Best Thread Correlation Trading - Basic Ideas and Strategies

[NVP]

Hi Everyone !

hmmm........we appear to have a good turnout here at present ?

Jedster what are you doing to them man ?.....hahahaha

N

 

[Jedster2001]

Hi Everyone !

hmmm........we appear to have a good turnout here at present ?

Jedster what are you doing to them man ?.....hahahaha

N

That's funny.....

Sorry dood, I'm scaring them away with my questions...

 

[NVP]

this is actually turning into an interesting Thread below.............even I have been confessing to my future possible ideas and plans

and Yes - my wife can trade me off the table ...........(but dont tell her I said that)

N

http://www.trade2win.com/boards/forex/177212-why-did-you-decide-trade-forex.html#post2167576

 

[elisab]

I think there’s a scientific answer here: http://www.diva-portal.org/smash/get/diva2:533771/FULLTEXT01.pdf or here: Investors Chronicle - Commodity/currency correlations

 

[Jedster2001]

I think there’s a scientific answer here: http://www.diva-portal.org/smash/get/diva2:533771/FULLTEXT01.pdf or here: Investors Chronicle - Commodity/currency correlations

Thanks for the references. The first article talks about cointegration, not correlation. They are not the same thing, so perhaps you might want to lookup the differences between the two. The second article is a 4 year old article talking about the correlation between oil and other instruments.

I'll accept that the NOK and oil are co-integrated. That makes sense and can be seen from the (long term) charts without any empirical stats required. However, I stand by my opinion that they are not correlated, or, they are only correlated very very loosely. so, if we take a 1H chart over a 5 year period, their peaks and troughs can be days, or even weeks apart.

You have to consider how you trade correlation. I'll assume you are not trading it with options as an institutional trader would do. So, how do we do it in the retail market. Well, you don't look for two instruments that are correlated and then when one moves in one direction, you buy/sell the other. That doesn't serve any purpose and you might as well just trade the original instrument. A general trading strategy with correlation is to wait for the correlation to break down, and for the pair to diverge. Then, you buy the weaker, sell the stronger, and trust that they will revert back to their correlation. You will generally have one losing trade and one winning trade, where the winner obviously outweighs the loser.

Now looking at the NOK/OIL pair, the correlation is so loose, they appear to be jumping around all over the place, all of the time. There isn't an obvious correlation, so you can't tell when the breakdown occurs. Hence it would be very difficult to know when to enter the trades.

Are you actually trading this? Did you sell USDNOK because of the rise in oil? Are you using spot forex, futures, options? What are the triggers for you? Given the almost non-existent correlation, how do you know when do you buy/sell? I am really interested in correlation trading so am curious how you are going about this in the real world.

Thanks
J

 

[NVP]

mornin all.........

my PC is locked away this morning as the house remains in replastering mode

it will be firing tomorrow again

N

 

[NVP]

I think there’s a scientific answer here: http://www.diva-portal.org/smash/get/diva2:533771/FULLTEXT01.pdf or here: Investors Chronicle - Commodity/currency correlations

now E ........do you really want to believe everything you read ? ....

 

[NVP]

Thanks for the references.

You have to consider how you trade correlation. I'll assume you are not trading it with options as an institutional trader would do. So, how do we do it in the retail market. Well, you don't look for two instruments that are correlated and then when one moves in one direction, you buy/sell the other. That doesn't serve any purpose and you might as well just trade the original instrument. A general trading strategy with correlation is to wait for the correlation to break down, and for the pair to diverge. Then, you buy the weaker, sell the stronger, and trust that they will revert back to their correlation. You will generally have one losing trade and one winning trade, where the winner obviously outweighs the loser.

