Money flows: Trading the strongest / weakest major currency cross

This was great stuff. Have you anymore to update unknown?

Hi,

a lot. This is just very little

Unfortunately a serious health condition in the family was discovered so i had to focus on a few other things the last months. I will be updating soon.

Hi unknown,

Thank you for the update. I just discovered your thread and it is hugely helpful - it's filled more than a few blanks for me. Would soooo appreciate installments 4,5 & 6 whenever you're ready.

Wishing you and your family members all the best and full recovery.

LAFF

#4 Using the minor crosses to find out the strongest / weakest major cross to trade for index (currency) breakouts

This is the major component and should /can be applied to every trading strategy. At the end it is just common sense + math.

No matter if you trade based on USD strength/weakness, a single isolated currency cross or some other major currency - no matter which breakout/reversal/continuation method you use - it is impossible to identify the correct trade on a single currency cross. That does not mean the trade is bad BUT a trade with more pips / more smooth / more safe / smaller SL might be in another correlated cross.

Suppose we are trading EURUSD:

We have identified a possible LONG trade in EURUSD with whatever method you are comfortable with - it does not matter.

What you do is analyse all EUR/XXX minor crosses.

What does it tell you if you want to long EURUSD and EURGBP is short?

GBP is stronger than EUR at the moment. BIG WARNING SIGN ON. You want to long a currency which is weaker than another at the moment? Think again.

The next step here would be to check the USDX + GBPUSD.

If USDX is short what it tells us is that EURUSD is being dragged up by USD weakness. We know that EUR is not the strongest currency (EURGBP down) at the moment so that USDX weakness must come from another USD cross. Since we know that GBP is stronger than EUR we take a look at GBPUSD. If GBPUSD is long that already tells us that GBPUSD would be a better option to long right now since we know USD is being shorted + GBP is stronger than EUR but both EURUSD + GBPUSD are going up. So essentially GBPUSD is super strong.

However if GBPUSD is short then it tells you the following:

Assumption: EURUSD supposed to be long
Fact #1 - EURGBP is short -> GBP is stronger than EUR.
Fact #2 - GBPUSD is short -> GBP is weaker than USD
Conclusion: EUR is not really strong (otherwise it would win against GBP with EURGBP) + USD is not really weak otherwise GBPUSD would rise since GBP is not the weakest either (winning with GBPUSD)

So essentially we got a crapshoot trade. Both EUR + USD are doing the ugly sisters battle. Both are neither perfectly weak nor strong -> spend your money somewhere else.


That is your basic method to identify the strongest / weakest cross or essentially the money flow between currencies.

It is however not as easy as just taking a look at one minor cross.

For that EURUSD trade we would look at the following:

USD weakness - MOST IMPORTANT - read through the BIS numbers (http://www.forexfactory.com/search.p...rchuser=214845)

USD has by far the most volume + importance in any trade you are going to be doing (as long as you are trading a USD major) so you check if USDX is short or you check the USD majors if the important ones / majority is long.

Your second step is to check all the EUR minors - http://www.forexfactory.com/search.p...rchuser=214845

Is EURGBP short -> check out GBPUSD + GBP minors. If you find a GBP minor that is short -> check its main currency. E.g. GBPAUD is short -> we know that GBP is stronger than EUR but AUD is even stronger than GBP -> check AUDUSD + AUD minors. You repeat this until you find you perfectly strong currency cross.

You ideal trade (that does not happen very often) is all USD majors short and one opposite currency with all its minors is long. You know that money is flowing out of USD and e.g. AUD is rising across the board so the money is flowing the most into AUD. Since the volume taking place is selling USD and buying AUD your best bet is taking a long AUD/USD which on a proper broker means you will be buying AUD and selling USD - just what is happening in the market.

This perfect trade (even a M2/M3 setup of this will easily get you up 30-50+ pips with a comfortable SL around 10-15) does not happen very often though. Most of the time you will find EURUSD/USDCHF/GBPUSD or AUDUSD/NZDUSD/USDCAD doing their thing bouncing back and forth. e.g. EURUSD/USDCHF/GBPUSD will be short while AUDUSD/NZDUSD/USDCAD are on the long side. The result most of the time will be EURUSD/... will be going down till AUDUSD/... hit support or other way round. Very nice for targets since you know that at either point USD volume will shift and no matter where your e.g. EURUSD trade is and what the EURUSD technicals say at that moment EURUSD will be affected / bounce back / stall at that moment. The overall USD volume is the dominant factor not some EURUSD only technical.

