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How to normalize Forex prices?

  • #1
  • First Post: Dec 5, 2011 1:50pm Dec 5, 2011 1:50pm
Hello,

I have a doubt about how normalize the prices of a FX cross. I mean, If i have to compare a cross with a stock, like: Google vs EUR/USD How can I calculate the variation in percentage of the EUR/USD ?

I have this kind of problem because if I calculate the difference in % I could get:

from: 1.3000 to: 1.3050 variation: 0.38%

from: 1.6000 to: 1.6050 variation: 0.31%

So a different percentage could be interpreted as different movement, but it is not true, we are always talking about 50 pips.

So, with stock I have not problem, the variation(%) it is the "real" value that I need, but with FX I think I must normalize the data before comparing them (example: doing a linear regression).

Could someone give me an advice?
Thank you!
  • #2
  • Dec 5, 2011 5:45pm Dec 5, 2011 5:45pm
Quoting dptrader
Hello,

I have a doubt about how normalize the prices of a FX cross. I mean, If i have to compare a cross with a stock, like: Google vs EUR/USD How can I calculate the variation in percentage of the EUR/USD ?

I have this kind of problem because if I calculate the difference in % I could get:

from: 1.3000 to: 1.3050 variation: 0.38%

from: 1.6000 to: 1.6050 variation: 0.31%

So a different percentage could be interpreted as different movement, but it is not true, we are always talking about 50 pips.

So, with stock I have not problem, the variation(%)...
trade Currency futures, that should solve your issue.

scfx
The best indicator is price.
  • #3
  • Dec 6, 2011 1:56am Dec 6, 2011 1:56am
Quoting scfx
trade Currency futures, that should solve your issue.

scfx
I don't think that I can solve my issue trading on currency futures because they have fixed tick value, so it should be the same thing.
  • #4
  • Dec 6, 2011 3:23am Dec 6, 2011 3:23am
The standard way to solve this is to take the logarithm of the price.

http://www.investopedia.com/ask/answ...ogvslinear.asp
  • #5
  • Dec 6, 2011 3:30am Dec 6, 2011 3:30am
Quoting Adal
The standard way to solve this is to take the logarithm of the price.

http://www.investopedia.com/ask/answ...ogvslinear.asp
Adal, thank you for your reply,

unfortunately I think this solution doesn't fix the issue. I do an example:

a = 1.3000
b = 1.3050

log(a)-log(b)
RESULT: -0.003838776

a = 1.6000
b = 1.6050

log(a)-log(b)
RESULT: -0.003120127

As you can see, I always get different results.

Any other advice?
  • #6
  • Dec 6, 2011 3:47am Dec 6, 2011 3:47am
Quoting dptrader
Adal, thank you for your reply,

unfortunately I think this solution doesn't fix the issue. I do an example:

a = 1.3000
b = 1.3050

log(a)-log(b)
RESULT: -0.003838776

a = 1.6000
b = 1.6050

log(a)-log(b)
RESULT: -0.003120127

As you can see, I always get different results.

Any other advice?
IMHO the log-return or %change is not so practical in forex (unless you trade weekly, monthly or yearly chart) because its daily fluctuation is very small compare to stock market. The change of 50pips at 1.3000 (0.38%) has no practical differences with the change of 50pips at 1.6000 (0.31%).
  • #7
  • Dec 6, 2011 3:56am Dec 6, 2011 3:56am
Have you considered creating an index of the instruments that you are trying to compare? Here is a link to a site that describes the process in Excel: index
  • #8
  • Dec 6, 2011 3:59am Dec 6, 2011 3:59am
Quoting ForexQuant
IMHO the log-return or %change is not so practical in forex (unless you trade weekly, monthly or yearly chart) because its daily fluctuation is very small compare to stock market. The change of 50pips at 1.3000 (0.38%) has no practical differences with the change of 50pips at 1.6000 (0.31%).

Hello ForexQuant,

Yes I'm thinking the same... maybe only the aritmetic differences are the solution:
1.3000 - 1.305 = -50 pips
1.6000 - 1.605 = -50 pips

but with this solution there is not the same "scale" with the stock that I need to compare....
  • #9
  • Dec 6, 2011 4:01am Dec 6, 2011 4:01am
Quoting One day!
Have you considered creating an index of the instruments that you are trying to compare? Here is a link to a site that describes the process in Excel: index
One day! thank you for the link, but the problem is "comparing two different instruments", I have no problem with Stock vs Stock OR Forex vs Forex, the problem is: Stock vs FX cross

Because stock gain/loss are calculated with % on the contrary Forex gain/loss are calculated in pips
  • #10
  • Dec 6, 2011 4:31am Dec 6, 2011 4:31am
Quoting dptrader
Hello ForexQuant,

Yes I'm thinking the same... maybe only the aritmetic differences are the solution:
1.3000 - 1.305 = -50 pips
1.6000 - 1.605 = -50 pips

but with this solution there is not the same "scale" with the stock that I need to compare....
It does not matter. The relative performance will be measured in unit pips/% instead of dimensionless.
  • #11
  • Dec 6, 2011 4:36am Dec 6, 2011 4:36am
Quoting ForexQuant
It does not matter. The relative performance will be measured in unit pips/% instead of dimensionless.
Wait, I don't understand, do you mean that we can compare Stock(%) vs Forex(pips variation) ?
  • #12
  • Dec 6, 2011 5:12am Dec 6, 2011 5:12am
Quoting dptrader
Wait, I don't understand, do you mean that we can compare Stock(%) vs Forex(pips variation) ?
Actually I never done such kind of solution before but I believe so. Anyway I may be wrong.
  • #13
  • Last Post: Dec 6, 2011 3:38pm Dec 6, 2011 3:38pm
Quoting dptrader
One day! thank you for the link, but the problem is "comparing two different instruments", I have no problem with Stock vs Stock OR Forex vs Forex, the problem is: Stock vs FX cross

Because stock gain/loss are calculated with % on the contrary Forex gain/loss are calculated in pips
I am no expert, but I believe that an index will provide you with the information that you want - that is assuming that you are comparing the two instruments. To do so you need to compare them in like terms, that is why the calculations on the link that I gave you convert the price of each instrument into a percentage relevant to each instrument. This then allows comparison of the instruments in like terms, no matter what they are.

One of the trading books that I refer to most frequently is Perry Kaufman's "New Trading Systems and Methods: Fourth Edition". If you can get hold of that, there are various examples of the use of indices - including one which compares the stock price of a gold mining company with the price of physical gold.

I hope you figure out a method that you are happy with...
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