting, sometimes combining both.

 

In our previous studies, the effectiveness in forecasting the market of such a technical analysis signal as "Bollinger Bands Reversals" has been revealed, especially in case of the author's closing of positions and in conjunction with the AD indicator.

 

We will apply the “macroeconomic background” filter to this signal and see if the rate of return increases with its application.

Hypothesis
To conclusion

The weighted average rate of return of a combination of fundamental and technical analysis signals is higher than the rate of return of a "pure" technical signal.

К выводам
Data used

Indicators of the signal rate of return of the author's strategy "Bollinger Bands Reversals" in conjunction with the AD indicator. The analysis used 3208 transactions for the test period from January 2010 to December 2020.


Indicators of macroeconomic reporting of the leading economies of the world:

  • The USA
  • Canada
  • The Eurozone
  • The UK
  • Switzerland
  • Japan
  • Australia
  • New Zealand


Instruments: 28 currency pairs


Timeframe: D1

Signals of the “Bollinger Bands Reversals” strategy will be filtered using the macroeconomic background (hereinafter we will use the abbreviation - MB). Under the macroeconomic background, we will mean the state of fundamental economic indicators of countries.

 

As an MB filter, we will take seven indicators for each of the 8 economies. A detailed list of indicators is presented in the appendix.

 

The MB filter "turns on" in the case when 8 evaluations out of 14 macroeconomic reports are in the same direction with the “Bollinger Bands Reversals” signal.

 

In the situation of 7 evaluations out of 14 - we refrain from transactions.

 


Example:

 

The “Bollinger Bands Reversals” TA signal offers to buy the EURUSD pair.

 

The indicators of the macroeconomic background at the moment for the Eurozone are as follows:

Interest rate, GDP, Trade Balance, Business confidence, Inflation and Unemployment rate have risen while Retail sales have declined.

 

The indicators of the macroeconomic background at the moment for the USA are as follows:

Interest rate, GDP, Unemployment rate and Trade Balance have declined, and Business confidence, Inflation and Retail sales have risen.


MB Indicator 
Base currency EUR
Quoted currency USD
Interest rate
buying
buying
GDP
buying
buying
Unemployment rate
selling
selling
Retail Sales
selling
selling
Trade Balance
buying
buying
Inflation
buying
selling
Business confidence
buying
selling


In this case, 8 out of 14 MB filter evaluations give a buy signal for the EURUSD pair, which confirms the current “Bollinger Bands Reversals” buy signal. So, we buy a pair of EURUSD.


 

The "sentiment" of the filter will be determined by comparing:

  1. new actual values ​​of MB indicators with the previous ones;
  2. new actual values ​​of MB indicators with the forecast ones.


 

We will also analyze in two versions of the "work" of the filter:

  •  the values of the MB indicators are not less than the previous/forecast ones, or below them (we denote: “>=, <”);
  • the values of the MB indicators differ from the previous/forecast ones (we denote: “>,<”).

 

Signals not confirmed by the MB filter are ignored.

 


Let's denote the "work" of the MF filter:

  • F0 – the input data of “Bollinger Bands Reversals” signal, without applying the MB filter;
  • F8 - 8 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal;
  • F9 - 9 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal;
  • F10 - 10 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal;
  • F11 - 11 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal;
  • F12 - 12 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal;
  • F13 - 13 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal;
  • F14 - 14 out of 14 evaluations of macroeconomic reporting, unidirectional with the “Bollinger Bands Reversals” signal.


 

Let's accept the conventions for the types of exit from the market:

  • BB – closing a position when the price touches the opposite Bollinger band;
  • %B – closing a position when the percentage bandwidth (%B) crosses the opposite level.



The results are presented in diagrams:

 

Bollinger bands reversals (comparing of new actual values ​​of MB indicators with previous ones)

Bollinger bands reversals (comparing of new actual values ​​of MB indicators with forecast ones)

The results of the "work" of the filter when comparing the new actual values ​​of the MB indicators with the previous ones:

 

The MB filter has allowed to increase the rate of return of the author's exit from the market (%B) of Bollinger bands reversals with 9 evaluations out of 14 to entering the market when the filter is "working" with the condition that the new actual values ​​of the indicators differ from the previous ones. The rate of return has increased from 0.43% to 0.57%.

 

At the same time, the number of market entries after filtering has significantly decreased, from 3195 to 94.

 


The results of the "work" of the filter when comparing the new actual values ​​of the MB indicators with the forecast ones:

 

The application of the MB filter to Bollinger bands reversals has allowed to increase the rate of return of the author's exit from the market (BB, %B) when the filter is "working" with the condition that the new actual values ​​of the indicators differ from the previous ones. The number of evaluations of the MB filter to enter the market has amounted to 8 out of 14.

 

When exiting the market by touching the price of the opposite Bollinger band (BB), the rate of return has increased from 0.36% to 0.61%. However, the number of market entries has decreased from 3208 to 99.

 

When exiting the market with the percentage bandwidth (%B) crossing the opposite level, the rate of return has increased from 0.43% to 0.75%. But the number of market entries has decreased from 3195 to 97.

Conclusion

The rate of return growth using the macroeconomic background filter has been observed with the condition that the new actual values of the indicators differ from both the forecast and the previous ones.

With 8 evaluations out of 14 of the MB filter to entering the market and the author's exit, the “Bollinger Bands Reversals” signals have shown a 70% rate of return growth. At the same time, the number of market entries has decreased by more than 30 times.

The effectiveness of the macroeconomic background filter has been revealed.

Detailed results are shown in the Appendix.

XLSX (0.33 MB)Fundamental analysis as a filter of technical signals.xlsx

 


See also:

Fundamental analysis as a filter of technical signals. Part 2

The combination of macroeconomic indicators as a signal in the Forex market

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