Wednesday, March 26, 2021
Updated NPP Explanation (The last six paragraphs have been revised.)
Copyright © 2021 Fred Duckworth
Numerical Price Prediction is an approach to trading foreign currency pairs that I came up with based on five biblical principles:
- The first being to test everything and hold fast to only those things which prove to be valid and reliable.
- The second was a belief that, as in life, when you have a system operating at peak performance, more often than not, it's at least in part due to the interactions between its various components evidencing strong, healthy relationships.
- The third is the fact that the best of plans are typically established in the presence of a multitude of counselors.
- The fourth is the necessity of being able to rightly interpret the signs of the times.
- And the fifth is that, once again, as with life itself, positive outcomes are usually the result of having made good choices.
The first principle led me to reject the use of almost all common indicators, such as MACD, RSI, CCI, stochastic oscillators and the like; along with any approaches involving harmonic patterns, Elliot waves, pivot points, Fibonacci ratios and whatnot.
Instead, I attempted to rightly interpret the signs of the times by devising a methodology similar to that used by meteorologist to predict the weather—one based as much as possible on statistical analysis and mathematical probability.
The idea was to gather and evaluate precise, up-to-date, quantitative data and use it to calculate the odds of price reaching designated values within a given time period by patterning the system's elements after the equations, wave functions, and computer models used in weather forecasting.
But, instead of monitoring wind velocity and direction, cloud formations, humidity, temperature, and barometric pressure; I evaluate the synergy (or "relationships") between such factors as typical price ranges, reoccurring chart patterns, horizontal support and resistance, trend lines and market structure (which is to say, "a multitude of counselors that proved to be valid and reliable" over several weeks and months) all in multiple time frames—with the result being a graphical depiction (computer model) of current conditions that I could then use to help me make precise, well-timed trades (or in other words, "good choices based on rightly interpreting the signs of the times").
The system incorporates the idea of cycle theory, which holds that cyclical forces, both long and short, drive price movements, and can be used to anticipate turning points. It's also compatible with Edgar Peters' fractal market hypothesis, which views financial markets as fractal in the sense that they follow cyclical and replicable patterns—ones consisting of fragmented shapes that break down into parts which then replicate the shape of the whole.
I used these cycles to generate what some call "baselines" by conducting a thorough analysis to first uncover the cyclical waves formed in the wake of price action, followed by the defining of their general frequencies and magnitudes; and then finally plotting centered moving averages that came as close as possible to approximating the zero amplitude of the corresponding waves/cycles.
So, the notion that there are no "best" moving averages to use when trading is not one to which I subscribe. Again, at the heart of my system is the use of carefully selected baselines which I calculated in the manner explained above. (By baselines, I mean painstakingly selected moving averages able to rightly discern whether price is rising, falling, or maintaining its altitude within a particular time frame.)
However, it is not enough, in my opinion, to stop at merely determining which are the best moving averages to use when trading charts of a given time frame. To trade with the clarity and precision I desired required me to carry out one final step in which I assigned a specific temporal value to each individual baseline and its corresponding or associated price-range envelope—to answer the question: What moving average best conveys in which direction and by how much price moves every five minutes? Or every thirty minutes? Or every four hours? Or even every day?
Determining the specific moving average that best represented price movement for each of the major time intervals along with their corresponding price range envelopes seemed to be the final step I needed to carry out in order to complete the development of my trading system to my full satisfaction.
And yet, even after this "final" step, their emerged still another aspect to interpreting price action that proved deserving of my consideration which I had not envisioned at all—the concept of "temporal" support and resistance.
In other words, not only do I believe there is a certain amount of
distance beyond which exchange rates will typically resist separating themselves from the central tendencies of key price distributions. It seems to me I have also observed that there is generally a limit to the amount of
time exchange rates will advance in one particular direction without deviation. I refer to these limitations as
temporal support and resistance, and they have proven to be a welcome enhancement to my system.
As of today, when putting this system into practice, I switch back and forth between daily, 240-, 60-, 15-, and 5-minute charts to get different perspectives, even though all of these time frames are basically configured with the same relative/corresponding measures.
I rely on the
36-day baseline to gauge in which direction price is headed from year-to-year, with the outer limit of the corresponding price range set at 10% deviation. However, to monitor
actionable price movement from a swing trading perspective, I have to drop down to the
twelve-day baseline, though I'm generally looking to trade in the direction of the slope of the
eight-hour baseline.
Even so, there are actually four different categories of trade setups of which I might take advantage:
- If rates veer off to the outer limits of the 2-day price range, there is a high probability that mean reversion will come into play, in which case, it makes sense to enter positions as the 4- and 8-hour baselines reverse direction such that price begins to regress back toward the 2-day baseline. This is especially true if price is at the same time switching from a trajectory that was contrary to the slope of the 12-day trend to instead flow in harmony with it; even more so if the 1-day, 1½-day, and/or 2-day baselines join in the reversal. (Completing such a maneuver can sometimes take as long as two days, if not longer.)
- If the 8-hour baseline is sloping in a given direction, and candlesticks cross to the opposite side of this measure, look to enter positions as the 40-, 60-, 90- and 120-minute baselines reverse course, thereby initiating a return of price to the side of the 8-hour baseline that matches its trajectory (assuming of course that its slope has remained unaffected).
- If the 36-hour (1½-day) baseline and the 4-day temporal trend line (i.e., arbitrating measures) are sloping in a given direction, and candlesticks take off in the other direction so that they begin painting on the opposite side of these indicators, look to enter positions as the 40-, 60-, 90- and 120-minute baselines (or 8-hour baseline?) reverse direction, thereby initiating a return of price to the side of the "arbitrating measures" that is aligned with their trajectory.
- And finally, if the 2-day (1½-day and 1-day) baseline(s) is/are sloping in a given direction and price pulls back to the "inside" limit of the 4-hour price range and/or the 10-hour temporal support/resistance level, enter positions as price is rejected at these levels, as conveyed by reversals in the 40-, 60-, 90- and 120-minute baselines—provided that the 8-hour baseline is aligned with the 2-day (1½-day and 1-day) baseline(s). (The one exception to this conditional caveat is when rates are returning to the 2-day baseline under the influence of mean reversion—especially if this move is in agreement with the slope of the 12-day baseline, as described in the first setup above.)
