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Money flows: Trading the strongest / weakest major currency cross

  • #61
  • May 16, 2012 4:20pm May 16, 2012 4:20pm
@unknown4x:

Excellent thread. Recommended reading for all, IMO.

I don't fully understand money flows, but I am always looking to pair strongest vs weakest currencies on the D1/W1 TFs, as I suspect that currency strength in these longer TFs is linked strongly to macroeconomic factors. I have found that these moves generally last at least 3-4 days, and sometimes much longer, which gives a good directional bias for making intraday entries, and potentially high RR trades. I use a couple of strength meters, Recent Strength and CSM ("currency strength meter"), that I wrote myself exclusively for this purpose. They are freely available here.

As you also point out, if AAABBB is trending up, and BBBCCC also, then AAA > BBB > CCC, which means that AAACCC will trend even more strongly, making it the logical choice for the strongest, cleanest move. This phenomenon must always be so, given that triangular equilibrium must be maintained.

The strength indicators allow me to look for currency correlations. Currently, EUR and CHF are extremely positively correlated. AUD and NZD are traditionally correlated (although events in China seem to have affected AUD over the last few months, diluting this correlation), while USD and JPY seem to move in and out of positive correlation. CAD is something of a wildcard; it occasionally sides with USD but generally floats 'somewhere in the middle'. A couple of years back, GBP and EUR were positively correlated, but this is no longer the case. Recently, GBP has been siding with USD and JPY, as very strong, while NZD (and to a lesser extent, EUR and CHF) have been weak. Recent long positions on GBPNZD have been extremely profitable.

Understanding correlation is a great adjunct to any trend-following strategy. Trading strong vs weak simply tells the trader which pair to trade, and can therefore be used as an independent add-on to any strategy, without affecting the strategy itself, but further augmenting any edge that is provided by the strategy.

Just my 2c worth.

David
  • #62
  • May 17, 2012 1:24pm May 17, 2012 1:24pm
Thanks yes the triplet logic is the most valuable since it provides a double bottom. e.g. Trading EURUSD based on EURUSD up, GBPUSD up and EURGBP up. 80-90% of the time that will yield you pips no matter which crosses you choose, no matter which market, time, timeframe whatsoever. Why? Because it is no system it is simple reaction to flows. Two USD majors going in one direction and one even stronger than the other. It takes a shitload of money to accomplish such a setup and that shitload of money is not in the game for one candle.
  • #63
  • May 31, 2012 6:21pm May 31, 2012 6:21pm
Really fantastic stuff man. I'm always surprised to see how many people stick to one currency...when such a significant additional edge might be just a matter of clicking a different button.

one can sometimes find the same basic chart pattern and breakout or retracement, etc...across a basket of correlated markets, and then can choose which market is the weakest against each other... and this is even more common now with the "risk on/off" paradigm that is front and center in todays markets.

And really really great explanation. I've only thought about it in terms of developing customized indexes a couple times, but never to the extent you've figured it out.

keep up the great work...

X
  • #64
  • Jun 1, 2012 6:50am Jun 1, 2012 6:50am
Quoting forextraderx
Really fantastic stuff man. I'm always surprised to see how many people stick to one currency...when such a significant additional edge might be just a matter of clicking a different button.

one can sometimes find the same basic chart pattern and breakout or retracement, etc...across a basket of correlated markets, and then can choose which market is the weakest against each other... and this is even more common now with the "risk on/off" paradigm that is front and center in todays markets.

And really really great explanation. I've only...
Thanks. Well... seems like people like to watch macd instead and hand over their cash to their bucketshops. Always nice that see some people with a bit of brain left for which it is of help though.
  • #65
  • Jun 1, 2012 9:59am Jun 1, 2012 9:59am
Quoting unknown4x
Thanks. Well... seems like people like to watch macd instead and hand over their cash to their bucketshops. Always nice that see some people with a bit of brain left for which it is of help though.
I personally only feel right about a trade if I believe I have a good grasp on what the basic underlying elements are that are currently influencing the markets. Teches, fundie's, sentiment, correlated markets, the whole thing.

