Introduction to Inter-Currency Analysis

[walterw 10]

So... you want to trade forex ? well its a hell diferent aproach than futures, thats for sure... when I just started with the idea of getting into forex, I really didnt realize how diferent this market would be... at some point I was almost discouraged with my mixed results on my research...

 

What I didnt really realized is that as it happens with futures, forex also has its "internals".... those spy tools that can give you that extra edge...

 

As you all know trading futures can be so much easier when you use certain internals like tick, trin, etc etc... you call it... but this "internals" give you a hint of whats going on...

 

Same happens on forex when you introduce "Inter-Currency Analisis" to the ecuation...

 

Its simple all currencies are related one to another... they just cant change so much without affecting other currencies, because they are all related in pairs... they all form part of a "tissue" that has some certain flexibility but at last it will come back to an organic equilibrium...

 

Lets give a little simple example so you can grasp what I am talking about here... lets say we have a super up move on the USD/JPY ok.. what this means is that the USD is becoming more strong than the JPY... simple as that... now the USD (the currency itself, not the pair) its becoming strong... so what can we expect then to happen on the other pairs that contain the USD if the USD itself its becoming strong ?.... mmmm well, welcome to the "Inter-Currency Analisis" world... now let me grab a good argentinean cup of coffee... I keep going on the next post. cheers The Chimp.

[walterw 10]

If you start to look at the currency by itself... how she is becoming strong or weak in relation to other currencies... then you start to see the big picture in forex... you start to have an incredible edge... you have an "internal" that its telling you what REALLY its happening on the market... you just simply can not ignore the true condition of a currency you are pretending to trade... its so fool to ignore whats the true "health" of this currency in relation to all the other currencies...

 

KNOWING the true health of a currency its the begining of a TRUE validated CONTEXT from wich you can build infinite alternatives to your trading... BUT you need first a good solid context and that context I beleive is "Inter-Currency Analisis"...

 

When you do "Inter-Currency Analisis" you are basicly creating a solid foundation to build a super skyscraper on it... its so solid it can handle just about any weight on it...

 

So this information its key to any forex trader... now gathering this information may becme a very sofisticate procedure if not hard actually, thats the reason many traders just dont have this info because its actually pretty hard to gather it in a fashion where you can see it simple and usable..

 

Thats where I actually found some edge on this soft I will show you, but lets go first into the intrinsecal concepts... next post

[walterw 10]

As you know a pair is formed by two currencies... if this pair will trend, it will actually happen because one currency its becoming strong and the other its becoming weak... now thats obvious on the considered pair... how about if I tell you that the currency "itself" its becoming strong or weak in relationship to other pairs... so lets say I have EUR/USD and I have the info that the EUR is becoming very strong in relationship to other pairs and happens to be also that the USD its becoming very weak in relationship to other currencies... so now I KNOW I have a strong EUR in relationship to other pairs and a weak USD in relationship to other pairs... not just between the EUR/USD but between the rest of the market...

 

Well you can expect a super up move more likely...

 

Remember that the currency that starts the name of the pair if strong expect up move if weak expect down move... the second currency on the name has to have oposite condition (strength/ weaknes) from now on I will call TOP to the first currency on the name and BOTTOM to the second one on the name... Example : EUR/USD EUR = TOP USD= BOTTOM ,

 

if TOP is strong and BOTTOM is weak, expect UP move...

 

if TOP is weak and BOTTOM is strong, expect DOWN move...

 

 

So now we want to know how strong or weak each of the currencies that conform a pair is in relationship to other currencies... I call that "Inter-Currency Analisis"

 

cheers Walter.

[walterw 10]

Just in case you didnt read it please check this disclaimer here http://www.traderslaboratory.com/forums/f18/software-disclaimer-3942.html

 

There is a lot of softwares out there trying to do some "Inter-Currency Analisis" but with no success at all, they just cant compile all the information in a way that may be usable... if the final information cant be really used to put in a trade its just futile...

 

I found this soft that does an outstanding job doing some excellent "Inter-Currency Analisis" name is Topgun software for forex (leveragefx) (will not post link here, you may find it on the net)... the edge it has its the ability to do a great job showing "Inter- Currency Analisis" in a tradeable manner...

 

This brilliant fellows created a tool called Fxmultimap (FXMM) wich gathers the information of several diferent pairs to gauge the intrinsecal strength / weakness of a given currency...

 

Its all plotted on a histogram where you can very easy see how things are doing in terms of strength/weakness...

