Individual Currencies & Relative Strength

Recently I have done some reading and watched a video about using the current "Relative Strength" of an individual currency(s) as the basis for deciding what pair(s) to trade. This thread began to explore the possibilities but has since gone 'dark':

http://www.forexfactory.com/showthread.php?t=80927

I'd like to re-open the discussion for the purpose of learning if there is a reliable way to do what has already been described in this thread. The information I seek would only be useful, IMO, for 'immediate' intraday trading. My preference is for trading larger time frames, but occasionally it suits my trading style to 'scalp' a few pips on a smaller chart. And it seems both reasonable and logical to select a pair that has opposite strength/weakness.

Any comments, observations, opinions and experiences are welcome.

Surprisingly, no-one has posted on this topic. Am I wasting my time here?

Here's something I read on this topic that IMO seems relevant:

"Relative Strength Analysis
To determine the relative strength of a currency, it is necessary to detect whether the currency is bullish or bearish against a basket of other currencies. If we discover that the currency is predominantly bullish against a basket of other currencies, we will have gained valuable knowledge about current market sentiment towards that currency. As speculators, we can apply this knowledge towards buying or selling the currency against any other individual currency."

And here is a screenshot of an indicator that shows the relative strength of individual currencies and their relationship.

Any comments?

Hi BB!

Hope you get more participation!

Seems to have a lot of merit.

I know that you want to discuss
longer TF's so, I'll just only post this
one reply to "prime" your thread. LOL

I'm going to leave my charts on this
"Eurobasket" set up for a while and
check it out.

Good trading!
Brent

Thanks Brent for your support and interest!

My initial thinking is that this process would work well on small timeframes; the 5 minute in particular. However, I see that you are using HA candles on the 1 minute chart and perhaps that TF would be a good place to use Relative Strength data.

I'll post again since you don't seem to mind, BB.

This could really be worth exploring, if you ask me.

On the attached screen shot (this one on OANDA platform):

Two E/U trades:

1) Euro was seen weakening against all four of the others at the
same time so I shorted E/U.
E/C and E/G started to strengthen and E/J and my E/U stalled so
I covered at break even.

2) Euro strengthened against all four simultaneously so I bought E/U.
All four rallied then E/G stalled first at previous resistance. Then
E/J and my E/U started stalling so I got out with 25 pips.

Of course these are "ideal" outcomes. But, there could be a nice
edge here if someone worked on it, I think.

Basically, the same thing happened again
on two more trades right after my last post.

These two weren't quite as nice. Got a little jumpy
and exited a little early. Still not too bad (-2 and 12).
Be nice to apply it to a longer TF if possible.

FXSurfer......

After looking at your charts, it appears you are trading "naked" so-to-speak, using only the price action represented by the HA candles and the immediate trend on the 1 minute chart.

What "longer TF" would you like to apply this to? And are you still thinking intraday trading?

BeachBum, may i know what indicator you are using to display individual currency RSI on the 2nd post? Can you post it here?

Take a look at this article:

http://articles.mql4.com/484

The indicator you want and others that may be of interest are at the end of the page. HTH!

I have been trading more than 2 years now and from day 1 I cannot seem to get rid of RSI in my trading style. The picture of the indicator u posted really gave me a spark on something.

I may need to rewrite the indicator to filter the info that I need. At the moment putting all the lines inside 1 indi is chaos. Cannot read it properly but the answer is there.

Just use one pair in each window

RSI has been a favorite of mine since I started "Fozzy" trading two years ago.........

CFP is very good. its clean and easy to read. 2 ways of reading it and it gives a clear signal on a trending market.

1. uptrend if value >0. downtrend if value <0.
2. Use MA to filter the CFP giving you an advance signal.

Unfortunately it only give you direction of trade. Entry and exit need to find elsewhere. Furthermore in a ranging market this indi is dead.

Hello BB and FXsurfer,

I am usually very quiet and make my way through the forums and rarely post because in the I don't have the time it takes to considerately reply to all the posts that result from a deep participation. But I would like to make a few comments here about correlation trading that may bring a greater understanding on reading the strength or weakness of various currency pairs. If you already know these things I don't mean to be redundant. This is a fairly quiet thread, the way I like to share, and for a few stray readers this might open there yes a bit.

