Spot forex and correlations

Hi everyone,

At the risk of actually sounding like the utter n00b that I am - what is the general stand on FX spot correlations when doing spreads trading? I'm really been trying to wrap my head around this, ever since I read the post from some weeks ago on FX spots where the poster was doing a triangular spread (or suchlike).

What I'm getting at here is that am I wrong in assuming that you don't want that high a correlation, positive or otherwise? For instance - where I to trade, say long cable/short eurodollar at a 0.94 correlation, that would more or less cancel the position, wouldn't it?

And while we're on the subject - is anyone actually trading spot forex or is that a no-no in the realm of spread traders? I'm really interested in trading financial futures, however the local market is less than liquid and the costs associated with trading "offshore" makes that a non-option at this time. Thus I figured I'd cut my teeth trading spot forex, as that is doable on a fairly small account...

Anyways - any and all input on spreads trading on spot forex is more than welcome.

Br,

/Allinger

(edit - make that "offshore"...)

FX correlations

Have a look on DailyFX.com

They update a list of FX correlations over a month to a year. Although the dollar majors are
pretty correlated, having a EUR/USD and USD/CHF spread would have a different outcome to
GBP/USD and USD/CHF.

Also, strength in a particular cross can also affect the correlation. For example, weakness in the JPY may be the main driver of USD strength (if it was USD/JPY specific news such as the
YUAN situation) on a particular day and something like the EUR would be moving less.

Relative strength would be key for your strategy also, where EUR/GBP strength would mean
buying EUR/USD and selling GBP/USD would be the wise trade.

SAINT

SAINT said:

Relative strength would be key for your strategy also, where EUR/GBP strength would mean
buying EUR/USD and selling GBP/USD would be the wise trade.

Click to expand...

Thanks SAINT!

Given that it is impossible (at least I've been unsuccessful so far) to find "proper" spreads charts on spot forex I've been looking at comparative overlays and then at candle charts, in order to find the most probable entry on my long position. So far the test drive I've done has been rather profitable - should you have any suggestions/tips etc I'm all ears.

Now I'm trying to work out the money management and confidence issues...

/A

allinger said:

Thanks SAINT!

Given that it is impossible (at least I've been unsuccessful so far) to find "proper" spreads charts on spot forex I've been looking at comparative overlays and then at candle charts, in order to find the most probable entry on my long position. So far the test drive I've done has been rather profitable - should you have any suggestions/tips etc I'm all ears.

Now I'm trying to work out the money management and confidence issues...

/A

Click to expand...

The reason you don't find "proper spreads" in spot forex is quite simple - they are cross rates.

You mentioned earlier buying the Pound and selling the Euro. That is like buying GBP/USD and selling EUR/USD, which is the same as selling EUR/GBP (the rate of Pounds per Euro).

As to your earlier question about whether anyone trades spot forex, the numbers would suggest that most people do so. Spot trading has WAY more volume than futures, and of course no pesky exchange hour limitations.

A lot of information about spot fx correlations: current values, time dependences(in graphical and numerical form).

http://www.understandmarket.com/index.php?categoryid=55

Obviously I'm the d00fus

UM_manager said:

A lot of information about spot fx correlations: current values, time dependences(in graphical and numerical form).

http://www.understandmarket.com/index.php?categoryid=55

Click to expand...

Thanks! I'll do my homework - it just seemed like a good idea at the time...