Oztrade

CROSS CURRENCY PAIRS CORRELATION - ADVANCED ANALYSIS

FX:EURUSD   Euro Fx/U.S. Dollar
Hi all, I wanted to share this chart with you - I am hoping it works when I publish it and the arrows stay inline with the text - something very interesting we all know about currencies moving in tandem with each other to some degree different economic events causing them to stop moving together but eventually they will again.

As a forex trader, if you check several different currency pairs to find the trade setups, you should be aware of the currency pairs correlation, because of two main reasons:

1- You avoid taking the same position with several correlated currency pairs at the same time and so you do not increase your risk. Additionally, you avoid taking opposite positions with the currency pairs that move against each other, at the same time.

2- If you know the currency pairs correlations, it may help you predict the direction and movement of a currency pair, through the signals that you see on the other correlated currency pairs.

If you would like more information describing the affects - reply with a short note and I will paste a URL
Trilo
a year ago
This is very interesting. Thanks for sharing.
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Oztrade Trilo
a year ago
I found this very interesting also - we all know that they do move in in conjunction with each other to some degree its just logic I guess. The other day I was looking to take a Cypher which formed on 3 pairs - price action looked very similar - I had my orders in place and when the first pair filled my order price rolled over on all three pairs and hit my target. So I wanted to learn a little bit more on correlation. Mainly so I don't double up on 2 losers or 2 winners when price action does the same thing. I would rather have 2 orders or more on pairs that are not correlated. Very interesting chart though
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adilaslam99
a year ago
I would like to dig it little bit more.
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Oztrade adilaslam99
a year ago
Here is the link where I found this data and chart which I wanted to share with you all on TradingView - any input would be great from everyone. I searched forex correlation in google and read some other interesting facts. But looking at this chart and then studying charts it is pretty accurate most times, the only things that affect it obviously is fundamentals, news etc - here is the link http://www.fxkeys.com/currency-pairs-correlation-in-forex-market-cross-currency-pairs/
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This is a great chart -- but respectfully I have a correction. This is not correlation, it's basic numerator denominator cancellation. There is an important difference.

Correlation measures the strength of the relationship of two data sets. This does not show that.

Rather, when you have a FX pair, you are selling the base currency (numerator), and buying the price currency (denominator). To quote investopedia, "if you were looking at the CAD/USD currency pair, the Canadian Dollar would be the base currency and the U.S. dollar would be the quote currency. The price represents how much of the quote currency is needed for you to get one unit of the base currency .

So what this chart shows is cancellation. If you take EUR/USD (sell Euro, buy Dollars) and USD/JPY (sell Dollars, buy Yen) then you can fractionally cancel the USD on both sides to just sell Euro, Buy Yen. That has no bearing on the statistical relationship of the pair because its tautological if both sides have the same cancelled variable. In other words, *all* you've done by canceling dollars is see what the final pair (EURJPY in this example) is doing.

Here's where things get confusing -- for most online FX brokers, they *flip* this terminology (base/price). Don't ask me why it makes no sense. But to prove my point, try charting EURUSD / JPYUSD and then just EURJPY. You will see they are identical, and this is the cancellation taking place. This shows that the "if and" parts of your table are redundant to the "then" part is the only relevant part in terms of showing the trend. All you need is the "then".

