Correlation Trading - Basic Ideas and Strategies

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Old Aug 26, 2009, 5:55pm   #1
NVP
 
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Correlation Trading - Basic Ideas and Strategies

Hi Everyone....An ambitious title indeed !

I want to consolidate as much information as possible on the subject within this
thread....the works !

Over the next few posts I will try to share my own humble thoughts/Ideas on Forex Correlation and would appreciate as much feedback and input as possible to help my studies.

I am not going to try to dictate where this thread leads, but I am hopefully that it will deliver some great Ideas, references and "Gems" for all of us to incorporate into our Trading.

To get things started In next post I am going to discuss The Major 8 currencies and how I have found they tend to interact with one another and if there are any simple rules we can learn from this to assist our trading.....

I will also attach an indicator I use to assess how the 8 Currencies are performing which I would love to develop further and expand with everybodies help

Please start adding comments / requests and of course any references or threads that would be beneficial to have linked in this one

apologies if anything has gone wrong in this first post...I hav'nt posted much before and this is my first attempt at a thread !

more tomorrow - time and work permitting !
Neil
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Thanks! The following members like this post: Forexaxe , fahdjeddah , ronald_fsm , Elsie-lk
Old Aug 27, 2009, 7:04am   #2
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Indicator for tracking FX Correlation

NVP started this thread Hi Everyone !

Probably makes sence to drop this into the pot first....

over the last few years I have been interested in all posts and discussions regarding Correlation - TPO(the Rumpled one) generated a version of this indicator a while back and included it as part of his many,many excellent Indicators available using Metatrader.

I believe FerruFx may have originated it though, but regardless of Authors and originators many thanks to both of these brilliant programmers/Traders for it !

the TPO version rotated the (non USD) Currency lines around the central X axis, which in effect became the Dollar crossover line for all of these Currencies (Based on the MA's set).....then there was a seperate USD line that operated as a stand alone showing its own movement.

The Version I have humbly tweaked shows all the lines actually correlating/interacting together with no real purpose to the zero X axis apart from signifying what currencies are stronger (above the Zero) and what are weaker (Below the Line)

sooooo when 2 Currencies cross that is the actual (well roughly) crossover point for those pairs based on the 2 MA's being used

Load it and play with it and I will happily answer any questions whilst preparing my next post....

USD= GREEN, STG= RED, EURO=Blue, AUS=Gold, NZD=LightBlue, CAD=Brown, YEN=/Yellow, SFR=Grey

the default setting is MA = 200 with delta on 13..........this means when currencies crossover it will (roughly) correlate to observing the 13MA crossover the 200MA on the pairs Chart for the 2 Currencies involved

(Added comment from NVP)
Just to reiterate for everyone unfamiliar with these type of charts - you are looking at the relative strength of each currency verses the other currencies.......the line which is highest is the strongest , the line which is the lowest is the weakest (based on the Moving average and Delta you have set in the paramerters). Crossovers happen where same MA's would be seen to cros sover for the pairs on Normal Charts.

if you want to observe virtually real time action set the Delta to 1 (ie chart changes with each new bar) and watch the fun.........

(I have never loaded a file on here before so excuse me if this doesnt work first time around)

edit: please follow link for downloads http://www.trade2win.com/boards/fore...tml#post993638

more soon
Neil

Last edited by Lightning McQueen; Dec 3, 2009 at 12:04am. Reason: link added
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Old Aug 27, 2009, 7:35am   #3
 
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A bit of information for your dossier

Quote:
Originally Posted by NVP View Post
Hi Everyone....An ambitious title indeed !

I want to consolidate as much information as possible on the subject within this
thread....the works !

Over the next few posts I will try to share my own humble thoughts/Ideas on Forex Correlation and would appreciate as much feedback and input as possible to help my studies.

I am not going to try to dictate where this thread leads, but I am hopefully that it will deliver some great Ideas, references and "Gems" for all of us to incorporate into our Trading.

To get things started In next post I am going to discuss The Major 8 currencies and how I have found they tend to interact with one another and if there are any simple rules we can learn from this to assist our trading.....