 

Example chart :

 

 

 

so we will be looking at the wonders of this tools on the next few days... and I will create diferent threads where I will present some scalping aproaches (classic stuff) that will be used on the "context" of fxmm analisis...

 

 

basicly the histograms above is the final calculation of the relation between several currencies... so the histogram its not another ordinarie histogram calculated from ohlc of the above bars, NO... its calculated from the relationshgip between other cureencies... COOL STUF MY FRIENDS chimp doesnt consume bad bananas... he like GOOOOD ones... I see ya tomorrow.. cheers The Chimp.

[brownsfan019 17]

Walter,

Good post as it makes sense (to me at least). As someone that's never gotten into fx trading seriously, my questions on your post here would be:

 

1) How can you watch/track if a specific currency itself is getting strong or weak? In other words, how can you tell if the USD itself is strong or weak?

 

2) Knowing what you said in the thread and assuming one could use that trade in real-time, wouldn't computers arb this before you could possibly make a profitable trade? We'll use futures as an example since that's what I know and you've traded them as well - it's a very common knowledge that there are computer arb programs out there that arb back and forth between stocks and the futures. Does not the same idea hold true in fx where if a computer program sees the USD moving in 1 currency to jump over to the other currency(ies) and get in?

 

The main question here being - how is a trader able to use your idea here in real-time to make trades? That's what it's all about, right?

 

I hope you know I'm just trying to see where this is headed and any practical real-time use of it. As you'll see around here, the forum has some new blood and some don't respond to kindly when you ask for practical application of an idea. You know me better than that, but it has been awhile, so just wanted to let you know that my questions and comments are purely educational in nature.

[brownsfan019 17]

note - your post w/ an actual chart helps a lot.

 

 

Still curious how this is used in real-time to make a trading decision though. Looking forward to more from the chimp!

 

PS

You may want to ask James to create a little sub-group for your threads so they stay together and you can moderate it.

[walterw 10]

Nice Brown... glad to see ya man ¡¡ being some time... well basicly I will start showing the interpretation of the below histograms... they basicly show us how each currency that conforms the pair is (stong/weak) in relation to the rest of the market... this will create a "frame" of context.... from there on I will start to explain some setups (nothing new actually) that happens on the price pane but now considering our histograms context... so it will take some time to put this entire idea to the final product... add the fact that I will like to see others ideas as we interact, so it will be a very nice journey... off course Brown, I will apreciate your inputs in candles here to this superb "Inter -Currency Analisis" context... lets go wild ¡¡ jejeje cheers Walter.

[walterw 10]

note - your post w/ an actual chart helps a lot.

 

 

Still curious how this is used in real-time to make a trading decision though. Looking forward to more from the chimp!

 

PS

You may want to ask James to create a little sub-group for your threads so they stay together and you can moderate it.

 

 

The Chimp corner ? jejeje that would be cool...

[GammaJammer 10]

1) How can you watch/track if a specific currency itself is getting strong or weak? In other words, how can you tell if the USD itself is strong or weak?.....

 

If you want to track broad USD movements, you can look at the Dollar Index (although you have to pay exchange fees to get a live feed, unless you want to take the components into excel and do it yourself).

 

......2) Knowing what you said in the thread and assuming one could use that trade in real-time, wouldn't computers arb this before you could possibly make a profitable trade? We'll use futures as an example since that's what I know and you've traded them as well - it's a very common knowledge that there are computer arb programs out there that arb back and forth between stocks and the futures. Does not the same idea hold true in fx where if a computer program sees the USD moving in 1 currency to jump over to the other currency(ies) and get in?.

 

In short, there is time to trade this way if you use longer timeframes, but if anyone thinks that the market in cable and eur/usd always moves in exact lockstep over micro timeframes, they are sadly mistaken. If this were the case, EUR/GBP would never move at all for example. The extent to which this is useable will vary intra day (as well as between currencies) depending on all sorts of factors.

 

My $0.02

 

GJ

[walterw 10]

Hi video...

Hello.swf

[walterw 10]

If you want to track broad USD movements, you can look at the Dollar Index (although you have to pay exchange fees to get a live feed, unless you want to take the components into excel and do it yourself).

 

 

 

In short, there is time to trade this way if you use longer timeframes, but if anyone thinks that the market in cable and eur/usd always moves in exact lockstep over micro timeframes, they are sadly mistaken. If this were the case, EUR/GBP would never move at all for example. The extent to which this is useable will vary intra day (as well as between currencies) depending on all sorts of factors.

