For many years in many places we have warned against using actual price levels in favor of detrended price changes, %changes, normalized indicators, etc. The exceptions have been when the price levels were relatively close over time, with no huge increases in price. We now believe that in many cases currency prices may qualify as an exception, in spite of the sinking dollar in the last few years. This may be especially true if using small bars and only a few months of history. The Euro, for example , has only gone from about 0.9 to around 1.55 since 2001. These ranges, proportionally, are a far cry from say AAPL (a low of about 10 to a high of about 200 in the same period).

The yen is one exception, but if you divide the prices by 100 (as the futures contract does) you are back in a small range around 1.0.

Moreover, with currencies, the price changes and %changes are very small indeed, possibly making it harder to discriminate them in a neural net sometimes.

Lately we have been doing models using the CME currency futures, both with NeuroShell and ChaosHunter without detrending and without adverse effect. Since our Turboprop2 algorithm does have the ability to extrapolate somewhat, the small increments in the currencies are not impossible to handle. Since we are using 5 or 15 minute bars, and hence no more than 2 to 6 month’s history, we feel pretty comfortable with using actual prices of currencies. We do the same with other pairs used as variables in the predictions or trading strategy.

We have been talking about input variables – we still do not believe you should predict prices in the Prediction Wizard if you are getting trading signals.