Complex Correlations individual currency indicies

Correlations are something I've always been interested in. I was talking to a friend today whom is much smarter than I. He trades correlations of equities where there are hundreds of instruments to correlate and trade deviations. As I look at his calculations I cannot stop myself from thinking Forex must be correlated as all currencies flow together like a river from one side of the world to another. Goods are purchased and equities are invested constantly 24 hours a day. There must be some limiting factor used by central banks intra day to stabilize their currencies. If there were not this indicator would not appear so organized with all the pairs moving like sine waves.
In this indicator you see the average of 4 currency pairs to show the index of each currency. In the attached image we see trade setups using the most deviated currencies at a given time. (I've watched this indicator in real time and these trades setup just like you see them here.)
In the first trade we see GBP is very oversold nearly the lowest of all pairs. On the top around the same time we see JPY is very overbought. The obvious observation would assume GBPJPY is going to go up. Remember that each of these currencies is the index of 4 pairs. So we are not seeing the result of just one pair throwing off a currency. We are seeing a nearly true average of each currency and it's value again other currencies in real time. Think about this. One currency can be moved violently very quickly when we look at one pair. But if we average 4 pairs we see that one currency takes much more effort and volume to move therefore it takes much more energy to reverse meaning trends would be more sustainable. Once these indicies start turning there is not much that can stop them. If we pick the indicies that are deviated the most against one another we are stacking the deck in our favor.
The second trade is also denoted as Red vertical line. Purple being CAD is the lowest index at Red and JPY is still the highest as the color pink. This means CADJPY is going to appreciate in order to balance itself with other pairs.
The third trade is aqua. Green is USD. Blue is CHF. USD should get weaker and CHF should get stronger. USDCHF should go down.
The fourth trade is USDJPY. We see the third blue line on the vertical chart overlaps Green USD and Pink JPY. USDJPY should go up.

can you post the picture in a zipped file so we can see it full screen and in a more clear way?

The indicator seems incredible ! Do you have it by any chance ?

Hi Jeff

I see from your other posts that you have been hunting for the indicator you demonstrate in Post #1 for a while and seemed to have found it now.

Logic would dictate that averaging the overbought and oversold conditions on each currency should work better than say just the Stochastics on one currency pair. Very interesting.

Would be grateful for a chance to give it a forward test if at all possible.

Dave W

I agree with melpheos. Can't see the lines very well as the picture is too small. Also it would be nice to see the math formula used to make this indicator. Yes, pairs trading in stocks is rather popular, there are programs that scan the market and help identify stocks that exceeded their average deviation. I was thinking about applying the same idea to forex, done correctly it should work.

Wow, this really looks good!
Any chance of uploading the indicator, or calculation formula?

Thanks in advance

Pretty cool. but im with Dexis, how is this calculated?

I think it is this one

Nice indicator. I can see right off the bat this will not run on IBFX mini accounts. They will need to append a "m" after all of the pair names.


good stuff. The code looks like it will do the same thing, as the chart above.

glad to see interest building in correlations.

here is one caveat. if you see for example that eur is very weak and jpy is very strong. now we see both rolling over meaning we should get in long eurjpy. the problem is the only pair that continues to selloff for eur is eurjpy. you see other eur pairs are now strengthening so we find ourselves in draw down and a failed trade. i think these situations are fewer than the profiable situations.
here is an image and here is indicator with more currencies added than the complex common. it takes a long time to calculate so please be patient.

You might also need to run the indicator on a platform that offers many currency pairs.
NZD requires 4 NZD pairs to calculate accurately so you'll need a platform that offers. NZDUSD, AUDNZD, EURNZD, NZDJPY
I found NorthFinance offers a ton of pairs and futures. their feed is sketchy however. They seem to turn their feed on and off or their servers are garbage. one or the other.
the mini issue could be fixxed if a coder were so inclined but since IBFX doesn't even offer EURNZD, SJones may as well just get a demo account to run the indicator at NF or someone as such.
i really hope this thread goes somewhere. I've been drawn to correlations for years but we just have not made any breakthroughs yet.

FXDD MT4 platform has all the required pairs apart from the EUR/NZD and NZD/JPY. I have set the NZD to the colour NONE, which still leaves me 7 currencies to monitor, should be enough.

Have just watched the AUD/USD turn from the oversold. Entry point using the MTF Stochastics would have been about .8752 and so far it has made 24 pips (20 pips discounting the spread of 4 ). See attachment

Dave W

Here is another good example from earlier on today. The CAD/JPY long at 116.22 out at 116.64, 42 pips (35 pips after the spread of 7). I find that using the MTF Stochastics is ideal for entry and exits and will allow you to catch the maximum pips.

Dave W

nice.
MTF stochastics to the mix.

i'm talking to another trader about correlations. hopefully we can define a system that does not lag at all. my only concern getting into this is every once in a while you get run over by a truck that is selling off very strong or rallying very strong.

the example i gave before took me a while to find. we would have won much more than we lost on the one bad trade. here is how it happens. the indicator averages 4 pairs to show sentiment of one currency. so to find eur we average eurusd, eurjpy, eurgbp, eurchf.
say for example we have eur as the lowest currency and jpy is the highest. this means we go long eur and short jpy. =long eurjpy. after we enter eurchf, eurgbp and eurusd are appreciating while eurjpy is still getting crushed. this is an example of a failed entry. the indicator looks like it would be a profitable trade because the sum of the parts says so but the pair we chose to trade was the exact wrong pair.

http://articles.mql4.com/422

This article outlines a couple other approaches to these indicators.

here is a live AUDJPY call. Let's see if it materializes. this is not something i would take live because these JPY pairs are notorious for not correlating during winding and unwinding.

Good call on the aud/jpy. so far it has made 40 + pips and still going.

Dave W

here is where i called the short. I have not moved the vertical line. This is why I said I would not take this live. JPY pairs wind and unwind against all logic. They are like a freight train. It's better to let them run.
What you'll see is the AUD on other pairs getting weak and this trade we just see consolidation against the strength.

Looks very interesting this indicator. There seem to have been a few combined indicators posted around on here but they generally have been based on multiple indicators rather than multiple pairs.

I guess the next level is to apply the MTF principles to this as the plots are time dependant. Following on from the link posted earlier concerning the development it may become more CPU hungry if multiple timeframes are incorporated but may add an increased level of security with potential trades.

The extreme levels could also do with determing. That is at what level does one currency need to be above and the other below 0, or the absolute difference need to be, before considering entering trades on sign of a reversal.

Good stuff.

G-Man

When i looked yesterday at my chart, the indicator looked totally different... I know that data provider makes a difference but it was very different in particular for the AUD that was only lightly oversold...

I'll post a screenshot when back from work

the indicator might not update for a long time or at all. you may have to right click on it as if you were going to adjust the indicator then hit ok and it should redraw everything accurately. i'm not sure why it does this.