How do you use correlations?

If you are long gbp/jpy and short chf/jpy you are long gbp/chf. The only way this strategy would work is if you had lots of capital. This has been discussed before though. If the gbp/chf drops 100 pips you enter, then you enter again, and again and again and again every time there is a 100 pip drop. You can carry that trade and make good interest while you wait for your averaged position to move upwards.

Though you would need at minimum a 100 or even 200k account to feel comfortable with standard lot entrances at a time. Considering that safe averaging is always 1,2,3,4,5 and not 1,1,1,1,1. This is to make certain you dont ever need to get even close to your initial entrance.

interesting. i've never given correlations a thought before. thanks guys for all the info

I think you missed my point. This example was over simplified. It started out with 6 full lots. And on that position I would buy and sell mini lots on 100 pip swings.

I did a test with GBP/USD and JPY/USD from Mar 2005 through Dec 2005. There was a 2000 pip drop in the GBP/USD starting the beginning of March. My account was allocated in such a way to make about 40%. Note that this was a test but the account survived that drop. I had to add over 20 more mini lots but when GBP stop going down I started cashing in those small lots and the account ended up over 80%.

You do not need a 100K account to do this. It works on any size account. The key is to trade small enough lots.

where can i get the interest rates etc??

This site has a lot of great tools incuding rates: http://www.mataf.net/en/analysis-interest_rates.htm

I dont quite understand. 80% return is incredible! Would you mind posting a little more information? Would have the returns come whether or not the market retraced in your favor?

I must be missing something (as usual).. probably obvious as well.

OK.
Here's one of the ways I use Correlation.

Example only:

I'm Long Pair 'A' and have been for 3 days.
Tommorrow, NFP will be released.
I don't want to leave my trade simply because of a news release event so...

"Hedge It."

But with what? Hmmmm. Let me check out my most current "Correlations" Spread sheet and then I will decide.

Correlation is... >80 then take the other side. or Correlation is... <20? then take the same side.

I don't understand how an imperfect hedge is better than exiting the market and restoring your original position after the smoke clears.

That.
Doesn't surprise me at all.

It would appear you still have some revelations ahead.

Why don't you explain it to us like we're seven? Is this a contest on who's the smartest or an open forum to help those that "still have some revelations ahead"?

I mistakenly thought that you could put aside your attitude and explain to the good people what the advantages of hedging would be over an exit/entry strategy. The post is entitled "How do you use correlations" so it would be interesting to learn why you prefer a correlated hedge over other options.

I apologize. No. It is certainly not a contest between, obviously, 2 experienced traders.
{btw. This scenario, [Exp v Exp] is possibly the best that this forum can achieve}
Synopsis:
Let's say you are in a nice Profitable Trade AND news is about to be released.
Phil says, Get out and Back in if the News is in your favour..
I'm saying you might be wiser to Put your position in Neutral during the event and decide AFTER if you want to hang on. {Unless of course you are TTN}

Niether is wrong, But one method may Possibly cost you less Spreads.

Bemac: The following is from my favorite trading book ROASO -Edwin Lefevre. I have struggled with applying this advice as I am wanting to be a longer term holder but FX fluctuates so much short term. If I understand what you are saying then hedging is a possible solution?

