Introduction to Inter-Currency Analysis

[walterw 10]

I understand tick volume is used for this calculations, wich is pretty reliable as activity equals to volume... I attach a tick chart with vwap on TG using esignal data. you can see it performs pretty well... cheers Walter.

 

[walterw 10]

  Trader333 said:

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

 

Paul, are you familiar with Jerry`s method ? you can see it here :

 

http://www.traderslaboratory.com/forums/f6/trading-with-market-statistics-ii-the-1990.html

 

there is a lot of material on how he uses vwaps for his trading...

 

Now, what I am presenting its not vwap trading at all... this inter-currency analisis tool happens to be calculated from dinamic vwaps, but the real use its to see how a currency is performing in relation to ALL the other currencies... cheers Walter.

[walterw 10]

  walterw said:

Paul, are you familiar with Jerry`s method ? you can see it here :

 

http://www.traderslaboratory.com/forums/f6/trading-with-market-statistics-ii-the-1990.html

 

there is a lot of material on how he uses vwaps for his trading...

 

Now, what I am presenting its not vwap trading at all... this inter-currency analisis tool happens to be calculated from dinamic vwaps, but the real use its to see how a currency is performing in relation to ALL the other currencies... cheers Walter.

 

Obviously there is a lot of excelent vwap based setups using TG... we will discuss them in a diferent thread as well... cheers Walter.

[GammaJammer 10]

  walterw said:

I understand tick volume is used for this calculations, wich is pretty reliable as activity equals to volume...

 

Sorry to be blunt Walter, but that assertion is absolutely and utterly false I'm afraid, and, while that doesn't necessarily mean your strategy can't work, I think you are potentially placing yourself and others in harms way if you continue to assume that tick volume bears any resemblance at all to actual traded market volume, as it simply doesn't.

 

Why? Ok - let me give you an example;

 

You are plotting a chart of eur/jpy on your charting system. Where is this price derived from? Unless you have an actual trading feed from one of the wholesale ecns (most likely EBS in this example) and you are actually plotting the deals given and paid, all you are getting is bid/offer updates.

 

So when does the bid / offer update? Well, it can update for three primary reasons;

 

1) Some trading has taken place in the instrument you are tracking, in sufficient size to affect the interbank market's bid / offer

2) There has been a bid / offer change in one of the underlying 'components' of the price (in this case the eurjpy price on your chart feed is almost certainly derived from eur/usd and usd/jpy

3) A certain amount of time has elapsed, and the data auto refreshes.

 

So if you use example 2, there could be all sorts of trading going on in usd/jpy which might cause tick updates in eur/jpy even if there isn't a single sausage going through the market in eur/jpy.

 

What's worse, the better charting packages use 'blended rates' i.e. they take their feed from more than one source (professional data services such as reuters, bank e-commerce feeds etc). And all these rate engines in turn are updating frequently, for the reasons discussed.

 

Even Worse - there are several ecns trading FX, so even if you could somehow get volume data from one (and you don't even get full volume data from EBS unless you pay them an absolute fortune) you wouldn't get the others. And venues such as currenex, Lava etc are, these days, an increasing share of the volume, and definitely non-negligible.

 

EVEN WORSE THAN THAT - sometimes, the most volume is going through when the price ISN'T moving, if eur/jpy is 70/72 say, and I try and sell 50m EUR, normally that will move the price a few pips. But if I run into someone bidding for eur 50m at 70, that bid might absorb ALL of my selling (if I'm lucky). Thus lots and lots of volume going through with minimal or even zero tick update.

 

OK - THE FINAL REBUTTAL - lots of the bidding / offering these days is what is called 'support pricing' i.e. big banks bidding / offering at certain levels not because they really want to buy or sell euros, but because they have comitted to the ecns to support their product. So these bids and offers will be auto generated by algos, and will track the price up and down. And some are smart. Very smart. So if it's 70/72 again, and I'm trying to sell no worse than 70, and maybe I offer at 71, the market is suddely 70/71 (my offer) so the smarter algo will pull it's bid at 70 and replace it maybe at 69 or 68 (as it doesn't want to get hit at 70 in a market where there's already a 71 offer as that's possibly a losing trade). Bingo - another situation with two price updates and NO volume going through.

 

Hope this all makes sense - trust me on this one - tick volume in FX is a marketing ploy by the chart providers only - it has zero and even potentially negative corellation to actual volume in the market.

 

GJ

[thrunner 10]

  GammaJammer said:

....

Hope this all makes sense - trust me on this one - tick volume in FX is a marketing ploy by the chart providers only - it has zero and even potentially negative corellation to actual volume in the market.

GJ

With all due respect, I don't think we can really trust you or even Walter on this without more statistical analyses.