It's actually pretty funny in a pathetic sense... taht so many people try to trade, but actually don't understand a thing about the market or how it works.

Truth is, I'm shocked to see that anyone succeeds at all, particularly when the do so with a few indicators, a highly mechanical setup based on nothing more than "I follow the trend, and when this thingy down here says the pullback is overdone, I buy it"

Obviously a more mechanical approach to things can work, but I just find it's best if those triggers are first filtered with good, sound, rational, compelling reasoning to know why price is likely to move any such way in the first place.

Maybe it's for the best anyway. It is our income, after all

X
  • #66
  • Jun 1, 2012 11:30am Jun 1, 2012 11:30am
Quoting unknown4x
The inflows + USD / JPY flows are the most important thing you need.

You really only need bonds/indices/equities for the larger trades. Even there it helps but it is not needed if you analyse all of your crosses the right way and wait for the right flows. All of the above are represented in the crosses. If you are playing the smaller tfs for a bunch of 20 pippers a day (which makes much more money than you could ever position trade anyways) then the currency flows are all you need.

Make sure to really really understand USD + JPY + partly CHF...
Nice thread bro. Good stuff.

Trade Life !!
  • #67
  • Jun 1, 2012 11:34am Jun 1, 2012 11:34am
Quoting bandung
hi unknown4x,
this week the crosses move nicely as you can see on my attached image.
would you elaborate your view about this crosses move?
They're all running to safety. For us that means LONG, USD, JPY, and SHORT, AUD, CAD, NZD.
Everyone's running for cover.
  • #68
  • Jun 1, 2012 1:54pm Jun 1, 2012 1:54pm
Quoting shomari
Nice thread bro. Good stuff.

Trade Life !!
You are welcome. Greets to sfbay. Good friend from UC Berkeley there. Many years back... Need to visit him damn time goes by...
  • #69
  • Jun 1, 2012 1:56pm Jun 1, 2012 1:56pm
Quoting shomari
They're all running to safety. For us that means LONG, USD, JPY, and SHORT, AUD, CAD, NZD.
Everyone's running for cover.
Not so fast with the horses QE -> short the fuck out of USD just like we are seeing now. ECB rhetorics of possible bank union stuff along with QE expectations and off we go on the EU long. I rather trade intraday flows from the low TFs than predict something. Fundamentally you are right though and everything should go to hell
  • #70
  • Jun 5, 2012 6:53am Jun 5, 2012 6:53am
Quoting unknown4x
Not so fast with the horses QE -> short the fuck out of USD just like we are seeing now. ECB rhetorics of possible bank union stuff along with QE expectations and off we go on the EU long. I rather trade intraday flows from the low TFs than predict something. Fundamentally you are right though and everything should go to hell
Yeah. same here. Ready to go long USD or EUR anytime.
As fortoday tough, a little nervous today about ay G7 news. Still have some orders to go short AUD GBP and EUR against JPY and USD though. Haven't entered yet, but I'm hoping the US data will push the markets in my favor.
Bernanke might signal some QE on Thurs when he testifies, so, staying real vigalent and tight with stops this week.
Just heard Merkels deputy ,at G7 meeting, said Spain can go to the European bailout fund and that Eurobonds are only to be considered in the medium term. Spain apparently resisting.

Interesting week. Haven't looked at bonds yet today, or CDS. Just sort of holding my breath through the G7 meetings.