"Well, Elmer made for the old man and, without a word of
apology to John Fanning, told Turkey, "Mr. Partridge, I have
just sold my Climax Motors. My people say the market is entitled
to a reaction and that I'll be able to buy it back cheaper. So
you'd better do likewise. That is, if you've still got yours."
Elmer looked suspiciously at the man to whom he had given the
original tip to buy. The amateur, or gratuitous, tipster always
thinks he owns the receiver of his tip body and soul, even
before he knows how the tip is going to turn out.
"Yes, Mr. Harwood, I still have it. Of course!" said Turkey
gratefully. It was nice of Elmer to think of the old chap.
"Well, now is the time to take your profit and get in again on
the next dip," said Elmer, as if he had just made out the
deposit slip for the old man. Failing to perceive enthusiastic
gratitude in the beneficiary's face Elmer went on: "I have just
sold every share I owned!"
From his voice and manner you would have conservatively
estimated it at ten thousand shares.
But Mr. Partridge shook his head regretfully and whined, "No!
No! I can't do that!"
:'What?" yelled Elmer.
"I simply can't!" said Mr. Partridge. He was in great
trouble.
"Didn't I give you the tip to buy it?"
"You did, Mr. Harwood, and I am very grateful to you.
Indeed, I am, sir. But --"
"Hold on! Let me talk! And didn't that stock go up seven
points in ten days? Didn't it?"
"It did, and I am much obliged to you, my dear boy. But I
couldn't think of selling that stock."
"You couldn't?" asked Elmer, beginning to look doubtful
himself. It is a habit with most tip givers to be tip takers.
"No, I couldn't."
"Why not?" And Elmer drew nearer.
"Why, this is a bull market!" The old fellow said it as
though he had given a long and detailed explanation.
"That's all right," said Elmer, looking angry because of
his disappointment. "I know this is a bull market as well as you
do. But you'd better slip them that stock of yours and buy it
back on the reaction. You might as well reduce the cost to
yourself."
"My dear boy," said old Partridge, in great distress "my
dear boy, if I sold that stock now I'd lose my position; and
then where would I be?"
Elmer Harwood threw up his hands, shook his head and walked
over to me to get sympathy: "Can you beat it?" he asked me in a
stage whisper. "I ask you!"
I didn't say anything. So he went on: "I give him a tip on
Climax Motors. He buys five hundred shares. He's got seven
points' profit and I advise him to get out and buy 'em back on
the reaction that's overdue even now. And what does he say when
I tell him? He says that if he sells he'll lose his job. What do
you know about that?"
"I beg your pardon, Mr. Harwood; I didn't say I'd lose my
job," cut in old Turkey. "I said I'd lose my position. And when
you are as old as I am and you've been through as many booms and
panics as I have, you'll know that to lose your position is
something nobody can afford; not even John D. Rockefeller. I
hope the stock reacts and that you will be able to repurchase
your line at a substantial concession, sir. But I myself can
only trade in accordance with the experience of many years. I
paid a high price for it and I don't feel like throwing away a
second tuition fee. But I am as much obliged to you as if I had
the money in the bank. It's a bull market, you know." And he
strutted away, leaving Elmer dazed.
What old Mr. Partridge said did not mean much to me until I
began to think about my own numerous failures to make as much
money as I ought to when I was so right on the general market.
The more I studied the more I realized how wise that old chap
was. He had evidently suffered from the same defect in his young
days and knew his own human weaknesses. He would not lay himself
open to a temptation that experience had taught him was hard to
resist and had always proved expensive to him, as it was to me.
I think it was a long step forward in my trading education
when I realized at last that when old Mr. Partridge kept on
telling the other customers, "Well, you know this is a bull
market!" he really meant to tell them that the big money was not
in the individual fluctuations but in the main movements that
is, not in reading the tape but in sizing up the entire market
and its trend"

Hi MG,
It's gonna take me a while to digest the crux so pls be patient. {at least for my response}

I agree experienced traders are the best for the forum, but sometimes egos get in the way. No offense.

I think what Phil was saying, was to close your position before news, and reopen it after the news regardless of what the news outcome was. This, essentially, is just removing all the movement of the news from your trade, but costing you the price of re-entry (spread). Your scenario is hedging it, which is also putting the position "in neutral" and also costing you another entry (the spread of the pair you hedge).

In my opinion, these are the nearly same thing, the hedge just makes things a big more complicated AND is not always the same, as per Phil's "imperfect hedge".

The only perfect hedge is to hedge it with the same pair, which does the same thing in this case, so why are we even talking about correlation?

No Offence taken.

You have just added some Input to who you are as a trader.
If Phil's method suits you better, then Go For It.

I think {and hopefully Phil agrees} the More You Think, the better Trader You Are.
[btw. correlation is the Thread Topic.]

I know the topic is correlation, I was just stating that in my opinion correlation has nothing to do with either side. You either close the position and reopen or hedge it with the same pair, hence no correlation. However, regarding the comment about who I am as a trader, yes I think way too much.

Now where did I put those peanut M&Ms...

Bill passes TwinC a bag of Peanut M&M's
Peace Bro. Have mine.

Read It... And...
Now I feel like an Old Wood Duck But then again, Perhaps that's who I am.

Old "Wood Duck" was a wise old codger.

I am gonna start looking into this idea of hedging using a correlated currency. I just want to ride out what in my mind is a short term correction.

The idea of hedging the same pair strikes me as counter productive because it implies that I am not convinced that my position is the correct one. Whenever I get that 'I'm wrong; feeling I get out. Standing aside is also a position.