It sounds like a simple question, but its tough to analyse whether topic's question is true or false. I daily trade around 15 to 20 forex pairs, including all majors and most of the minors & crosses. What i noticed, is that price overshoots tend to occur more often on less volume traded pairs, which does make sense. On higher volume pairs support and resistance is pinpointed with less overshoots than lower volume pairs. This also makes sense.
This however invalidates a good chunk of correlation based trading because the volume weighting is not accounted for. If we take for example USD/JPY and AUD/JPY the positive correlation is usually quite high (90%+), and you do not want to take double risk by trading long or short on both. Without considering the volume of the pair trading and solely going by correlation one would trade either 1x USD/JPY or AUD/JPY. If a trader considers volume traded, USD/JPY would always have the preference over AUD/JPY. If title statement is true, its USD/JPY causing overshoots on AUD/JPY, not the other way around. When AUD/JPY hits a key-resistance, this resistance can easily be invalidated by a good bunch because price has not reached a key resistance on a higher volume JPY pair (USD/JPY).
Another way to make use out of this is that whenever a higher volume traded pair has broken s/r, minors will follow, not the other way around (as it would result in false breakouts).
Any thoughts on this?
This however invalidates a good chunk of correlation based trading because the volume weighting is not accounted for. If we take for example USD/JPY and AUD/JPY the positive correlation is usually quite high (90%+), and you do not want to take double risk by trading long or short on both. Without considering the volume of the pair trading and solely going by correlation one would trade either 1x USD/JPY or AUD/JPY. If a trader considers volume traded, USD/JPY would always have the preference over AUD/JPY. If title statement is true, its USD/JPY causing overshoots on AUD/JPY, not the other way around. When AUD/JPY hits a key-resistance, this resistance can easily be invalidated by a good bunch because price has not reached a key resistance on a higher volume JPY pair (USD/JPY).
Another way to make use out of this is that whenever a higher volume traded pair has broken s/r, minors will follow, not the other way around (as it would result in false breakouts).
Any thoughts on this?