From forex forecasts to forex signals. Effect of the forecast move magnitude.

In the course of the trading system optimization, best returns have been seen to be obtained by ignoring forecast moves below a certain threshold, and acting on those above that threshold (that threshold was also called entry parameter). A small fraction of large returns has been seen to account for much of the positiveness of the Pearson correlation coefficient between actual logarithmic returns and their forecasts. Each Danica output contains forecasts for 14 forex rates, and a natural question is: how do I pick the ones to place trades? One might expect that the odds of success can be improved by selecting those markets where the next move is forecast to be large. I take version 0.5 of Danica forex system and study dependence of the correlation between the forecast and real logarithmic returns in day close on the relative strength of the forecast move.

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