Fundamental analysis Macroeconomic indicators Technical indicators

Fundamental Analysis as a Filter of Technical Signals. Part 2

Elena Berseneva 29 june 2022 27

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.

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

The rate of return of signals of "large" (ZigZag (12.5.3)) "Head and shoulders" patterns


8 economies of the world:

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


Instruments: 28 currency pairs


Timeframes:

  • D1
  • H1


Exit the market:

  • 5th candlestick
  • 10th candlestick


Period: January 2009 – December 2020


There are 248 signals in total.


28 currency pairs have been taken as instruments:


 
AUD
NZD
JPY
EUR
GBP
CHF
CAD
USD
AUD
NZD
1
JPY
2
8
EUR
3
9
14
GBP
4
10
15
19
CHF
5
11
16
20
23
CAD
6
12
17
21
24
26
USD
7
13
18
22
25
27
28


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.


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 “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.

Conclusion

The macroeconomic background filter combined with the daily signals of the "Head and shoulders" patterns has allowed to increase the rate of return to a significant value of 0.3% with 8 evaluations out of 14 to enter the market.


That is, if you follow the rule of entering the market with 8 evaluations of the macroeconomic background filter out of 14, then you can expect a higher rate of return on the co-directional signals of the “Head and shoulders” patterns.


The number of market entries using the MB filter significantly declines, and these signals are rare.


The effectiveness of the macroeconomic background filter has been revealed.

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

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