Article / 03 August 2016 at 13:30 GMT

Coincidence and confidence

Hypothesis Testing
United Kingdom
  • Statisticians must correlate past events with future probabilities
  • Various methods exist, each with their own risks and rewards
  • Strange correlations and coincidences need not be ignored

Starry night in the desert
Statisticians routinely find all sorts of coincidences and correlations, from chart patterns to the passage of the moon. But which of these can we use to make profitable trades? Photo: iStock

By fxtime*

Statisticians come in two varieties from which endless specialities/flavours are derived. At the practice's core are several sub-variants.

First we have the Frequentists, who carefully record events that have happened and count their occurrence again and again until they can determine what is likely to re-occur in the future based on the historical data they have collected.

Over the months I have documented and suggested endless versions of frequentist trade structures which we can use and accrue income from.

Secondly we have Bayesian statistical analysis which works very similar to the Frequentists' studies except it considers past events statistically and implies expected results despite not knowing the full facts. 

We all do this when we complete a crossword puzzle... we use our knowledge to complete a series of questions to form a final pattern that, if successful, will finish the crossword even though we didn't know what the final crossword would "be". Bayesian mathematics works on the foundation principle that the probability of event B given that event A has occurred is as close to 100% as possible to be of worth.

Again, trades of this type have been posted.

These two types of statistical models have caused many a heated debate over which has the greater value in forums about algorithims, computer coding, or general matters such as credit scoring for mortgages and credit cards. or occasionally (now) infamous law cases (and subsequent proven miscarriages of justice).

Which brings me to the matter of subjectivity and control measures. If we are to use these modern-day techniques of assessment, then we need a means of measure that gives us confidence in its results. We need to determine what is truly ''a random event'' and what is a recurring event which we can confidently expect to occur and therefore trade from.

But should we ignore the random event? Should we say, as we have no meaningful long-term correlation of data, that the so called ''random event'' is a rogue movement in markets that we have to accept as ''the law of s*d''?

Frequentist and Bayesian analysts rely on one other core foundation rule and that concerns the size of the data set. Ten years of data is great as a large pool of results gives us consistency as a measure, but the flaw is that times change and markets move faster and respond to different world measures. 

Ten years ago, telecoms were developing the mobile technology that permits mobile banking or simple online chat and these two areas have indeed changed the world's economic structures as well as the political landscapes of various countries (Egypt, for example). So we need to also look at smaller blocks of real-time history – say five or even three years.

The flaw in this, however, is that you have less data to support your view and we may be giving too much weighting to a market or equity or FX pair than is necessary, and thus we skew our results due to a lack of data.

The compromise is less conclusive data for more real-time trend analysis/overview but greater risk.

So for "fun", here are some very short-term quirks of markets that correlate well but have the really big caveat that they can only be viewed as coincidences because we just do not have the supporting (three-plus years) of data to support the theory;

What we do have, however, is an 84% or greater probability that, given the following has occurred, we can expect these trade setups to continue to have co-incidental confidence!

If the data drop below 84% probability I will let you know and then you can stand aside from the trade.

First, lets look at the USDCAD spot market...

Using the UK time reference here (you can correlate to your own time zones easily enough), look at the hourly close price at 1100 and compare to the price at 1200, one hour later. If the latter candle close is above the 1100 one, then immediately enter a long for plus 5 or if it is below, then immediately enter a short for the same amount; use the trading range of the 1100 candle as your stop.

USDCAD example

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank 

Now let's look at silver; we can look at XAGUSD spot or the near-dated silver futures markets.

Silver has a cycle for buy and sell ''roll over'' periods that coincide with the lunar calendar. It has nothing to do with the moon but there is a coincidence in timing which we can trade:

  • new moon = sell
  • full Moon = buy

These are obviously only scalps only. Let me also say that I know absolutely nothing about astronomy, but this cycle also correlates well, coincidentally, with soy crush, wheat and corn.

Thirdly FGBL... near-dated bund futures. Due to space limitations I will post this as an update immediately after the article.

To be honest. I have a list of these ''oddities'' for making trades and will post them with the caveat that the US senator Donald Rumsfeld once described...

"We know what we do know.
We know what we don't know.
But the real problem is; that we don't know what we don't know."

