Thread: Correlation of Pairs

I beleive this can be known as triangular arbitrage, or something comparable, if I remember from my time spent researching global finance (while I was awake during lectures, that is...!)

Originally Posted by ;

I beleive this is known as triangular arbitrage, or something comparable, if I remember from my time spent studying global finance (while I had been awake during lectures, that is...!)

Thats exactly what it is.

You should tell the guys in the https://forexintuitive.com/forex-tra...ds/97817-.html ribbon that school CAN help you in gambling!

Originally Posted by ;

err....why waste your time with observations as soon as you can merely look at the EURCHF chart. That will tell you precisely what the correlation is. Same with currency pairs. . .if you want to know the significance with all the EURUSD and USDJPY, simply look at the EURJPY etc. .

I don't believe this will bring the correlation between the 2 pairs the exact same way you look at the other two pairs...

whenever you're looking at the EUR/CHF, you're see the grand total of this motion of the other two pairs, the EUR/USD along with the USD/CHF, but you do not really know what occurred there for everyone. . .Someone might have moved up modestly with the other stable, so the EUR/CHF went up, somebody might have moved up sharply along with the other down slightly, so the outcome is going to be the exact same on the EUR/CHF graph as the first instance...

What I am trying to state is that when you look at the EUR/CHF, you're viewing the product of the movements of the other two pairs, which means you truly do not work out the complete connection between the 2 pairs. .

For instance:

The EUR/CHF is trading at 1.5500, the EUR/USD is trading at 1.2000, and therefore the USD/CHF is trading at 1.2916

The EUR/CHF moves upward to 1.5600, the results here are so much:

1- Can the EUR/USD maintained trading at 1.2000 and the USD/CHF went upward to 1.3000?

Two- Did the USD/CHF maintained trading at 1.2916 along with the EUR/USD went to 1.2078?

3- Can the USD/CHF went to 1.2950 along with the EUR/USD went to 1.2046?

The above 3 cases do not apply for the reverse correlation.

4- Can the USD/CHF went to 1.2850 along with the EUR/USD went to 1.2140?

5- Did the USD/CHF went to 1.3050 along with the EUR/USd went to 1.1954?

The above 2 instances employ for the reverse correlation.


So what really happened? You can't really know just by viewing the graph of this EUR/CHF guy...


Thanks,

Nader

Iso,

I have just read the link to the item by Kathy Lien. A fantastic overview.

She does mention using a trailing correlation (which I earlier called a rolling correlation). This is so much better than just looking at tables. However, she doesn't speak about utilizing returns to compute the correlations, which is important. I look at graphs initally, but the issue is that two currencies might be dring or trending together over the long-term, but aren't correlated on a day to basis. This does and can happen.

Also, she talks about hedging a EUR/USD exposure with USD/CHF, something I truly disagree with. Why not reduce your exposure? By hedging like this, you're paying out more spread, and depart yourself vulnerable to a shift from the correlation that risks creating your Dollar less powerful. Not good.

: )

Reply abob - the basics is, up to correlations proceed! :

I am not a fantastic lover of hedging either for reasons you have stated but again I am not a specialist there. (Looks like I've got some studying to do!)

For the Investopedia post why don't you reply with your queries to her? You obviously know your stuff so I think she would be interested in your comments also.

Originally Posted by ;

iso,

I have only read the link to the item by Kathy Lien. A good overview.

She does mention using a trailing correlation (which I earlier known as a rolling correlation). This is indeed much better than just looking at tables. But she doesn't talk about using returns to compute the correlations, which can be important. I look at charts initally, but the issue is that two monies might be trending or dring together over the long term, but are not correlated on a day to basis. This can and does occur.

Additionally, she talks about hedging a EUR/USD exposure with USD/CHF, something I really disagree with. Why don't you lower your exposure that is EUR/USD? By hedging like this, you are paying out more spread, and end up susceptible to a change in the significance that risks making your Dollar less powerful. Not good.

: )

Hello iso dude, I did indeed em her a few weeks ago with suggestions for the dailyfx.com correlation evaluation. She liked the thoughts, but had been swamped with anything else. . .life Continues

Originally Posted by ;

Lou,

check out this website: http://www.dailyfx.com/

They've fx correlations available and are updated yearly.

friggin' amazing! Thanks for this link!

I've noticed this correlation in 4 hour graphs and see that when you overlay the graphs, the correlation itself signals going long one pair and brief the other, but like any other system, there are a lot of false signals, as if both are headed together, but suddenly reverse in reverse directions, each the strong corrolation characteristic.

A midpoint line introduces itself, where the upper pair and reduced pair may or may not meet. It would be improbable the values of these pairs, relative to their appreciation/depreciation, when they did meet would stay at this point for extended time (because of the high likelihood of adverse corrolation). The likelihood being greater that they would move apart and staying apart before moving back again presents itself.

Sell from the money options on the upper pair, and buy from the money options on the lower pair. Build more on the premium compared to purchasing the lower. Inevitably the pairs will shift inward, and you earn money on the upper, or the reduced goes up farther than the upper goes down. Plus they do not necesary need to to intersect, its just playing with this .90 - corro play around the midpoint that the 2 pairs are being pushed and pulled off from.

The trade could discount if the difference persisted againt the play to the midpoint, so you would need to sell up notch and forget purchasing the decreased calls.
Another play is to brief the upper in FX and purchase the reduced in FX,, and buy from the money options on the upper FX and sell from the money under the decrease FX. The drawdown will be Flat Corro Upper Calls and Put. You have to be a estimate to how much the negative corro inwards would gain, then purchase and sell around it. In case the gain is healthy, they guess you could do it, even after factoring the costs for the options from the play.

What a notion you gotten me warmed on. I can not get this!