Best Thread Correlation Trading - Basic Ideas and Strategies

[NVP]

hey all

i'm busy cleaning out my attic ....heres an interesting link .....

Relative Strength Index Charts

 

[NVP]

this is a legendary Thread at FF

Trading system using relative strength @ Forex Factory

I tried to talk to the guys involved many times as I do have ideas how to improve the decisions made on currency pairs....

but FF is a funny site and you really have to crawl and load in multiple posts and be humble and dare not critisise the experienced traders to beallowed into big threads .....

wheres the fun it that ?

N

 

[NVP]

more ?

OK !!

Dudes like Steve and Kang Gung are heavy reading.....and only for people really committed to learning about the legends in Strengthmeter and Basket trading methods

you have been warned !

Relative Strength Basket Trading System @ Forex Factory

Kang Gun Relative Strength trading - the EA's @ Forex Factory

N

 

[NVP]

hey all

(extracted from my updates today here at Fxcorrelator.com)

slow week for me as you have seen regarding charts and interest.....why ?

Well the Dow has made a cup shape descent and now rise leaving it back at sunday night trading levels.....

alongside this the USD has been much stronger than the Yen so the potential big buys of the USD through tuesday and wednesday were not supported as much as I wanted by the yens ascent..... trading my ma based systems made this frustrating on 1 hour charts but if you were trading more traditional price action methods (support/resistance breaches) then a few pips were around

today I feel that unless we have significant news to support the Dow it will soften during the day as traders take back the profits made in last 2 days buying it

that should send the usd more north so look for sells on the USD pairings with EUR,GBP and AUD

good hunting
N

 

[NVP]

nearly 299,000 views on this thread now eh ?...........not bad, not bad !

 

[Petar_Serbia]

nearly 299,000 views on this thread now eh ?...........not bad, not bad !

Congratulation dude,good job :smart::clap:

 

[NVP]

hey all

we are 300,000 views up on this thread now and rising - heres to half a million by xmas !

A big thanks to contributors past and present ....and to everyone who has bothered to eyeball this thread

what I do is not rocket science or mumbo jumbo and a lot of traders are doing it without realising anyway

1) I wait for the dow to show a directional bias (risk on / off)
2) I wait for the usd and yen to be in partnership in the opposite bias
3) I trade the currencies against these dudes who are showing the biggest divergences

simple ?.....well mostly

sure theres plenty of complications and rules if you want to make things more interesting...... and its in our human DNA to ALWAYS make things more difficult for ourselves to justify our intelligence and status with others.....but its up to you

me ?

well I look at a DJ30 chart and say up or down? (up in 4hr charts below)

then I say Yen and USD .....up or down ? (green and yellow lines mainly down in chart below - its my free fxcorrelator indicator available here or at FXCorrelator.com)

then I say - ok those dudes are going in opposite directions so I will BUY any currency(s) that are diverging away (up) from the USD and YEN big time...

tell me the colour lines I have been buying as pair trades to Yen and USD in last few months :smart:

(hint its blue and its also the big trader "sell" prediction for 2012 - tee hee )

Thanks again all ......and big respect to T2W :clap:

NVP (Neil)

PS and a big thanks to everyone asking about my business partner and friend sylvie - she is feeling much better and gaining her strength again.......now where is that list of jobs ?

 

[NVP]

so will the euro recovery continue ?

the boys are betting .... NOT

Euro rally: Point, Counterpoint, and Guesses

 

[NVP]

me ?

Predictions are for fortune tellers

just trade what you SEE :smart:

N

 

[NVP]

Hey all

I do have my ups and downs with moneyweek.....in fact they wont let me post anymore on the Currency articles which I must say can be naively simple and misleading sometimes (sorry guys)

but this aint bad actually....discussing the correlation between US Bonds and US Stock indices....I'm not conviced that he shouldnt have removed the USD effect on the Tbond charts but he does mention it at the end as a possible skew effect (remember Stock indices are not priced in local currency** but bonds are)

What do I think ?.......I trade what I see when I see it ....and If I am going to play the "Moneyflow game" (which this is) I will be correlating more markets into the equation than this and introducing a lot more factors and weightings...... :smart:

and dont get to tied up on correlations sometimes....they are not as predictable as you think....and the 2 markets below could trend together as easy as pie tomorrow

N

** although they kind of are if you are physically buying and selling the Stocks in the country concerned.....


Dear NVP,

There are two huge financial forces at work in the global economy.

