hi,
I think JPY is better suited as base considering that is the “refuge” currency of choice. GBP is less suited to be a base currency as it is in my opinion very vulnerable to Brexit news.
if you want to day-trade based on currencies strength you can just move to M15/M30 and buy/sell any pullback against the predominant trend. So buy any pullback in CADCHF. My 2 cents.
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Hi,
This strategy is for catching long term trends (hence the use of the 4HR MA). I have tested it on 1HR charts and results were very poor. I doubt you will be able to successfully combine it with intraday scalping.
ohh okay,
thanks for the info. i didnt know GBP had such negatives.
yes i did it with the 4 H MA , but i thought of doing it intraday. because i havent tried long term trading. i will try and see how it goes.
thanks
Hey Dennis,
I just wanted to say thanks for all your work. It is appreciated and the sound advice you give.
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There is no particular advantage to using the GBP as the reference currency (the common denominator), just because you are trading the London session, or for any other particular circumstance.
See a more detailed explanation below.
The JPY’s reputation as a “safe haven currency” is not relevant to the calculation of Strong/Weak rankings. And the perceived “Brexit risk” to the GBP is likewise not relevant to these calculations.
The thing that is relevant is close mathematical linkage, explained as follows:
If the 8 major currencies exhibited perfect mathematical linkage, then for any 3 currencies
– let’s call them AAA, BBB, and XYZ –
AAA/XYZ ÷ BBB/XYZ would equal AAA/BBB exactly
As an example, using actual currencies, CAD/JPY ÷ CHF/JPY would equal CAD/CHF exactly, if these currencies were perfectly linked mathematically.
In the real world, actual currency prices fluctuate around that equality (perfect linkage), but almost never satisfy that equality exactly. However, in the case of the major currencies, the inequality is always slight, and this is what I am calling “close mathematical linkage”.
This screen-shot was taken at 1:43 pm New York time today, and shows a portion of the TradingView “Rates” page which is built into the Babypips site.
Simultaneous CAD/JPY, CHF/JPY, and CAD/CHF prices are highlighted in yellow. We can check the mathematical linkage by dividing CAD/JPY by CHF/JPY and comparing the result to CAD/CHF.
CAD/JPY ÷ CHF/JPY = 84.784 ÷ 110.469 = 0.76749 – which is close, but not exactly equal, to CAD/CHF = 0.76745
This slight inequality can never become large, because if it did, it would be immediately arbitraged back into line. This is true for all of the major currencies, and for many of the more liquid minor currencies. For highly illiquid exotic currencies, the mathematical linkage can get more widely out of line over the short term, because arbitrage in illiquid markets is difficult.
You can test this mathematical linkage on other major pairs, if you’re so inclined. For instance,
-
does EUR/USD ÷ GBP/USD = EUR/GBP ?
-
does AUD/USD ÷ NZD/USD = AUD/NZD ?
-
does EUR/AUD ÷ GBP/AUD = EUR/GBP ?
-
does AUD/CAD ÷ USD/CAD = AUD/USD ?
You will find, as a general rule, that these comparisons are approximately equal, but almost never exactly equal. But, the 8 major currencies all come very close to maintaining perfect mathematical linkage, which makes all of them equally valid as the reference currency in a Strong/Weak Analysis. So, given that all 8 currencies are equally useful as a reference currency, which one should be chosen?
Dennis has wisely chosen the JPY, because it is always the quote currency in any currency pair, and therefore calculating the Strong/Weak rankings never entails currency inversions, which are a nuisance and can be a source of math errors. Consider, for example, using the USD as the reference currency. The USD is the quote currency in 4 of the 7 major pairs, but it is the base currency in the other 3 pairs – which means that, in 3 out of 7 calculations, the price of a USD-pair must be inverted in order to place the USD in the denominator.
You are correct.
The metrics in Dennis’ Strong/Weak Analysis (daily closing price and 200SMA on the 4-hr chart) are optimized for multi-day trading. Attempting to apply his metrics to intraday trading is likely not a good idea.
It’s certainly possible to design strength-meters (or so-called “heat-maps”) which are optimized for shorter-term trading – and several of those are available on the internet – but they require different metrics.
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For a while I was also doing a strong Weak rankings based on the 1hr chart and 200 hr moving average, you would get a lot more signals but far less reliable, lots of whipsaw action and you are forever at the mercy of today’s news events. You tell me what is easier, picking the winner of a Football game between a 10-1 team vs a 3-8 team or in same game trying to pick who will score the first TD of the second half of the 3rd quarter, Best stick to longer term trends, and leave the day trading to the get rich quick newbies
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Yes, another day of pullbacks, the GBP really got hit again, look at the chart below and how they slammed the GBPCHF right down to the 200ma on the 1hr chart. This pair has had a nice run, let’s see if it can find some support here
Hi Everyone,
Sorry not posted in a while, been busy!
I don’t suppose anyone has calculated what the max drawdown was for the 12 top s/w trades this year. I see each of them has hit 100 pips profit at one stage, would be interesting to know what the maximum drawdown was.
If no one has this information i will work it out when i have time.
Have a good weekend everyone!
wow. thanks for all the inputs.
there is lot I learnt here
last week was ruled by pullbacks and consolidation, Time to be patient as we wait for the market to show it’s hand and our next SW Trade
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And there we have it, a new Top SW Trade as USD surges on the day, is it too late for another short CHF trade, Our SW rankings have not let us down so far and I am not going to second-guess it now,
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USD holds on to the #1 spot and our newest Top Trade USDCHF was up a whole 30 pips, basically, we had a slow day in the market
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USD remains strong as NZD takes over the 8th spot giving us a new trade, short NZDUSD. Our Top SW Trade for the last two days USDCHF keeps grinding higher hitting +67 pips today
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Death, Taxes, and SW trades!
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I am tied up today, will not have time to post a ranking until late tonight or early tomorrow, it does look like another winning day, I know it sounds like a broken record, all we do here is win
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We’ll be doing so much winning, you’ll get tired of it.
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Weakness returns to the CHF, Our Top SW Trade USDCHF topped +100 pips today marking our 13th winning trade in 2018 as we remain perfect for the year
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Great response. Cheers!
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Good week for our Strong Weak trades, Top Trade USDCHF hit a high Friday of +139 pips. CADCHF is just below it’s old high and NZDUSD started out good but pulled back on Friday, GBPCHF took a hard hit on Friday, it is still above its entry point but everyone should have taken profits by now as it hit a high of +385 pips two weeks ago
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