Creating a Forex Index?

Discussion in 'Strategy Development' started by BOC, Oct 6, 2018.

  1. BOC

    BOC

    I know there is an FX forum but I thought I'd ask here because a lot of you are math and statistic guys, which I ain't.

    Does it make sense to create a custom index in my charting program (Sierra Chart) of, for instance, the AUD, using the pairs I trade - AUDCAD, AUDCHF, AUDJPY, AUDNZD, AUDUSD, EURAUD (inverted for the index, of course), GBPAUD (inverted). I could then measure the performances of the pairs against the index via relative strength.

    Is this a dumb idea?

    Thankye!
     
  2. RudiMarin

    RudiMarin

    Hi Boc, I use fX index with Tradingview, it is easy and works for me. Cheers!
     
  3. BOC

    BOC

    Interesting site. I checked their index against mine. Very similar. So maybe it isn't a dumb idea.

    Thanks much.
     
  4. RudiMarin

    RudiMarin

    No problem. Is it convenient to create those index with Sierra chart? Do you have a special data feed supplier who gives you the inverted pairs or do you just inverse them yourself?
     
  5. BOC

    BOC

    You just check a box in the chart settings, "Invert Prices".
     
  6. The key to the usefulness of such indices in in the weighting. I suggest a correlation-based weighting, like the Bloomberg currency indices -- i.e. take the Perron-Frobenius vector of the ratio-symmetric AUD pair matrix.
     
  7. BOC

    BOC

    Thanks for the suggestion. As I said, math is not my thing. So I think you're saying the more positively correlated pairs would have greater weight, the more negatively correlated pairs less weight, with the weightings changing as the correlations changed with fresh data. Could this be done in a spreadsheet?
     
  8. No, the opposite. Highly correlated currencies will have individually less weight. I have attached the original Bloomberg white paper, which explains the method in more detail. Note the ubiquitous Peter Carr is listed among the authors.

    The method I suggest above is somewhat simpler but achieves much the same end and is based on Sraffa (Commodities from Commodities) as amended by Pasinetti (Lectures on Theory of Production) and Bidard (Price, Reproduction, Rarity).

    Yes, pretty easily. Just follow the recipe in the attached paper. Bloomberg has actually patented the method, but I think you'll get away with replicating it in Excel. The equations in the patent application (easily found with a google search) are a bit more opaque than in the attached paper.
     
    Last edited: Oct 8, 2018
  9. You'll need the attached VBA class and code to do eigen decompositions in Excel.
     
  10. tomorton

    tomorton


    Interesting idea, and possibly overdue, might help private retail traders.

    I wonder if there's a simpler way through this though? I note whether each pair with a major currency as base is either bullish or bearish using simple TA criteria. Right now, this tells me that AUD is bearish in all of the 7 pairs against the other major currencies, while CAD is bullish in all 6 of its pairs charts against majors. This suggests the optimum pair to short right now for me would be AUD/CAD - take a look at the chart to check this but it would be hard to find a more bearish daily chart.

    Meanwhile, the EUR is bullish in 3 out of 7 major pairs, GBP is bullish in 4 of 7 major pairs, so EUR/GBP is pretty neutral, not attractive to my trend-following strategy for either going long or short, agreed?
     
    #10     Oct 8, 2018