CounterFlow Indicators

Any number of indicators can be drawn on the currency index charts. How does a trader combine the indicators they see on the currency pair chart itself, and the 2 separate currency index charts? Does one look for confirmation in one of the index charts? Both of the index charts? These are all open questions and of course it depends on the indicator itself.

We currently provide a trend indicator to demonstrate how the currency indexes indicators can be combined in an interesting way. These indicators are calculated for a given pair by first calculating the indicator for the two related currency indexes. In our example we consider the pair EURUSD. Firstly we calculate the trend indicator for the index EUR, and then for the index USD, as follows:

This chart shows the index chart for EUR across about a day, and below it our 24 hour trend indicator. This indicator uses a 24 hour window of pricing data to calculate a value between -1 and 1, such that we have a normalized indication of the chart's trend. Here we can see the EUR index has drifted on the short side, before returning to the long side.

Now let's see the same indicator for the USD currency index:

Here we see something more drastic happening with the sudden long spike. Since USD is the second part of the EURUSD pair, we expect this to contribute as a large short spike on the EURUSD. And this is what we see in the next chart:

The long movement in the EUR index at the right edge is overwhelmed by large short spike in the USD index. This already gives us useful information, to help us understand where the market movements might be originating from. We can now anticipate USD causing large movements in other related pairs.

Now here's the interesting part of this trend indicator. When we combine them to form a trend indicator for the pair EURUSD, we see an almost flat line. Wouldn't we expect to see the drastic short spike in the indicator? The answer is no, because the indicator for the pair includes a correlation term. This measures the correlation between the movement in the USD and EUR indexes. When the two index move in similar directions, the correlation between them is high. When they move against each other, the correlation low.

The correlation term is inverted in such that our pair indicator is suppressed when the two indexes move in tandem. When the two indexes move against each other, the compression term encourages the trend indicator. The reasoning is that if EUR and USD and trending against each other, the pair might exhibit a stronger trend.

If we consider the chart for the pair AUDUSD, we see that the short spike is also present as expected. The pair does after all have the same USD component. However, here we see the trend indicator very strongly highlight the short spike. This is because the AUD index is moving against the USD index, and hence is cooperating in moving the price of the AUDUSD pair.

And now let's check the AUD chart, to verify the above:

As expected, we see AUD index falling at the moment where the spike occurs. USD spikes upwards at this point, and hence the two are working together to contribute to a large spike in the AUDUSD pair. Hence the trend indicator sharply indicates the spike.

This illustrates one way we might make use of our currency indexes to select between pairs to trade. We might suggest that AUDUSD is a better pair to trade in this scenario, as the two sides of the pair are coorperating to move the pair's price. This indicator is availabe on the CounterFlow feature of the website, covering trend time ranges of 24, 48, 72, 96 and 120 hours.

*** IMPORTANT: Please note carefully that the above describes a reasoned logic about the way currency index capture price movements in the underlying pair. However, the Forex market price movements are far more complex than this. These indicators alone will not provide a magic bullet. Our own research suggests they can offer useful hints about when to enter a trade, but only when combined with many other factors. And as is often found in Forex trading, signals can be interpreted in a contrarian sense. We provide these indicators are interesting research tools for analysts, to assist in a deeper understanding of the Forex market.

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