What is the Matrix

The Matrix (Figure 1.1) or Currency Strength Matrix to give it its full name is a market analysis tool
specifically designed for the Foreign Exchange (FX) market that allows traders to have a much
more focused approach to their trading each week. Having a focus is crucial to trading success in
any market but even more so FX. The FX market is a very complex and unique market to trade not
least because of its two sided nature which can make trade selection much harder than in other
markets. It is therefore easy for even experienced traders to find themselves in a trade which they
later regret taking. Having a system like the Matrix that filters out these trades will increase a
trader’s probability of success.

Completed on a weekly basis while the market is closed, the Matrix identifies the current
strongest and weakest currency pairs, giving traders the highest probability buy and sell options
for the week ahead. To complete the Matrix a trader must first analyse each of the 28 currency
pairs included therein, Figure 1.2, and as this is done using rules based analysis, it ensures a
systematic approach to reading a price chart that eliminates the possibility of errors typically
associated with misreading a chart. There are many more currencies available to trade than those
presented in the Matrix, however due liquidity and the fact that these currencies make up the vast
majority of daily trading volume, I have restricted the list to the 8 majors.

EUR GBP AUD NZD USD CAD CHF JPY FOR

EUR 0 0 0 0 0 0 0 0

GBP 1 0 1 0 1 0 0 3

AUD 1 1 0 1 1 1 1 6

NZD 1 0 0 1 1 0 1 4

USD 1 0 0 0 1 0 1 3

CAD 0 0 0 0 0 0 0 0

CHF 1 0 0 1 0 1 0 3

JPY 1 0 0 0 0 0 0 1

AGAINST 6 1 0 2 2 5 1 3

Figure 1.1 Example of a completed Currency Strength Matrix

EURO PAIRS GBP PAIRS AUD PAIRS NZD PAIRS USD PAIRS CAD PAIRS CHF PAIRS
EURGBP GBPAUD AUDNZD NZDUSD USDCAD CADCHF CHFJPY
EURAUD GBPNZD AUDUSD NZDCAD USDCHF CADJPY
EURNZD GBPUSD AUDCAD NZDCHF USDJPY
EURUSD GBPCAD AUDCHF NZDJPY
EURCAD GBPCHF AUDJPY
EURCHF GBPJPY
EURJPY
Figure 1.2 The 28 currency pairs contained within the Matrix
As a technical trader, reading a chart consistently is critical in your aim to take money from the
market. I say consistently instead of correctly as there is no one correct way, we can all trade
differently and therefore see things differently, but we must always individually be consistent in
how we do it. Unfortunately however, we are all human and prone to errors, whether you’re a
beginner or an experienced trader. In most aspects of our lives we can get away with small errors,
but in trading, errors cost money. In my experience the vast majority of these errors, and
subsequent loss of money, have been due to a misreading of the chart derived from a lack of
consistency and therefore avoidable. These are the worst kind of trading mistakes and eat into
your trading capital more than any other. As a result I developed this tool to help traders remove
the possibility of discretionary and unnecessary errors resulting in losses.

Before we get to understanding and implementing the Matrix in our trading, we must establish
the rules for reading a price chart as this is how we determine the scoring we see on the Matrix,
Figure 1.1. Firstly it must be remembered that the Matrix is designed to be based on the daily time
frame although it also works well on the weekly. Also, when discussing price charts I will always
use examples showing candle stick charts but bar charts will work equally well.

How to read a chart

So how do we read a chart? Well essentially we start by identifying the cycles on the chart and in
particular, every high and low that connect the cycles together and whether they are higher or
lower than the previous one. Sounds simple right, let’s look at a chart of AUDUSD in Figure 2.1 as
an example. The red arrows shown clearly mark each high and low and from this we can easily
determine that this chart is making higher highs and higher lows. This example is very straight
forward and if you were to mark this chart yourself most people would put the highs and lows in
the same place. Unfortunately however not every chart is made up of cycles that are as clear as
this. The next example in Figure 2.2 of GBPUSD tells a much different story.

Figure 2.1 Daily chart of AUDUSD from June to September 2012

 Figure 2.2 Daily chart of GBPUSD from March to June 2014

This chart goes through periods of up trends then down trends and also at times no trend at all.
It’s also not clear where all the highs and lows are so we need to establish set criteria for what
makes a high and a low. The following is the 5 simple points to remember when reading a chart.

