By Sergei Belov, Ernest Chan, Nahid Jetha, and Akshay Nautiyal ABSTRACT We applied Corrective AI (Chan, 2022) to a trading model that takes advantage of the intraday seasonality of forex returns. Breedon and Ranaldo (2012) observed that foreign currencies depreciate vs. the US dollar during their local working hours and appreciate during the local working hours of the US dollar. We first backtested the results of Breedon and Ranaldo on recent EURUSD data from September 2021 to January 2023 and then applied Corrective AI to this trading strategy to achieve a significant increase in performance. Breedon and Ranaldo (2012) described a trading strategy that shorted EURUSD during European working hours (3 AM ET to 9 AM ET, where ET denotes the local time in New York, accounting for daylight savings) and bought EURUSD during US working hours (11 AM ET to 3 PM ET). The rationale is that large-scale institutional buying of the US dollar takes place during European working hours to pa
When I was growing up in the trading world, high Sharpe ratio was the holy grail. People kept forgetting the possibility of "black swan" events, only recently popularized by Nassim Taleb , which can wipe out years of steady gains in one disastrous stroke. (For a fascinating interview of Taleb by the famous Malcolm Gladwell, see this old New Yorker article . It includes a contrast with Victor Niederhoffer's trading style, plus a rare close-up view of the painful daily operations of Taleb's hedge fund.) Now, however, the pendulum seems to have swung a little too far in the other direction. Whenever I mention a high Sharpe-ratio strategy to some experienced investor, I am often confronted with dark musings of "picking up nickels in front of steamrollers", as if all high Sharpe-ratio strategies consist of shorting out-of-the-money call options. But many high Sharpe-ratio strategies are not akin to shorting out-of-the-money calls. My favorite example is that of