Currency Pairs

[Rhody Trader]

... So it doesn't make sense to trade a cross unless both factors are moving in the same direction, with exception for carry trade times.

I'm with GJ on this one. Oftentimes I'll trade a cross to stay out of a USD exposure. You don't need both sides of the cross to work in your favor to make money. You only need one side to appreciate/depreciate relative to the other. They are exactly like any other pair, which is why sometimes you'll hear the non-crosses referred to as crosses becaues they are all exactly that.

In addition, from a TA point of view, watching a GJ chart and believing that one watches bulls and bears in action is illusory. The liquidity is in GU and UJ whereas the daily turnover in GJ is less than that in, e.g., USDSEK. Based on BIS figures from last year, so I may get corrected again...but the principle still holds.

The liquidity is where a market maker is willing to provide it. Since you will quite readily find very good dealing rates for GBP/JPY, it's not at all a question of liquidity. What you're referring to is traded volume. You're right that flows in GBP/USD and USD/JPY are the bigger drivers in changes in GBP/JPY than straight action in the cross, but that doesn't alter the analytic landscape at all in terms of TA.

Do you change your methods from stock to stock because one trades a lot less volume than that other? You shouldn't. It's the same in crosses. They do trade outright themselves, which supports their quotes, as well as having knock-on effects into one or both of the legs. The quote level of GBP/JPY represents what the market believes the fair relationship between those two currencies to be. Thus, to say that you're not properly seeing bulls and bears in action in the movements of a cross is incorrect.

 

[r.w.]

Thanks for your reply, John. Here are my comments.

I'm with GJ on this one. Oftentimes I'll trade a cross to stay out of a USD exposure.

Agree.

The liquidity is where a market maker is willing to provide it. Since you will quite readily find very good dealing rates for GBP/JPY, it's not at all a question of liquidity. What you're referring to is traded volume. You're right that flows in GBP/USD and USD/JPY are the bigger drivers in changes in GBP/JPY than straight action in the cross, but that doesn't alter the analytic landscape at all in terms of TA.

Yes, I meant volume. I am not sure I am with you here. Taking it one step further, it would mean that if we divide cotton prices by coffee prices and chart it we should interpret the chart as an expression of the market's view of how many tonnes of coffee one should pay for cotton, and the fluctuations in the chart would be an expression of the related market psychology. I would prefer to look at that as two different markets instead. Or am I missing something?

The quote level of GBP/JPY represents what the market believes the fair relationship between those two currencies to be. Thus, to say that you're not properly seeing bulls and bears in action in the movements of a cross is incorrect.

Sure, over the longer term GBP/JPY reflects anticipated and real changes in the relative shape of the UK and Japanese economies, and that is a very tradable relationship. But certainly not on an 4h basis, where the volumes are in the USD pairs - and GBP/JPY flows along so that arb relationships don't get out of balance. Or were today's fluctuations in cable a result of sterling vs yen bulls and bears acting it out and cable following along?

Or am I still missing something?

Thanks,
R

 

[questroizac]

I trade NZ$. JPY

 

[Rhody Trader]

Yes, I meant volume. I am not sure I am with you here. Taking it one step further, it would mean that if we divide cotton prices by coffee prices and chart it we should interpret the chart as an expression of the market's view of how many tonnes of coffee one should pay for cotton, and the fluctuations in the chart would be an expression of the related market psychology. I would prefer to look at that as two different markets instead. Or am I missing something?

Since there is no mechanism to keep Coffee and Cotton prices in line with each other, so your's isn't a good analolgy. Nobody trades Coffee/Cotton. If people actually traded that, regardless of how much more the individual contracts traded, it would be meaningful.

GBP/JPY is more like Treasury's. Most of the volume flows through the specific instruments (2s, 10s, 30s) individually, but there's also a decent amount of yield curve action. Some traders, in fact, do nothing but trade the yield curve - and they most certainly apply TA to it.

Sure, over the longer term GBP/JPY reflects anticipated and real changes in the relative shape of the UK and Japanese economies, and that is a very tradable relationship. But certainly not on an 4h basis, where the volumes are in the USD pairs - and GBP/JPY flows along so that arb relationships don't get out of balance. Or were today's fluctuations in cable a result of sterling vs yen bulls and bears acting it out and cable following along?

Volume isn't the determining factor in price movement. If so the Eurodollar futures would be among the most volatile instruments on the planet.

I would contend, in fact, that trade flows through GBP/JPY are even more impactful on a short-term basis than on a longer-term one just for the simple reason that they are less frequent. If some UK exporter comes through and does a couple yards of GBP/JPY it will almost certainly have more of an impact than were the same amount of GBP/USD or USD/JPY done.

 

[r.w.]

