Money flows: Trading the strongest / weakest major currency cross

People tend to trade single crosses only. Be it by priceaction, indicators, fundamentals, levels, whatever. Only very few times people will take into account that a currency cross is ... you name it ... a cross between two currencies which themselves are defined by their strength / weakness against all other currencies.

In the following posts i will highlight a few things people might want to take into account before getting into any kind of trade.

I will talk a bit about

- #1 Overall theory - http://www.forexfactory.com/showthre...74#post5257574
- #2 Currency indices - http://www.forexfactory.com/showthre...75#post5257575
- #3 Major / minor crosses - http://www.forexfactory.com/showthre...43#post5260243
- #4 Using the minor crosses to find out the strongest / weakest major cross to trade for index (currency) breakouts - http://www.forexfactory.com/showthre...56#post5472756
- #5 USD VS JPY - http://www.forexfactory.com/showthre...17#post5487117
- #6 Identify single cross strength/weakness #1 - MAs, Midpoints, Fibs, Pivots - http://www.forexfactory.com/showthre...09#post5856209
- #7 Identify single cross strength/weakness #2 - Supply / Demand - S/R Levels - http://www.forexfactory.com/showthre...33#post5856233
- #8 US Dollar - Risk on/off - Stocks/Gold
- #9 Timeframes - http://www.forexfactory.com/showthre...40#post5856240
- #10 Compounding - http://www.forexfactory.com/showthre...61#post5864861
- #11 Helpful Links / Tutorials
- Few examples

Have fun and get yourself a drink


ALERT: TANSTAAFL! There ain't no such thing as a free lunch. This is not a system, free signals, charts whatsoever. Go on to some fake chick thread and let them rip you off if you are searching for that. This is the basic knowledge on how to read money flows and if you put a lot of work, logical thinking, probably some programming, 4-5digit hours of charts in it then you will be rewarded with a system with your own edge yes. I will not disclose my edge to you. You would not be able to understand / trade it my way anyway. Remember... TANSTAAFL.

#1 Overall theory

The overall theory is quite simple. Lets say you are an EURUSD trader. EURUSD is your daily bread and butter but you rarely watch to the left or right. You have some kind of strategy to define e.g. a breakout to either side. What you probaby have noticed is that most of the time EURUSD will not move by itself. Either a few of the major USD crosses like GBPUSD, USDCHF, AUDUSD, NZDUSD, USDCAD will join in or the minor EUR crosses like EURGBP, EURJPY, EURCHF, EURAUD, EURNZD, EURCAD will join or lead your trade.

What you also noticed is that some breakouts are smooth as butter and some are choppy as hell. Also some make an instant 50 pips while some struggle to make even 20.

Today was a good example of that. People trading only EURUSD were in rough waters. EURUSD broke to the upside but in a very choppy trade. The reason was quite simple. If you scanned through the other big majors you noticed that the big pips were actually made in USDJPY, GBPUSD and AUDUSD (in that order). Now if you took a look at the EUR minors you noticed that most or all of them were short. If you did the same for JPY, GBP, AUD minors you noticed that on every breakout of their majors they actually were long just like their major. The majors then produced a nice smooth big pip move - unlike the crappy, choppy EURUSD one. EURUSD was simply dragged along by USD selling. Not a good trade choice!

We are already at the first important point here. Each cross does not magically move by itself but represents a valuation of two sides (EURUSD -> EUR vs USD) against each other. Think of it like the scale of the lady of justice balancing the scales of truth and fairness. If the left side is light and the right side is heavy the scale will go down heavy to the right side. It will go down heavy to the left side the other way round. But there is also the case where both sides are equally heavy (or as you might have heard if both sides e.g. eur - usd are equally ugly sisters). Then the overall scale does not move or just chopps around.

Bottom line:

Trading a single cross might not be the most clever / profitable way of trading. There might be the same trade in another major around the corner with much more + more smooth + more safe pips.

Crosses represent two sides which gives you following (6+1) states for every trade:

ideal:
- left side up vs right side down
- left side down vs right side up

choppy + dangerous:
- left side down vs right side down less
- left side down vs right side down more
- left side up vs right side up less
- left side up vs right side up more

no use:
- left side down vs right side down equally

#2 Currency indices

As we talked about in #1 each forex cross trade consists of 2 sides which give us 6+1 states a trade can be in.

e.g. EURUSD is the strength/weakness of the EURO currency messured against the US DOLLAR.