Point 1 – Minimum Cycle Length

The fundamental principal behind reading a chart is that one
complete cycle must contain a minimum of 5 bars. Within a
cycle there will either be 2 lows and 1 high like Figure 2.3 or 2
highs and 1 low. There is no maximum number of bars to a
cycle.

Figure 2.3, 5 bar minimum cycle

 Point 2 – Confirming a low
A low can only be confirmed as a low once at least 2 subsequent bars have
‘taken out’ the high of the previous higher bar. In Figure 2.4 you can see how
during the formation of bar 2, price moved up through the blue line
representing the highest price traded on the previous day, bar 1, and in the
process ‘taking out’ bar 1’s high. Bar 3 then proceeded to pass up through the
blue line representing the highest price traded in day 2, ‘taking out’ day 2’s
high and establishing 2 higher bars. It’s only after we have two higher bars that
the low of bar 1 can be confirmed as a low.
It is also important that during the formation of bars 2 and 3 that the low of
these bars does not take out the lowest price traded on day 1. If this happens
then the count must start again from this new low.
Figure 2.4

Point 3 – Variable bar counts

The sequence illustrated in figure 2.4 will not always be present. It
will not always happen that the two higher bars will be consecutive.
This is fine but there still needs to be two out of the total number
that do take out the previous high.
Figure 2.5 shows how it has taken 4 bars to give us 2 higher bars.
Bar 2 started the sequence by taking out the high of bar 1, but bars
3 and 4 did not take out the high of bar 2 meaning the low is still
not confirmed. It is only when bar 5 takes out the high of bar 2 that
this low is confirmed and we can mark it with an arrow.
Again notice that none of bars 2, 3, 4 or 5 moved lower than the low
of bar 1, this is important.

Figure 2.5

Point 4 – Confirming a high

The same is also true for confirming a high, just in reverse. In this
instance we need 2 lower bars to take out the low of the previous lower
bar. Figure 2.6 shows how it took 3 bars to produce 2 lower bars. Bar 2
does not take out the low instead this is done by bar 3. Bar 4 then also
takes out the low price of bar 3 and at this point we can confirm the
high of bar 1.
When establishing a high it is important that the bars following bar 1 do
not take out its high. See how bars 2, 3 and 4 have a lower highest
trading price than bar 1.

Figure 2.6
 Point 5 – Be flexible
There will also be times when you will need to be
flexible and adapt as the chart unfolds. Figure 2.7
shows how a previous low (A) can be invalidated and
a new low confirmed in its place (C). You can see
how bars 2 and 3 produce higher bars and therefore
bar 1 could be confirmed as a low. However bar 4
then gives us one lower bar that produces a new low
before price moves higher again through bars 5 and
6. As there is only one lower bar, bar 3 cannot be
confirmed as a high. Without a high at B we cannot
have a low at A. These two points are therefore
invalid and a new low is confirmed at C.

Figure 2.7

How to score a chart

Now we have established the criteria for reading a chart you are now in a position to score that
chart based on the identification of its highs and lows. When doing this for the first time I
recommend going back about 2 months on any daily chart and making your way to the current
bar, identifying every high and low along the way. Once complete, the scores will be based on the
2 most recent highs and the 2 most recent lows. On any chart there will be 1 of 4 possible
scenarios present at any given time, as illustrated in Figure 3.1.

A. Chart is making higher highs and higher lows

B. Chart is making lower highs and lower lows
C. Chart is making higher highs but lower lows
D. Chart is making lower highs but higher lows

The scores awarded will consist of either a 1 or a 0. Where a chart is showing cycles that are
consistently moving in the same direction this will be a result of one currency being stronger than
the other. It is this strength we are looking to find and will award that currency a 1 as a result. A
weak currency will be awarded a 0 and if there is no consistent cyclical movement, then those
currencies will be awarded 0 as well.
Figure 3.1

Before I go into the scores for each example in figure 3.1 I think this is a good time to go over the
relationship of currency pairs. I stated earlier that FX is a two sided market and what I mean by
that is that when trading FX you are always trading pairs, so you will always be buying one side
and selling the other at the same time. This is something a lot of traders either don’t realise or
struggle to get their head round, but it is very important to understand. The two sides of a pair are
known as the base currency and the terms currency. The base currency is always stated first in the
pair and when looking at a chart it will always be showing the movement of the base currency.
Using EURUSD as an example,
EUR USD

BASE TERMS

The relationship between these two is simple, whatever the base does the terms will do the
opposite. This is why in the Matrix we always assign a score to both sides.

