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; Hey Ingot54 just looked at the site you recommended in earlier thread Currency Pairs Correlation in Forex Market: Cross Currency ...

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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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Old Aug 27, 2009, 5:11pm   #17
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Timing is all in this game........

NVP started this thread Ref earlier thread and my 1 hour tip (a Bad one ?)

just like comedy the secret to Trading is.....................Timing

Neil
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Old Aug 27, 2009, 6:18pm   #18
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is it time yet ?

NVP started this thread back again.........perhaps the Yen will hold on the 5min now at the resistance point shown and start moving up again with its tag team partner (USD) ?

GBP on 5min has started falling in line with the 1 hour TF.....or is it just a small retrace and it will continue upwards..............

hmmm...AussieD (Gold colour) is getting frisky on 5 and 1h Charts....and it appears to be moving opposite to the USD/Yen now on the 5min (per my rules)...so perhaps thats a buy signal ?

Dowgone this trading stuff is hard !

Neil
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Old Aug 27, 2009, 6:31pm   #19
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go baby go !

NVP started this thread thought i'd add a proper chart (Finally !) to show what is happening in the real world you are all probably more used to.........me I like the FXcorrelator world m'self....

GBPJPY trades should carry a goverment health warning - but this is for demonstration purposes only and they move reeeeeal nice !

Go baby Go !

have to go out now....more tomorrow....
Neil
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Old Aug 27, 2009, 7:39pm   #20
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Carol Alexander for cointegration apparently good, my PhD firend is in love with the author
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Old Aug 27, 2009, 10:12pm   #21
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NVP started this thread thanks shatztrader...i'll have a look

Neil
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Old Aug 28, 2009, 7:03am   #22
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cointegration Trading....

NVP started this thread Hi Shatztrader

just had a quick look this morning at Carol alexanders work and this is indeed very interesting........also brings home to me a little that trying to generate a lot of interest in this whole subject could be like pushing certain substances uphill

the thing is (as Ingot54 alluded to in an earlier Post)........understanding correlations and the methods of measuring/reproducing these graphically in a meaningful way is a key weapon in sucessful Trading - ignore it at your peril

I recognise my postings have been a little folksy to date and some people are probably thinking I am not showing enough respect to established Statistical/Scientifc methods in this area................but the truth is I am not a statisician and I would love to bring a balance here to this thread between the Science of correlation techniques verses the brutal practicalities of sucessful Trading

people on this site want profitable/workable trading sIdeas and systems and I want to bring some to the table !

c'mon all - please bring some thoughts to the table.......even if its denegrating my efforts to date and my (flawed?) indicator

Neil
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Old Aug 28, 2009, 7:07am   #23
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trial the indicator....?

NVP started this thread Hi (damn late for work now!)

It would be great if someone started using the indicator attached in earlier threads and fedback comments thoughts through this thread..........after about a year of playing with this I still have only achieved 25% of what this baby can do

c'mon you Metatrader fans !

Neil
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Old Aug 28, 2009, 7:57am   #24
 
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Correlation and Arbitrage

Quote:
Originally Posted by NVP View Post
Hi (damn late for work now!)

It would be great if someone started using the indicator attached in earlier threads and fedback comments thoughts through this thread..........after about a year of playing with this I still have only achieved 25% of what this baby can do

c'mon you Metatrader fans !

Neil
Hi Neil - I have followed every post.

I know about correlation, but apart from knowing not to trade against other positions, or in the same direction as other positions already open, I was wondering what else Correlation could be useful for.

I had a look at the pair that I posted (USDCHF and EURUSD) and I noticed something really interesting. At first I thought that the 2 pairs mirrored each other exactly. Mostly they do ... but there are times when there is a delay between when one pair makes a move, and the other moves in the opposite way.

It seems to me that this almost a licence to print money.

If you are quick enough, you can get SHORT the EURUSD if it has not moved when the USDCHF has suddenly gone LONG. Historically the pairs mirror each other, but this arbitrage occurs from time to time, and if you did little else than wait for it, you could do well I think.

I am certain there are people trading this already - there would probably be people who have already posted a method for it. If so, could someone please provide links. It's interesting.

In the chart(s) below, I have shown some subtle differences in the WEEKLY charts.

I think when looking at these divergances on the 1H TF, the opportunity must surely pop out at you n'est ce pas?
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Old Aug 28, 2009, 8:45am   #25
 
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Hedging

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It seems to me that this almost a licence to print money.

I am certain there are people trading this already - there would probably be people who have already posted a method for it. If so, could someone please provide links. It's interesting.
Would it be practical to be simultaneously LONG one pair and SHORT the other?