 

My $0.02

 

GJ

 

HI GJ... as we get more in topic you will see this doesnt have much to do with correlation actually... its more the overall performance a currency is having in relation to all the other currencies... so we will get there... cheers Walter.

[GammaJammer 10]

OK - it's your thread mate - will watch and see

 

Not trying to hijack.

 

GJ

[walterw 10]

OK - it's your thread mate - will watch and see

 

Not trying to hijack.

 

GJ

 

Oh no GJ not a problem... you are most welcome to interact ¡¡ I will try tomorrow to explain how this works... so far introductions... cheers Walter.

[ztrader 10]

Walter,

 

This is the TopGun Software which you can get for free if you sign up with one of the brokers, i.e. FXDD. FXCM, and FXSolution through LeverageFX. If you will be scalping, you should be able to meet their trading volume requirement.

 

Nonetheless, TopGun has lots of useful indicators, other analytic studies and way too many methods to trade with. You will enjoy them all for your research. For scalping, you really would not need more than a couple of them. The FX Heatmap will do the trick, yet I prefer to use the FXmeter. The e-signal data is a big plus of course and I am planning on using it in a different way.

 

ENJOY!

 

Z

[walterw 10]

Walter,

 

This is the TopGun Software which you can get for free if you sign up with one of the brokers, i.e. FXDD. FXCM, and FXSolution through LeverageFX. If you will be scalping, you should be able to meet their trading volume requirement.

 

Nonetheless, TopGun has lots of useful indicators, other analytic studies and way too many methods to trade with. You will enjoy them all for your research. For scalping, you really would not need more than a couple of them. The FX Heatmap will do the trick, yet I prefer to use the FXmeter. The e-signal data is a big plus of course and I am planning on using it in a different way.

 

ENJOY!

 

Z

 

 

Hey EJ ¡¡ how are you man ¡¡ how is that pipastic life jejeje...

 

well yes Topgun has very nice promotions... but I will not get into that here, let each one find it out by themselfs... I will keep my postings pure educational, you are more than welcome to the technical interaction... maybe some Z stuff ? jeje cheers Walter.

[walterw 10]

So what are this histograms any way ?...

 

lets make a little bit of history and explain where this super indi comes from...

 

I know I may not explain with much accuracy as the developer may explain but I will try to explain the overall concept...

 

The TG developers originally created the Heatmap wich is a grid that shows how weak/strong is a certain pair... that calculation of strength/weakness its calculated from some sort of dynamic vwaps... (thats a propietary TG algorithm) so the heatmap use to look like this :

 

 

you can see on the example above some key CHF pairs being plotted there and you can notice some color changes on it, wich means green more strong, red weaker... basicly I asume thats the relation between price and dinamic vwap that gives that color palete...

 

As time passed the TG developers found out that making an average of all the heatmaps from this pairs that contain a same currency in its name, could give a view of how that particular currency is performing in ALL the pairs... giving birth to the FxMultimap (FXMM), our fancy histogram in question...

 

 

 

So now on a very simple histogram, you can see the overall performance of a given currency in relation to various currencies... that gives you an integral information of how really strong or weak a currency may be...

 

on the next post I will explain the histograms I am using on my actual chart...

 

cheers Walter.

[walterw 10]

As the core tool used to calculate the FXMM its a dinamic vwap (Balance point line continuous, tg name), it may have diferent settings adjusted... so far I finded my confort zone at the 60 minutes parameter alone...

 

So you will notice that I use 60 on my histograms... that means 60 minutes dinamic vwaps being used to create the FXMM...

 

now lets take a look at this chart :

 

 

Thats an EUR/USD 10 tick chart... the data is from esignal (only data supported by TG at this time ) and it has a filtered data that makes the chart more clean, thats the tdfx on the symbol...

 

So lets focus at this time on the histograms below, you can notice I have 3 of them... well the FXMM has the ability to read diferent text files, giving the trader the abilty to program diferent algorithms as to how the fxmm may be calculated... on my case I am using 3 diferent text files provided by TG : COMBO, TOP, BOTTOM... I finded this combination as the most simple and practical one for my research...

 

So let me explain what each one means :

 

Let me start by the TOP and BOTTOM ones... as I stated before TOP = the first currency on the pair name and BOTTOM = the second currency on the pair name...

 

So for example on EUR/USD TOP= EUR and BOTTOM= USD...

