Correlation between currency pairs

options-george

Well-known member
483 92
I am looking to compile data to give me correlations between the 10 different currency pairs that i currently trade. I want to do this for risk management reasons.

Ideally I am looking to arrive at data something like this (I have pulled numbers from thin air for this example):
EURUSD-EURGBP correlation 1H (for x periods) 0.8, 4H 0.7, D 0.73
GBPCHF-CHFUSD correlation 1H -0.7, 4H -0.78, D -0.79
etc etc

I may also looking at catching the correlation with the the ES/NQ/TF futures contracts.

My plan was to obtain data to allow me to calculate this as from a designated Day 1, and to then update at the start of each trading session. It will then allow me to calculate how much I can risk per trade if for example I am long GBPCHF, short USDJPY and want to go short CHFJPY given the correlation across the pairs and my set risk parameters for a single trade.

Before embarking on this work, I thought I should ask whether this data is actually available somewhere already (whether free or not) or whether on the forum here has already tried to do something like this. I have done some searching already but have not found anything yet.

Appreciate any comments in advance! :)
 

options-george

Well-known member
483 92
I can give you the answer for ES/NQ/TF (chuck in YM as well) - very, very, very correlated.

If you've got two positions on in different ones of those at the same time, you've basically just got double exposure.

Little bit less so on very low timeframes, some will be moving faster / further on certain days etc, but basically they move together.
Hi Jose - thanks for your post. Sorry I don't think I was clear enough in my email. I was meaning correlations between various currency pairs and the indices, rather than the correlations between the indices themselves. :)
 

scose-no-doubt

Veteren member
4,630 954
regress the % move per unit of time and check the r value. Obviously you'll get a more accurate picture the larger your sample size.

Don't say I never give you anything :)
 

Aspen Trading Group

Well-known member
427 1
I am looking to compile data to give me correlations between the 10 different currency pairs that i currently trade. I want to do this for risk management reasons.

Ideally I am looking to arrive at data something like this (I have pulled numbers from thin air for this example):
EURUSD-EURGBP correlation 1H (for x periods) 0.8, 4H 0.7, D 0.73
GBPCHF-CHFUSD correlation 1H -0.7, 4H -0.78, D -0.79
etc etc

I may also looking at catching the correlation with the the ES/NQ/TF futures contracts.

My plan was to obtain data to allow me to calculate this as from a designated Day 1, and to then update at the start of each trading session. It will then allow me to calculate how much I can risk per trade if for example I am long GBPCHF, short USDJPY and want to go short CHFJPY given the correlation across the pairs and my set risk parameters for a single trade.

Before embarking on this work, I thought I should ask whether this data is actually available somewhere already (whether free or not) or whether on the forum here has already tried to do something like this. I have done some searching already but have not found anything yet.

Appreciate any comments in advance! :)
I do not think there is any disagreement that various asset classes will impact and drive price action in FX pairs, i.e. S&P's vs EUR/USD - to cite a real basic correlation. Introducing correlations between various FX pairs/crosses though is not so clear cut and I believe at the end of the day, you will find that not much insight can be gained. Some work done by Peter Panholzer at DynexCorp in Geneva (top ranked FX fund) refutes the notion that price action in 1 pair can offer insights into the price behavior of another pair.

We have not done any exhaustive studies on this as has DynexCorp, but we would agree with his conclusion.
 

options-george

Well-known member
483 92
I do not think there is any disagreement that various asset classes will impact and drive price action in FX pairs, i.e. S&P's vs EUR/USD - to cite a real basic correlation. Introducing correlations between various FX pairs/crosses though is not so clear cut and I believe at the end of the day, you will find that not much insight can be gained. Some work done by Peter Panholzer at DynexCorp in Geneva (top ranked FX fund) refutes the notion that price action in 1 pair can offer insights into the price behavior of another pair.

We have not done any exhaustive studies on this as has DynexCorp, but we would agree with his conclusion.
Hi Aspen Trading Group - many thanks for your reply - I notice you are a head a trader at a fund? Thanks for taking time to post on this thread - much appreciated.

I guess I am trying to use the rate correlations for risk management purposes rather than as the foundation of a trading strategy. Do you consider that for risk management purposes using historical correlation data is good enough? With my current trading I will sometimes have more than one FX position open at a time - I am a more or less a swing trader when it comes to FX (I don't do that many trades - maybe 20 a month, though I do trade on a full-time basis). I am trying to get an understanding of how to best manage my position sizing for the situation where I have several open positions at a time, and figured that the correlation between the rates may be a good starting point for this.

As far as the correlation between fx rates and equities are concerned, this is of a lower concern for me. My equity trades are all daytrades and will vary from several minutes to at most several hours - and almost always the target and stop distances are far less than the equivalent target and stop distances for any fx trades that might be open at the same time.
 
Last edited:

martymr

Newbie
4 1
I do not think there is any disagreement that various asset classes will impact and drive price action in FX pairs, i.e. S&P's vs EUR/USD - to cite a real basic correlation. Introducing correlations between various FX pairs/crosses though is not so clear cut and I believe at the end of the day, you will find that not much insight can be gained. Some work done by Peter Panholzer at DynexCorp in Geneva (top ranked FX fund) refutes the notion that price action in 1 pair can offer insights into the price behavior of another pair.