We have the natural forces of deflation. Debt being paid down, credit tightening, houses being put in order - the inevitable deleveraging after a period of excess.

And we have the artificial forces of inflation. Systematic currency devaluation - the printing of money to buy bonds and supress interest rates in an attempt to re-inflate asset prices and stimulate growth.

The secret of success as far as trading equity and bond markets is concerned has been to correctly identify which force is dominant. In other words, to figure out whether or not we're in an inflationary or deflationary cycle.

But how can you tell? And which are we in now?

and Which way will the market head next?

Although things have slowed over this past week, we do still seem to be in an inflationary phase as far as stock markets are concerned. But are markets topping out before the next inevitable phase of deflation? Or is this a gentle slowing before the next bout of price rises? How does one know?

I suggested a simple method of technical analysis last week that takes the thinking out of the decision-making process - thinking can be a dangerous thing after all.

Nevertheless, we all do it at least some of the time. And I've been thinking hard this week about other ways to identify whether we're in an inflationary or deflationary phase. And I may have come up with something.

Just as gold is a key holding of any hard-core inflationist, so government bonds make up a large portion of any hard-core deflationist's portfolio. The US government bond market is the biggest market in the world. It can reveal a great deal about where money is flowing.

In the chart below you can see US government bond prices (in black), and the S&P 500 (in green), between 1981 and 2001

CHART 1

As you can see, US government bonds, which had a rotten time of it during the inflationary 1970s, have been in a bull market since late 1981. And broadly speaking, for much of the time, they traded in the same direction as equities. When the S&P 500 rose, so did 30-year government bonds. When bonds fell, equities were either flat or they eventually fell too.

This was the case until mid-1998. Then they decoupled. Equities fell with the Asian crisis, while government bonds rose. When equities recovered, bonds fell. In other words, during equity routs, investors have flooded to the perceived safety of government bonds and bond prices have risen. When investors get greedy again and decide equities are OK, they move their money from bonds back into the stock market.

Here we see bonds and stocks from 1998 onwards. US bonds fell as equities rose into 2000. Then the bond market rallied to 2003, as equities fell in the dotcom bust. During the mega-run in equities between 2003 and 2007, US bonds traded in a range while equities surged ahead. Then bonds had a huge rally with the 2008 stock-market bust, fell with the subsequent rally from 2009, and then rallied with the bear market in stocks of 2011.

CHART 2

The bond market is signalling that we’re back in inflation mode

But here's the thing. Since the October 2011 low, the stock market has rallied some 30%. But the bond market has not suffered the corresponding falls you might have expected. It is trading damn near its all-time highs.

There are all sorts of possible reasons for this: money fleeing Europe, or the relative strength of the US dollar, for example – you could come up with any number of things.

But here's what I've noticed. Below is the same chart as the one above, except in this case, I've popped in a red arrow to mark each time the US bond market (black line) has moved to the top of its range.

Now look at what's happened to the S&P 500 (green line) in the subsequent few months. Can you see? Highs in the bond market have frequently anticipated rallies in the stock market. It even worked to a limited extent in the deleveraging fiasco of 2008.

CHART 3

Why am I mentioning this now? I don't know how much lower interest rates can go - or how much higher US government bond prices can get. However, I wouldn't have thought that yields can go much lower than this. If they do, and the bond market breaks above say 145, then I'm wrong and we're probably into another deflationary phase. But for now we are certainly at the upper end of their range. I suggest that equities are not a sell until bonds move to the lower end.

Yes, I know that it goes against the grain to buy into anything after it's just had a 30% move up. I know valuations are getting a little rich, particularly in tech stocks. I know that sentiment is a little too bullish. I can find a hundred reasons why equities are set to crash. And it may be that bonds and equities have re-coupled again after their 13-year divorce and, just as the Asian crisis separated them, the European crisis has re-united them. The jury is still out on that one.

But for now the bond market is telling me that the inflation trade - or that risk - is back on. That means that cash is not the place to be, but assets - be it gold, equities or commodities - are. I’m still looking for a correction in equities, by the way, but I don’t think it’ll be the big kahuna and so pullbacks could be a buying opportunity. If the bond market heads back to the lower end of its range - in the low 120s - well, that'll be your cue to start heading back into the deflation bunker.