The strength of the EUR currency itself is defined by the strength of its major+minor crosses:

EURUSD
EURGBP
EURJPY
EURCHF
EURAUD
EURNZD
EURCAD

The (un)weighted average of those crosses defines the strength/weakness of the EUR - its index also referred to as EURX. There are a few other minor ones but we only care about EUR, USD, GBP, JPY, CHF, AUD, NZD, CAD here.

Which crosses are included in an index depends on your liking. There are a few official indices:

EURXt=34.38805726 x (USDt)–0,3155 x (GBPt)0, 3056 x (JPYt)– 0.1891 x (CHFt) 0.1113 x (SEKt) 0.0785
USDXt=50,14348112 x (EURt)–0,576 x (JPYt)0,136 x (GBPt)–0,119 x (CADt)0,091 x (SEKt)0,042 x (CHFt)0,036

Those are fairly old calculations as you can see e.g. AUDUSD is not included in the "official" USDX although if you look through the forex spot volumes of the BIS (https://www.bis.org/publ/rpfxf10t.pdf) it remains of question if you should use the official USDX or volume adjusted indices. Other indices are weighted on different factors. Rebalanced indices can e.g. be found at markit (http://www.markit.com/en/products/da.../iboxxfx.page?)

So if we look at a EURUSD trade we basically want to look at

- what does EURX do?
- what does USDX do?
- where do both fit into according to the 6+1 states?

For any other trade e.g. AUDUSD that would be AUDX + USDX or AUDNZD -> AUDX + NZDX

What you want are inverse symetrical moves. One index up, one index down. This will already have a _BIG_ impact on your trading if you have not been taking proper care of related pairs until now.

So now we are all happy n go make a shitload of money? Of course its a bit more complicated

A common mistake traders do with indices is trusting them

Why can an index mislead you - especially the official ones which don't take into account modern day crosses + volumes?

Let's take USDX as an example. We are looking at EURUSD long and all we want for now is a simple inverse symetric move of EURX long and USDX short which should give us the ultimate EURUSD long trade.

We enter the trade and boom it goes against us, chopps, whatever although EURX keeps rising and USDX keeps going down... WTF? Well look at the equation. An index can be fooled by single pairs doing big breakouts. It doesn't happen very often but it does happen. A good example when that happens is GBPUSD rising because of GBP strength. GBP is a big factor in both EURX and USDX. If GBPUSD rises because of GBP strength it will push USDX down. EURX will probably rise with it if the other major currencies are weak themselves resulting in stronger EUR minors -> rising EURX even without EURUSD following. Overall EUR will be kept in check by EURGBP. We will talk more about this in the major/minor section. This is the crucial part to getting into the right trade!

A helpful example would be todays moves. If you watched EURUSD you noticed that EURUSD was rising although both EURX and USDX were falling. The ugly sister battle. The volume was in USDJPY, GBPUSD, AUDUSD. They pushed USDX down heavy which of course pushed the other USD pairs up too. At the same time EUR lost against all those strong currencies on the minor field of course - EURJPY, EURAUD, EURGBP etc. EURGBP alone is like 1/3 of the EURX. So EURX went down. A trade in EURUSD would have been pretty much a blind one since both EUR and USD were actually weak. USD just happened to be weaker. Not a good trade setup!

Mathematically you could easily explain it the following way:

Suppose you got an index A which consists of 50% A1 and 50% A2.

If both A1 and A2 are 50 pips away from a baseline e.g. SMA50 then the index would be away 50 pips from its baseline too correctly representing its crosses. If however A1 is 50 pips away from baseline and A2 is -50 away from baseline the index 0 pips away or on baseline falsely representing its crosses - in thise case a false breakout.


Conclusion: Indices can be very helpful for a first quick overview over the situation but it does not spare you from looking at each part of it.

