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Values for the currency pair masses could also be defined so as to make the average currency temperatures match the room temperature in the Kelvin scale or even fancier, to the Celsius or Fahrenheit. Since the square root of the variance is the standard deviation, such a temperature definition gives an idea of how intense the random motion is in pips.
A news event affecting the value of the US dollar can be detected when its rates to the rest of the main currencies change consistently. In other words, when the rate movements happen to correlate. See Appendix A on Event Trigger calculation. A numerical expression of this correlation is the average of difference to its EMA Exponential Moving Average over all the main currencies. The problem with this approach is that the significant currencies to consider are not that many, actually only 6 pairs can be used.
An average over such a small sample is not immune against random motion and prone to render false positives. More precisely: pondered by the probability of the observed rate velocity not being due to the Brownian nature of the motion. Knowing that the velocity distribution in Brownian motions is Gaussian, in absence of an event, the probability of observing a velocity below a value V can be calculated by the area under the Gaussian probability density curve:.
Only So, it is fair to say that if a velocity observed is above, say 6; it is very unlikely 4. The mathematical expression of the probability of a velocity V, not being random is:. Where erf x is known as the error function.
Going back to physics, in a chamber with a mixture of gases, the average energy of all molecules is the same, thus all the gasses have the same temperature and we can speak of the temperature of the mixture or chamber temperature.
But this is so because, even if the initial temperature of the gases were different when they were added to the mixture, their molecules would eventually collide with each other until equilibrium is finally attained. No such interactions have been observed so far. The trigger is a calculated number designed to detect USD events. A US dollar event is a surge in the USD rates to other main currency caused by some piece of news on America's economy perceived as having relevance.
The ideal trigger should have the following qualities:. So, the trigger should be some sort of average movement over the six currencies. The movement. Let's start defining "movement". Quantifying movement always requires a reference, in other words to state precisely how much something has moved, you must specify an origin or a former position. A trivial definition of movement for a FOREX rate could be the last quote before the present one, but would such a movement definition be helpful for event detection?
Consider the following case:. According that movement definition, movement for T1 and T2 would be both one pip and for T3 it would be 0 pips. That definition is not telling the story at all, it seems rather obvious that the rate at T0 made a better reference. The problem is that back at T0, there was no way of knowing an event was coming. Even if, by some illumination, we had known and took the rate at T0 as reference, by T4 the event would be gone, yet the movement respect T0 would still computes as a big one.
A better reference at T4 would be rate at T3, respect to which the movement would be 0 pips indicating the end of the event; but again…if we only had know at T3 that the event was almost over. A better definition for movement is one that uses a moving average as reference:.
This way, the movements at T2 and T3 will compute as big, while the ones for T0, T1 and T4 will compute as little. The chart shows a very convenient moving average for that event. A greater value of K makes a slower, average while a smaller value allows following the signal more. It was empirically determined that for most events, 40 made a good value for K.
Currencies move up and down all the time, but it is unlikely to see a rate wander more than 4 pips in a minute. During events, rates could surge 10 or more pips. It is easy to tell when an event has occurred, but not easy to make a profit on it. For that, you can not wait until it is obvious that there is an event, because by then, most of the movement will be over and may not even cover the spread and fees involved in the transaction. Cheers to the author!
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Brownian motion is the string that ties institutional financial risk models, markets and algos together because it allows them to predict the. This forms the heartbeat of technical trading. It typically drills down to intra-day momentum or price reversals. It is an extension in non-trivial ways of age-. The aim of this quantitative trading strategy is to use high frequency price data to predict the high and low of the stock price or for that.