there are many errors in price, which make predicting the price difficult. see diagram error in price below.
the errors are very different from each other in term of its magnitude, which mean unavoidably one can only predict the future price move with significant error
bias error 1 <> bias error 2 <> bias error 3
slope error 1 <> slope error 2 <> slope error 3 <> slope error 4
if you can find a some what correlated currency pair and put them close together, you notice a gap between the currency pair which is some what constant in term of the gap distance. see diagram correlated currency pair below.
If we plot the gap as a trend, gap as of currency 1-currency 2, you will notice the bias errors become some what constant or stationary is the word. So is the slope errors. Now if we are to predict the future gap move base on current gap move, we will be able to predict better (as in making less error in our prediction) compare to the prediction we would make on one single currency move. Why? because the gap is more stationary than the currency itself!
How about if we use 4 currencies and calculate a gap? see diagram multiple currency gap below.
the errors are very different from each other in term of its magnitude, which mean unavoidably one can only predict the future price move with significant error
bias error 1 <> bias error 2 <> bias error 3
slope error 1 <> slope error 2 <> slope error 3 <> slope error 4
if you can find a some what correlated currency pair and put them close together, you notice a gap between the currency pair which is some what constant in term of the gap distance. see diagram correlated currency pair below.
If we plot the gap as a trend, gap as of currency 1-currency 2, you will notice the bias errors become some what constant or stationary is the word. So is the slope errors. Now if we are to predict the future gap move base on current gap move, we will be able to predict better (as in making less error in our prediction) compare to the prediction we would make on one single currency move. Why? because the gap is more stationary than the currency itself!
How about if we use 4 currencies and calculate a gap? see diagram multiple currency gap below.
