Out of these currency ps which are the most correlated

[Mainframes]

Hi guys

Out of the following currency ps. Which are the most correlated or anti- correlated?

1) EUR/GBP EUR/USD

2) EUR/USD USD/CHF

3) GBP/USD USD/CHF

I have used the data http://www.mataf.net/en/analysis-correlation_id.htm
to find out that 1) is very correlated 2) 3) are very anti-correlated. As I am new to fx trading I would like to know if any experienced people on here could tell me which (out of 1)2) 3)) are the most correlated.

Thanks in advance

[mahras]

EURUSD USDCHF. Almost always unless disaster strikes when CHF increases in value (the Swiss are a neutral stronghold historically)

[Nonpiker]

Regarding EUR/USD EUR/GBP please realize that EUR/USD is a component of the cross. I do not think you can correlate something to itself. If that makes sense. You can put a long EUR/GBP position on by buying EUR/USD selling cable or vice versa for a short. EUR/USD & USD/CHF are going to be negatively correlated as well as cable USD/CHF. This is due to the fact that on a dollar higher move the dollar based p will typically go up the euro sterling based ps will go down.

Please note that if the crosses move such as EUR/CHF you will see instances when USD/CHF stays unchanged while EUR/USD goes higher. You will then look at EUR/CHF see that it is higher. This is opposed to both ps moving in opposite directions the cross remaining unchanged. There are instances when the cross will drive the market.

The idea of components is one that is key to understing these markets explaining some of the moves you will see.

[Mainframes]

Thanks for the replies. I think I underst your points. The reason I'm asking these questions is that I'm thinking of going into trading with the money I've made on some property. Nonpiker; Sorry I meant in my previous post EUR/USD GBP/USD not EUR/GBP EUR/USD.

I do have a couple of questions still though (sorry if I word them in a complicated manner):

a) Imagine I decide to try to "p trade" GBP/USD EUR/USD as they are correlated. I would overlay the graphs for GBP/USD EUR/USD wait until they deviate significantly. Then under the right circumstances I would buy GBP/USD sell EUR/USD wait till the graphs recombined to close my positions. This deviation of the graph is mathematically represented when the following equality DOESN'T hold (assuming my maths phd was not worthless):

((GBP/USD)_i * (EUR/USD)_f ) / ((GBP/USD)_f * (EUR/USD)_i) = 1

where for example (GBP/USD)_i is the initial exchange rate when I open the position (GBP/USD)_f is the final exchange rate when I close the position.
My question is what is a imum that I should expect the above equation to violated. I.e what is the imum deviation 1 that I can expect the right hs side of the above equation? E.g. 1.06?

(Note that the above equation is a measure of how correlated the (GBP/USD) the (EUR/USD) p are. All it says is that if (GBP/USD) become twice as strong then (EUR/USD) should also become twice as strong.)

b) An analogous equation could be written down for EUR/USD USD/CHF which would measure ANTI-correlation. I would be interested in knowing what your views are on the imum deviation away 1 that it would have. But I will ask that assuming people still want to talk to me

It is really an answer for part b) that I want because I can already overlay the graph for correlated ps on my broker i.e I can 'see' answers for part (a) by looking at historical data. But am not allowed to overlay graphs for anti-correlated ps so it is harder to estimate an answer for (b).

Thanks in advance

[Nonpiker]

Mainframes

The idea you are bringing up is the same I was trying to make in my above post. If you buy EUR/USD sell GBP/USD you are putting on a EUR/GBP position. Think about the following: you buy euro's sell dollars then you sell sterling buy dollars. The dollar positions looks like the following visually:

EUR (long) USD (long) The long dollar positions negate one another
---------- * ----------- you are left with EUR/GBP.
USD (short) GBP (short)

The question you are asking would require you to get the volatilities of the crosses both EUR/GBP EUR/CHF ( a specific period) compare them with the closing rates any given period. You can then ascertain what the stard deviations would be since you are trading the crosses via their components. Please let me know if that makes sense to you; because I will try explain it in further detail if you are unclear.

Good Luck.

[jotace]

What if you treat "i" as the open of every day "f" as the close in excel. Then you can try the same but choosing "i" as the close the first day of the year choosing "f" as the close of the day +60 (aproximately a quarter). With excel you can try this kind of laboratory essay. It will provide you with the mean value consequently which values could represent an extreme.

[mishak]

Hello Mainframes your "maths phd was not worthless" for sure.

However the guaranteed income may come only bonds. Opening an "odd cross" position on Forex market bring you profit with 50% chance.

Just look at historical EUR/GBP chart - you'll see this cross has its highs lows. If you buy cross near its low you'll probably make money etc. Every forex position carries risk of loss.

In real life you'll deal with "historical" correlations. They will change in future - you may bet on it.

Just recall recent London bombing expect elections soon in Germany.

[Mainframes]

Thanks guys gor the comments. I now underst about the cross rates. (I should pay more attention). Cheers