Article Who is Your Dance Partner?

[T2W Bot]

In this article I will focus on the correlations of currency pairs and how they can help us trade. Occasionally, a trader may notice that a particular currency pair may lead another currency pair – that is, have turning points that happen a candlestick or two earlier. While it is rather rare for two different currency pairs to do EVERYTHING in the same way for long – be it trending or channelling – occasionally, we can be alerted to a potential turn in one pair when its dance partner turns first.
The first currency pair and its partner that we will examine is the EURUSD and the USDCHF. Before we examine the charts, always remember that with the USD on different sides in these two pairs, we have a reasonable Economics 101 belief that the charts will be heading in opposite directions at the same time. If the EURUSD is trending up, the US dollar is getting weaker versus the Euro, while in the USDCHF, a DOWNWARD trending chart is indicating a weakening US dollar versus the Swiss Franc...

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[TheBramble]

"Notice how the USDCHF's swing high was a day later than the low on the EURUSD.........At this point, it looks as though the USDCHF had taken the lead...". And therein lays the crux of the matter.

Rick doesn't suggest any method for establishing how to establish when one is 'leading' the other. The reason he is unable to do that is because there isn't so tight a relationship between USD, EUR and CHF (in his example) as to provide any basis for making trading decisions ‘with greater confidence’ based on these apparent correlations.

USD, EUR and CHF don’t exist in isolation to all the other currencies. If USD is being sold hard, it doesn’t necessarily mean that therefore EUR and CHF will be picking up the other side. It would be simply lovely if it were that simple…

For those that feel correlations are the way to go, NVP here on t2w does a lot of work in this area (too much probably LOL).

While some may feel Ricks suggestions can show them they way to picking the tops and bottoms I’d suggest they go right ahead and try it in real-time. For my trading purposes, if I want to know the relative strengths of the pair I’m planning on trading – I look at the slope.

 

[Swanagee]

Swanagee

This is a very useful article. I trade with pairs and this has helped to clarify some points for me.

 

[TheBramble]

That’s interesting Alan.

In what way did you find it helpful, specifically with regard to the example Rick has given?

 

[Swanagee]

That’s interesting Alan.

In what way did you find it helpful, specifically with regard to the example Rick has given?

I hadn't previously considered comparing the USDCHF with EURUSD and it opens possibilities for other comparisons. I have previously compared EURUSD with GBPUSD, finding that often one follows the other. I think I will widen my span now.