We have not done any exhaustive studies on this as has DynexCorp, but we would agree with his conclusion.
This is an interesting thread to my personally, since my trading method hovers in the correlation arena. My particular approach, however, is based on the natural cyclic flow of INDIVIDUAL currencies - not pairs. My experience with my own method tells me that correlation between currency pairs themselves is very much a "gray area". They do correlate RANDOMLY at certain moments based on their particular strength/weakness levels at that time, but then break away when certain levels of disparity are introduced.

The disparity itself has a cyclic behavior pattern of its own, which is what typically causes most traditional correlation strategies to 'break'. If you don't know what to look for and when, then your odds of sustaining a profitable strategy based on "commonly viewed" correlation are slim.

I can't divulge into too many details here, otherwise, I'd be jeopardizing the confidentiality of my own hedging methodology. But I can say with full confidence that "correlation trading" as most traders look at it is severely flawed and misunderstood.

Nonetheless, options-George, if you're able to find a way to make it work for you, then that's fantastic. All the more power to you. I'm merely speaking from my own personal experiences and discoveries.

I wish you well with your trading.

All the best,

Marty
-martymr
 

Aspen Trading Group

Well-known member
427 1
Hi Aspen Trading Group - many thanks for your reply - I notice you are a head a trader at a fund? Thanks for taking time to post on this thread - much appreciated.

I guess I am trying to use the rate correlations for risk management purposes rather than as the foundation of a trading strategy. Do you consider that for risk management purposes using historical correlation data is good enough? With my current trading I will sometimes have more than one FX position open at a time - I am a more or less a swing trader when it comes to FX (I don't do that many trades - maybe 20 a month, though I do trade on a full-time basis). I am trying to get an understanding of how to best manage my position sizing for the situation where I have several open positions at a time, and figured that the correlation between the rates may be a good starting point for this.

As far as the correlation between fx rates and equities are concerned, this is of a lower concern for me. My equity trades are all daytrades and will vary from several minutes to at most several hours - and almost always the target and stop distances are far less than the equivalent target and stop distances for any fx trades that might be open at the same time.
Hey options-George, solid question and my answer may not specifically address it, but let me give it a go.

From a correlation standpoint, we do not rely too heavily on historical correlations, we too are swing traders - 1-3 day duration, so our main focus in terms of correlation is what are the correlations right now - or over the last few days. Once we determine that we can then determine if we buy/sell a certain currency pair/cross do the other asset classes support or refute that idea. Until we have a solid foundation amongst the asset classes, we trend to ignore any trading set-ups that exist only from a technical perspective. This may touch upon your question in terms of risk management I suspect.

As an example, we are looking at a possible reversal in EUR/USD right now via a ending diagonal pattern (possible) but are ignoring the signal for now until we can get the S&P's to exhibit a pattern that suggests they too will go higher. Thus we consider this a 'risk management' tool as we survey the overall landscape first to make sure everything fits together.

If that was not clear or did not address the question - let me know.
 

NVP

Legendary member
36,903 1,904
This is an interesting thread to my personally, since my trading method hovers in the correlation arena. My particular approach, however, is based on the natural cyclic flow of INDIVIDUAL currencies - not pairs. My experience with my own method tells me that correlation between currency pairs themselves is very much a "gray area". They do correlate RANDOMLY at certain moments based on their particular strength/weakness levels at that time, but then break away when certain levels of disparity are introduced.

The disparity itself has a cyclic behavior pattern of its own, which is what typically causes most traditional correlation strategies to 'break'. If you don't know what to look for and when, then your odds of sustaining a profitable strategy based on "commonly viewed" correlation are slim.

I can't divulge into too many details here, otherwise, I'd be jeopardizing the confidentiality of my own hedging methodology. But I can say with full confidence that "correlation trading" as most traders look at it is severely flawed and misunderstood.Nonetheless, options-George, if you're able to find a way to make it work for you, then that's fantastic. All the more power to you. I'm merely speaking from my own personal experiences and discoveries.

I wish you well with your trading.

All the best,

Marty
-martymr

thank god for that ......more for the rest of us ;)

N
 

fayalac

Established member
560 14
You can download the information with almost any broker and you can determine your correlation value with excell.
You can do it often for the 1 hr chart´s to have a dynamic value that can help you to decrease the risk, you could also, with enough input, try to run a regression to foresee the possible change in the correlation values.
 

Mtweek

Newbie
9 0
More people lose more because they has little knowledge of trading.Demo account is not realistic.People must learn how to set up account and deposit $10, $20 and learn how to deal with emotion,etc.
 

NVP

Legendary member
36,903 1,904
More people lose more because they has little knowledge of trading.Demo account is not realistic.People must learn how to set up account and deposit $10, $20 and learn how to deal with emotion,etc.
good point...but off topic ?

N
 

fayalac

Established member
560 14
More people lose more because they has little knowledge of trading.Demo account is not realistic.People must learn how to set up account and deposit $10, $20 and learn how to deal with emotion,etc.
Besides off topic, when you have gained certain degree of experince you dan really identify the difference among a demo account and a mini account.
All i will tell you is that any account with a deposit of 10 or 20 is lost. It is useless to open an account with such amount.... :cool:
 

QMForex

Newbie
1 0
Most products such as TradeStation and Metastock have correlation functions built in, however for a specific currency pair each timeframe will have different correlations. Eventually they all revert to the mean however that does not stop large correlation swings in the opposite direction. For example EURGBP has limited correlation to GBPUSD at present, having said that most asset classes are correlating to one in this environment, hedge funds are having a hard time these days.

It is interesting to have this information for diversification and money management, however trading correlation is a very specialist subject.
 

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