It is that last line which has yet to be quantified so we run a greater risk as this must be viewed as a coincidental market move until confidently proven otherwise.

These aren't hard and fast trade structures – rather, view them as part of the "Lady Luck" strategies described in earlier posts.

— Edited by Michael McKenna

*fxtime is a pseudonym
03 August
fxtime fxtime
Update....usdcad chart for today :-)
03 August
fxtime fxtime
another suggestion made earlier today...this time the Dax
Market currently shows 10170 so easilly in profit and you could bank your hard earned now or wait for the suggested high at 10182
03 August
fxtime fxtime
kom' we are now at the 10182...this is as far as the Bayes model goes. Upto your trade management now...trail stop etc :-)
03 August
kom75 kom75
I've just seen it hit my tp. Thanks for advice. Normally I don't trade Dax. I'll look at it at start with breakout, Bayesian and std dev
03 August
kom75 kom75
Btw. I like above usdcad strategy. Another simply thing I can implement.
03 August
fxtime fxtime
Here is a Bayesian range scenario (which is what it is designed for);
Only +24 though so you probably made more on the Dax :-) Good call of yours.
03 August
fxtime fxtime
kom there are three usdcad strategies posted...two here and you will see plenty of realtime posts about the +5 price break out on site. Usually they are robust trades but the start of the week I managed net +3 on Monday for the usdcad so not a great day as suffered a -16 loss at one point!!
03 August
fxtime fxtime
kom....don't use the std dev on the DAX as I am about to adapt that as the recent spate of gap opens is destroying normal fill orders. I will post an adaptation probably tonight fwiw. The adaptation/optimisation will erase the bad fill or just no fill situations seen of late.
03 August
kom75 kom75
I use Bayesian range for usdcad. Someone is working on algo based on this strategy. Next week I'm gonna test it, but will wait with real trading till September. Not enough liquidity for now. Can I use Bayesian for other majors and will it be same reference candle as for breakout strategy (I.e usdcad)?
03 August
fxtime fxtime
No each market has its own reference point and time range....the DAX as you saw had 30mins using 9:30 -10 range ....the usdcad use that range as it is an international price adjustment/fixing point which we can utilise as the usd is at that time illiquid and data releases will move that market quickly as it becomes more liquid within an hour or more. Most of the usdcad action is done within 4 hrs of that trade signal imho ! There is a lot of A.I/algo functions running world wide so follow them and only seek the fast easy money.
03 August
kom75 kom75
As reference candle I mean candle for the specific instrument, I.e for gbpusd or eurusd it's 9-10 or for usdjpy it's 11-12. So question is if I can use this candles as a reference points for Bayesian range strategy
03 August
fxtime fxtime
usdjpy can be utilised on 11-12 and yep spot on for cable and eurusd but do not use on eurgbp as that is a pairing that simply reflects the arbitrage between eurousd and cable and is best traded as a ratio open / close trade using that six line algo. No charting required just a measure between the number of pips moved up/down on either side and relating that to the algo for best fit and trade.
03 August
fxtime fxtime
Likewise audjpy is best derived via usdjpy against audusd imho.
03 August
Michael O'Neill Michael O'Neill
fxtime; the USDCAD strategy is brilliant and for any doubters out there, I can attest that it works,.
03 August
fxtime fxtime
Many thanks Mike for the feedback and the kind testimonial :-)
Have a good evening mate.
05 August
fxtime fxtime
Interesting that the co-incidental usdcad close price trade worked before NFP and then for those who preset orders the price break outs would have earned too.
05 August
fxtime fxtime
We have exceeded the weekly 2nd std dev at 1.3181 and are currently above it so we should at least pull back to that level and either consolidate before the weekend or drift down imho.
08 August
fxtime fxtime
Co-incidentally as it were the usdcad trade mentioned in the article has worked again today :-)
09 August
fxtime fxtime
And once again....co-incidentally it worked on usdcad :-)
Last update for this as new article tomorrow.
09 September
fxtime fxtime
First week back from my hols and the co-incidental close price trades and range break trade worked again today :-) My first retirement trade too !
13 September
fxtime fxtime
LOL...still working :-)
22 September
fxtime fxtime
Worked again today :-)
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