One of the problems with such a hedging strategy, would be that big losses could run up if the method began to diverge against the trader. Nothing correlates 100%.

So in order to scalp the divergances, why not have the pair hedged on demo, waiting for a large loss to occur. This would be the SETUP for putting on LIVE trades.

The TRIGGER would be when the losses start to reduce, as correlation resumed.

The method would need very tight stops, and always have a Take Profit in pace in case of large profit spikes.

But how would you enter a Stop Loss for a hedged trade?
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Old Aug 28, 2009, 9:00am   #26
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Euro/Swissie Ideas

NVP started this thread Hey Ingot54 !

thanks for your kind attention and very interesting comments

The close corrlations seen on the Euro and Swissie together with relatively low volatilities most of the time does indeed generate some trading ideas - particularly
when their relationship is perceived to be "stretched" on overbought / oversold positions

I have a Version of the FXcorrelator somewhere that isolates the two pairs for this purpose and also adds a "difference in value" line to highight when we see the big o/B or O/S position.......in truth its not perfect as it carries the usual health warnings when one tries to call the turning point between 2 pairs (but risk can be reduced by introducing standard price analysis principles on the EURCHF chart)....also theres the spreads if you are trading real short TF's

i'm at work but will access my home files remotely and try to find it....just need to hide from the Boss (ha ha )

i'll have a look at other post as well..........

Neil
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Old Aug 28, 2009, 9:16am   #27
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Stops or Correlation

NVP started this thread
Quote:
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Would it be practical to be simultaneously LONG one pair and SHORT the other?

One of the problems with such a hedging strategy, would be that big losses could run up if the method began to diverge against the trader. Nothing correlates 100%.
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But how would you enter a Stop Loss for a hedged trade?



Good point !

some (most?) correlation trading systems and strategies require multiple trades to implement the plan and exploit the correlation anticipated

trouble is (and ive seen this discussed in a lot of sites) you have no capability to create stop losses, as in each individual trade being made they are all part of a greater dynamic group of trades (ive heard them called clusters ?) sooooo its a real problemo and without manual monitoring if it goes wrong you are really in the dodo...and even manually you could go down real fast on short TF's before you hit the "abort" buttons

let me have a think and also we may get some more comments as well !

love the Long/short idea !.............regardless of Correlation I have always thought that since all Financial Instruments display Fractal Behaviour across different timeframes one could be long in the 5min whilst being Short in the 1h on the same Currency Pair otr indice etc etc .........if you introduce standardised Money management principles (as you've already mentioned) of say 1-2% per trade then actually they are totally different trades in risk/return terms and could superboost your Capital base over time........assuming you are calling it correctly !

so is this a new form of correlation Trading strategy using the same instrument ?..........

very interesting !

Neil
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Old Aug 28, 2009, 10:11am   #28
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Eurchf_fxcorrelator

NVP started this thread Hi Ingot54

aaaaaahhh..found it , just tidied it up a little and shes good to go !
I will post this in next post.....heres background

Ma200/Delta 3 .........a fairly standard setting i use

I've removed the other 6 currencies to isolate our Pair

Blue Euro , Grey Swissie

I've added a difference line (yellow) between the 2 currencies

The Zero horizontal line now becomes important to measure the variance to
the yellow line

to estimate o/b or o/s areas you will need to add two further horizontal lines (ive put them in yellow dotted).....then position these to where you feel that point is on particular TF being used (ie eyeball them in !)

in example below I have the lower line (oversold) showing (upper line is not showing) as that is where the pair have been considered to be oversold in the past based on my own judgement ......this i not a fix you see where the yellow line turned to impress you all - as it is based on historical information not on the picture

hey everyone try it out and give me feedback !

comment
confession - in actuality this is not a million miles away from looking at the pair in normal mode and introducing standard o/b o/s methodologies........however a normal pairs chart will not show you the slopes/relativity of the 2 Currencies in question or their relationships with the other Currecies at the points of o/b or o/soldness.....this is where we could create the edge to enhancing its success....!

Neil
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Old Aug 28, 2009, 10:19am   #29
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Eurchf_fxcorrelator file

NVP started this thread here she is...........dontcha love remote access technology !

please get questions in today ....i'm away from internet access for 3 days from tonight as I have promised my wife we would go away for the long Bank holiday weekend.....

Neil
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Old Aug 28, 2009, 10:34am   #30
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Longer TF Trading

NVP started this thread Hey Ingot54

I also notice you prefer the Longer TF's.......here the 4h Basic indicator set on the 200Ma/delta 3 as at now

Hope you have been buying your eastern Neighbours currency in August !

Neil
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