 

[NVP]

A new month dawns !

and a tough tough start to proceedings....

heres a 15m TF with Dow (left) and a 1000 ma setting FXcorrelator (right)

notice anything missing off that rising Dow move ?

ummm........the USD and the Yen falling ?

yep.....the market correlation is not normal...that means stay out ...sure theres a few games we can play but its all risky biscuits...so why bother ....

normal service will resume as usual soon

OR....

like the last post here .....why not ask yourself what is driving any wierd Market dynamics ?....

sometimes trading is noticing what IS NOT happening to keep you out or perhaps get you into a move ......it makes good traders Great ones ! :smart:

N

 

[NVP]

hey all

wanna play some more games with the FXCorrelator ?

heres a version that lets me see what currencies are doing what

its called my X-men FXcorrelator

this setting is based on 1 MA (=1 Bar) .....so the position of the x men is where they finished on each single bar of trading

I've put it on a Weekly TF .....see below ?...who is stongest so far this week ?
Answer = BROWN CAD

Whos weakest so far ?
Answer = BLUE EURO

hint - last week (previous Bar) winner was Blue Euro and loser was the yellow Yen

and so on........

I use the X-men version of the FXCorrelator in a lot of my advanced systems as they are less confusing than lines

always think outside the box with your indicators.....its amazing how small variations in what you are doing can work better for some approaches :smart:

N

 

[NVP]

hey all

jees Feb was disappointing re correlation......the Dow was big all month (see below)....but look at how the USD just walked the horizontal and never fell....unlike the Yen where the Boj also helped by dumping their currency in the month

in hindsight the trades were all involving yen sells (even against the USD....and I must confess I stick to the USD when trading due to liquidity and spreads offered)

such is life....the message for march is that usd is strong - so follow any 80/20's (or whatever setting you are now using on the FXcorrelator) where you see a Dow sell/ usd buy :smart:

N

 

[NVP]

heres the X-men results for Feb

http://www.trade2win.com/boards/for...-basic-ideas-strategies-1068.html#post1801140

Euro wins the month easily (??) (how ??)

Yen is trashed.....and it was second to last in Jan as well with USD

hmmmm....3 from 3 in March ?

N

 

[NVP]

Dow falls (left chart) ........usd (Lime) and Yen (yellow) rise right chart 500ma setting

its that simple gang (well mostly )

N

 

[NVP]

you want guarantees in Trading ?

sorry ....guarantees are for sofas and washing machines

N

 

[danjuma]

...rise right chart 500ma setting...

Hi NVP, I see sometimes you mention 500ma. Is this part of the 80/20 system, I thought we use just the 80 and 20ma?

Thanks
Dan

 

[NVP]

Hi NVP, I see sometimes you mention 500ma. Is this part of the 80/20 system, I thought we use just the 80 and 20ma?

Thanks
Dan

hey Dan

good question

The ideas published here in this (large ) thread incorporate 2 things

1) The usage of a Forex Strengthmeter to analyse market conditions
2) The correlation between Forex and equity markets

I have been thinking for some time now in creating a new thread here simply about Forex Strengthmeters as they are certainly much more accepted now in Trading circles than the 3 years ago when I started this thread and there are still a lot of misconceptions and confusion surrounding them and their powerful tools to understand market conditions

look up / Google

Forex Strengthmeters
Currencymeters
Tom Yeomans currency strengthmeter (csr)
Henry Liu's strengthmeter
Forex Heatmaps
forex Basket trading

or indeed even FXcorrelator.com (for my humble ramblings) and you will see the barrage of stuff now available to read and watch on Youtube :smart:

Regarding Forex/Equity correlation its pretty straightforward most of the time (Carry trade....risk on/off) so thats not really a decent thread for me

in terms of my FXCorrelator settings I use the higher settings (like 500ma) to look at pure market conditions ...where the 500 really shows me what is going up and what is going down pretty accurately bar by bar in real chart time

if you drop to lower TF's ( 20ma 80ma or whatever you chose to use) then the view is more distorted around the ma you set....here you just utilise simple ma based systems to trade when the currencies are above / below the Zero line as explained in this thread and in my website(s)

so the 500ma is the big picture :smart:....like below where you see overnight the Yen(yellow) and the USD (green) finally succumbed to falling off of that Dow return to strength

relatively easy money if you know what to look for
N

 

[danjuma]

Many thanks for your reply.

