Forex: Momentum

Buy on the up arrows, sell on the down arrows

Based on the idea that the trend is your friend, this tool generates Buy & Sell signals using price action alone, depending only on information available at the time. It relies on analysis of annual rates of change and moving averages. For comparability, exchange rates have been rebased to set year-end 1994 at 100.

In each chart the currency is shown by the bold white line on the right hand axis. The moving average is represented by the thin white line alongside on the same axis. The main explanatory variable, the momentum indicator, is the thin yellow line  using the left hand axis. Buy & sell signals are represented by red arrows embedded in the price index.

This investment tool is based on the observation that the psychological effect of a shock takes about a year to wear off. Known as the Coppock Indicator, after the man who successfully applied the concept for forecasting the US stock market over many decades, this momentum indicator is designed to generate buy signals. In statistical terms momentum is defined here as a 12-month time-weighted moving average of monthly changes. Buy signals are generated when the rate of change turns up from a level below the zero line, as shown by up arrows.

However, owing to the different character of market peaks, the Coppock Indicator has been supplemented by a Moving Average Indicator for generating sell signals. These arise when the index falls below its moving average, while above the Zero-line, as shown by down arrows.

Sometimes trend-based charting strategies generate buy and sell signals at the worst possible times. To reduce this risk, our strategy also includes an Overbought / Oversold component.

By combining three proven components in one strategy,  overall performance can often be dramatic. That is how this strategy produced excellent results when back-tested. 

Please note that, in order to provide users with a low-maintenance once-a-month service, signals at times of crisis may be late. Thus signals will be shown at month-end prices, rather than automatically on reaching targets during the month.

Owing to the conversion of legacy currencies into Euros, analysis is provided only on the common currency. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.

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