Trade Life !!
  • #71
  • Jun 5, 2012 8:20am Jun 5, 2012 8:20am
Quoting shomari
Yeah. same here. Ready to go long USD or EUR anytime.
As fortoday tough, a little nervous today about ay G7 news. Still have some orders to go short AUD GBP and EUR against JPY and USD though. Haven't entered yet, but I'm hoping the US data will push the markets in my favor.
Bernanke might signal some QE on Thurs when he testifies, so, staying real vigalent and tight with stops this week.
Just heard Merkels deputy ,at G7 meeting, said Spain can go to the European bailout fund and that Eurobonds are only to be considered in the medium term....
Good luck with them. I have been going almost 100% hit it hard and fast the last months. Lmax spreads are decent, correlations / fundies/news are all over the place most of the time so risk 5-10 for 10-20, rinse & repeat on S30-M3 4-5x a day.
  • #72
  • Edited 8:30am Jun 5, 2012 8:24am | Edited 8:30am
Quoting unknown4x
Good luck with them. I have been going almost 100% hit it hard and fast the last months. Lmax spreads are decent, correlations / fundies/news are all over the place most of the time so risk 5-10 for 10-20, rinse & repeat on S30-M3 4-5x a day.
It' s been workng great for a few weeks but I knew it was bound to end.
BOJ minister just ruined my JPY trades this morning at the G7 meeting. Thankfully they hadn't triggered yet.
http://www.forexlive.com/blog/2012/0...zumi-comments/

Waiting for US news. Maybe it'll help my shorts.

Trade Life !!
  • #73
  • Jun 5, 2012 9:15am Jun 5, 2012 9:15am
WOW! Nice threat! thank you very much! I'm learning a lot! Keep the good work!
I know where the market is going to move next: to the righ! XD
  • #74
  • Jun 5, 2012 9:19am Jun 5, 2012 9:19am
Quoting fugio
WOW! Nice threat! thank you very much! I'm learning a lot! Keep the good work!
You are welcome.
  • #75
  • Edited Jun 6, 2012 3:28pm Jun 5, 2012 7:41pm | Edited Jun 6, 2012 3:28pm
OK got it. This method is correct. ;-) http://s7.directupload.net/images/120606/osbbr34k.png
  • #76
  • Jun 9, 2012 3:20am Jun 9, 2012 3:20am
Quoting No-Luck
OK got it. This method is correct. ;-) http://s7.directupload.net/images/120606/osbbr34k.png
Hi No-Luck,

Have you see this ? http://www.forexfactory.com/showthread.php?t=163158
It's a master piece of Mr. Hannover ... if you have time, I think it's good to take a look of it.

Hi Unknown4x,

Nice thread, very helpful, thank you ... waiting to see the following information (#6 - #11) ...

Thanks
- pedma -
Good friends are more valuable than gold ...
  • #77
  • Jun 9, 2012 3:54pm Jun 9, 2012 3:54pm
Quoting pedma
Hi No-Luck,

Have you see this ? http://www.forexfactory.com/showthread.php?t=163158
It's a master piece of Mr. Hannover ... if you have time, I think it's good to take a look of it.

Hi Unknown4x,

Nice thread, very helpful, thank you ... waiting to see the following information (#6 - #11) ...

Thanks
- pedma -
Thanks. Well given the limit interest i can't promise on those yet lol but just go through the usual threads about the individual topics or read through babypips school (laugh or not the basics are covered very well) and apply them. Like I said money flows are no strategy. You use your own single cross strategy (no matter if technical or fund) and pull it all together with money flow logic to make the real bucks. What kinda single cross strategy you use doesn't really matter that much. They all kinda work the same way at the end at none are precise given that single cross TA/FA can _never_ be precise for technical reasons (I explained why - cross = single rate but cross represents 2 rates which themselves represent about 3-4 major rates so _at least_ 6-8 factors pulling on a single cross).

So use some TA (preferred in my opinion) that you are comfortable with and pull it together and make it precise with money flows.
  • #78
  • Jul 5, 2012 9:03am Jul 5, 2012 9:03am
Thanks to Unknown4X and all contributors here for a very interesting thread.
I'm interested in opening a discussion into what kind of technicals and time frames people are finding most suitable for use with the kind of short and sharp flows we are getting in current markets.
At the moment I am using a fairly crude tool of entering on engulfing bars on the 15m time frame on the strongest/weakest pair from the Frankfurt open from 1 hour after London open. With properly managed exits it is profitable, but I'm sure it could be more so. I exit when the flow shifts away or on the break of an inside bar.
  • #79
  • Jul 9, 2012 3:20pm Jul 9, 2012 3:20pm
Hi Unknown4x. Thanks for a very interesting thread.