Tick volume in Forex is like exit poll samplings in an election. Sometimes they can be very accurate if done properly, but sometimes they can be very wrong. Some of the anecdotes you described can be true in specific cases, but over the long run, tick volume analyses of Forex could proved to be useful and statistically significant.

[Trader333 10]

  thrunner said:

..... but over the long run, tick volume analyses of Forex could proved to be useful and statistically significant.

 

Can you say in what way that it can be useful ?

 

 

Paul

[walterw 10]

No need for precise volume data... this is not vsa or volume analisis... technicals on this stuff I am presenting work pretty well as you are actually looking if a currency is performing well or not in relation to others... some will like it, others not... not a problem, I will keep explaining tomorrow some strategies to trade with using this tools. cheers Walter.

[walterw 10]

  GammaJammer said:

Sorry to be blunt Walter, but that assertion is absolutely and utterly false I'm afraid, and, while that doesn't necessarily mean your strategy can't work, I think you are potentially placing yourself and others in harms way if you continue to assume that tick volume bears any resemblance at all to actual traded market volume, as it simply doesn't.

 

Why? Ok - let me give you an example;

 

You are plotting a chart of eur/jpy on your charting system. Where is this price derived from? Unless you have an actual trading feed from one of the wholesale ecns (most likely EBS in this example) and you are actually plotting the deals given and paid, all you are getting is bid/offer updates.

 

So when does the bid / offer update? Well, it can update for three primary reasons;

 

1) Some trading has taken place in the instrument you are tracking, in sufficient size to affect the interbank market's bid / offer

2) There has been a bid / offer change in one of the underlying 'components' of the price (in this case the eurjpy price on your chart feed is almost certainly derived from eur/usd and usd/jpy

3) A certain amount of time has elapsed, and the data auto refreshes.

 

So if you use example 2, there could be all sorts of trading going on in usd/jpy which might cause tick updates in eur/jpy even if there isn't a single sausage going through the market in eur/jpy.

 

What's worse, the better charting packages use 'blended rates' i.e. they take their feed from more than one source (professional data services such as reuters, bank e-commerce feeds etc). And all these rate engines in turn are updating frequently, for the reasons discussed.

 

Even Worse - there are several ecns trading FX, so even if you could somehow get volume data from one (and you don't even get full volume data from EBS unless you pay them an absolute fortune) you wouldn't get the others. And venues such as currenex, Lava etc are, these days, an increasing share of the volume, and definitely non-negligible.

 

EVEN WORSE THAN THAT - sometimes, the most volume is going through when the price ISN'T moving, if eur/jpy is 70/72 say, and I try and sell 50m EUR, normally that will move the price a few pips. But if I run into someone bidding for eur 50m at 70, that bid might absorb ALL of my selling (if I'm lucky). Thus lots and lots of volume going through with minimal or even zero tick update.

 

OK - THE FINAL REBUTTAL - lots of the bidding / offering these days is what is called 'support pricing' i.e. big banks bidding / offering at certain levels not because they really want to buy or sell euros, but because they have comitted to the ecns to support their product. So these bids and offers will be auto generated by algos, and will track the price up and down. And some are smart. Very smart. So if it's 70/72 again, and I'm trying to sell no worse than 70, and maybe I offer at 71, the market is suddely 70/71 (my offer) so the smarter algo will pull it's bid at 70 and replace it maybe at 69 or 68 (as it doesn't want to get hit at 70 in a market where there's already a 71 offer as that's possibly a losing trade). Bingo - another situation with two price updates and NO volume going through.

 

Hope this all makes sense - trust me on this one - tick volume in FX is a marketing ploy by the chart providers only - it has zero and even potentially negative corellation to actual volume in the market.

 

GJ

 

good GJ... but charts talk for themselfs, its like love, sometimes you just dont understand it.... cheers Walter.

[GammaJammer 10]

  thrunner said:

With all due respect, I don't think we can really trust you or even Walter on this without more statistical analyses.

Tick volume in Forex is like exit poll samplings in an election. Sometimes they can be very accurate if done properly, but sometimes they can be very wrong. Some of the anecdotes you described can be true in specific cases, but over the long run, tick volume analyses of Forex could proved to be useful and statistically significant.

 

Fair enough - I'm not asking for trust - it's no skin off my nose either way. I just happen to know a fair bit about this subject.

 

There might be a correlation, and it might be that Walter's system works better with this tick volume stuff overlayed, but that in no way proves cause and effect. And for the reasons I outlined, it's unlikely it ever will either. If it works then great, but equally I could develop a system that worked better if you overlayed the volume of blue BMWs going past my window onto it and say that that equated to FX volume in some strange way. The fact is I would be wrong, but I might still be making money.

 

GJ

[Kiwi 16]

Actually, thrunner, you can trust what GammaJammer said without statistical analysis.

