The November and December 2008 issues of Currency Trader featured articles examining the short term behavior of major currency pairs after inside days.
The original analysis covered seven currency pairs: U.S. dollar/Canadian dollar (USD/CAD), Euro/U.S. dollar (EUR/USD), British pound/U.S. dollar (GBP/USD), U.S. dollar/Japanese yen (USD/JPY), U.S. dollar/Swiss franc (USD/CHF), Australian dollar/U.S. dollar (AUD/USD), and New Zealand dollar/U.S. dollar (NZD/USD). The results showed inside days — overall, in all currency pairs — were more often than not followed by bullish price action during the analysis period, but there was another, more interesting, tendency that appeared tradable in some situations: Inside days were often followed by “inverted” price action relative to the inside day’s close. Inside days that closed higher preceded short-term down moves, and vice versa.
The following analysis shows how specific inside-day signals reflecting these tendencies performed over a 10-year period and offers insight on how to construct useful trade setups. The signals are applied to the EUR/USD pair because previous testing showed the basic pattern tendencies were more consistent and profitable in this market.
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