I only trade 10 pairs and I have a system that I use for entries, exits etc that has worked quite well. The problem I have is when I get signals on multiple pairs at the same time. In the past I've just split the risk amongst the pairs and traded them all. After reading this thread I've decided to incorporate what you are teaching into the risk management part of my system so that when I get multiple signals I would chose the pair (based on strength/weakness) that would be most likely to move into profit. I have the basic understanding of the methodology down but I was hoping you could help and see if I'm using it correctly.

Currently I am looking to go long on both the Aud/Usd and the Aud/Jpy pairs. Normally I would just split the risk of 1% on each trade. Using relative strength/weakness though I see from my charts that Aud is stronger than both Usd and Jpy. So now looking at the Usd/Jpy chart I see that its kinda flat over the last week but over the past month momentum has been up as its making higher highs and lows. So my conclusion based on recent momentum is that Usd is slightly stronger than Jpy and hence if I want to trade strength versus weakness amongst those 3 pairs then I would be looking to trade Aud/Jpy. Is this correct?

Thanks ............. and sorry for the long post
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  • #80
  • Jul 17, 2012 7:18pm Jul 17, 2012 7:18pm
Quoting Alienonweed
Hi Unknown4x. Thanks for a very interesting thread.

I only trade 10 pairs and I have a system that I use for entries, exits etc that has worked quite well. The problem I have is when I get signals on multiple pairs at the same time. In the past I've just split the risk amongst the pairs and traded them all. After reading this thread I've decided to incorporate what you are teaching into the risk management part of my system so that when I get multiple signals I would chose the pair (based on strength/weakness) that would be most likely to move...
Hi,


well it depends on how you want to apply it. Overall your thoughts are correct but


1) usdjpy was slightly bearish on the daily -> usd weaker -> trade would have been audusd
2) for an audusd - as in usd major trade you definitly want some usd volume on your side, looking at the daily that is a really a mixed thing at the time of your posting since on that timeframe stuff is all over the place, audusd is long, eurusd is deep in the red but recovering so that would help, usdcad with you (but bouncing) which is always good since its a nice usd flow indicator, gbpusd / eurusd (most part of usd volume) were not with you at the time your chart is showing so on a daily point of view i wouldnt have taken a trade at all since nothing was really aligned / correlated. You can still trade that kind of setup but it needs _a lot_ of experience since your usd volume which is the most important for a usd major trade was partly in oversold as crap retrace mode and partly in breakout mode. Can be done but you better know what you do if you want to go down that route.


A few points:


1) Money flows can be very complicated on the higher timeframes since they are of course a lot less in sync than the smaller timeframes since it's not only about TA there but also FA. E.g. your example is one of those. You need patience there... I would recommend use smaller timeframes and shoot only for the perfect setups. Happen more often than you might think since pretty much every day got at least 1-2 big moves on some pair which is 90% of the time a perfect move - otherwise it would not make those pips -> pips need flows.


2) Make sure you analyse a broad set of correlated instruments on multiple timeframes. Always take a look at at least one smaller / greater timeframe. If the smaller doesn't look good for the trade the bigger won't do it either. Your daily trade will not go anywhere if M1 M2 M3 M5 M15 M30 H1 H4 etc don't support it no matter how good it looks.


Put the greatest emphasise on the part with the most volume - for usd majors that is of course USD volume. If you are looking into an audusd long you definitly want some others like eurusd, usdcad, gbpusd. The reason is quite simple:


If you look at AUD strength through its minors and make a trade based on that you are trading blind. e.g. Just because audgbp and audeur are long it does not mean aud is truly strong. If both gbpusd and eurusd are short / weak that will automatically pump up audgbp / audeur because of their gbp / eur parts. So aud could be neutral or even weak and audgbp / audeur will still go up. Always use multiple triplets.

Hope that helps you a bit.
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