So I decided to post this study, again something that I use in my other trading. Mostly futures, and equities where we have a lot more diversification. I thought I would try it on 11 forex pairs and see what we have. SO lets start with the nuts and bolts, what is Fractal Efficiency, for those more mathematically inclined it is given by this formula
where n is the period, and P is price.
How did i measure this, I used the last 365 days of the pairs eur/usd, gbp/usd, aud/usd, eur/gbp, hkd/jpy, nzd/usd, usd/jpy, usd/chf, nzd/cad, usd/cad, chf/nok. I then took a moving window of 20 1 hour bars and calculated using the formula above, then i took the average of all calculations to come up with the FE of the past 365 days.
So what does FE measure, it measures what i consider to be noise to signal, how much up and down motions do we need to get from point A to point B that could be drawn in a straight line. Basically a perfect trend would be a straight line from bottom left to upper right, or upper left to bottom right from point A to point B, noise creates spikes in this perfect trend that make it less efficient travel, which we see as the bounces up and down, and eventually get from point A to B but have a lot of āwasted movementā in between. This measures that difference, with 1 being the best at a perfect trend and 0 being all noise.
Unfortunately because all of these are currencies, we dont see any stark difference, if we were comparing different commodities, futures, equities of different sectors and activity, and/or fixed income then you would see a HUGE difference. Unfortunately FX is very uniform and basically 1 āsectorā so to speak.
Basically, what we can see here is this, there is basically difference from trading any 1 currency to the other, unless they are very exotic, CHF/NOK. Even HKD/JPY stands in the middle of the range. So patterns that arise on the majors, which actually have the LEAST amount of noise, which is quite an insight. I would never have imagined that, usually the more liquid and highly traded the more noise.
So we have the adage that if you can trade fiber and cable then you can translate that to other pairs, well if we consider that the efficiency ratio or signal to noise of basically all majors and even most exotics are very similar. This means that if you can extract the correct amount of signal out of fiber to trade it profitably you will be able to extract enough signal out of most other pairs to trade them profitably as well. I mean even if you are trading CHF/NOK its only 10% less signal than say fiber.
This can be also used to measure the effect of HFT, HFT generates a lot of noise, with major index futures have less than half of the FE value of these FX pairs. So the signal to noise ratio is very low, caused by there constant pushing of price in small areas. So I would presume that the amount of HFT thatās in the spot FX market is significantly less than what exists in the equity index markets and possibly others.