 

So the TOP histogram (the one on the middle) its the FXMM of the EUR alone... that means that we have the average of heatmaps of all this pairs that contain EUR : EUR/USD , EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD and EUR/AUD... so on the TOP histogram (the one on the middle) you can see the real health of the Euro currency itself in relation to other currencies...

 

Same calculation happens on the BOTTOM histogram (the one on the bottom) its making the calculation for the USD... that means that we have the average of heatmaps of all this pairs that contain USD : EUR/USD, GBP/USD, USD/CHF, USD/JPY, USD/CAD, USD/AUD, USD NZD... so on the BOTTOM histogram (the one on the bottom) you can see the real health of the USD currency itself in relation to other currencies... now, this BOTTOM histogram is inverted in its plotting, so if the BOTTOM currency its strong (originally green) it will plot red and viceversa... thats because we are actually expecting to see oposite performance between the top and bottom currencies...

 

WE WANT strong TOP against weak BOTTOM for bull action...

and

 

WE WANT weak TOP agains strong BOTTOM for bear action...

 

 

let me take some coffee.... continue on next post....

[walterw 10]

The first Histogram on the top is the COMBO fxmm, this one is some sort of average from the TOP and BOTTOM histograms, wich means that it will tell us how this "Pair" as a pair is doing from the average of the intrinsic calculation of each currency below... (top/bottom)...

 

So I hope you start to grasp what all this means...

 

Basicly it means that when a currency becomes REALLY strong, it actually happens in all pairs, not some only... if it becomes REALLY weak, it actually happens in all pairs as well, not some only...

 

You can gauge the real momentum of the market, reading the overall performance and not only looking at what happens on one pair... but the entire market as a whole...

 

This is key to catch the good moves and stay out of bogus action...

 

cheers, The Chimp.

[walterw 10]

So the core concept now is to trade STRONG currencies against WEAK ones... simple as that..

 

If a currency its becoming STRONG on the entire market and its oposite its becoming WEAK on the entire market, you may have quite a nice confidence things are going to trend your way... at least for some time...

 

Thats the idea of this histograms... giving an overall context to the trader, so he can actually design his strategy in a safer realm...

 

As the bottom histogram is inverted, having the same color on the histograms means that we have oposite strength/weakness going on...

 

So at this point we will have 3 posible interpretations of the histograms :

 

1_ All the same color= Trend Setups

 

2_ After trend moves, Divergences forming (Subsiding Strength/weakness)= Posible Counter setups

 

3_ Oposite colors = Nothing to do, no oposite strength /weakness , posible congestion action.

 

 

 

thats my basic interpretation so far of this tool... remember it is a context tool... cheers The Chimp.

[Blu-Ray 10]

As the core tool used to calculate the FXMM its a dinamic vwap (Balance point line continuous, tg name), it may have diferent settings adjusted... so far I finded my confort zone at the 60 minutes parameter alone...

 

Interesting concept Walter, it's looking good.

 

Could you do me a favour and post a screenshort of a 1 min chart with the 3 FXMM's on and also the dynamic vwap please.

 

Cheers

 

Blu-Ray

[walterw 10]

Yes Blu-Ray its very interesting and very powerfull context for scalping strategies... I attach 1 min chart and added the 60 min Balance point line continuous (dinamic vwap)... cheers Walter.

[GammaJammer 10]

Interesting concept Walter, it's looking good.

 

Could you do me a favour and post a screenshort of a 1 min chart with the 3 FXMM's on and also the dynamic vwap please.

 

Cheers

 

Blu-Ray

 

OK - quick question here - how on earth are you able to calculate a Vwap? Are we talking about futures trading here for FX, or some other form of access?

 

Excuse my potential ignorance

 

 

GJ

[Trader333 10]

Good question GJ because as far as I know there is no reliable volume data for forex and it is essential to have volume to be able to plot vwap at all.

 

Walter as GJ says is this actually futures data ?

 

 

Paul

[Trader333 10]

I have been giving this concept more thought and I am interested to know others view on what I am about to say:

 

When price drifts away from vwap it is likely to come back to it. This applies especially with stocks when a stock price hits 2 standard deviations from the vwap price. If applied to forex I can see the same case.

 

So in the above examples, if a currency is showing generic weakness then it would make sense to me that a high probability trade is more likely when price has drifted in the opposite direction of its weakness from vwap back to the vwap price and especially by 2 standard deviations.

 

Any thoughts ?

 

 

Paul

[justlurkin 10]

And a quick question: How is VWAP calculated on Forex data in your example?

 

edit - Oh, never mind as I see the question has already been asked and I missed the entire page.

 

thanks