Correlation Trading - Basic Ideas and Strategies

This is a discussion on Correlation Trading - Basic Ideas and Strategies within the Forex forums, part of the Markets category; Well, I am not referring to any indicators, as such... It's just that with very little Excel you can look ...

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Old Aug 27, 2009, 11:43am   #9
 
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Well, I am not referring to any indicators, as such...

It's just that with very little Excel you can look at a whole variety of things, e.g.:
1) rolling correlations, using diff horizons
2) regressions over diff horizons that could suggest possible relationships

These are very basic techniques, but they will often provide some insight. If you want to get proper statistical-like, there's a plethora of more sophisticated methodologies (ARIMA, PCA, cointegration, etc).
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Old Aug 27, 2009, 1:11pm   #10
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My observations

NVP started this thread Thanks Martinghoul

I'll have a look and bring back any interesting sites or links for these....I use Excel a lot at work but have never extended this much in regards to processing Trading data....but clearly it is a fantastic generic tool for this kind of thing

Neil
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Old Aug 27, 2009, 1:42pm   #11
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The Forex Family and their traits.....

NVP started this thread Ok Lunchtime……(certainly not for wimps in my book)

I think I’ve got these all down in correct manner I intended ....I will correct this if I find an error

Apologies for political incorrectness below - I have tried to enliven what is a pretty “dry” post....

Meet the family

Sterling (Red)
Volatile little varmit, mainly “hates” (ie negative correlation) the Yen and USD$
Not absolute friends (ie positive Correlation) with anything else (in my humble opinion) perhaps is more friendly and runs with the European Currencies than anything else – but much more Volatile so don’t get bitten !
Non Forex-wise any relationships it has are probably due to its negative
correlation to the USD$ and the Yen – so refer below to those comments

Euro (Blue)
Lower volatility than most again I would say, primarily “hates” (ie negative correlation) the Yen and USD$. Its best chum (ie positive Correlation) is the Swissie and they go most places together in my opinion.
Non Forex-wise any relationships it has probably relate more to its Negative correlation to the USD$ and the Yen – so refer below to those

SwissFranc(Grey)
All said above in the Euro comments …Swissie (in my opinion) demonstrates
lowest volatility levels of all the Majors most of the time…useful for trading against higher volatility currencies

AUS$ (Gold)
Gday mate…….It cant stand the USD$ and the Yen, and should party a lot with its neighbours (NZ$) but seemingly not enough as you would trade reliably on … loves to party hard with high interest rates on offer compared to the other Majors.
Non Forex-wise …….“loves” Gold (positive correlations) but enough to trade reliably on (?)

NZ$(Lightblue)
Same relationships as its neighbour above…..is also fond of high interest rates…….

YEN (Yellow)
Volatile and mainly “hates” all currencies (ie negative correlations) except the
USD$, which generally moves in the same direction (but US$ is generally less volatile). People sell it in perceived times of greater risk/opportunity as it has the lowest interest rates out there....then they can buy high Yielders (AUS$ and NZ$)
Non Forex-wise It “hates” (negative correlation) most Stock indices and Commodities. Traders sell Yen (the carry trade) to buy these (and Vice versa)….watch it against the US Stock Indices for closest (negative) correlations


CAD$ (Brown)
Difficult to pin this one down - except moves generally negative to US$ and Yen
Non Forex-wise …….“loves” Crudeoil (positive correlation) but enough to trade reliably on (?)

USD$ (Green)
The “Daddy” whether the rest of the unruly forex family like it or not !.

“Hates” all currencies (ie negative correlations) except the Yen , which generally moves in the same direction (but the US$ is generally less volatile). People sell it in perceived times of greater risk/opportunity (its the major holding reserve currency for most countries) Counter-wise traders will buy it as a safe haven when they are dumping everything else and risk appetites are falling……commonly dumping the high Yielders (AUS$ and NZ$)
Non Forex-wise It “hates” (negative correlation) most Stock indices and Commodities. Watch it against Gold especially for some great (negative)
correlation Plays .


I will publish examples of the above behaviours as soon as I can .. but just load up the FXCorrelator indicator yourself and watch the soap opera unfold again and again in any timeframes or MA/Delta variations you chose……

soooooo…..how can we apply this to making money ?

thats why I started this thread……..so any answers/comments out there please ?

Neil
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Old Aug 27, 2009, 2:08pm   #12
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27th Aug Morning session on Charts

NVP started this thread Last post for a while as back to work...late one on cards so perhaps no posts till tomorrow now......

Heres the morning through the eyes of the Indicator in 1min TF....I cant believe Sterling was hanging out down with US$/Yen mid morning......must've been some bad news out there to show it so far away from the other currencies Trading opposite (as usual) to the USD$/YEN tag team....

lots of dinaros in bank for you if you've been long on the Aussie and NZ$ trading against (wait for it ).....the US$/YEN

Neil
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Old Aug 27, 2009, 2:10pm   #13
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did you spot the deliberate mistake ?

NVP started this thread here de Chart...........
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Old Aug 27, 2009, 2:30pm   #14
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CAd vs Oil........?

NVP started this thread Couldnt resist a peek at what I said..........

personally i would never trade CAD vs Crude oil correlations but thats not to say we
cant come up with some ideas here amongst all the others i hope we will
sharein future

thats really it unfortunately for now......

Neil
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Old Aug 27, 2009, 4:24pm   #15
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the 1 hourly Chart

NVP started this thread Hmmmm......just glimpsed at the 1 hourly charts with setting 200 MA and Delta 3

the US$/YEN tag team (Green/Yellow) are in full attack mode going up, mainly at the cost of Sterling (Red)......better get my holiday currency now !

Sometimes I add overbought/oversold lines to these charts based on the historic levels that some currencies achieve (mainly Yen and GBP that stretch the boundaries the most in highs/lows) so I know how much more is left or if a Currency is poised to retrace ........

in this scenario the prices have potentially more to go to get anywhere near the over bought/sold levels possible (even the Red line GBP)....

so based on everything else one should be theoretically still selling pound and buying either of the tag team currencies until the bias changes (go with the Trend)..........

I would not advocate mixing the 2 volatile currencies (JPY/GBP) unless you like your action fast and stops wide......

Neil
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Old Aug 27, 2009, 4:55pm   #16
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currency Correlation - nice link

NVP started this thread Hey Ingot54

just looked at the site you recommended in earlier thread

Currency Pairs Correlation in Forex Market: Cross Currency Pairs

nice...and I like to think the indicator I am using translates this into chart form !

Neil
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