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
Conditional Parameter Optimization: Adapting Parameters to Changing Market Regimes via Machine Learning
Every trader knows that there are market regimes that are favorable to their strategies, and other regimes that are not. Some regimes are obvious, like bull vs bear markets, calm vs choppy markets, etc. These regimes affect many strategies and portfolios (unless they are market-neutral or volatility-neutral portfolios) and are readily observable and identifiable (but perhaps not predictable). Other regimes are more subtle, and may only affect your specific strategy. Regimes may change every day, and they may not be observable. It is often not as simple as saying the market has two regimes, and we are currently in regime 2 instead of 1. For example, with respect to the profitability of your specific strategy, the market may have 5 different regimes. But it is not easy to specify exactly what those 5 regimes are, and which of the 5 we are in today, not to mention predicting which regime we will be in tomorrow. We won’t even know that there are exactly 5! Regime changes sometimes necessi