Understanding Risk-Adjusted Predictions with GBPUSD

[dr1ver1]

For me Friday was a good day, in particular significant unrealised PnL from being short GBPUSD. The system has me short everything at the moment. Interestingly, the trades this morning were to increase all short positions apart from GBPUSD, where it closed out some of the position. I had been anticipating an increase in the short GBPUSD, so I reviewed the calcs.

The forecasts for all the Trend Following EWMA crossovers had decreased in magnitude even though GBPUSD was further down at Friday's close (see table below). All of the EWMAs have been moving downwards, with the faster ones moving down more. The Standard Deviation of the returns however had increased from .007 to .012, so almost 50% increase. The forecast calc divides by the Instrument Risk, so the forecasts had reduced.
This highlights that the Forecast is a risk-adjusted prediction.

Probably for most of you this is fairly basic stuff. I find I sometimes need to remind myself of the fundamental mechanics of the system even as I continue to work on coding more technical aspects. I think it is also one of the benefits of trading manually, and having a relatively small portfolio of 10 assets: it is easier to track and to build intuition, to notice and then investigate when things seem strange, before I scale up to the full system.

Date	22/09/2022	23/09/2022
GBPUSD Dec-22	1.1274	1.0861
Abs Std Dev	0.007	0.012
EWMA 8	1.144	1.131
EWMA 16	1.154	1.146
EWMA 32	1.170	1.165
EWMA 64	1.193	1.190
EWMA 128	1.228	1.226
EWMA 256	1.271	1.270
EWMA 8,32 Forecast	-19.53	-15.31
EWMA 16,64 Forecast	-20.00	-13.74
EWMA 32,128 Forecast	-20.00	-13.56
EWMA 64,256 Forecast	-20.00	-12.54