For investments decision making and comparison of different securities, offered on financial markets, an adequate unified basis is absolutely necessary. The income return on an investment also called yield serve as this basis.
Functional connection between term of an investment and earned return (for most securities it equals to interest rate) could be visualized as a chart in “return- timeline” coordinates. Constructed line is called yield curve and it is powerful investment assessment tool which shows not only current market condition but also expectations of rate movements in future. Uprising (also referred as positive) yield curve signals that interest rates for long term instruments are higher than for short term. Descending (negative) curve stands for opposite situation.
A yield curve analysis for long run time period (even from first historical records till latest trade deals) may help to set realistic investment goals. Ideal yield curve demonstrates stable growth coming through successive local peaks. An inverted yield curve, where the shorter-term yields are higher than the longer-term yields, can be a sign of upcoming recession.
For Foreign Exchange market a special technique yield curves intersection was developed in order to help traders in minimization of loss periods and to increase number of profitable deals in total trading volume. It roots in Moving Average price smoothing that is widely used to choose a moment for entrance to the market and is included in all popular analytical software programs. In most cases traders build two MA graphs upon different time frames and enter the market if short-term MA crosses long-term line for long position and vice versa for short position.
Yield curves intersection method is very similar to above mentioned technique but moving averages are calculated for yields, not for prices. If short-term MA line is above long-term line it means that at a current moment market generates more profit than in preceding analytical time period. When market conditions change for the worse the short-term MA line goes under long-term.
So after analysis of all gathered data and relative risk evaluation a trader opens a position only if short-term moving average is higher than long-term. Trading signals, received when short-term MA is lower than long-term, are ignored. On the other hand all trading signals and their results must be considered for yield curve calculation because it’s built on all historically generated signals, not only on those that were accepted for trade’s execution.
This strategy logically makes it possible for traders to pass through long loss making periods on the market. Trading decisions, confirmed by above mentioned method, will comply with the market leading to higher percentage of profitable deals. Frequently investors receive the same or even higher return with lesser movements against a position and with lesser quantity of deals.
Yield curves intersection technique is based on simple assumption that in certain periods the system works more efficient than in another. Quite often it is true. But sometimes situation which a trader may take for a positive phase (or positive market condition) is a result of chain of accidental coincidences, statistically affected the yield curve fitting and influenced decision making process. That’s why notwithstanding all advantages of this risk minimization method its disadvantages also must be remembered:
It should not be used for real time trading, especially for intraday profiting.
Since calculation of the yield curve involves absolutely all signals, generated by trading system, traders have to spend their time on recording transactions that will not bring them actual profit.
The results highly depend on chosen parameters of yield curve fitting. It may happen that intersection of 3-days and 6-days moving averages shows positive phase and potentially high profits while intersection of 4 and 7 days MA’s line will give opposite result and predict significant losses.
By clicking “Continue”, you agree to the default cookie settings on our website.
Trading Point uses cookies to ensure that we provide you with the best experience while visiting our website. Some of the cookies are needed to provide essential features, such as login sessions, and cannot be disabled. Other cookies help us improve our website’s performance and your experience through personalising content, providing social media features and analysing our traffic. Such cookies may also include third-party cookies, which might track your use of our website. You may change your cookie settings at any time.
Read more, or change your cookie settings.
What are Cookies?
Cookies are small data files. When you visit a website, the website sends the cookie to your computer. Your computer stores it in a file located inside your web browser.
Cookies do not transfer viruses or malware to your computer. Because the data in a cookie does not change when it travels back and forth, it has no way to affect how your computer runs, but they act more like logs (i.e. they record user activity and remember stateful information) and they get updated every time you visit a website.
We may obtain information about you by accessing cookies, sent by our website. Different types of cookies keep track of different activities. For example, session cookies are used only when a person is actively navigating a website. Once you leave the website, the session cookie disappears.
Why are cookies useful?
We use functional cookies to analyse how visitors use our website, as well as track and improve our website’s performance and function. This allows us to provide a high-quality customer experience by quickly identifying and fixing any issues that may arise. For example, we might use cookies to keep track of which website pages are most popular and which method of linking between website pages is most effective. The latter also helps us to track if you were referred to us by another website and improve our future advertising campaigns.
Another use of cookies is to store your log in sessions, meaning that when you log in to the Members Area to deposit funds, a "session cookie" is set so that the website remembers that you have already logged in. If the website did not set this cookie, you will be asked for your login and password on each new page as you progress through the funding process.
In addition, functional cookies, for example, are used to allow us to remember your preferences and identify you as a user, ensure your information is secure and operate more reliably and efficiently. For example, cookies save you the trouble of typing in your username every time you access our trading platform, and recall your preferences, such as which language you wish to see when you log in.
Here is an overview of some of the functions our cookies provide us with:
This website uses Google Analytics, a web analytics service provided by Google, Inc. ("Google"). Google Analytics uses analytical cookies placed on your computer, to help the website analyze a user's use of the website. The information generated by the cookie about your use of the website (including your IP address) may be transmitted to and stored by Google on their servers. Google may use this information to evaluate your use of the website, to compile reports on website activity and to provide other services related to website activity and internet usage. Google may also transfer this information to third parties, where required to do so by law, or where such third parties process the information on behalf of Google. Google will not associate your IP address with any other data held. By using this website, you give your consent to Google to process data about you in the manner and for the purposes set out above.
Change Settings
Please select which types of cookies you want to be stored on your device.
We are using cookies to give you the best experience on our website.
Read more or change your cookie settings.