#3 Major / minor crosses

There are major and minor crosses. Major crosses are pretty much the ones with the most influence / volume. Since USD accounts for about 85% of all trade volume and is the most influential / volume pair in most important indices the majors are generally said to be the USD counter crosses:

EURUSD
GBPUSD
CHFUSD = 1/USDCHF
AUDUSD
CADUSD = 1/USDCAD
NZDUSD
JPYUSD = 1/USDJPY

The minors are each currencies other counter crosses e.g

EUR: EURJPY, EURGBP, EURCHF EURAUD, EURCAD, EURNZD
AUD: AUDJPY, AUDGBP, AUDEUR, AUDCAD, AUDNZD

Your trading terminal might have different minors like GBPAUD instead of AUDGBP. It is just inversed.

e.g. to calculate AUDGBP from GBPAUD:

audgbp_open=1.0/gbpaud_open
audgbp_close=1.0/gbpaud_close
audgbp_high=1.0/gbpaud_low
audgbp_low=1.0/gbpaud_high

Important is that if you calculate the reciproke of the high/low values you need to take the opposite since you want to display OCHL values where a high is on top and a low is on bottom. So to get the reciproke low of gbpaud you need to calculate 1/gbpaud_high.

Another thing you might encounter is that your terminal does not have either pair. You can still calculate it yourself:

GBPAUD = GBPUSD * USDAUD = GBPUSD * 1/AUDUSD
NZDCAD = NZDUSD * USDCAD

logic is simple:

GBP.....USD
---- * ---- = GBP/1 * 1/AUD = GBPAUD
USD....AUD



and so on.


Conclusion:

Currencies are made up of a major crosses which are usually the most influential / biggest volume cross and various minor crosses against all other currencies. The total of all makes up the value of the currency not just the major!

Just skimmed through this but great points. I also use currency cross indexes to trade with much success. I don't believe in just trading one pair.. Doesn't matter to me what pair it is as long as they're either strong vs. weak vice versa.

When reading all of the threads I've seen on forex factory and many other systems they don't really mention currency indices... But I think people are slowly catching on ..

Cheers!

Ahh, you kind of beat me to it. I was going to start up a thread very similar to this but called 'USD'. The USD is the most dominant currency in the world and pretty much all the other currencies revolve around it. To analyse the USD money flow you are getting to the core of the currency market.

When I first noticed correlation I would see conflicting setups on say for example EURUSD and USDCHF. The setups on both indicated a shorting opportunity. That was completely contradictory. Those two setups cancel each other out.

Other times a setup on one pair would pull the rest of the related currencies with it. So while you see a large move on one pair and your confused as to why, you look at the other related pairs and find the catalyst setup in one of them. For example, GBPUSD breaks out of a range, EURUSD follows. This of course depends on whether it is Dollar or Pound buying/selling.

I tend to look for the currency pair that has an obvious and clean setup and watch how it plays out on the related pairs.

Obviously I am just talking about pairs, you also have to consider all related instruments like equity, debt, derivatives and commodities/metals.

It's all about identifying the money flow and buying/selling the dips of the flow. Where are the big funds deciding to put their money?

I use ForexTicket for my analysis. Damn good site. They have currency indexes that combine all currency pairs that relate to the major. You can see how the dollar, for example, is being bought or sold across all the pairs.

Look at this chart. The recent moves in EURUSD has mostly been USD activity. The EUR is just slowly selling off while USD whips and consolidates.

I will join you on this thread and help make sense of this inter-currency/market stuff. Discover trading as being a whole-istic practise rather than an isolated one.
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A very brief daily overview on currencies.

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Nice Tyoon. Welcome on bord. The idea is the same. I will go a lot more into detail though. Will try to add another section in a few hours. Hopefully we can teach each other a few tricks here and there Although i have been doing this for many years i always love to see new / different styles of it.

Getting myself a nice Martini Rosso first. Cu later.

Perfect. I believe understanding this will be a massive edge.

Not much time on my hands right now but last hours nice example of flows:

Put yourself a

USDX
JPYX
CHFX
GBPX

and see how money flows out of there and then watch how it flows into

EURX
AUDX
NZDX

To tell which pair currency the money is shifting into the most watch its major + all of its minors. You will quickly see that AUDX ergo AUDUSD is the winner from the beginning on with a very short NZD intermezzo.

