trading Eur/Gbp based on E/U x G/U correlation

Hi.. I'd like to make some kind of trading system based on correlation of these pairs. Value of E/G can be enumerated as EU/GU so I think that it is possible to create a system which will work with short-term timeframes(TF5,TF15,TF30) and will profit on temporary corellation abnormality. Any ideas how to start?

btw. I have some experiences with MQL/JForex so I can create a indicator or EA for purpose of this thread eventually

been tried many times just search correlation and you will get a wealth of knowledge with indis ea and everything in between

good luck on your quest. i didn't have very much luck with it at all

yes I know that it won't be so easy, but strong correlation between E/U a G/U makes E/G a very conservative synthetic pair so I think that i could be more interesting than much more volatile pairs such as G/Y E/Y,.. We only need some indicators which can solve if pair is in trend phase(BB,WR%,ATR?). And I've just discovered JForex platform(no I can't trade full lots with dukas copy :-) but they are good for tests). anyway JForex can run strategy tester with data from more than one pair(like MT4).. so we can test it in JForex and after that port back to MT4..http://premnaea.kvalitne.cz/moje/1.PNG

If you want a system to trade EUR/GBP based on EUR/USD vs. GBP/USD divergent movement, then you are really looking for arbitrage opportunities rather than correlation. Actually, strong correlation between the two major pairs would become the underlying assumption for seeking out opportunities on the cross.

Those arbitrage opportunities are essentially non-existent in a market as liquid and accessible as FX, and if they ever arise institutional program-traders and their automated systems would profit from them (and thereby close the gap) before any of us retail traders could ever notice.

One way that is exploited is by scalping on EUR/GBP during the Asian session. EUR/USD makes up nearly 40% of volume during that session, while GBP/USD accounts for only roughly 7% (don't quote me on the numbers, they are for illustration only and will change over time), when during European and American sessions they are almost equally active. So many scalpers and scalping EAs are looking for strongly overbought or oversold conditions on RSI etc. oscillators on M1 time-frames, in the belief that those are caused by trading in the EUR/USD that GBP/USD has not caught up with yet, and that price is going to return to the median.

If you want to gauge the relative strength of EUR vs. GBP to determine the likely direction of EUR/GBP, then maybe a better approach is to look at less volatile crosses such as EUR/AUD and GBP/AUD, or EUR/CHF and GBP/CHF, or a basket of those, instead of the /USD or /JPY pairs, which are largely driven by risk sentiment.

If you are looking for a correlation-based system, watch for sudden movements on either the EUR or GBP against /USD, /AUD, /CHF, /JPY or whatever you like that has no apparent underlying fundamental reason, like news releases etc., and wait for the other pair to start catching up in the same direction.

I would be cautious though doing that with EUR and GBP, because short-term correlation from what I see every day on my charts is not that strong. The pairs that I would pick for this kind of approach are EUR/USD vs. USD/CHF, which of course have negative correlation, so you would enter in opposite directions.

thanks a lot for answer.. That is exactly what I'm planning to do: build system for asian session on E/G. But I guess that my broker won't let me make a trade on TF1M, because (as you said) there isn't enought liquidity during overnight session. So I will try to start with TF5M, but you gave me the way. I will post here my results and progress.

Most welcome!

So -- share your profits, but please don't blame me for any losses

Just kidding.

hi
intresting thread

looking forward to evolve

regards lodol

today's situation... http://premnaea.kvalitne.cz/moje/0910_1.PNGhttp://premnaea.kvalitne.cz/moje/0910_2.PNG

btw. Does anybody know what happen if I enter into E/G? I'd say, by logic, that when I buy or sell any of synthetic pairs(E/G,G/Y,E/Y) let's say E/G.. so my broker will buy E/U and sell G/U, but he doesn't do it, because margin requirements for synthetic pairs are same as usual.. so I'm a little bit confused

Great thread.
I am looking for a gif or jpg chart of correlations table. The table is an intermarket chart of commodities, stock-index futures and the currency market. I would really appreciate any help regarding this..... thanks