Hope this was useful, I am only offering this as a helpful point not as any criticism intended.
+6 Reply
Oztrade SPYderCrusher
a year ago
Thanks SPY - makes perfect sense, we know the meaning for correlation and cancellation so in terms you are right a correlated pair would affect the cross currency being said it would cancel it out. http://www.investopedia.com/articles/forex/05/051905.asp this explains correlation more in depth and the correct formulas for calculating. I haven't really worried about this at all, I guess more for input from other traders to see their thoughts - when I back test I don't use correlation in my back testing so I just trade my plan and stick to it. Same as fundamentals they don't concern me at all - I mentioned this to some friends who are also traders that if they worried about fundamentals and news events then they would have or should have applied this in their back testing to get perfect results, its ironic that they can back test a strategy for 1 year 5 years or what ever and then in real trading they dont trade through big news events. Their are a million ways to make profit in the market many different strategies there is not one set way and it is great to hear all the stories from us traders. I also implement the Kaizen Philosophy into my trading - Thanks again for your input on this
+1 Reply
SPYderCrusher PRO Oztrade
a year ago
Definitely, and thank you for the follow-up. Good stuff :D
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ThomasJeff_DCM PRO Oztrade
a year ago
This is a really good point about the back testing, people backtest their trading method, and most don´t remember if there were news coming out on 2012-3-16 so they just trade it if there is a setup. And in the end they should of course end out with a profitable result. They take the pairs that perform the best and make a portfolio that of course is OBVIOUS too correlated and then they start to panic about news, correlations, fundamentals.

When they were backtesting they did non of that they just testet every single setup when it showed it self and that is consistency! Then when they start trading they are worried about a thousand things we can´t predict anyway. Like this weeks FOMC, i know its a bit special this time but i´m just gonna trade like any other day. i´ve been trading the same method for 5 years, and i´ve seen a lot of FOMC and odd enough my equity is still making new higher highs every month. Its the consistency to stick to profitable model that is important. If you got 2-3 trades going the same way what does it matter in the long run, cause you will have just as many 2-3 trades going your way with a good R:R its money in the pocket. Consistency is the key! No fear or greed! Just my 0.2 Cents..

And thanks for your message Oztrade i´ve been busy as no words can describe so had not had the chance to wite you back yet, just fell over this post over my breakfast =D

Kind regards.
Thomas Jeff
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Oztrade ThomasJeff_DCM
a year ago
Thanks Thomas - hope all is well and your back is doing better. Thanks for your insight on this and you are 110% right trade the plan. I brought this topic up the other day regarding backtesting because most people dont take into account news events and massive spikes and in backtesting it shows them great numbers - but in real they take a lot of it out from things they listen to. If they just stick to their plan follow their rules and trade it they will produce the positive expectancy and have results. All the best and happy trading this week.
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You can reduce redundancy by trading the highest liquidity pairs alone too.
Correlations come and go, but it's good to understand what fundamentals link pairs together.
Nice chart!
+3 Reply
Oztrade IvanLabrie
a year ago
Thanks Ivan - yeah I seen that correlation come and goes - if it were in sync 100% of the time then we would all have a better advantage. I guess my main query with all this was if I am 50.1% sure that a pair was going to roll over - just an example if there is a cypher pattern completion on AUDCAD and AUSUSD similar to like we are seeing now - and all the signals were telling me that it has a high probable chance that it will fill my order and roll over to at least hit one target - based on other filters and confluences as well - then instead of having 2 positions why wouldnt one just increase position size on one pair. This would be the same as losing 2 trades or winning both. I hate reading into things - the more I read the more it makes one think.
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IvanLabrie PRO Oztrade
a year ago
Increasing risk in that scenario would be the same as increasing risk for increasing risk's sake. I don't see an edge, if both aud pairs look similar it simply means that the aud element in both is getting stronger, not necessarily usd or cad in particular becoming weaker.
What SpyderCrusher mentions is important to consider.
What are the markets that really DRIVE prices and make all the ratio charts look like they look?
The usd pairs! So, why not focus on usd pairs to understand individual currency strength or weakness?
That's what I try to do at least.
+3 Reply
Oztrade IvanLabrie
a year ago
Great point Ivan - you are 100% right as the USD is the currency that drives most. And focusing on the most liquid pairs. Excellent to have your input. Looking forward to back testing and putting together another strategy and portfolio I am working on. Thanks
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IvanLabrie PRO Oztrade
a year ago
Cool, I'd rather forward test, backtesting can lead to one seeing things work, but with the current market conditions, these setups would no longer work the same way.
+1 Reply
Oztrade IvanLabrie
a year ago
Very true on that Ivan - the markets are changing so much - who knows the entry levels for advanced patterns could even change to be more effective. If we have 10 million traders all front running orders then things change, traders miss trades. Taking profits early - trend traders not using structure and so on - it will be interesting to see the changes over the next few years and we will need to use the Kaizen Philosophy to keep fine tuning our strategies - Forward testing is key
+1 Reply
IvanLabrie PRO Oztrade
a year ago
Observing market conditions and having a trend vs range definition is paramount. Forward testing to get a good feel of what we do is a good idea.
Good luck this week! (we'll need it)
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Oztrade IvanLabrie
a year ago
You too Ivan all the best and happy trading this week. Take care
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SPYderCrusher PRO IvanLabrie
a year ago
Excellent points Ivan -- especially about forward testing. At least that is where the idea meets reality so to speak.

