Different correlation based on scale

Trading Discussion Currencies
1

I’m Having some trouble telling which pair is overvalued and which is undervalued in a correlation strategy.

I’ve seen various videos and articles which show two pairs on the same chart where the author/presenter will say something like “Pair A is above pair B: therefore A is overvalued and B is undervalued”. Simple enough. In their articles and videos, when scaling, panning, etc, all data points maintain their relationships between the two currencies.

In TradingView, however, if you add a second currency to the chart, pair A may appear to be above pair B at time x but when you drag the chart left/right through time, pair A will sometimes “move” and appear below pair B at the same time x. This is clearly an issue with how the different charts are scaled but I’m not sure what else I need to be doing to tell which is truly overvalued and which is undervalued. Handling this in a purely graphical manner seems risky - it feels like there should be something available (maybe in an additional indicator) which would more objectively state over/under value relationships.

So my questions are:

  1. How do I tell which is overvalued and which is undervalued? Are there other indicators used to determine this?
  2. If there are correlated pairs with prices at different scales of absolute values (EUR/USD & AUD/JPY), is the answer to question #1 the same solution to this scenario?

I’m not necessarily interested in the particular steps to display this in TradingView. I’m mostly interested in the element of pair correlation that makes it so simple for these content creators to so confidently state that one pair is over/under-valued in relation to another.

Thanks!

2

Better to think in terms of a currency rather than a pair.

The notion of ‘over’ or ‘under’ value in the crosses then can often apply in the short term.

For example, right now markets are just open and thin - Eur/Gbp Eur/Usd and Gbp/Usd

First has opened down, second is up and third is stale.

So whilst I type I expect Eur/Gbp to rise, based on the buying on Eur/Usd and the lack of Gbp action on Gbp/Usd.

Will it continue, it’s suggesting Euro buying, so depends on USD, then check tomorrow morning to see.

Eur/Gbp 88.77, Eur/Usd:2013 Gbp/Usd : 3500 - remember thin markets,.

1 Like
3

As always the right side of the chart tells the tale - Eur/Gbp spiked up to 89.17 and Eur/Usd to 2075

Gbp/Usd rose to 3560 so the Euro buying being hinted at was helped by some USD selling - thinking in terms of the currencies helped me predict the direction :slight_smile:

4

Pardon me but i do not understand what you mean… Would appreciate if you could elaborate further.

5

Just means that when I look at current price or past chart I am always thinking what is likely to happen on the right side of the chart.

Many posters say there is no need to ‘predict’ which is good news for them, I have found that thinking right side is a help for me in decision making.

I have a belief that if a person gets direction correct then it becomes a little bit more difficult to be wrong.

Check some of my posts to see how I think right side.