Forex Trading System- Activity

Overview

When analyzing spot currency interval data, it should be noted that all six quote fields(open, high, low, close, upticks, and downticks) can be derived directly from thestreaming tick data. An uptick occurs every time the current price exceeds the magni-tude of the previous price within the prescribed interval. Similarly, a downtick occurswhenever the current price is lower than the previous price.

ACTIVITY BAR CHART

Given the two fields upticks and downticks, we define activity as shown in Figure 2.1,where x is the array index in the time series.

Activity is displayed as vertical bars in the lower portion of the five-minute chart inFigure 2.2. The empty rectangles are upticks, while the shaded rectangles aredownticks.
In the long-term chart (Figure 2.3), note that activity in the EURUSD currency pairnearly tripled during the 2000–2007 period.

COMPOSITE ACTIVITY

The foreign exchange is a 24/7 global market (with reduced liquidity on Saturdays andSundays, of course). The importance of activity is extremely useful for traders in deter-mining when to trade. For this purpose, we developed two composite charting tech-niques to show traders when trading activity is at its highest and lowest for eachcurrency pair: the time of day chart and the day of week chart. Composite charts aresimply the average activity for each time interval sampled over a long time frame.

TIME OF DAY ACTIVITY CHART

In Figure 2.4, multiple time intervals have been plotted where each average value hasbeen centered. That is, the three-minute average for 10:00 A.M. is the mean of the activity
for 9:59 A.M., 10:00 A.M., and 10:01 A.M.rather than front-based averaging (9:58 A.M., 9:59A.M. and 10:00 A.M.).


DAY OF WEEK ACTIVITY CHART

The time of day chart is excellent for examining the activity over a single 24-hour pe-riod. For the purpose of scrutinizing the activity over an entire week, we created theday of week chart, which is simply the concatenation of six time of day charts. (SeeFigure 2.5.) Because of the increased time frame, we also increased the time interval.Because New York City is conventionally considered to be the global center for currency trading, the bottom time scale of all time of day and day of week charts isexpressed in terms of U.S. eastern time (ET) or Greenwich mean time (GMT) minusfive hours.

Several time of day and day of week charts for the most frequently traded currencypairs appear in Appendixes E, F, and G. These charts have been updated to mirror theprevailing market’s characteristics and are intended as a computer-side reference guidewhile traders are working in their online currency platforms.

EQUI-ACTIVITY CHART

The equi-activity chart is the brainchild of co-author Jim Bickford, who wanted to incor-porate the activity property directly into the OHLC bar chart rather than displaying ac-tivity at the bottom of the chart as an afterthought. The concept is similar to that ofanalyst and author Richard W. Arms Jr., who in the early 1970s introduced the equivol-ume chart in his book Volume Cycles in the Stock Market.

The basic principle is that, since the height and range of each vertical bar define thehigh and low prices for that interval, the width of the vertical bar can be used to repre-sent the activity for the same interval. The chart in Figure 2.6 displays the raw data as aconventional OHLC vertical bar chart with equal spacing along the x-axis, whereas thechart in Figure 2.7 displays the accordion-like property of the equi-activity chart: Col-umn widths increase proportionately with an increase in activity during that interval.

ACTIVITY MERCURY CHART

The mercury chart is another creation that Jim Bickford also conceived while trying toutilize the vertical bars for more than just open, high, low, and close information. Thischarting technique first appeared in Chart Plotting Algorithms for Technical Analysts(Syzygy Publishing, 2002). (See Figure 2.8.)

The crux of the mercury chart is the shading inside the vertical bars. If the activityfor the current interval is greater than the activity of the previous interval, then the in-side of the vertical bar is left empty. If the activity for the current interval is less than theactivity of the previous interval, then the inside of the vertical bar is shaded.

UPTICK-DOWNTICK MERCURY CHART

An important variation to the activity mercury chart is its sibling counterpart, theuptick-downtick mercury chart. (See Figure 2.9.) In the uptick-downtick mercurychart each vertical bar is divided into two equal parts and shaded according to thefollowing rules:

A—If the current uptick is greater than the previous uptick, then the upper half ofthe bar is left empty.

B—If the current uptick is less than the previous uptick, then the upper half of thebar is shaded.

C—If the current downtick is greater than the previous downtick, then the lowerhalf of the bar is left empty.

D—If the current downtick is less than the previous downtick, then the lower halfof the bar is shaded.

Not surprisingly, types AC and BD are much more frequent than types AD and BC.Incidentally, the mercury chart derives its name from the thermometer-like appearanceof the four bar types in Figure 2.10.CONCLUSIONThe examination of the activity of targeted currency pairs can be very insightful in as-sisting traders in determining when to schedule their trading sessions. The addition ofthe equi-activity chart and the mercury chart to the trader’s arsenal may also provide atechnical edge in the selection of currency pair candidates