Best Thread Correlation Trading - Basic Ideas and Strategies

[NVP]

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

 

[NVP]

Indicator for tracking FX Correlation

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/for...ing-basic-ideas-strategies-64.html#post993638

more soon
Neil

 

[Ingot54]

A bit of information for your dossier

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.

 

[NVP]

the Swissie and Euro.........

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

 

[Martinghoul]

Senor, you're aware, of course, that there are all these quantitative methods designed for this sort of analysis?

 

[NVP]

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

 

[NVP]

quantitative Methods

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

 

[NVP]

More Sites / Information Sources

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)

 

[Martinghoul]

Well, I am not referring to any indicators, as such...

It's just that with very little Excel you can look at a whole variety of things, e.g.:
1) rolling correlations, using diff horizons
2) regressions over diff horizons that could suggest possible relationships

These are very basic techniques, but they will often provide some insight. If you want to get proper statistical-like, there's a plethora of more sophisticated methodologies (ARIMA, PCA, cointegration, etc).

 

[NVP]

My observations

Thanks Martinghoul

I'll have a look and bring back any interesting sites or links for these....I use Excel a lot at work but have never extended this much in regards to processing Trading data....but clearly it is a fantastic generic tool for this kind of thing

Neil

 

[NVP]

The Forex Family and their traits.....

Ok Lunchtime……(certainly not for wimps in my book)

I think I’ve got these all down in correct manner I intended ....I will correct this if I find an error

Apologies for political incorrectness below - I have tried to enliven what is a pretty “dry” post....

Meet the family

Sterling (Red)
Volatile little varmit, mainly “hates” (ie negative correlation) the Yen and USD$
Not absolute friends (ie positive Correlation) with anything else (in my humble opinion) perhaps is more friendly and runs with the European Currencies than anything else – but much more Volatile so don’t get bitten !
Non Forex-wise any relationships it has are probably due to its negative
correlation to the USD$ and the Yen – so refer below to those comments

Euro (Blue)
Lower volatility than most again I would say, primarily “hates” (ie negative correlation) the Yen and USD$. Its best chum (ie positive Correlation) is the Swissie and they go most places together in my opinion.
Non Forex-wise any relationships it has probably relate more to its Negative correlation to the USD$ and the Yen – so refer below to those

SwissFranc(Grey)
All said above in the Euro comments …Swissie (in my opinion) demonstrates
lowest volatility levels of all the Majors most of the time…useful for trading against higher volatility currencies

AUS$ (Gold)
Gday mate…….It cant stand the USD$ and the Yen, and should party a lot with its neighbours (NZ$) but seemingly not enough as you would trade reliably on … loves to party hard with high interest rates on offer compared to the other Majors.
Non Forex-wise …….“loves” Gold (positive correlations) but enough to trade reliably on (?)

NZ$(Lightblue)
Same relationships as its neighbour above…..is also fond of high interest rates…….

YEN (Yellow)
Volatile and mainly “hates” all currencies (ie negative correlations) except the
USD$, which generally moves in the same direction (but US$ is generally less volatile). People sell it in perceived times of greater risk/opportunity as it has the lowest interest rates out there....then they can buy high Yielders (AUS$ and NZ$)
Non Forex-wise It “hates” (negative correlation) most Stock indices and Commodities. Traders sell Yen (the carry trade) to buy these (and Vice versa)….watch it against the US Stock Indices for closest (negative) correlations


CAD$ (Brown)
Difficult to pin this one down - except moves generally negative to US$ and Yen
Non Forex-wise …….“loves” Crudeoil (positive correlation) but enough to trade reliably on (?)

USD$ (Green)
The “Daddy” whether the rest of the unruly forex family like it or not !.

“Hates” all currencies (ie negative correlations) except the Yen , which generally moves in the same direction (but the US$ is generally less volatile). People sell it in perceived times of greater risk/opportunity (its the major holding reserve currency for most countries) Counter-wise traders will buy it as a safe haven when they are dumping everything else and risk appetites are falling……commonly dumping the high Yielders (AUS$ and NZ$)
Non Forex-wise It “hates” (negative correlation) most Stock indices and Commodities. Watch it against Gold especially for some great (negative)
correlation Plays .


I will publish examples of the above behaviours as soon as I can .. but just load up the FXCorrelator indicator yourself and watch the soap opera unfold again and again in any timeframes or MA/Delta variations you chose……

soooooo…..how can we apply this to making money ?

thats why I started this thread……..so any answers/comments out there please ?

Neil

 

[NVP]

27th Aug Morning session on Charts

Last post for a while as back to work...late one on cards so perhaps no posts till tomorrow now......

Heres the morning through the eyes of the Indicator in 1min TF....I cant believe Sterling was hanging out down with US$/Yen mid morning......must've been some bad news out there to show it so far away from the other currencies Trading opposite (as usual) to the USD$/YEN tag team....

lots of dinaros in bank for you if you've been long on the Aussie and NZ$ trading against (wait for it ).....the US$/YEN

Neil

 

[NVP]

did you spot the deliberate mistake ?

here de Chart...........

 

[NVP]

CAd vs Oil........?

Couldnt resist a peek at what I said..........

personally i would never trade CAD vs Crude oil correlations but thats not to say we
cant come up with some ideas here amongst all the others i hope we will
sharein future

thats really it unfortunately for now......

Neil

 

[NVP]

the 1 hourly Chart

Hmmmm......just glimpsed at the 1 hourly charts with setting 200 MA and Delta 3

the US$/YEN tag team (Green/Yellow) are in full attack mode going up, mainly at the cost of Sterling (Red)......better get my holiday currency now !

Sometimes I add overbought/oversold lines to these charts based on the historic levels that some currencies achieve (mainly Yen and GBP that stretch the boundaries the most in highs/lows) so I know how much more is left or if a Currency is poised to retrace ........

in this scenario the prices have potentially more to go to get anywhere near the over bought/sold levels possible (even the Red line GBP)....

so based on everything else one should be theoretically still selling pound and buying either of the tag team currencies until the bias changes (go with the Trend)..........

I would not advocate mixing the 2 volatile currencies (JPY/GBP) unless you like your action fast and stops wide......

Neil

 

[NVP]

currency Correlation - nice link

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

 

[NVP]

Timing is all in this game........

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

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

Neil

 

[NVP]

is it time yet ?

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

 

[NVP]

go baby go !

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

 

[shatztrader]

Carol Alexander for cointegration apparently good, my PhD firend is in love with the author