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2015issue C1249-55

Construct a CAD-oil pair from percent-of-range Bollinger maps

Oil-exporting currencies are treated as positively linked to crude, so this archive article constructs the Canadian dollar versus oil. Each series is mapped to a percent-of-range-band, intermarket-divergence is the gap between those maps, and a correlation-gate allows or vetoes the pair.

  • Treat the Canadian dollar as a petrocurrency and build the pair as the Canadian dollar versus oil, not as a fixed one-to-one link.
  • Place each series on a shared-lookback percent-of-range-band, then read intermarket-divergence as the percent gap of the oil map versus the CAD map.
  • A correlation-gate must stay above minus 0.4 on a 20-session window at entry, and a 60-session reading below minus 0.4 plus a 15-session price extreme is treated as a regime-break exit.
  • The construction is described as most useful while crude is volatile and trending, and as likely to pause in a range-bound-oil-regime such as 2011-2013.
Entries in this reading3 entries
Current trackCorrelation analysis52 readingsBollinger Bands84 readingsIntermarket analysis136 readings

Start from the petrocurrency pair

Oil-exporting currencies are treated as positively linked to crude, and the constructed pair is the Canadian dollar versus oil. The Canadian dollar versus the US dollar is the petrocurrency here: a currency whose exchange rate is typically driven by the oil-export economy behind it.

The oil-CAD link is treated as usually positive but not a constant 1.0, because policy rates and carry can periodically dominate.

The CAD-oil pair is also constructed from a trade-flow story. Canada's main export destination is the United States, so oil-price swings are treated as USD-flow swings into the Canadian dollar.

Map both series on a shared lookback

Each series is mapped to a percent-of-range-band, a same-lookback map that places the latest close between the lower and upper two-standard-deviation Bollinger bands.

Those maps share one shared-lookback: the common sampling window used for both Bollinger maps and the short-horizon correlation check. The default construction uses a 20-session lookback and a 0.0001 floor in the band-width denominator so a flat standard deviation cannot divide by zero.

Read intermarket divergence, then wait for a reversal

Intermarket-divergence is then the percent gap of the oil map versus the CAD map after both series share that lookback.

Long and short setups require a 3-session extreme of that divergence beyond plus or minus 20, plus confirmation that the divergence is already reversing.

CAD–oil Bollinger-band divergence, summer 2015

Daily gap between crude’s and the loonie’s 20-day percent-of-range Bollinger maps, read from the upper NinjaTrader pane for 27 May–8 October 2015. Pair longs set up after a push through +20 that then turns down; shorts after a push through −20 that then turns up. The pane’s last labeled print is 0.64.
Daily gap between crude’s and the loonie’s 20-day percent-of-range Bollinger maps, read from the upper NinjaTrader pane for 27 May–8 October 2015. Pair longs set up after a push through +20 that then turns down; shorts after a push through −20 that then turns up. The pane’s last labeled print is 0.64.6C Dec 2015 versus CL Nov 2015 · Daily · 2015-05-27T00:00:00.000Z to 2015-10-08T00:00:00.000Z

Each leg is mapped as 1 + (close − 20-day SMA + 2σ) / (4σ). Divergence is (oil map − CAD map) / CAD map × 100. A 20-day correlation reading below −0.4 vetoes a new pair trade. Digitized points are whole numbers except the labeled close.

Install the correlation gate

A correlation-gate is a rolling CAD-oil correlation filter that blocks entry or forces exit when the oil link has weakened or flipped.

A 20-session CAD-oil correlation above minus 0.4 is required at entry so the pair is taken only while the intermarket link has not inverted. That short-horizon check uses the same shared-lookback as the two maps.

A 60-session correlation below minus 0.4 is used as an exit when price also breaks a 15-session extreme, treating a sign flip in the oil link as a regime break.

Pause in a range-bound oil regime

The same construction is described as most useful while crude is volatile and trending, and as likely to pause in a prolonged range such as 2011-2013.

That setting is a range-bound-oil-regime: a prolonged sideways crude period in which the same divergence construction is expected to pause rather than keep firing.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
25 of 37 in the Correlation analysis track
201512-18 pp.Next on Correlation analysisCAD/USD and crude: first the correlation, then the band gapIn 2014, oil led Canadian merchandise exports at US$128.9 billion, or 27.2 percent of the total, which is why CAD/USD can be studied as a commodity-currency spread against crude rather than as a standalone rate.
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  25. 2015Construct a CAD-oil pair from percent-of-range Bollinger maps
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