 

[NVP]

I love the moneyweek Gang....

every week they have to churn out contentious ideas and strategies to liven up their subscribers and solicit responses...I got banned months ago after continued harassment of their ideas around currency trading which generally are an ongoing insult to most Forex traders intelligence......(yes some Traders have intelligence apparently )

So heres some stunning reseach on the correaltion between localised currency strengths and Equities........ so what do you all think ?

N :smart:

Dear NVP,

If you are going to invest in stocks, should you do so in a country with a strong and rising currency? Or one with a weak currency?

Odds are you think it is the former. Most investors do. Just look at the endless justifications given for investing in emerging markets.

You’ll pretty much always be told that even if the stock market in question doesn’t do as well as expected, you’ll still get a nice kicker from the rising currency.

Strong currencies represent strong economies and strong economies have strong stock markets. Or so the story goes.

It’s a compelling argument. There’s just one problem. It simply isn’t true…


The weaker the currency, the better

Research out last week from a group of academics at London Business School has demonstrated that when it comes to currencies and investing, weakest is definitely best.

If you want to get the best returns from stock markets, you want to get unhedged exposure to the countries with the weakest possible recent exchange rates.

The research looked at 83 different countries, and split them into five groups based on how strong their currencies were against the dollar over a series of five-year periods from 1900.

The results were striking: as the FT puts it, “the quintile of countries with the hitherto weakest currencies delivered markedly better returns than countries that had had strong currencies in the previous five-year period”.

From 1972 (when Bretton Woods gave us floating rate currencies) onwards, the correlation was even more obvious. Returns from the weakest currency countries were almost three times those of the strong currency countries.

Why weak currencies lead to strong stock markets

The academics say that they have no definitive answer as to why this might be the case. And the headline reporting the results in the FT suggests the correlation is somehow “mysterious”.

But is it really that complicated? Weak currencies mean cheap exports. That means good profit margins and more often than not, rising stocks.

Anyone in any doubt that cheap currencies are good for profit margins need only cast their eye towards Germany’s giants. Or perhaps to the market reaction to the Bank of Japan’s decision to start printing money like everyone else. The yen weakened and the stock market soared.

Japan’s not as much of an export economy as everyone likes to think (around 11% of GDP). But there still doesn’t seem to be much of a mystery there.

Say the yen continues to weaken against the dollar (and preferably against the Korean won and the other major Asian currencies too) for the next four or five years. I can’t imagine why anyone would be surprised to see its stock market massively outperform on the back of a profits boom in the five years after that.

Korean equities have outperformed Japanese equities over the last few years seemingly for one simple reason. The lowly-priced won has made Korean exports cheaper (and its corporate profits higher) than those coming directly from Japan. That might be about to change – and the rise in Japan’s stock market is anticipating the possibility.

How to profit from the currency wars

The theme of this decade looks like it will end up being ‘currency wars’. Around the world, governments are desperately trying to steal growth from each other. By devaluing their currencies, they boost the competitiveness of their export industries (and cut the real wages of their workers along the way).

So far the only major government not to have joined in the fun is that of China. However, it might not be long before it does.

As Albert Edwards of Societe Generale points out, “the recent rapid slowing of export growth certainly seems to be associated with the strength of the exchange rate”. If growth keeps slowing or if a slowing turns into a hard landing, why wouldn’t China devalue its currency too?

On the plus side, all this does give longer-term investors a pretty clear steer on how to invest. All they need to do is sit back for a few years and watch the currency wars unfold.

Then they’ll need to buy shares in the winner’s stock market – the winner being the government that most comprehensively destroys its currency. Easy.

For those who don't want to wait there is always the UK. The pound has been weak against the euro and the dollar since 2008. Indeed, measured against the dollar, it's been the worst-performing of all 16 major currencies over the past five years, according to Bloomberg.

And for those who want to take the whole weak currency thing to its natural extreme, you could consider looking at Iceland. The krona has been the second-worst performing currency against the dollar over the past five years (the worst has been the Venezeulan bolivar).