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Post From: Offering To The Community: Forex: Currency Decorrelation (and Currency Strength)

[2018-11-11 23:49:49] Link To Thread - Link To Post [Go To First Post]
Halco - Posts: 92
http://www.sierrachart.com/image.php?Image=1541979931449.png Attached is a chart showing one way one might use Brett's excellent decorrelated indexes with Relative Strength (Ratio in Sierra Charts). First pane is a 4-hour price chart of the EURJPY; 2nd pane is the the EUR decorrelated index, composed of the major currencies; 3rd pane is relative strength, EURJPY/EUR INDEX with std dev bands on a 20 period EMA; 4th pane is relative strength, EUR INDEX/JPY INDEX (JPY INDEX not shown on this chart) with std dev bands on a 20 period EMA. I'm not going to get into a lot of technical analysis here, this is just a basic example of how one could use RS. At point A the EURJPY goes into a tight trading range; B to C rising supports form an ascending triangle; B to C the EUR INDEX (2nd pane) is now uptrending while the EURJPY holds its own (mostly flat) against the EUR INDEX (3rd pane), as the EUR INDEX shows good relative strength against the JPY INDEX (4th pane), crossing the ema and then riding it. Following C the EURJPY breaks out to new highs as the EUR INDEX, the EURJPY/EUR INDEX RS and the EUR INDEX/JPY INDEX RS all also make new highs, a very positive confirmation of the EURJPY breakout. C to D EURJPY is in a nice uptrending channel with shallow pullbacks on mostly tight spreads. During this time the EUR INDEX also uptrending well; EURJPY/EUR INDEX RS rides its uptrending 20 period ema; EUR INDEX/JPY INDEX RS is trending very strong, staying well above its 20 period ema. At E is the widest spread up bar in the EURJPY since around A, possibly climatic action, while the EUR INDEX has gone flat and both the RS lines have become over-extended as they both violate the upper std dev bands. At F is a "change of character" in EURJPY as it's the deepest pullback on wider spreads, while the EUR INDEX is flat or possibly rolling over and both the RS lines have rolled over sharply and crossed below their 20 period ema's back to the bottom std dev band. The EUR INDEX and the two RS indicators confirm the price behavior of the EURJPY very nicely in this chart. Relative Strength lends itself to traditional technical analysis quite well - it trends, ranges, reverts to the mean, becomes overextended. For those interested in learning more about RS there is an excellent book called "Patterns of Relative Strength" by Isaac J. Israel, an oversized book of 200 pages with at least 100 charts that is an exhaustive study of RS. It can be found used on Amazon for a few bucks. Date Time Of Last Edit: 2018-11-12 00:18:16