Thanks
J

Yep ...........I talk here about the Yen , USD and (inverted) Dow relationships but I would never stake my life on them as they break down regularly and often

regarding J's comments above ...........I have never been comfortable trading correlation divergences on "related" instruments as in truth the expected reversion can be a long and arduous journey that has no guarantees or much profitability.....you are also struggling to place stops (unless you can construct a fancy dynamic stop based on the price differentials) and are betting on 2 (or more ?) seperate instruments moving to form......

as J says in the end you may as well trade 1 instrument and keep it simple as in what I am seeking to do with the Yen / Dow / USd relationship.......I simply look for the pattern and just trade 1 instrument.....I'm not looking to trade Dow / USD / Yen "differentials" or anything like that (although I have toyed with the idea at times)

good discussion - lets keep it running and i hope others contribute as (IMO) there is a hell of a lot of ***** talked about correlation in the Forums and by "Experts"

N

Kathy's Liens stuff is generally a half decent explanation / introduction

http://www.investopedia.com/articles/forex/05/051905.asp

and :-

http://www.investorwords.com/tips/1...tween-the-stock-market-and-forex-markets.html

and :-
http://www.kathylien.com/site/forex-blog/correlation-between-eurusd-usdjpy-and-stocks

 

[elisab]

Thanks for the references. The first article talks about cointegration, not correlation. They are not the same thing, so perhaps you might want to lookup the differences between the two. The second article is a 4 year old article talking about the correlation between oil and other instruments.

I'll accept that the NOK and oil are co-integrated. That makes sense and can be seen from the (long term) charts without any empirical stats required. However, I stand by my opinion that they are not correlated, or, they are only correlated very very loosely. so, if we take a 1H chart over a 5 year period, their peaks and troughs can be days, or even weeks apart.

You have to consider how you trade correlation. I'll assume you are not trading it with options as an institutional trader would do. So, how do we do it in the retail market. Well, you don't look for two instruments that are correlated and then when one moves in one direction, you buy/sell the other. That doesn't serve any purpose and you might as well just trade the original instrument. A general trading strategy with correlation is to wait for the correlation to break down, and for the pair to diverge. Then, you buy the weaker, sell the stronger, and trust that they will revert back to their correlation. You will generally have one losing trade and one winning trade, where the winner obviously outweighs the loser.

Now looking at the NOK/OIL pair, the correlation is so loose, they appear to be jumping around all over the place, all of the time. There isn't an obvious correlation, so you can't tell when the breakdown occurs. Hence it would be very difficult to know when to enter the trades.

Are you actually trading this? Did you sell USDNOK because of the rise in oil? Are you using spot forex, futures, options? What are the triggers for you? Given the almost non-existent correlation, how do you know when do you buy/sell? I am really interested in correlation trading so am curious how you are going about this in the real world.

Thanks
J

It is very difficult to find correlations higher than 0.8 in the financial world and often these correlations blow up in the short term. There is no point looking at the correlation between S & P500 and Dow to make investments. I am much more interested in the long-term trends and I know that if the oil rises, then I will buy Nok and Canadian stocks, or if the copper rises, then I will buy the Chilean stock.

 

[NVP]

no worries E.......if you ever feel like publishing your ideas more then feel free here .........you will really need to expand and explain them more though as our viewers are generally inexperienced in correlation principles and strategies and will require more hand holding if they try to replicate them


thanks again
N

 

[NVP]

mornin all.......

PC is alive again in new room so lets make the most of the charts before the builders and decorators arrive

heres my 4hr 20ma 3 delta on the Left (for higher TF signals)
and on the right is my standard 20ma delta 1 1 hr TF signals

The Tick colours are explained in the chart and indicate the "diluted" trading signals of my free system available here in the signature area

as I have been saying more recently unless you start to tweak the MA settings and other games waiting for the DOW/USD/YEN alignment can be like watching paint dry ..........

So I have been suggesting cheats here where you drop to satisfying just 2 conditions instead of the 3 in effect putting you in permatrade mode ......(you have been warned !)

This advanced strategy was actually part of my VIP course last year where I immediately encouraged the students to reduce the ma settings to faster than 20ma and also consider trading Naked (just yen/usd together) and also cheating with just 1 currency matching the dow in certain conditions......

again I encourage people to think about what they are doing here as you must must must believe in the patterns you are following so that you have no problems losing trades (which you will)

in trading (as in life) you have to make decisions to move forward .......right and wrong :smart:

have a good day.....
N

 

[NVP]

Hey all.....