So now looking at chart A in figure 3.1 it is making higher highs and higher lows. This means that at
this time the EUR is making higher highs and higher lows against USD, therefore progressively
moving higher, which means EUR gets a 1 (EURUSD, blue box in figure 3.2) for its strength and USD
by default must get 0 (USDEUR, red box in figure 3.2) because of its weakness. If EUR is up against
USD then USD must be down against EUR.

Figure 3.2 Assigning the scores

 Chart B, EUR is making lower highs and lower lows against USD so this time EUR gets 0 for its
weakness and USD gets 1 for its strength.
Chart C, EUR is making higher highs but also lower lows against USD so as there is no
agreement between the two sides both get 0.
Chart D, EUR is making lower highs but also higher lows against USD so again as there is no
agreement both sides get 0.

This process of scoring is carried out for each of the 28 currency pairs, reading from left to right,
starting with all the EUR pairs then GBP pairs and then AUD pairs etc (Figure 3.2) until all 56 cells
(28 currency pairs with 2 scores each) have been filled as in Figure 3.3.

Figure 3.2 Each chart scored should result in 2 scores added to the Matrix

EUR GBP AUD NZD USD CAD CHF JPY FOR

EUR 0 0 0 0 0 0 0 0

GBP 1 0 1 0 1 0 0 3

AUD 1 1 0 1 1 1 1 6

NZD 1 0 0 1 1 0 1 4

USD 1 0 0 0 1 0 1 3

CAD 0 0 0 0 0 0 0 0

CHF 1 0 0 1 0 1 0 3

JPY 1 0 0 0 0 0 0 1

AGAINST 6 1 0 2 2 5 1 3

Figure 3.3 Completed Currency Strength Matrix

Using the Matrix

With all the charts analysed and the scores recorded now comes the good bit, how do we choose
which currency pairs to trade. To do this we first need to fill in the last column titled ‘FOR’ and
bottom row titled ‘AGAINST’ on the Matrix. The FOR column is filled in by adding up all the scores
in each row for each of the currencies in the left hand column, Figure 4.1. The AGAINST row is
filled in by adding up all the scores in each column for each of the currencies in the top row, Figure
4.2.

Figure 4.1 The score ‘FOR’ EUR

Figure 4.2 The score ‘AGAINST’ EUR

It is these FOR and AGAINST scores we will use to determine the strongest and weakest currencies
and in turn the best currency pairs to trade. The reason for this is that by identifying the strongest
and weakest currencies and then pairing them together we have a higher probability of getting the
movement and the direction we expect. Most of you at one time or another will have experienced
being in a trade that has went nowhere and this is usually a result of trading a pair of currencies
with a similar strength without you realising it. Using the Matrix correctly reduces the possibility of
this happening.

The strongest currency will be the one with the highest ‘FOR’ score combined with the lowest
‘AGAINST’ score, with the weakest currency being the one with the lowest ‘FOR’ score combined
with the highest ‘AGAINST’ score. The maximum possible score for each is 7, with the best pairs
being a combination of those at the extreme opposite ends to each other.

Looking at the Matrix in figure 4.2 we can see the currency with the highest FOR score is AUD and
it also has the lowest AGAINST score making it the best buying option for the week ahead. On the
other side of the scale, EUR has the lowest FOR score and also the highest AGAINST score making
it the best sell option for the week ahead. We can also see that CAD has a 0 FOR score but a
slightly better AGAINST score than EUR with it being 5, making it marginally stronger than EUR but
still a good sell option. This gives us two great currency pairs to follow,
EURAUD and AUDCAD
We will be looking to sell EURAUD, this will mean we will be selling the weak currency and buying
the strong one, while also looking to buy AUDCAD, meaning we are buying the strong currency
and selling the weak.

Figure 4.2 Completed Matrix highlighting strongest and weakest currencies

The scores will of course change from week to week and there is no limit to the number of
currency pairs that could be paired up as a result. There will also be weeks when there are no
currencies with extreme scores at either end of the scale. If there is no currency with a FOR score
of 7, 6, or 5 and no currency with a AGAINST score of 0, 1, or 2 then I recommend you be very
cautious and look to stay out of the market until things become clearer. There will be times during
the year when markets roar and times when everything stands still. If you follow the MATRIX it will
tell you what to trade in the good times and it will also tell you to take a break during the bad.

Happy trading