The easiest way to see the composition of a cross currency is to observe the underlying currencies. If you opened three charts side by side on your screen, say the GBPUSD, USDCHF and the cross GBPCHF, and made them bold, large candlesticks on the 1 MINUTE chart, you can observe the tick by tick nature of the moves. The cross currency pair is nothing except the relationship of the strength between the underlying two pairs. Basically, the cross is nothing more than an algorithm of the relationship between the underlying pairs. The cross does not move on it's own accord, as in a standard supply and demand relationship (like contracts in the Futures markets traded on an exchange). Rather it moves in a dance in step with the underlying currencies.

There are 9 possibilities of correlation (in the Strength-Weakness relationship), but before I list them, I must state that an understanding of the BASE currency (the FIRST pair listed in a currency combination) and the DIRECTION of the candles is an absolute MUST to understand strength and weakness. Strength is occurring in the BASE currency and is demonstrated by a candle moving UP. The opposite is true, as well, going down. This can cause some confusion when one sees the USD getting stronger against one currency and at the same time get weaker against the other (this is what happens when the GBPUSD moves more than say, the USDCHF. When the USD gets equally stronger against both the GBP and the CHF at the same time, the GBPCHF stays FLAT. It can be a bit confusing to fully grasp this when trading strength and weakness, but like anything, practice sharpens the skill. Taking 30 full minutes of fully observing this at a busy time in the market, will make the relationship with the cross clear. I's a good exercise for newer cross traders.

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!



pipsqueak4x

greengo.......................your comments are appreciated!

Pipsqueak4X.................This is exactly the kind of information I was hoping to glean from FF members who are familiar with individual currency strength data and use this as the basis for a trading strategy. Yours is a great post; I will be digesting this with a view towards using it myself. Thanks again!

PS.................only a nickle?

Great input Pip, Greengo and of course BB!

Thanks for taking the time to share,
Brent


Also: I didn't have a specific longer TF in
mind, BB. For me, maybe anywhere from
1-10 min. candles.

Excellent post pipsqueak4x. I have noticed this too. What I think this means is that in order for this 3-way relationship to exist almost perfectly all cross transactions must first be converted to USD. I have wondered why direct GBP/CHF buying and selling cannot exist.
Ex. A London buyer needs to pay for widgets purchased from a Swiss seller. The buyers bank deducts GBP from the buyers account. The bank sends the Swiss seller the equivalent CHF that the bank has in reserve.
I guess I am missing something basic here.

Here's a diagram for easy visualization.

Here E/U and U/J both rally and produce
a rally in the E/J cross.

Is my understanding more or less correct?

Hi guys -

I thought I would poke my nose in, hope you don't mind. I produced a video on this very subject not too long ago in the James16 private site, which is why this thread caught my eye. I have found a simple way to do it, in my humble opinion.

First, download a demo platform from a broker like GFT. (I only say them because they have something like 120 pairs.)

Second, pick a currency. Notice I say currency, and not pair. With a broker like GFT, there is a really good chance that they will have several pairs with that particular currency in it.

In my video, I randomly picked out the Czech Krone. I believe there is something like 11 pairs with the CZE in it at GFT. All I did was look at the overall trend on all 11 pairs. I used the weekly charts. If a chart was dead obvious, I would "score" the CZE a 1 for that chart (strengthening) or a -1 (weakening.). If it was
somewhere in between, I would either score it a 0, or a +.5 or -.5. I know this is somewhat objective, but the trend on a weekly SHOULD be obvious.

I believe I came up with a score of something like 9 out of 11. Pretty strong.

Then, I looked up the USD. I did the same thing. I seem to remember that the CZE was far more strong than the USD. (I based it on the pairs I could count with it.)

So when I added up the strengths, I did a little division for a "percentage score".

With my totals I learn two things in this case: I have absolutely NO INTEREST in selling the CZE against anything, and (at the time) if I wanted to go long the USD, it wouldn't be against the CZE.

I know this isn't exact to the pip, but it keeps the wind at your back......

Clockwork

Yes and this is because the current (EJ value)=(EU value)*(UJ value)
This will work with any cross pair, unless USD is first in the pair i.e. usd/cad.
CAD/JPY=(USD/JPY)/(USD/CAD)