I will also attach an indicator I use to assess how the 8 Currencies are performing which I would love to develop further and expand with everybodies help

Please start adding comments / requests and of course any references or threads that would be beneficial to have linked in this one

apologies if anything has gone wrong in this first post...I hav'nt posted much before and this is my first attempt at a thread !

more tomorrow - time and work permitting !
Neil
Hi NVP

This link may help to introduce newbies to what corelation is, and which pairs it affects.

For example, if you are position sizing using 2% of your account, you would not want to be long the EURUSD and at the same time short the GBPUSD.

Nor would you want to be long or short both pairs simultaneously.

In the first scenario, you are negating your bet.

In the second scenario. you are doubling your bet.

There are other pairs notable for the same behaviour (ie: correlation).

Lately the EURUSD and USDCHF have been mirror images of each other - anti-correlation, if you like.

Correlation is something every FX trader needs to be aware of, to avoid such clashing, unless trading in a more sophisticated manner.

As for the interesting points you have raised ... speed on!

Currency Pairs Correlation in Forex Market: Cross Currency Pairs

There are possibly other good sites discussing correlation - I would love to have an opportunity to visit some of them, if anyone has links.

Last edited by Androosh; Sep 8, 2009 at 7:05pm.
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Old Aug 27, 2009, 9:24am   #4
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the Swissie and Euro.........

NVP started this thread Hi ingot54

Welcome on board....lets hope many more join us !

(Queensland eh..I used to work in Cairns - but thats a story for another day)

Still working on my next post, but yes I totally agree with your comments on Euro/Swissie....these "Euro Twins" stick together most of the time with lowish volatility and both can make excellent "foils" to trade against more volatile currencies that tend to move in opposite directions......

heres a snapshot of my indicator (posted #2) to illustrate this.....its the 1 hour TF as at now on the standard 200/13 setting and I have highlighted the EURO and Swissie whilst dotting the others.....boy are these two in love most of the time !

if this is unreadable let me know - again early days re all this techno stuff for me !

Neil

DOH - I've just been dumped with loads of work and a tight deadline .......dont they know I'm trying to start a thread here ?.....will post more when I can over next few days

Last edited by Androosh; Sep 8, 2009 at 7:05pm.
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Old Aug 27, 2009, 10:02am   #5
 
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Senor, you're aware, of course, that there are all these quantitative methods designed for this sort of analysis?
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Old Aug 27, 2009, 10:20am   #6
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NVP started this thread Hi Martinghoul

do you have some decent links/sites to suggest re this ?

lets get them all in the Thread for discussion and their potential uses for assisting in
profitable trading

Neil
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Old Aug 27, 2009, 11:12am   #7
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quantitative Methods

NVP started this thread Martinghoul

ummm........sorry brain is numb today - do you mean the Oanda type stuff ?.........

eg "an 86.33% negative correlation on EURO/YEN for the last week"
meaning they were negatively correlated 86% of the time period expressed

and/or the various "heatmaps" that show this in Grid formats across all the major currencies ?

while we are on grids/indicators etc etc I have seen indicators/software out there that shows the correlations between 2 pairs in a bar type format (forex Heatmap/Multimap?) that can be made to appear pair by pair below standard charts to support the particular currency pair you are watching....cant remember if that cost....think it does

also I know theres something available from Tom Yeoman who sells an indicator in Excel/VB format that does a similar thing to the indicator I posted above.....(albeit in a much more accurate way I presume before I get grief from his followers !)

I have no comments to make about these - just starting to get the sources / Indicators / Methodologies rollin here..........please keep em coming people !

doh back to work.............

Neil
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Old Aug 27, 2009, 11:37am   #8
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More Sites / Information Sources

NVP started this thread Joe Ross publishes work/updates on correlations (although non forex stuff mostly commodities) he correlates relationships across commodities and also the differing futures/Timeframes...

This grand master of Trading and his followers recommends trades when these relationships are considered overbought/sold.......... confuses the hell out of me, but it must work for more intelligent people than moi....(thats most people then)
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