 

Trust is an unfortunate word here because it suggests that one or either of the other parties might be untrustworthy.

 

What is interesting is the question of whether or not you could build a useful trading concept despite the genuine issues with any forex volume measure. You might be able to because the proxy for volume might have useful characteristics. However, knowing what he has said could apply at any time and almost certainly differently to different feeds you might also be considerably wiser in your use of a proxy for traded volume.

[OAC 10]

  GammaJammer said:

If it works then great, but equally I could develop a system that worked better if you overlayed the volume of blue BMWs going past my window onto it and say that that equated to FX volume in some strange way. The fact is I would be wrong, but I might still be making money.

 

GJ

 

Blue BMWs may be nice, but I like the length of mini-skirts better !

[MidKnight 12]

  walterw said:

I understand tick volume is used for this calculations, wich is pretty reliable as activity equals to volume...

 

Hi walter,

 

I believe in the Forex world - this is a false assumption. A tick is strictly a bid change. No actual volume has to trade (although it might) for the data feed to send you a new tick.

 

Thanks for sharing this thread btw.

 

My best regards,

MK

 

*edit: I posted this before reading GJs excellent post. He definitely knows what he is talking about in FX. I think I read at T2W several years ago that he worked/managed interbank FX dealers or something.

Edited June 2, 2008 by MidKnight

[walterw 10]

Its hard to ignore this charts... be it with tick or watever volume calculation... they do perform.... lol

 

 

cheers Walter.

[Kiwi 16]

A question worth asking is:

 

does it perform better than this one?

 

.

[BlowFish 10]

First interesting thread Walt, you have obviously been busy and not just lying on a beach . I'll be interested to see where you go.

 

 

There are a couple of fundamental explanations why this might 'work' despite not being able to get accurate volume data. I'll leave that up to the philosophers and mathematicians. As an example the way the tool works inaccuracies may tend to cancel each other out being applied on both sides of the equation. Noise and filters and all that sort of stuff.

[GammaJammer 10]

  BlowFish said:

As an example the way the tool works inaccuracies may tend to cancel each other out being applied on both sides of the equation. Noise and filters and all that sort of stuff.

 

I genuinely don't think so. Maybe in the ultra long run, but 100% not in the short term. Sometimes this indicator will be positively corellated with volume, sometimes negatively, and sometimes uncorellated. To me that means any relationship is circumstantial at best, and since it's such a random, artificially created bit of data, I just can't see it as anything other than a mental crutch. Bit like a pair of lucky pants or something

 

GJ

[walterw 10]

  GammaJammer said:

I genuinely don't think so. Maybe in the ultra long run, but 100% not in the short term. Sometimes this indicator will be positively corellated with volume, sometimes negatively, and sometimes uncorellated. To me that means any relationship is circumstantial at best, and since it's such a random, artificially created bit of data, I just can't see it as anything other than a mental crutch. Bit like a pair of lucky pants or something

 

GJ

 

Ok GJ, I think you made your point, now relax and enjoy the show... As I always say, lets keep it educational and also I would suggest not getting into any competition here as to who is wrong or right, likes or not... I will start showing how this performs, and how it may be used... cheers Walter.

[walterw 10]

  Kiwi said:

A question worth asking is:

 

does it perform better than this one?

 

.

 

 

Nice chart Kiwi ¡¡ certainly nice.

[walterw 10]

So I presented so far this 3 histograms that show us the condition of a currency in relation to several other currencies...

 

If we have oposite performance in the currencies that conform a pair we may expect trending action... if they are not contrasted we may expect congestion action...

 

As the third histogram (BOTTOM) is inverted color, then we will expect to see all histograms on the same color for contrasted trend action... if colors are mixed, we know they are not contrasted so we may expect congestion action...

 

 

I already presented 3 posible interpretations of this 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.

 

 

So from the 3 alternatives I will focus at this time on the first one... All the same color = Trend setups

 

When the 3 histograms have the same color, we clearly know that one currency is strong in relation to other currencies and the other is weak in relation to the other currencies... so being opposed on their performance in the market could give us a clear hint that we will have some trending action...

 

So from here on I will focus in presenting some posible "Trend Trades" with the FXMM context being used...

 

There can be several diferent strategies in terms of trend trades, depending on how much scalping or day trading you actually want to do... so for the sake of simplicity I will open 2 new threads where in one I will present a scalping strategy and on the second one it will also be a scalping strategy as well, but a little more larger... cheers Walter.

[Sledge 13]

Walter-

Quick question:

If we don't have this "heat map" at our disposal, but are somehow able to manually source the information- say we use the following and this is a current example:

 

Using FUTURES DATA:

Right now the JPY is weak- Look to Sell

Right now the AUD is a fairly strong "Buy"

 

This was the most- mis-matched pair I could find currently.

