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Unleash the matrix to get in action

You remember the film Trading Places? The key scene takes place in the commodities trading pit for orange juice in the World Trade Center. Two traders observe that Randolph and Mortimer, the two old-timers running the show, are buying every orange juice contract in sight. Then those two observers rush into the pit to be part of the action.

I didn’t understand the significance of this ‘action’ – the volume and activity in a trade – until my friend and trading partner Dr David Paul taught me the Relative Strength Matrix. He explained that because many traders trade just one thing at a time you could be losing out on ‘action’ in other asset classes, something that short-term traders favour.

For example, if you only trade euro-dollar, you may well miss out on better opportunities in other currency pairs. David taught me to go through each currency pair and cross pair within the ‘four majors’ and ascertain where the strengths and the weakness were.

The explanation below is not a strategy, but an analytical framework to ascertain where the best move of the day is likely to be.

Put a four-hour chart on the screen with a 60-period moving average. Go through each of the 10 pairs – euro-dollar, sterling-dollar, dollar-Swiss franc, dollar-yen and their six cross pairs – and make a note of which currency is the strongest and which one is the weakest. After looking at all 10 pairs, you now have a Relative Strength Matrix of the 10 currency pairs.

Here’s an example. On the morning of 1 April 2011 the euro was stronger than all the four main currencies, while the yen was the weakest against them. So naturally I was looking for opportunities to buy euro-yen all day. The non-farm payroll numbers made it a difficult trading day, but nevertheless in my live trading room I raked in 30-40 points in euro-yen alone. It is a simple analytical framework and it only takes 15 minutes to do in the morning.

Tom Hougaard

Published: 23 September 2011

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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