#5 USD VS JPY

USD and JPY this is where most of the money flows will take place and both together with USDJPY are one of the greatest ways to make sure you enter a trade that is backed by serious money. This is the most important thing. Afterall one thing is for sure - your money and that of a few retailers does not mean anything in the market. As a retailer you will max out / get slippage around 150 100k lots usually which is already some serious money but it still won't move the market in any way worth mentioning so your only chance is following bigger money. That's where the infamous follow the trend comes from... it should be called follow the big money but ... don't be late

The following scenarios can take place:

USDX + JPYX are long
USDJPY is long

Basically it means money is flowing into USDX and JPYX which happen to be the two biggest money parking lots. It also means something on the other side has to be sold. Go to your bank and request some JPY. You will have to provide them with some USD for that. So JPY gets bought and USD sold. If you want some USD you need to give them some other currency -> buy USD - sell X.

So if money is flowing into the two big parking lots then we need to find out where it is coming from. First of all we want to know where the most money is going into: USD or JPY. We use USDJPY for that.

USDJPY is long too so the most money is going into USD + it is the strongest.

Now we check the USD majors + their JPY minors. For EUR we would check

EURUSD + EURJPY.

If EURUSD is short and EURJPY is short too (+ of course all other EUR minors) that means the EUR is getting heavily sold and represents our weakest counter.
Our trade would be SHORT EURUSD. (weak eur vs strong usd + strong jpy - perfect)

If EURUSD is short and EURJPY is long that picture changes though. Either you move on the other counter pairs to find a perfect match or if you dont find one you would go LONG USDJPY. You know that USD is the strongest and wins against EUR too but JPY looses against EUR so whatever you do both EURUSD and EURJPY are not the best choice. In the situation the best choice would be USDJPY since USD is stronger than both EUR and JPY and JPY is weaker than both EUR AND USD so setting other possible majors appart the weakest (even though it has inflows!) is JPY and the strongest is USD -> LONG USDJPY.

If both EURUSD AND EURJPY are long then you would trade LONG EURJPY. EUR is even stronger than USD and it is stronger than JPY -> #1 left side. JPY is weaker than both EUR and USD -> #2 right side -> LONG EURJPY.

Thanky you unknwon4x for your efforts and inputs.
You mentioned the indexes USDx,EURx etc.
I'm wondering which index calculation you are actually performing since there are many different types of currency indexes.
For example, do you look at the original USDd or some later invented index?

Regards,
Juergen

Hey guys, still reading the thread but wanted to share something that I think can also help a lot to identify strong/weak.



Pairs are correlated when they are either above or below the 0 line. the 0 line is key to understanding these squiggle lines. Notice as they all bunch around 0 we get breakouts. I had noticed something similar with another correlation indi i used years ago to measure eurusd to usdchf. I can dig it up if there's interest.

Found it, you'll see the same decorrelations preceeding breakouts with this -- its designed to only compare 2 pairs and displays correlation as a histogram.

Pairs that are I'd say in the area of 75-90% correlated are good to use with the indi. You'll see plenty of opportunities when correlations in this range break down.

Here's the FXcorrelator in my ecosystem

Very interesting thread. The relative currency strength is crucial to my daily charts system. At the beginning of each new day I examine all 28 pairs (and some exotics) and I write down my sentiment for each one, based on trend and S/R levels. Using S/R means that while a pair may be trending very well, I may not flag it as having a good probability to continue because it may be very close to an S/R level. Or, a pair may have been consolidating but my expectation can be bullish based on a breakout.

After writing down my prediction (or lack thereof) for each pair, I then proceed to see which currencies have the most positive predictions and which ones the most negative ones. This will give me a ranking of currencies according to my expectations, from the strongest to the weakest. Obviously, the pairs of the strongest currencies vs the weakest currencies are the most tradable, but of course one can do further optimization by looking at the trend for each of these pairs, how close they are to important S/R, how close or far the SL/TP will have to be, and so on.

Unknown4x, if you are still around here, please continue to write your articles.
I like your multi-view on the market and your writing style.
So even if there are not so many answers right now, this does not mean that no one is reading your good stuff.
Keep going!

Regards,
Juergen

Hi Juergen,

i posted the official calculations and a few rebalanced ones in the index section. I use those + my own custom ones tailored for different crosses + different situations. I always look at multiple calculations at once since (if you know your stuff) that tells you a lot about how the flows are structured. I described the weakness of the standard calculations (one pair way off -> fooling the index). You can spot such things by creating your own indicies based on differnt usd pairs. If only one breaks out and the rest stays you know it is fooling you. The hard thing about money flows is that it is almost impossible to manually trade it without custom tools -> indices which give you a quick overview about the general flows/structure. Watching each pair by itself is too much information. You need to combine it into neat packages that indicate you certain patterns like the #1 pitfall YEN flows trying to make you think it is USD flows. But overall you are good to go with the official ones + the rebalanced ones i posted.

Thx for the informatin
Currently, I'm playing around with multiple regressions on a variety of rather uncorrelated pairs to see if there are good turning points when some of the pairs approach S/R zones.
Maybe this is a bit helpful in predicting the overall direction of those baskets or of a single pair.
A whole lot of work though...

beyon actually i forgot one. Here is a very nice read into general index calculation stuff that should get you going with custom ones.

http://www.cutthespread.com/spread-b...urrent-reality

http://www.cutthespread.com/spread-b...s-dollar-index

http://www.cutthespread.com/spread-b...sal-euro-index

I noticed something along these lines as well, although I used an indicator called ccfp.

It seems as if once in a while you can anticipate major movements by identifying areas where most of the currencies converge and run flat whilst one is still following a trend.

Although it is probably too rare to be worth watching out for.

Thanks, very interesting
Now keep going and write the missing parts of this thread, at least I will read it ;-)

I have been recently been looking at this basic idea also. I have uploaded a zipped csv I have of 1 minute bar data I have of EUR/USD with my EUR and my USD indexes, with 11 weeks of data.

I'm trying to figure out a way to determin if the individual currencies are strong or weak and then trade when one is strong and one is weak.

Awesome thread.

Here's an anomaly to me.. because I'm struggling to look into the deepest levels of all the minor crosses

22nd Feb 2012, DXY and JPYX went up, as did all 12 main crosses, EURUSD, GBPUSD, USDCHF, USDCAD, GBPJPY, EURJPY, AUDUSD, NZDUSD, NZDJPY, CADJPY, CHFJPY, and USDJPY

The only logical thing to me was for some to go up, but generally AUD, EUR, GBP etc to be sold off, as per most other days with risk on. However, I know the answer is in looking at the actual crosses like EURGBP, just can't work this one out right now, been racking my head for couple hours! Like a puzzle!

Not a whole lot of interest lol ah well. People want to get fucked by "signal providers" instead of putting their mind to work i guess.

Everyone who took a few bits away i wish green pips. Its complicated to get right at the beginning but enables you to trade any cross, session, timeframe. Make sure you spent some time at it though.

Also get a programmer or learn some some stuff yourself and make yourself your own indices as i mentioned. I prefer pivot-vertical screens and put the indices / pairs under each other. Don't use the broker ones. If you don't have the money for ebs/thomson either use MT4/5 (research the subject first though - multi currency stuff is almost always broken if you don't do it 100% right) or a good alternative is jforex. You can easily roll your own charts with it + the pricefeed is much better.

Green pips to the ones that deserve it

People trade currencies for more than just currency... What about other investment vehicles like commodities, or international business transactions?

If you want this concept to be waterproof than you would somehow have to account for everything that is exchanged for money.

Yes but since you are trading out and inflows and some of those reflect stuff like the commodities you got that covered. On the small TFs they don't matter at all anyways and even in the big ones the flows are much too small to have major impact on the majors.

Never bad to have an eye on bunds, tbills, dax etc though.