Estimating Currency Strength by Superposing Forex Cross Rates
Summary
The article describes a method for estimating the changing value of individual currencies from a set of forex pairs. It first normalizes each pair by its average close over a sample, then combines direct and inverted cross rates to derive currency series. The author presents this as a way to separate a currency’s movement from the relative movement of its quoted counterpart and to synthesize rates that a broker may not offer.
The method is illustrated with EUR and USD, then extended to other currencies. The article compares the inferred EUR/USD ratio with the observed pair and introduces a prior-bar error adjustment to reduce amplitude discrepancies. Charts are offered as evidence of improved agreement after compensation, while also showing phase distortions that grow with history gaps and smaller timeframes. The method therefore depends on synchronized, sufficiently complete price histories; no quantitative forecast accuracy, trading results, or independent validation is reported.
Key ideas
- Normalize each cross rate by its average close over a chosen sample before combining currency series.
- Combine direct and inverted cross rates to estimate component currency values and derive synthetic pairs.
- A previous-bar adjustment based on the difference between the inferred and observed pair can reduce amplitude error.
- Missing or unsynchronized history can create increasing phase distortions, especially deeper in history or on smaller timeframes.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.