steve.jarvis's picture

Simplifying Technical Analysis of Individual Currencies, rather than FX pairs

One of the problems facing analysts of the Foreign Exchange markets is that Currencies are quoted in pairs. GBP/USD at 1.54 means "each GBP is worth 1.54 USD".  So each chart or price series indicates how well each Currency is doing relative to the other.  To gain a better understanding of how well any one individual Currency is actually doing, you need to look at a number of different pairs or cross-rates.  And to have a complete view of say 10 Currencies, you need to look at each individual one versus every other one, which amounts to 45 charts. As only the most dedicated analysts out there have the inclination (or time) to do this, what might the alternatives be?

It is possible to get trade weighted data for a number of Currencies, but the central banks who are supplying the information and the agencies that compile the data series would appear to lack uniformity in their approach.  And the problem from an analytical point of view is that because they are "trade-weighted", this means that component Currencies have varying degrees of influence.  For instance, DXY (USD Index) is made up of something like 57% EUR, with the next two biggest components (JPY & GBP) making up something like 13% & 12% respectively.  Another provider of USD Trade weighted data uses completely different figures, something like 34% EUR, 16% JPY, 12% CAD and 10% GBP.

A solution to the problems encountered by both of the above methods to determine the trend of an individual Currency, is to create your own basket (or index) for each Currency.  This is something I do for 10 majors, namely USD, EUR, GBP, JPY, CHF, CAD, AUD, NZD, NOK & SEK.  For each of these Currencies, I create an equally weighted basket containing a cross-rate against the other nine Currencies is created, which smoothes out all the lumps and bumps caused by the Currency on the right side of the pair.  I have created charts over a wide range of time periods, from intra-day to long-term, to get a better indication of any Currency's trend. Traditional charting methods, such as channels, double tops, moving averages, etc can then be applied to each chart.

Of course, it's difficult to trade any individual Currency on a day to day basis using these charts, but where it does come into its own is in terms of market timing and having a macro view on any individual Currency.  Using Tradermade's Maverick charting platform it is a simple exercise to set up these charts, or any other form of Currency basket - even trade-weighted if you prefer!

If you are not currently a user of Maverick, simply drop a line to support@tradermade.com who can set you up with a free trial.  

Below are a selection of my Currency baskets, over differing time periods. Click on each to enlarge it.  I hope you find this of interest and welcome others thoughts, from whatever perspective, such as FX, Technical Analysis, Trading or Economics perspective.

Chart 1/. NZD basket, 9 months, daily plots.  Chart 2/ CHF basket, 2 weeks, 1 hour plots. Chart 3/ USD basket, 2 days, 15 minute plots