Basket of currencies forex

Basket pegs might also reduce an inflow of foreign short-term capital which is likely to be subject to a short-term exchange rate risk and to a sudden reversal in the direction of the capital flow. In other words, the basket-peg regime makes the country less dependent on risky foreign capital, while not affecting long-term foreign investments such as portfolio and direct investments.

This objective can be defined as a relative price variable like the terms of trade and the real exchange rate , or as a macroeconomic variable such as the balance of trade and the balance of payments. SDR — especially if its shares contain the country's trade partners.

A harmonic average method has a built-in appreciation anti-inflation bias and thus is optimal for price stability. An arithmetic average is best for maintaining the real effective exchange rate with its bias towards nominal depreciation. More information about averaging methods with a specific example here. Given the same set of currencies, the standard basket method should give the same value of the home currency as the harmonic average method.

In practice, some minor currencies that are not traded in the market may have to be excluded from the standard basket and the weights of remaining currencies that are positively correlated with the excluded currencies should be increased. They include how often to quote the exchange rate, whether or not to disclose the basket composition and how wide a margin to maintain. First, let's pay attention to the calculation equation. This is a geometric mean with weight ratios. We will try to apply this principle to our USD basket by using a custom set of currency pairs.

Let's accept another assumption — remove weight ratios and reduce the equation to calculating a normal geometric mean. We implement these changes to apply the geometric mean principle to perform calculations at all baskets. In real practice, we will have no knowledge of weight ratios for any currency pair.

Let's see if our changes have any effect. To do this, we will use a simple indicator: property copyright "Copyright , MetaQuotes Software Corp. Below are the results H1 timeframe : testBasket. We may notice a very good match on H1 timeframe. Movement directions at most segments coincide, as do the vast majority of local extreme points. On D1, the picture is less favorable but still quite acceptable. The positions of the majority of local extreme points are the same, as is the movement direction in most areas.

Differences in some areas can be easily explained by the lack of weight ratios and a different set of currency pairs. Besides, the scales of the charts superimposed on each other are different. On the basis of the obtained results, we consider the geometric mean calculation equation acceptable for calculating different basket currency status parameters. We will call it the method 1 further on.

However, we should also be aware about the equation limitations. More specifically, it would be a bad idea to use it with arguments that can take negative values. There are quite a lot of such arguments in technical indicators. In addition, calculating the geometric mean may considerably load the terminal if such calculations are not in a separate library.

Let's create yet another test indicator for calculations based on that equation. Stochastic indicator values are used as arguments: property copyright "Copyright , MetaQuotes Software Corp. The obtained result is shown below: Thin lines stand for the original Stochastic, the red double-width line is a new unified Stochastic based on the arithmetic mean equation, while the green double-width line shown for comparison is based on the geometric mean.

Analyzing the equations, we can see that they yield very similar results. The graph based on the geometric mean has more visible extreme points, while the one based on the arithmetic mean is more smoothed. Although, this may be nothing more but our subjective impression. Limitations associated with negative arguments and PC computing power seem to be the most critical factors affecting the practical application.

Generally, the arithmetic mean can also be applied for calculations as the method 2. Initial practical conclusions After having read the previous paragraphs, you may ask yourself "What is the need of all of this? We can also obtain another indicator drawing the chart similar to the standard RSI.

Read this best time frame for forex scalping indicators phrase

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