Cluster Indicators in FOREX by Simeon Semenych
Any financial instrument that is traded on the market is a position of some active towards some currency. FOREX differs from other markets only in the fact, that another currency is used as an active. As a result in the FOREX market we always deal with the correlation of two currencies, called currency pairs.
The project that started more than a year ago, helped to develop a group of indicators under a joint name cluster indicators. Their task was to divide currency pairs into separate currencies. Since then indicators were changed several times. Moreover, the interest of users and active discussions in forums allowed to develop methods of working with indicators and create trade systems based on them.
The idea of dividing a complete cluster of currency pairs into separate pairs is simple. Suppose, a small cluster is used for currency pairs EURUSD, GBPUSD, EURUSD and the task is to separate the currencies: EUR, USD, GBP. If within a certain period of time a pair EURUSD grew, the difference will be added to EUR and subtracted from USD. If at the same time the pair GBPUSD raised, the changes in price are added to GBP and subtracted from USD. And, finally, it is necessary to consider the price changes of the pair EURGBP. Suppose the pair sank, then the difference will be added to GBP and subtracted from EUR.
As in Forex it is impossible to determine a common denominator, which could be a model stable in time, when separating currencies, they are not normalized and all the changes are counted in relative units. Until recently a point was accepted as such unit. But as the point value is changeable in time and is different for different currencies, in last modifications of cluster indicators the price change was calculated in percentage. Besides, experience showed that contemporary quote servers do now allow a significant difference of currency crosses. That is why to reduce the traffic of pumping quotes and to increase the operation speed of the indicators, calculations of all currency pairs are conducted on the basis of dollar crosses only. So the general algorithm of the indicators looks like this:
- Determination of currencies, that will enter a cluster. Is set by user’s settings;
- Mathematical calculation of non-dollar crosses based on dollar ones, even if USD is excluded from the cluster;
- Noise filtering by moving average. The parameters are set by the user;
- Analysing all currency pairs of the cluster on the price change and fulfilling the matrix of currencies, included into the cluster;
- Next is the logical realization of a certain type of indicator, i.e. for a trend following indicator several timeframes are processed (not only the current one), simple transformations are used for an impulse indicator.
During the development of the complex of cluster indicators, a large number of ideas was realized in separate indicators. However now the author suggests dwelling on three main types.
The first one is indicator CCFp
CCFp (Complex_Common_Frames percent) – is a trend following indicator. Its predecessor CCF estimated the divergency of currencies in points, while CCFp works with specific values, which allows to avoid distortions, resulting from the “heaviness” of separate currencies. “Heaviness” here means that, for example, pound is almost twice more expensive than USD (Febr. , 2007 – time of article writing). As a result – points for each currency have different value. So the decision was made to count the percentage.
The second indicator is CC (Complex_Common).
It is an impulse, or signal indicator. It is very sensitive and quickly reacts on the price movements.
The picture shows the currency pair EURUSD. Two windows below contain the same indicator. The upper window shows all the currencies, lines of USD and euro are semi-bold. The lower window contains the same indicator, but all other currencies are concealed; it shows currencies only of the corresponding pair.
The third indicator Complex_Pair1
is a derivative from the indicator CC. At the picture Fig 2 the lower window displays only two lines: EUR and USD. The sum of these indicators is the indicator Complex_Pair1, which reflects only one impulse (signal) line.
You can find more information, indicators source code, trading strategies in the articles: