Fundamental Analysis as a Filter of Technical Signals. Part 2

Let's continue the study of applying the macroeconomic background filter to technical analysis signals.

Filtering "Bollinger bands reversals" signals has been useful and has increased their weighted average rate of return.

Today we will consider the signals of the “Head and shoulders” pattern.

28 currency pairs have been taken as instruments:

We will filter the signals of the “Head and shoulders” pattern using the macroeconomic background (MB).

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 “Head and shoulders” signal.

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

The "sentiment" of the filter for each evaluation is defined as follows:

• If the newly published actual value is better or equal to the previous one, then the evaluation is positive.

• Plus, we compare the indicators in two versions:

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

Signals not confirmed by the MB filter are ignored.

Example:

The “Head and shoulders” 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, and 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.

In this case, 8 out of 14 MB filter evaluations give a buy signal for the EURUSD pair, which confirms the current “Head and shoulders” TA buy signal. So, we buy a pair of EURUSD.

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

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

Let's accept the notation keys for the timeframe and exit from the market:

• 5th hour/day - exit the market at the close of the 5th hour/day after entry;
• 10th hour/day - exit the market at the close of the 10th hour/day after entry.

Analysis of results

“Head and Shoulders” pattern signal (comparing of new actual values ​​of MB indicators with previous ones)

The MB filter has allowed to increase the rate of return of daily “Head and shoulders” signals, with 8 evaluations out of 14 to enter the market from close to 0 to a significant value of 0.32%.

The rate of return of exiting the market at the close of the 5th day after entry is higher than at the close of the 10th day.

The number of transactions after filtering has decreased from 248 to 97.

The rate of return of hourly signals “Head and shoulders” with the applied filter has remained practically unchanged. It has not reached a significant value of 0.15%.

It should be noted that the results of the filter applying at 10, 11, 12, 13 and 14 evaluations out of 14 to enter the market are excluded from consideration due to the small number of transactions after filtering, namely: less than 50 for the daily timeframe and less than 500 for the hourly timeframe.

“Head and Shoulders” pattern signal (comparing of new actual values ​​of MB indicators with forecast ones) 

The MB filter has allowed to increase the rate of return of daily “Head and shoulders” signals, with 8 evaluations out of 14 to enter the market from close to 0 to a significant value of 0.32%.

The rate of return of exiting the market at the close of the 10th day after entry is higher than at the close of the 5th day.

The number of transactions after filtering has decreased from 248 to 97.

The rate of return of hourly signals “Head and shoulders” with the applied filter has remained practically unchanged. It has not reached a significant value of 0.15%.

The results of the filter applying at 9, 10, 11, 12, 13 and 14 evaluations out of 14 to enter the market are excluded from consideration due to the small number of transactions after filtering, namely: less than 50 for the daily timeframe and less than 500 for the hourly timeframe.

Detailed results are shown in the Appendix.

XLSX (0.06 MB)Fundamental analysis as a filter of technical signals. Part 2.xlsx

See also:

Fundamental analysis as a filter of technical signals

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