Heres the week........USD has taken flak.....3rd week running......only NZD has shown any consistency with a couple of positive weeks above the Zero

Thats a 500ma on the left on a 1 hr TF ....and a 1 ma on the right set on a weekly TF.....

The FXCorrelator is a pretty flexible little dude ........so use it and abuse it !

cheers
N

 

[NVP]

Dows crumbling as i'm hunting USD and Yen buys on 15m TF

 

[NVP]

hard work eh ?........and dow has stalled ......

leaving it at the moment now ......as have to scoot for a while anyway

N

 

[NVP]

keep an eye out though as it still looks intesting re a few buys on USD and Yen .....

later
N

 

[NVP]

mornin all........

I didnt get a chance to reboot my terminal later yesterday to update my charts and the FXCM connection is now down at the moment (as it is on a saturday) so i cant get latest bars

such is life.......anyway i will be out this weekend shopping for things to score points with my wife (ZZZZZ) ......and getting wet in the process today it looks like......

have a good one
N

 

[NVP]

hey all

look at this explanation and expansion of the FREE core system here and then review the chart below....the 15m TF for Friday

http://www.trade2win.com/boards/for...-basic-ideas-strategies-1454.html#post2168278

If I were trading this very simple and introductory system they are the positions I would be taking at the ticks..........utilising the new approach of trading either the USD and Yen currencies against the direction of the Dow on a 20 sma......thats 24/7 trading if you want it .......hey nothings perfect........add simple pip targets or convergence signals to create the exit signals once you select the currency you are pairing against these guys.....

Naive ?......probably........better systems available ?......of course ......wildly profitable in this format ?.....doubtful ........

but useful to show the possibilities of using strengthmeters and market correlation ?.......100% YES !

if you dont like it change it ..........I am not advocating its long term use ......but F1 drivers dont start in F1 cars ....they work up from go-karts and get the speed and experience and reactions and skills along the way to the top......as you must if you decide to introduce strengthmeters into your trading arsenal.....

ive been using Strengthmeters for over 10 years now ....so naturally have evolved and I am not STILL using this basic system.....but its certainly in the DNA of what i use now as you must never ever ignore your roots...........

my FXcorrelator actually started life as a 34ma delta 3 setting from the bones of the Basic Strengthmeters I gradually found and adapted to fit my own uses...then the 20ma came after I wanted to speed things up and start to also utilise Dow correlation on the USD and YEN (and CHF at the time)....10 years back.....!!

so welcome to the thread all ......and feel free to ask questions of me and the Gang......there are a lot of very very very good traders and programmers here who will help if they can......

Cheers and thanks again to the Gang around me (past and present) and everyone kind enough to get us to this point in the game.....we are truly just warming up and hope you will join us for a peek at a very very powerful and underated trading Tool

N

 

[mike.]

Neil. ive downloaded the correlator and is up and running, Is there any written information to go along with it ? is there a sequence for entry like the three ducks set up ? Ive watched a couple of your video's but do you have any live trading using the correlator for entry and exit points ?

I would like to get accustomed with it but am unsure exactly what im looking for.

Also, how do you get the text up on the screen with the colours of the currencies ? mine doesn't have them...cheers.

 

[NVP]

hey mike........the indicator below linked to the signature area should provide colour and the currency names at the top.....you must align syntax though in the area shown as per the word document/notes in the signature area

regarding live signals and Entry exits ....there is a very simple methodology in ther word document in the signature area ........mainly around closing bar signals

enter when either USD and Or Yen are tradable based on patterns describribed....pick an opposing currency

Exit when the Trailing stop is breached or ATR target pips are met or one of the pair currencies crosses back across the zero .....or the dow (if being used) crosses back across the 20 sma

apologies if the style is less exacting and prescribed than most.........The Thread is here to introduce the possibilities of Strengthmeters using a very simple entry level system

ask more questions !
N

 

[NVP]

let me relaunch a video by the weekend at Youtube ........a new basic system intro and explanation is long overdue !!

N