I would contend, in fact, that trade flows through GBP/JPY are even more impactful on a short-term basis than on a longer-term one just for the simple reason that they are less frequent. If some UK exporter comes through and does a couple yards of GBP/JPY it will almost certainly have more of an impact than were the same amount of GBP/USD or USD/JPY done.

Very much in line with my original point. Less frequent, indeed. And, sure, you can trade info on trade or M&A related flows, but not in the context of this thread - at least as I've understood it.

 

[nine]

Thanks guys. I will have a look at usd.cad cad.eur & cad.jpy.

One of the last two will be preferable because I have a lot of pairs with eur in half.
My "anti-correlation strategy" will be to take no more than 2 positions with the same pair in the same direction and if I go ahead with a paper thread while I sort out a strategy i will take 1% positions.

 

[r.w.]

Sorry mate you're still missing something. There are a handful of very active wholesale market participants who specifically trade GBP/JPY because they can boss it around intraday. Their flow is smart, directional and not at all based on fundamentals. And they don't execute through the legs either (usually)

GJ

Thanks, that was the missing piece that I didn't expect. Still, for the smaller trader, wouldn't it make sense to keep an eye on the legs separately, as one lot of GBP/JPY roughly equals (at today's rates) one (1.03) lot of cable and two (1.95) of usd/yen?

 

[Rhody Trader]

Thanks, that was the missing piece that I didn't expect. Still, for the smaller trader, wouldn't it make sense to keep an eye on the legs separately, as one lot of GBP/JPY roughly equals (at today's rates) one (1.03) lot of cable and two (1.95) of usd/yen?

What does the current GBP/JPY exchange rate have to do with whether or not to look at USD/JPY and GBP/USD when trading the cross?

While it can indeed be useful to look at the "legs" (and whether you're a small or large trader shouldn't matter), if you're trading the cross you need to be looking at the cross in your final decision-making. Failure to do so could be very dangerous.

 

[r.w.]

What does the current GBP/JPY exchange rate have to do with whether or not to look at USD/JPY and GBP/USD when trading the cross?

The equation is

a_2 b_2 - a_1 b_1 = b_2 (a_2 - a_1) + a_1 (b_2 - b_1)

Now let let a and b be the two legs.

 

[wasp]

Great thread and great responses chaps. Definitely worth listening too......

 

[wasp]

So, I'm thinking about starting a thread based on trading 8 pairs based on daily or 4hrly signals (eod=globex close). These will be based on limit or stoplimit entries set around eod (because I like my sleep way to much to be awake during US rth.

Currently I have 7 pairs:
These majors: EUR.USD USD.JPY USD.CHF AUD.USD
These crosses: GBP.JPY EUR.JPY

What should my 8th be please? And is it worth doing another "Make Money Trading (forex) thread?"

Notice you have no kiwi's in there.......? Possibility?

 

[beenaontime]

Hi Nine

Try the eur/jpy pair, it is very similar to the Dow

If you take the ticker name out on a four hour chart, and place them side by side

one cannot tell them apart bar by bar!!!

Good trading

beenaontime

 

[fembot]

Best suggestion are cable related I would say..and with all this unravelling in the markets sending commodities zooming you have to get into USD/Cad and AUD/USD both are boosted by commodities (Wheat /Canada, Gold/Australia) so always a good un.

Having great results with three pairs Cable, Euro/Yen and Stg/Yen .. just keep your stops trailing and watch out for fix times on cable

 

[NVP]

the world is your oyster........

I'm normally a very short term index futures trader but I want to branch into currencies on longer term (daily/4 hour swings and trends).

So for someone in this category what pairs do you guys recommend. Currently I'm looking at these majors and crosses. I wonder what else provides either more diversity or nice tradable trends and pullbacks (most of mine have USD as half the pair)?

Currently:
These majors: EUR.USD USD.JPY USD.CHF AUD.USD
These crosses: GBP.JPY EUR.JPY

So, I welcome opinions on which ones should be included or excluded from a trend/swing trading portfolio. If you want to give opinions for other trading styles can you just point it out for my benefit and that of anyone else looking at the thread later.

Thanks.

Hey Nine

in these TFś you have the luxury of comboing any of the major 8s without worrying about spreads !

in my humble opinion these are recommended

Yen or USD on 1 side of the trade ....always (and dont trade as a pair)

any of the other 6 are ok based on behavior at the time

Yen vs GBP will give biggest potential returns (but bigger DDowns)
USD vs Swisse or Euro lowest returns but much more predictable

AUS NZD and CAD are a little commoditised but returns will sit between the 2 extremes explained above

Good trading....
N

 

[clorets]

Anything with the yen can indeed be tricky since the yen is used as a safe heaven currency, like the usd.

AUD and EUR work well for the long term. At those scales, I would try not to restrict myself too much. Just screen every pair/cross and if you have good reasons to enter a trade then just do it.