EUR / GBP Trends Using Autocorrelation and Correlation Approaches

in Forex Trading, Hot Currency Exchange

Many analysts have likened the patterns of the EUR/GBP value changes to those of the EUR/AUD when viewed from the viewpoint of correlation analysis of two-point scale. Autocorrelation is a straightforward method that makes use of inter-disciplinary approaches in order to conduct market efficiency tests within the scope of the EUR/GBP.

In most cases, analysts make use of up to 100 hours worth of time-length so as to come up with a wide range of statistical data. The time series limits may extend for up to 20 units in order produce measures of returns that are properly distributed within different time limits so as to come up with free correlations.

When the two currencies are being considered for purposes of comparison, a time lag of one hour has to be the main variable within which all other factors fall. In one such analytical study that was carried out so as to find about the relationship between these two currencies between 2002 and 2009, each of the currencies was compared to other major currencies.

The GBP was compared to the JPY (GBP/JPY) while the EUR was compared to the AUD (EUR/AUD). The latter currency was also compared to the CHF (EUR/CHF). This is how autocorrelation was used to effectively determine how this currency pair compares with others in the foreign currency exchange markets. All these comparisons depicted the GBP/EUR pair as a very strong one. In terms of EUR/GBP autocorrelation, the EUR/CHF pair appeared almost as strong as the EUR/GBP. It should be noted that these considerations were not limited to one time bin.

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The main conclusion here is that the overall effect has a far larger correlation than what is usually seen.  In this case, the autocorrelation should actually be viewed as an average of the product of all hourly returns that are taken within one lag. If the result is negative, a trend reversal could be only hours away.

According to the Martingale simulation, a EUR/GBP comparison depicts a very positive correlation when the bigger picture is considered. The same case applies to the EUR/CHF. This shows a striking similarity in performance between these two currencies. The visibility of this performance is always underscored by a relatively low level of volatility and consequently an equally low noise range.

[ad#downcont]The problem is that sometimes the lag ranges used in autocorrelation don’t match with the prescription provided by the Martingale approach.  When trading in this currency pair it is good for you to consider both short-term and long-term factors so as to register high profitability. Another way of looking at it is through the use of bearish and bullish autocorrelation. These approaches take into consideration trader psychology which is what foreign currency exchange trading is all about. When considering hourly levels, an important way of defining the EUR/GBP currency pair is to monitor both upward and downward trends and to see if there are any indications of a stable long-term trend.