I have read all I can find on Correlation trading and also been testing Correlation, or Two Pairs trading for quite a while on a demo account. At present I use an ‘Overlay’ chart which is very useful for comparing two forex pairs on one chart but it occurs to me that an MT4 indicator that can create a Moving Average of the difference(value) of the gap between two forex pairs on various timeframes would be very useful. This would clearly illustrate with just one line, the size of the gap between two forex pairs and when it is overstretched to reveal potential trading opportunities.
Has anyone come across this type of indicator - I’ve searched for ages without any success.
Sorry, I’ve never seen any indicator that illustrates the numerical between two instruments’ values. Some programmes offer the chance for a given chart to be displayed relative to another of your choice.
But what would be the purpose of seeing this difference, how would you use it?
Hi, and thank you for your prompt reply. I feel that such an indicator would be straightforward for any user to understand - I’ve managed to describe it in a few words. There is an indicator that’s rather similar to the one I’ve described that’s Stochastics orientated but I think I’m correct in saying that you can’t beat basic price data and the taking of two prices and showing the gap increasing/decreasing on a single line daily/hourly etc is a 100% accurate and visually easy way to spot potential trading peaks on sets of pairs that are already recognised as having a proven positive or negative correlation history.
The Overlay indicator works OK but the one I’m after would probably sit in the usual sub-chart at the bottom of the MT4 screen (don’t know what it’s usually called) and if it had horizontal lines, say 6 or 8, to aid easy historical comparison and perhaps the most recent gap value this would be ideal.
I presently have 8 positive and 7 negative charts I keep an eye on so a precise and quick visual tool would be a much more efficient way of working, especially if checking smaller time frames a few times a day.
I think the system has legs. I know I’ve not invested anything new, but have managed to make 2,700 pips just trading spasmodically at odd times over the last roughly six months using only daily charts so I think I should now take this system more seriously although recent unusual activity, especially ‘Brexit’ doesn’t help a system that relies upon repeating, historical correlation patterns.
Hi @pipsqueak234, I have coded an Indicator similar to what I think you are referring too.
It overlays in this example a few of the EUR crosses on the same chart… just at varying price levels which is set by the quoted pair.
ie: EURUSD, EURCAD, EURAUD, EURNZD, EURGBP, EURCHF. Won’t work on YEN Pairs…
(See Below)
(Chart above is D1 TF)
(Chart above is 4H TF)
You can ascertain at a glance that the EUR is strong against the NZD, AUD and CAD (300+ pips since 14/12), flat against the CHF, USD and GBP… It also confirms that the EURGBP is one of the least volatile pairs contained in the majors…Simplicity once again…
The Indicator is coded to signal on cross of pairs or if the EUR is displaying strong or weak on a CSM, it will open long or short positions on any combination of pairs…so it can be used by an EA.!
Hi Trendswithbenefits. - Thank you for your reply. Both your reply and the one from Tommor has made me realise that I’ve not described what I’m looking for properly (too much Christmas pud or something). In fact it’s not really an MA at all but simply a line that shows the difference between two forex pairs. For the sake of clarity to make sure I don’t get it wrong again here’s an example:
EURUSD and USDCHF, lets say they’re overlaid on the same chart and you can see that the gap between them is presently 50. Next day it’s 65, then 42, 56, 81 etc.etc. If these differences in the value of the gap could be plotted as a single line chart with perhaps the option of a few horizontal lines to help visually and the present difference in gap value displayed, it would provide instant, 100% accurate clarity when seeking potential trades of pairs with large gaps that are out of sync. with their regular, historical relationship.
Of course, this plotting of a line isn’t an MA at all. No averaging or projecting but just actual fact using just price. I managed to overthink this and mislead myself with my earlier description but I’m sure I’ve got it right this time. Hope this makes sense and there’s an indicator out there that can do the job.
Hi @pipsqueak234, it’s a hard ask to do this as a chart based Indicator or even Oscillator (Sub-Chart) because of the prices being across such a large range.
ie: ATM EURUSD is around 1.13 and the USDCHF is approx 0.99… it’s a long way up to get both prices into a chart… and maybe even further for other pairs you wish to correlate.
A graph similar to Dennis’s SW Analytics maybe required to measure the gap across correlated pairs.
Have a good look through MQL5 as I’m sure this would have been solved sometime in the last 7 years or so.
This is a good idea, interesting area for some study.
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Agree… It’s an interesting concept, hope @pipsqueak234 can find an existing solution amongst all those Indicators… It’s similar to the way that a Currency Strength Meter works only across pairs…
Maybe Something like this… It’s a FREE Download for MT4
Uses Pearson’s correlation coefficient…
Hi Trendswithbenefits.
Yes, it would be a bit of a stretch with prices of both pairs on same chart. The overlaying indicator I use called ‘overlay-chart’ which is freely available gets round this by using the price of the prime/first pair on the chart and showing the second pair pattern overlaid but still using the prime pair price data - presumeably calculated from a fixed predetermined point where both pairs are deemed to start at the same value. I did have an indicator that allowed this period to be altered but this one does the job quite adequately. Here’s an example:
The sub chart would only need to be a single line which would fit OK - you can see I’ve compressed a sub chart in the pic. I’ll keep looking and report if I manage to find it.
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