So a nice trade may be to go LONG AUD/JPY.

 

BUT

A quick look at the chart shows that pair appears to be peaking pretty hard- Any insight?

Sledge

Edited June 2, 2008 by Sledge

[BlowFish 10]

I did notice a public domain 'heat map' for MT4 when searching for something else. Chances are it is a different tool but it does compare relative strength of various pairings.

[walterw 10]

There are several Inter-Currency analisis tools out there... but so far no one of them get near to what TG does... lol.

[cowpip 10]

  walterw said:

Ok GJ, I think you made your point, now relax and enjoy the show... As I always say, lets keep it educational and also I would suggest not getting into any competition here as to who is wrong or right, likes or not... I will start showing how this performs, and how it may be used... cheers Walter.

 

Walterw, I don't think it's a question of who is right and who is wrong - it's a question of basing trade decisions on believable data or not. I certainly wouldn't invest my cash based on decisions dictated by an indicator that was based on flimsy or fictitious data. That's not a playable "edge."

 

I'll definitely hang my boots beside GammaJammer's opinion on this matter before I'd rest it beside those of the chart providers. These indicators may be "cool" to look at, but "cool" indicators may freeze hell cold when truth be told.

 

The question to be asked (and answered) is this: is it worth your time and/or reputation to engage in "research" that is based on an indicator that has no real computational value?

 

I won't say any more concerning this on this thread. My only concern is with those who know less and who may think that your research is worth trading with real cash, when in fact it should be considered highly experimental at best.

 

To those who are new to forex who are reading this - be careful. Your hard-earned cash is easy-prey out there if you aren't basing your trading decisions on rock-solid and time-tested strategies.

 

To Walterw and the rest who are building this thread... I find it admirable that you are striving to find new strategies to become successful and I wish you the very best. Keep it up and you will indeed be successful. It's always a great thing to have new ideas bounced around. But in making this discussion public, you must also be receptive to comments from those having greater knowledge than you. Don't take GammaJammer's (and other) comments lightly. I have it on good knowledge that their chair sits a fair bit higher up the totem pole than most on here (myself included).

[walterw 10]

  cowpip said:

Walterw, I don't think it's a question of who is right and who is wrong - it's a question of basing trade decisions on believable data or not. I certainly wouldn't invest my cash based on decisions dictated by an indicator that was based on flimsy or fictitious data. That's not a playable "edge."

 

I'll definitely hang my boots beside GammaJammer's opinion on this matter before I'd rest it beside those of the chart providers. These indicators may be "cool" to look at, but "cool" indicators may freeze hell cold when truth be told.

 

The question to be asked (and answered) is this: is it worth your time and/or reputation to engage in "research" that is based on an indicator that has no real computational value?

 

I won't say any more concerning this on this thread. My only concern is with those who know less and who may think that your research is worth trading with real cash, when in fact it should be considered highly experimental at best.

 

To those who are new to forex who are reading this - be careful. Your hard-earned cash is easy-prey out there if you aren't basing your trading decisions on rock-solid and time-tested strategies.

 

To Walterw and the rest who are building this thread... I find it admirable that you are striving to find new strategies to become successful and I wish you the very best. Keep it up and you will indeed be successful. It's always a great thing to have new ideas bounced around. But in making this discussion public, you must also be receptive to comments from those having greater knowledge than you. Don't take GammaJammer's (and other) comments lightly. I have it on good knowledge that their chair sits a fair bit higher up the totem pole than most on here (myself included).

 

Its interesting, I still did not show anything yet here... I would aprecciate your scepticism once the strategy is presented and you can validate the fact that the data and tool its so bad...

 

I personally would not waste my time doing this and sharing my knowledge if this tool was so bogus... I personally do beleive it works because it simply does, so for the sake of keeping educational this thread I will apreciate if we can get into the topic of how this works and not into the prejudice of how it doesnt.... I understand all the theory GJ presented, I am not new to all this info he presents, what I believe is that certain aspects of statistics are hard to understand some times... even when some theoretical asumptions may make sense, some times on the practice they simply dont..

 

When I mentioned vwaps on forex seems like its not reliable data, well the fact is some times, small samples of proxy data can be sometimes even more powerfull than true factic data, this happens a lot on internals... many are proxy data and work better than true factic data...

 

I dont take GJ comments lighter, I just want to present how this "unreliable data tool" as your comments are does work... cheers Walter.

[GammaJammer 10]

  cowpip said:

Don't take GammaJammer's (and other) comments lightly. I have it on good knowledge that their chair sits a fair bit higher up the totem pole than most on here (myself included).

 

Actually, if you look closely at a totem pole, there is usually a butt-ugly face on it, right near the bottom.

 

That's me