My two cents is that backtesting by and large is a fool's errand. Its *extremely* challenging to not end up just curve fitting the data set into "some idea" that appears good. Also, not to imply any skill or lack thereof, but the vast majority of people do not have the mathematics or statistics background to properly backtest an idea (certainly not saying that I do necessarily either, haha).

some thoughts:
- backtesting should be to disprove ideas, not prove them.

- almost no one attempts to conduct significance tests on their results, meaning any statistical conclusion is prone to type I or II error
- no one (that I've ever seen in a blog at least) conducts more advanced statistical regressions such as ARCH regressions or model F Tests

for this reason the simple construct of buy when x crosses y and hold until z is usually a really flawed study.

So what does work? What is a good idea? Well coming up with a repeated, testable premise that is constructed in risk;reward terms rather than if A then B terms is a better shake. Also, if you look at *all* the best traders/investors (they have to be doing something right, right?) they all use ancillary data that is not strictly just T.A. to get their edge. Whether its order flow, or a team of highly paid research analysts, or access to management.

again, my 2 cents.
+1 Reply
Oztrade SPYderCrusher
a year ago
Good Point Spy - yes thats exactly correct in backtest - I guess many people are different and that gives the edge to one who wants to prove the results wrong and wrong again, they will do there best to try to make the results look bad rather than look good because the bottom line is to protect capital and for one who wants to get results they want to see rather than take every single little aspect of the test into account then its their loss. Like Ivan said as well which is 110% very true to have something on paper and forward test it to see the results speak for themselves is key to a successful strategy.

Backtest results will show you the full picture of a perfect trading system if you were to trade it exactly like the results say. That means you would need to be awake 24 hours a day lol and to not miss a beat in reality most backtesting needs to be entirely around your hours of trading. The results spreadsheet that I use have very extensive data which calculates the whole lot from Live Equity to Money Management - it consists of Live data and back test data and current pip value daily weekly. In order to have almost perfect results good data is needed. I guess the system I use is not over complicated both in back testing and forward testing so its manageable on a daily weekly basis.

And yeah for sure Spy to disprove is what successful traders do - they want to try to make the figures on paper not work - I remember talking with the Guys from trade empowered - Darren Oglesbee the founder of the Cypher Pattern, he was actually looking for something else while backtesting and came across these figures of a new pattern being up to 80% accurate on some pairs, Jason Stapleton and Akil Stokes didnt believe the figures he was showing them and they tried so very hard to prove him wrong they backtested the absolute %$#@ out of it and couldnt fault it with the results. Hence the Cypher Pattern was emerged into the world of Trading.

Just an example I tested a theory of using the RSI set to 3 and 96 on LTF - my normal TTF is 60m so I wanted to see if I tested this on 5m charts and ran a series of buy sell signals on the 5m chart having the RSI set to 3 and 96 it was amazing the results it showed. This was only with one filter and it makes you think the possibilities could be endless in regards to having a system that produces a positive outcome.

