DislikedHello BB and FXsurfer,
Example: GBPUSD candles moving up STRONG and USDCHF candles moving UP STRONG = GBPCHF moving up STRONG (Actually this means that the USD is getting weak against the GBP and at the same time the USD is getting strong against the CHF) Interpret: Candles on BOTH GBPUSD and USDCHF are moving up together strong = STRONG move up on GBPCHF (but, at almost 1.7:1 ratio!! GBPJPY doing this is almost a 2:1 ratio!)
The 9 Strength-Weakness Correlation positions:
1. GBP/USD Up and USD/CHF Up - Cross will move UP STRONG (Primary trade objective moves)
2. GBP/USD Down and USD/CHF Down - Cross will move DOWN STRONG (Primary trade objective moves)
3. GBP/USD Up and USD/CHF Down equally - Cross will REMAIN FLAT (Don’t trade these moves)
4. GBP/USD Down and USD/CHF Up equally - Cross will REMAIN FLAT (Don’t trade these moves)
5. GBP/USD Up and USD/CHF FLAT - Cross will move UP MODERATELY (Can bring decent profits)
6. GBP/USD FLAT and USD/CHF Up - Cross will move UP MODERATELY (Can bring decent profits)
7. GBP/USD Down and USD/CHF FLAT - Cross will move DOWN MODERATELY (Can bring decent profits)
8. GBP/USD FLAT and USD/CHF Down - Cross will move DOWN MODERATELY (Can bring decent profits)
9. GBP/USD FLAT and USD/CHF FLAT - Cross will remain FLAT (Market is undecided – leave alone)
Correlation trading like this is actually a type of Triangular Arbitrage, where we are exploiting the ineffieciencies of the market (completely legal and respectable) and knowing these 9 possibilities brings about a greater awareness of looking at two currencies and getting enough valid information to trade a third / cross currency.
Most people think that the crosses move on their own accord, with separate support and resistance, etc. like the underlying currencies. The crosses hit S and R when the underlying currencies do, not on their own! But it truly looks like the crosses are moving on their own accord a chart! This is the biggest understanding about crosses. If you sell this info, give me a nickle, OK?
I hope this articulates a few points of your discussion in this thread.
Keep your powder dry, Cheers!
pipsqueak4xIgnored
The examples you gave are correct as stated for the 9 SW correlations possible, but there is a few more possible correlations that you should have stated. You based those on the assumption that the direction of the move (example 1 the gbp/usd (UP) and the usd/chf (UP), that move UP is caused by the usd) if the move UP is caused by the usd your are correct, but what if the usd is neutral and the move UP for gbp/usd is being caused by GBP and the move UP for Usd/chf is caused by the CHF ? Your cross trade will not be a strong move in any direction and more then likely will be sideways , the exact direction will be caused by which part either GBP or CHF has the strongest momentium at that time. As long as the usd stays neutral there is a 50-50 chance that the cross GBP/CHF will even go down .
So bottom line is, be careful taking any trades for the crosses if you are just looking at the direction of the move of the major currencies, unless you know which part of the major currencies is causing the directional move.
Good trading....
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