We can use PatternDNA's patent pending technology to match current action to historic trading and assess potential future performance. PatternDNA allows for the selection of 5 to 10 day long trading sequences and calculates for you the percentage of days which close higher (calculated from the 'open' price after the Pattern completes) 1-, 2- and 5-days out from when the Pattern completes.
A second performance metric looks at the Pattern with respect to a Target&Stop price. In the case of the Forex model we used an initial Target of 1% to trigger the Trail Target&Stop with an initial opening risk of 1%. The Trail Target&Stop is set at 1% apiece (i.e. each 1% gain will adjust the stop to 1% of that price) with an ultimate Profit Target of 5%. The RETURN figure is a cumulative return for the past year of the analysis based on a test list of 18 U.S. Stocks. Stocks were used as the basis of the historic Pattern test as stock data is more robust given the large number of illiquid Forex pairs.
In this article I will look at the current 5-day Pattern, then add an extra day to the Pattern and reassess performance; this will be done up to the 10-day maximum sized Pattern. This will build up a map of what may be expected in the days ahead for EURUSD.
So how did current action perform on the 1-, 2- and 5-day window and RETURN with Target&Stop. The following tables give the Percentage of higher closes over a 5-day period, the number of MATCHING historic pairings and the annualized cumulative RETURN.
On the initial analysis the first observation was the very low historic match at the Strongest Match Level for the default 5-day Pattern. There were just 2 matches with a 50:50 win percentage for the 5-days following the Pattern and a Cumulative Annualized Return of -0.9%.
At the Strong Match there was only credible data for the 5-day Pattern. Despite the relatively bullish prognosis for the next 5-days, the average Cumulative Annualized Return of -0.8% suggests this is not one you want to be holding for very long.
The weaker the Match, the more matches which can be made - but the more general the outlook becomes. At the Neutral mark the Pattern barely offers more than a 50:50 on closing higher, but suffers a much more punitive Cumulative Annualized Return at an average loss of 2.0%. This loss was offset by the mildly bullish 7-day and 8-day Pattern.
When the Match level is set at Weak and Weakest things really take a turn for the worst with the Cumulative Annualized Return falling to an average loss of 9.6% at the Weakest Math - remember, this is done from an initial stop of only 1%.
Based on this it would appear the near-term outlook - of up to 5 days - following Wednesday's bounce is bullish based on Strong Match data, but ultimately a 1% trim off Wednesday's close ($1.3133) would appear to be the ultimate return going forward. As things stand as of Thursday afternoon (15:00) the EURUSD has rallied to $1.3185 following ECB comments.
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