Technical analysis in Forex is deep and multifaceted. There are indicators built on patterns (visually appearing figures), on trend and forecast indicators, fractal theories. And in a separate group, you can combine tools based on statistical-mathematical methods, which are a search for patterns and a study of the correlation between certain kinds of events. One of these tools is the Spearman Rank Correlation Coefficient indicator used in mathematical analysis, but also used in Forex. In this review, without going deep into the math of math, we will introduce you to this indicator and show how to make money with it.
Spearman’s rank correlation coefficient
This indicator refers to oscillators, although it has a different calculation formula. Compared to stochastics, it is smoother and has no delays at reversal points. It is a non-parametric method for determining the connections between any events. Each type of event is assigned a certain rank, which determines the degree of importance of the events.
In Forex, it looks like this:
- The indicator finds two sites that have a similar trend. For example, areas in which 15 candles painted approximately the same pattern. Each candle of both sections is assigned a rank from 1 to 15, the lower the closing price, the lower the rank of the candle. Thus, the candle that closes below all has a rank of 1, the candle with the highest minimum is 15.
- The indicator calculates rank differences for each pair of values that are compared to each other.
- The result of the difference is squared, the totals are added.
- The final formula for calculating the final coefficient: 1 – 6 * the sum of squares of the difference of ranks / (n (n ^ 2-1)), where n is the number of paired observations.
The value of the Spearman’s rank correlation coefficient of 0.3 and below is equated to a weak level of communication, 0.4-0.6 to a moderate level, 0.7 or more to a high level.
- timeframe – H1;
- asset – EUR / GBP;
- levels: 0.9, -0.9.
Conditions for opening a long position:
- The orange line crosses the blue from the bottom up, being below the mark of -0.9;
- on the next candle open position. Stop-loss set at a distance of 15-30 points. The target profit level is 10 points.
A short position opens when the orange line crosses the blue line from top to bottom, above the 0.9 mark.
Levels will need to be determined visually, since for indicators with different periods they will be different. On Friday and Monday it is better to refrain from trading. The number of signals according to the strategy with the Spearman’s rank correlation coefficient is small, therefore it is better to use it as an additional one. You can also change levels by narrowing the corridor, but then more false signals may appear. If you need a template for this indicator, write about it in the comments and we will send it to you for free by email.