Trading cross pairs

Once i read this trick from an ex senior bank trader on twitter, the real one. I took note but quickly forgot about it.
I accidentally find it to day.

So let explained the idea it by a story. You can skip this and scroll to below part.

Quote

Disliked

"Suppose the town has 2 mobilephone store: Store A & Store B. They sell exact the same kind, same quality, identical in everything & from the same importer.

The rise & fall in exchange rate doesn't reflex the change in fundamental quality of phone A & B. It should be 1.05 as before.
But the sudden, large market order injected into market make this exchange rate temporary.

Take EURUSD, GBPUSD & EURGBP as an example.
I call the moment when large market order injected to the market which causes big movement as "Liquidity moment". As we all know the reason for market to move is "Lack of liquidity". That is, if you want to buy a real estate and nobody sell at this price - lack of liquidity at this price - then you have to buy at that much higher price.

So we have large USD sell market order suddenly injected to the market, cause a sudden change in EURGBP rate.
Fundamentally, there is (almost) nothing change before & after that moment.

Example in real chart
I use NY (GMT-4) chart. This is M15 chart.
It's May 12, M15 candle at 8:37 am NY time. Btw this is the intersection of London & NY sessions.
You can see this large bullish candle cut through bunch of equal highs above. So we can guess that bunch of buy stop will be triggered, adding fuel to the fire and push price up even more to these level above it.
We have the same price action on EURUSD
Large Dollar sell order injected into market, pushing both GBP & EUR up.
And the Side effect: EURGBP down.

i zoom into 1 minute chart here:
you can see the M1 candle, in GBPUSD chart it break out to upside and triggered Buy stop.
The Side effect is EURGBP down.

The trick is we consider the opening price as relative fair value, as price level prior to Liquidity moment.
EURGBP down, and also many wave of intraday speculation follow. We have an intraday downtrend on this pair.
But remember, the key level still above that opening price, prior to Liquidity moment.
I marked it at 0.8528 level.
This level is respected the very next day on May 13. Price touched it slightly and dropped immediately like a stone.

thank you and please give more examples

the technique detail is me extrapolate from my understanding of the concepts. As in my note about his idea as i remember: "Your business, i have nothing to do with it" then i need to find the way to apply the idea, by looking at market price action both backward and forward to gain experience.


Last Wednesday, May 11 the market seem to wait for US CPI release. It moved slowly toward 8:30 am NY time in narrow range with low volatility. Then the news hit, market exploded and chopped up & down.
There is very few fundamental reason for AUDNZD to move at that moment. To me the primary reason for AUDNZD to move at that moment is Liquidity.
Liquidity was different for AUD & NZD.

You can see that i cherry pick this pair. The other crosses at that moment aren't perpect as that.
They don't respect the previous "fair" level or don't react precisely at exact level.
The point is to expect the level will be respected in near future

If market priced in all information before news release (on cross pair), then news movement mess up with price, then anything that is deviated from the prior level should be considered (although temporarily) as over/undervalued, right?

EURGBP

EURCHF

EURAUD

GBPNZD

I measure candle's range to see if big Dollar's movement caused another big movement on cross pair, as evidence that cross pair move for the reason that is not related to fundamental factors.

Thank you for your response and hope for your success.

The reverse is also applicable.
This is basically the post news release technique.
If A/B movement was mainly driven by A, then B should have nothing to do with it (for the sake of simplicity, we assume that). Of course if economic condition in Europe is better, then one should expect London market would react joyfully. But for the sake of simplicity, we assume B is fairly independent in very short time period after the news.

To be clear if impact of news on A would have somethings to do with B, we can look at the similarity of their price action.
Here's some example:
BOE rate decision, May 5.
EUR/GBP shoot up, but mainly driven by GBP weakness (in red).
But interestingly, EURUSD (in blue) was dragged down.
The price level of EURUSD prior to BOE rate decision then became good resistance the day after.

May 6
The day after, the similarity between price action of EURUSD & GBPUSD. This wasn't GBP news. The news happened an hour prior to it, and it's moderate news. Both EURUSD & GBPUSD fallen quickly after broke down the previous day's low (=> lack of liquidity aka buy Limit order below caused quick moving market).
This price action caused side effect on EURGBP, this pair moved up.
But this opening level of the candle before "liquidity moment" (as mentioned in #1), became good support for price the next day

May 09
Just looking at price chart is hard to consider what moved what. But look at these number: % change of EURGBP roughly equal the difference between % increase of GBPUSD - EURUSD.
If EURGBP down as a side effect of Dollar trade, then its % change should be less than % change of both EURUSD & GBPUSD, wouldn't it? Otherwise, there would be big arbitrage opportunity and market participants would quickly cover it.
Moreover, this happen at London open time window, so GBP was primary reason.
So in this case we conclude that EURUSD is the independence actor here.
And this level become important support for next few days on EURUSD

nice thread.. i had used eurgbp and gbpusd inverse correlation successfully.. been using currency strength indicator