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Backtesting Foreign Currency Pair vs Bond Futures Charts

One potential approach to day trading the forex currency market is to compare the currency pair you are interested investing in with historical data of a closely related financial instrument. When looking for similar or complementary trends between two instruments, adding indicators to your view such as volume or moving averages provides additional insight as to the mechanics of movement.

Here are a few example of indicators you can use to help build and backtest your next trading strategy:

  • Trader interest (volume)
  • Testing historical low and high trend lines (moving averages)
  • Relative strength indication (RSI)

One example of backtesting using indicators could be looking at the relationship between the 10-year treasury futures contract (ZN) vs the EUR|USD foreign currency pair.

Backtesting_Foreign_Currency_Pair_vs_Bond_Futures_Charts

There seems to be an interesting trend correlation between the two instruments as shown by red circles on the 10 Year Treasury Bond volume and directional, red lines on the EURUSD pairing charts. With the help of NinjaTrader’s charting, strategy backtesting and trade simulation tools, we are able to potentially establish historic decreases in ZN futures contract volume as an indicator of trends in the EURUSD currency pairing.

The above chart demonstrates that after a significant decrease in volume is observed in the 10 Year Bond contract, there is significant movement in the EUR/USD foreign currency pair. A trader could hypothetically use the gap in volume on the 10 Year Treasury Note along with where it sits against the 14 and 21 day moving averages as an indication to buy or sell the EUR/USD currency pair.

The logic behind this particular relationship is that historically speaking, the 10-year treasury note and USD both have often been used as potential safe havens to avert more risk averse stock index futures. For this reason, the two investment vehicles often tend to move in unison as the US dollar is also used as a global currency benchmark.

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