At the same time look at USDJPY, USDCHF, GBPUSD to see that USD the major looser. That's what you want! USD having the biggest in/outflows followed by other money "parking lots" like JPY / CHF. That's when you have your _sure shot_ trades which you can easily make a killing 1:3-1:5 RR with super tight SL out of.

And that's the key. Greater than 1:2 Risk-Return with a trade frequency high enough to get decent daily compounding going (https://en.wikipedia.org/wiki/Compound_interest). And only then does daytrading on the lower timeframes make sense with the higher stress but _much_ higher compounding return. You can easily get an average of 1-2 3+% trades going per day that way without risking more than 1%. Just have the patience to skip the 10 pipers for the ones where you have money out/inflows out of multiple money safe heavens / parking lots at once with a 100% strong/weak counter.

There can be no more important preliminary consideration to a trading day/week than :- what are the current (proportional) volume flows of equity across all global markets.

Great stuff guys!

It's all about Swiss buying today. It's dragging the rest with it.

yes tyoon. as standard reference i will use alpari demo times:

around 3:30 most flows stop. we get some unimportant cross flows without any breakout character. cadx + gbpx do a small one but the minors tell us no big deal. Real fun starts around 8:30-9:00 chfx starts to get inflows, around 10:30 all of its minors break to the upside + usdx breaks away again, usd majors are all long anyways -> boom chfusd trade. For me SL was 15 pips, exit 11:00 when both chfaud and chfnzd hit resis on m5+m10+hourly close. RR 1:2 incl commission, drawdown 0. 2% bagged. Although it was smooth as hell it was not the most comfortable one though. Minors faced some resis here and there but usd majors were clean so was worth the 1% shot.

Sounds like you have done better than me today. I didn't sit on my hands, pulled some crappy trades.

Looks like Swiss has hit hard support/resistance. Dollar selling is massive.

Thanks for your detail regarding the times and movements.

ADD: You saw resistance on chfnzd and chfusd while I saw support on usdchf.

ADD: Swiss buying; "After 44.8 in November. A surprisingly strong read, the medium forecast having been around 45.4." - ForexLive. Report came in at 8:30 GMT. - Reason for buying.

There has been a bit of talk of Euro buying this morning. The charts don't say so. As mentioned before it has been USD/CHF activity in the currency market.

Reason for dollar supply (risk on):

Equities; opened with risk appetite.

Commodities; Gold is retracing. The market has huge appetite for commodities:

http://finviz.com/fut_image.ashx?rel...11711389218750

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Hhmm, when will risk fall off?

Swiss is selling off currently contributing a part of the dollar demand. The rest of the money is still in other instruments.

Please if anybody has conflicting ideas/analysis please challenge my view.

ADD: half hour to NY open. Hopefully see some movement in equities then.

ADD: US news at 3PM (GMT):

15:00US2Construction Spending (MoM)0.5%0.8%
15:00US2ISM Manufacturing53.252.7
15:00US2ISM Prices Paid47.945.0
19:00US3FOMC Minutes

This will give a clearer pictures of where the money will continue (or not continue) to flow to.

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I don't care so much about the flows at the top/bottoms (M5 - M10 for me but with techs up to daily on those charts). I always take breakouts of flows like when you posted your last message everything was retracing back to "zero" and with some patience you then had a fresh flow into AUD out of USD and JPY for continuation. Again the picture you want to see is multiple save heaven flow outs and a perfectly strong counter pair in this case AUD. All AUD major/minors where long -> smooth 35 pips without retrace. Talking about that RR. Didn't take it though. Got new espresso beans and the la pavoni was puking on me

Timing for that AUD was about 15:45 alpari demo.

If anybody got another suggestion for time reference i can use that too. Personally my platform is GMT.

unknown4x,

Could you please post some charts of what you are talking about in this example. I cannot wrap my simple mind around this.

Sorry, I know it takes time to prepare the charts but it would be greatly appreciated. Thanks for your efforts.

I am not finished with a few sections yet but i will try to come up with some charts. I cannot show mine since one thing i will not tell: what defines a breakout for me + a lot of my stuff is based on number crunching only and doesn't need visual charts. But that doesnt really matter since you can use any method from simple S/R, MAs, Indicators whatever to do that.

I will try to make some examples with simple universal indicators. Works just as well.

Sounds great. Thanks