Forex Decorrelated Indexes

Discussion in 'Forex' started by BOC, Apr 14, 2019.

  1. BOC

    BOC 1 AUD-X.gif?dl=0 2 JPY-X.gif?dl=0 3 AUDJPY.gif?dl=0

    I haven't posted here in a while, not sure how well the chart attachment works so I also provided links to Dropbox, hopefully they work as I haven't used that in a while either. Ha. Well, anyhoo...

    I'm experimenting with using the Forex Decorrelated Indexes of Sierra Chart, of which there are eight (the major currencies). This is a setup of a spring on the AUDJPY. Yes, this is hindsight; yes, this is cherry-picked. It's an analysis of one possible use of these indexes to look for setups on the relevant pair.

    Chart 1 is the AUD-X decorrelated index, 4-HR chart, with Keltner bands. In the second pane is my own Currency Strength Oscillator with long-term standard deviation bands (another experiment), which plots the index against the other major indexes. The third pane is the bar high/low spread, as a substitute for volume.

    Here, the A low and B high form a relatively brief, tight consolidation (defined by green dashed lines) at the low of, and just below, a longer, wider base (defined by the orange dotted lines). A base below another base is usually a sign of further weakness to come, however this one is a interesting in that it keeps coming back into the larger base. The rally to B is typical behavior of a breakdown from a range, as price climbs back into the base, then reverses to C. However, here the mkt rallies back into the larger base once again, to the previous high, at D. Note the very wide spread up closing on the high at the climax of D. It then takes 9 bars on the reaction to close below the low of that bar. At E there is a wide spread down closing on the low, however it is a higher low, the third such, and is immediately and soundly reversed on the next two wide spread up bars closing near their highs. The rally to F is strong, with the high an extremely wide spread up bar closing on the high, a possible breakout of the smaller range or possible short-term climatic action. Turns out to be the latter, an upthrust. But on the reaction it takes 10 bars to close below the low of that bar and the entire swing down to X takes twice as long at the previous rally to F. The next bar is a possible shallow spring of the previous three lows on a good spread up bar closing on the high.

    So this range is pretty well-defined, with generally orderly swings, the upswings are relatively stronger than the downswings, price is at the bottom of the Keltner bands and the CSO is at an oversold position and has reversed on the up bar at X.

    Chart 2 is the JPY-X index. Here there is a wide base, defined by A/B. Following the low at B there is a small tight base at the low of the larger consolidation which, in hindsight at the time of the powerful rally to X, one might consider absorption by buyers. However, the final swing of the rally to X might also be considered at least a short-term buying climax and possible upthrust with those last four extremely wide spread up bars closing on their highs, price outside the bands, and CSO overbought. The first down bar at the X high is on a decent spread closing on the low but still outside the bands. Price doesn't get outside these bands often and when it does usually doesn't stay for long. ("Usually". Very strong trends can last longer than we expect, natch.)

    Chart 3 is the AUDJPY with Keltner channel, volume, relative strength vs AUD index (with std dev bands) and bar spreads. Here the mkt forms a somewhat tighter base (green dotted lines) within a larger one (I've zoomed in for clarity, but the high of the large base is the orange line). At X is a possible spring, with climatic action on several wide spreads down closing on their lows on extremely strong volume, which then diminishes considerably at the very lows as spreads tighten the last couple bars and price is outside the bands. Note that relative strength vs the AUD index is also outside the std dev bands at the climax/spring and turns up on the reversal up bar at X, which is on a decent spread closing on the high. Again, RS doesn't stay outside those bands for long and when it reverses back into them there is usually, at the very least, a short-term pause or reversal.

    So, at X, we have a possible spring and climatic oversold condition on the AUD index, a possible upthrust and climatic overbought position on the JPY index, a possible spring and climactic oversold condition on the AUDJPY pair. One might consider taking a long position at such a short-term swing setup on the AUDJPY with these conditions: OB/OS on the two indexes via price action and relative to std dev bands (either against them or, even better, outside them), negatively correlated at significant resistance/support and in possible upthrust/spring positions. The AUDJPY also showing price structure of OS, climatic, possible spring, at or outside the bands, with relative strength outside the bands and turning up. Buy on the close of the reversal up bar at X with a tight stop just below the low, as when a spring/upthrust doesn't pan out it usually does so quickly (or of course it may not, it may just meander, in which case a time stop might be used). Make the intial profit target equal to the risk and subsequent targets and stops on up the line as per the trader's risk and trade management preferences.
    Last edited: Apr 14, 2019