Great stuff guys really like the posts and information you bring to the table.
+1 Reply
I have worked with this concept before. So If I may offer some insight. Yes, it makes perfect sense on the surface. Yes, logically it should offer a high degree of probability. The main issue is timing. And the Fx market is hardly a logical market. We are in an era where trends are hard to find and that is where this concept proves its worth, in trends. So if you can identify a trend you will find a smart trade. My problem was the current state of affairs in the Fx markets killed most smart entries as sentiment is changing every day and in a lot of cases the flow of funds changes multiple times a day. Nonetheless, I like the concept very much.
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IvanLabrie PRO coondawg71
a year ago
I've come to found the dollar is mostly ranging accross the board since February, so yes, agreed 100%.
Might be better to focus on trading from the extremes, and trailing every position to avoid whipsaws.
Not the best time for our trend trading strategies sadly.
That being said, we might see some very sharp directional legs starting this week with FOMC.
Doesn't matter if they are short lived in the intermediate term though, opportunity will be good with increased volatility.
+1 Reply
Oztrade IvanLabrie
a year ago
Yeah it should provide some movement as it always does, I read some articles the other day about certain governments/banking and other stimulating the forex market when there is low liquidity. FOMC is always great to see the massive movements from Fundamentalists and just the pure emotion driven from every trader in the market. All the best and we will see
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Oztrade coondawg71
a year ago
Thanks for you input - yes you are right sentiment changes very frequently we see in many testing scenarios compared to years ago certain entry levels and so on are slightly changing from what I can see. Front running orders seems to be changing entries and profit levels.
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SPYderCrusher PRO Oztrade
a year ago
you know what I forgot to say Oz...kudos to the effort it took to build this graphic in the first place!! That was no small feat!

Also, to the posters below (Delph, FullTime, omw...) just want to reiterate this is not a correlation.

Good luck, and happy trading guys :D
+1 Reply
Oztrade SPYderCrusher
a year ago
Thanks Spy - lol yeah it took some effort to get all the Arrows to line up well when I say line up there not perfect but all good.
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Delph
a year ago
Thank you for your CROSS CURRENCY PAIRS CORRELATION - ADVANCED ANALYSIS it is very helpful as I am a new trader.
Doug
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Oztrade Delph
a year ago
Pairs dont stay in correlation often this was just a chart to show the possibilities and like Spy said pairs do correlate but this is also a way to look at how one pair cancels another. All the best - it can work to ones advantage or disadvantage - check this link Delph http://www.investopedia.com/articles/forex/05/051905.asp this also shows certain pairs by date and time that have a % of correlation
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FullTimeTrader
a year ago
Thanks for posting this. I always use correlation as CONFIRMATION or additional information for my setups. Its not an exact formula, sometimes there is something interesting and sometimes nothing. Regards.
+1 Reply
Oztrade FullTimeTrader
a year ago
Thanks for your input FTT - greatly appreciated we are trying to get as many idea's and input from the large trading base of traders here on TV - I guess from any traders who use correlation to help explain anything they know or use in respect to there trading would help every here. Thank you
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omw78ygthasoh
a year ago
Hi yes I WOULD BE INTERESTED IN the currency pairs correlation
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Oztrade omw78ygthasoh
a year ago
Hi thanks, we are trying to get traders here on TV to provide there input so you can all read over it to get their take on this subject. If you look up the top of this post you will see 2 links on correlation - hope this helps - maybe you can also google search Forex Currency Correlation and see what more you can find. All the best and happy trading
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interesting but commonsense...!
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ForceFollower
a year ago
Excellent! Good job! A huge 'like' to you!
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Nice to learn more about Correlation bvetwen FX courrencies and commodities, like gold or crude oil,

feel free of share it
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Oztrade VICTORANDRESAMU
a year ago
CURRENCY VS COMMODOTY CORRELATION - CHECK THIS OUT
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tombiz777
9 months ago
Hi ,
I would like more info on how to read the correlation chart correctly and maybe see some examples.

Thank you

Thomas Jung
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tlc8020
5 months ago
Fickn awesome site bud......thanks for sharing......Cam
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