Forex pair selection based on relative strength

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Forex pair selection based on relative strength

Postby jtrade » Thu Oct 26, 2006 9:11 pm

The matrix on Michal's very interesting FPI thread reminded me of an approach apparently employed very successfully by a professional trader. I can no longer locate his website and remember he was offering his services to institutional investors last year, so perhaps he found some....

Using momentum data derived from relative-strength studies of a basket of currencies, he had created a matrix from which he could see which currency was weakest and which strongest within the basket. He could calculate an average exchange rate involving any two currencies and plot its rising and falling action on a graph.

For example, if interested in trading GBP vs. JPY and the momentum rate was rising, there are a number of possible reasons :

1.GBP is rising;* JPY is falling.
2.GBP is rising, JPY is holding steady
3.GBP is rising, JPY is rising but slower than GBP
4.GBP is holding steady, JPY is falling
5.GBP is falling, JPY is falling but faster than GBP
* The actions of rising, falling or holding steady refer to the currency pairs performance against a basket of currencies.

Obviously, the combination with the greatest potential to generate a profit would be the first: GBP is rising, JPY is falling. It goes without saying the trade direction would be long. This represents the ideal precondition for a trade since it involves one currency that is rising in momentum against a basket of currencies and another that is falling against the basket. The other combinations could also be traded, but from a relative-strength perspective, the degree of confidence in a positive outcome would be lower.

Having selected the optimum pair(s) to trade, entries would be made using the traders preferred trade entry set ups.

I am posting this in the hope that Michal, Avery or another forum genius might know how to piece this together... preferably in TradeStation, please... RadarScreen, perhaps ?

It's certainly an interestingly simple concept to think about, if not exactly straightforward to implement.

Ideas, anyone ?


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