Heckyl Alpha Pulse

Discovering the newest form of alpha in the currency markets

Posted on April 10, 2015 Updated on April 10, 2015

Using sentiment analysis for gauging general stock sentiment is nothing new in the financial industry. Ever increasing views and reactions of analysts, experts, fund managers and traders on blogs and social media sites, continues to drive this very interesting field of research. But how about analysing social indicators for currency pairs?

At Heckyl we achieve this by using the following parameters in addition to the standard ones explained in our earlier blog Sentiment Analysis in Finance :

1. Marco-economic news – Tracking macro indicators, central bank announcements, official press releases, government speeches and interviews for both countries separately
2. Macro Views by leading institutions and analysts for the two countries

Using this approach, we weigh these additional parameters just like we do for stocks and extract the sentiment for the currencies in question separately. The sentiment for the currency pair then becomes Sentiment (base currency) – Sentiment (quote currency). We also calculate separately the sentiment for the technical forecasts by experts for the currency pair, weigh it and add it to get the total sentiment for the currency pair.

In addition we calculate the social media message volume for the currency pair as a ratio of message flow count today vs its 22-day average count and express it as a multiple. So it actually identifies spikes in volume today as compared to its monthly moving average.

Let us take an example of how this helps in making trading decisions:

Our charts showed a positive sentiment for AUDUSD pair from 24^th of March as displayed below:

There have been lot of speculation regarding an RBA rate cut for some time, which would be negative for the Australian Dollar. There had also been a general positive sentiment for the US Dollar on the back of the Fed rate hike speculation. The sentiment for the currency pair was therefore positive for the last week of March. The sentiment showed a divergent trend from the price from 21^st March. After hovering in positive territory for more than a week, we saw a spurt in message volume of about 40x starting 30^th of March, when the sentiment also touched its high of 69.

The currency pair had been rising since 24^th March from 1.27 to 1.31 on 30^th March and a high of 1.32 on 2^nd April at which the message volume was also the highest at 55x. Traders taking positions on 24^th March would have returned a handsome 4% in just a week, had they been observing this trend on Heckyl’s platform. This is a massive return given it’s a scapler’s market and daily opportunities are limited in currencies.

This is just another example of the enormous power of processing millions of relevant data points and squeezing another opportunity in these fast-moving markets. If you want to explore this newest form of alpha, get in touch with us at mailto:info@heckyl.comto know more of our immensely powerful Heckyl FIND platform.