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Intermarket correlation - Price tells story?

  • #21
  • Jun 4, 2021 6:23am Jun 4, 2021 6:23am
Quoting alps99
{quote} Could you be more specific? I don't understand your abbreviation. Second, i don't like statistics on xx% of correlation, really. Most of the so-called correlation happen in tail part of the distribution - that is in an extreme move, otherwise most of the time financial asset moving in consolidation range and their correlation in random. The point is try to understand what happens in the market and act accordingly (mean there's some logical reason behind) and not promoting blindly take on correlation {image}
Ok, the idea is to put money management on a sound footing. Presently I select assets based on intuition but after seeing your blog I know you are the right person to help me.

I trade HSI, Dax, and Dow Jones because of 2% average high low range.
The three have positive correlations varying from 60% TO 100%
I choose one Forex pair which I think is negatively correlated by 80% but the volatility is low.
I use indices and forex options to complete the picture.
I am doing this intuitively and it has helped me manage margin well.
It is like I have put margin management on auto pilot by having assets which pull in opposite direction.
If drawdown goes so high that I have to stop trading further or get out unless the drawdown is reduced.
The arrangement is working fine as overshooting of drawdown is not choking my account to trade in other assets.

Have you had any systematic exposure to this kind of multiple symbols being managed in this way - mainly not to choke the margin capital and not get disturbed by drawdown so as to freeze the account if the intention is not to use Stop Loss.

It is like me trading 5% volatility , sum of 3 indices having positive correlation.
What could be high-volatility alternatives to low volatility Forex?

Gold is one that fits the bills.
Others may be agricultural commodities like soybean or copper or oil.

Websites recording volatility by High Low, ATR and Standard Deviation cover only forex pairs.
I have not found any site where I can find the volatility statistics for all CFD assets (except stocks)

It is actually basket trading matching the magnitude of volatility and momentum.
Practice makes a person perfect
  • #22
  • Jun 4, 2021 11:01am Jun 4, 2021 11:01am
Quoting simnz
{quote} Ok, the idea is to put money management on a sound footing. Presently I select assets based on intuition but after seeing your blog I know you are the right person to help me. I trade HSI, Dax, and Dow Jones because of 2% average high low range. The three have positive correlations varying from 60% TO 100% I choose one Forex pair which I think is negatively correlated by 80% but the volatility is low. I use indices and forex options to complete the picture. I am doing this intuitively and it has helped me manage margin well. It is like I...
As my understanding you try to hedge the equity position with forex position in order to minimize drawdown in case of extreme movement that's against your favor?
  • #23
  • Edited Jun 5, 2021 12:22am Jun 4, 2021 10:14pm | Edited Jun 5, 2021 12:22am
Quoting alps99
{quote} As my understanding you try to hedge the equity position with forex position in order to minimize drawdown in case of extreme movement that's against your favor?
I think I have not been able to convey effectively. My bad.

Sourcing symbols which have following properties
(a) Magnitude of the pip performance (in terms of dollar value) will be similar. A symbol can have pip multiplier with $5 per tick. Another symbol can have pip multiplier with $25 or even $250 per tick.

$5 tick value with 100 pips volatility can be matched with a symbol with 20 pips volatility but with a tick value of $25. Both preferably trading in similar times?
(a) Do not put pressure on margin deposit load by requiring posting more margin. Example: GBPUSD's daily high low range of 100 pips matching the high low range of 300 pips will require posting 3 contracts of GBPUSD.

Why?

(a) To help balance Drawdown either by having 90% negative correlation and manage load on the the deposit shown in the terminal as Margin%
(b) to count the symbol as a Positive correlation partner (in spite of it having generally negative correlation) on its own merit when it springs surprises by turning positive at times.
(b) Ensure drawdown does not cause psychological pain and freeze the brain into a depressive mood.
(c) Help continue trading by warding off the pressure on the margin is under control. And thus allowing me to keep trading with a positive mind trying to offset temporary loss (drawdown)
(d) By trading in a positive frame of mind, many times I have made bonanza when drawdown turns around and delivers a sort of bonus.

Protecting capital can be achieved by other ways:
(a) Hedging. Applying locks on a hedging platform. Releasing the locks. Re-apply the locks. Re-apply the release. It is time-consuming and does not give comfort to the brain to continue trading . I have done it for years and I would advise against this kind of risk management. It is a work of art done for own satisfaction.
(b) Initially keeping a large buffer of Pips. 10,000 pips is ideal capital. Pip value can be from 10 cents to $1,000 per pip.
(c) Start always with a TP of 10-30 pips depending on volatility of the symbol. I don't use Stop Loss so I have no idea of what size to be used.
(d) Never to enter trades impulsively mainly on the previous 4 daily lines of High or Low (also called stop hunt zones). Avoid Buying at Highs and selling at Lows. Have patience and re-think before entering
(d) Plan to hold for long if trades don't favour you. If you have faith in Averaging, then count 15 days high and low distance and split in 12 portions and be ready to trade in the grid of each portion without increasing the size of each trade. This will help lower the breakeven point. Most of the time, it has not only lowered the breakeven point but delivered more profit that I had planned for by using one trade. My experience is only with EURUSD. Commodities currencies don't work with a fast mean reversion . I have seen NZD taking 2 years to turn back. Aud also has similar characteristics.
(e) If you love martingale as a risk manager, then don't put any money more than 15 days of high and low distance and treat it as risk you don't mind taking. Once you have told you brain to become brave, you go on martingale spree. No holds barred. Like you do at casinos. Don't allow greed to take over your brain if you are doing good.
Practice makes a person perfect
  • #24
  • Jun 5, 2021 12:43am Jun 5, 2021 12:43am
Quoting alps99
I open this thread to discuss about topic as the title said: to exploit the divergence between multiple correlated assets. Let's do this together. I believe traders on the street look at multiple assets and react according to the prevailing theme. For example in an economic ecession, as stock rallies when sign of confidence, commodity price and commodity/emerging market currency will also get a boost as they share the "same energy" in a trading theme.. Sometimes they just sell bond when stocks rally. I don't know why, that's what happened. Although...
I have worked as a financial journalist and understand the business of weaving stories.

It was only when I looked deeply into the auction bidding process, the appointment of official market makers in most of the markets and the non existence of designated markets makers in countries like India, I realised rotation of liquidity is the key. What triggers the liquidity is known to insiders. By trial and error methods I have to guess on the number of triggers that could be used on a daily basis and when should I bet.
It is like a game of chance initiated by the market makers in Germany or by big instituions in India. I have to acquire skills like that practised by a casino card counter or a poker player . And that is what I am doing.
Practice makes a person perfect
  • #25
  • Jun 5, 2021 2:04am Jun 5, 2021 2:04am
Quoting simnz
{quote} I think I have not been able to convey effectively. My bad. Sourcing symbols which have following properties (a) Magnitude of the pip performance (in terms of dollar value) will be similar. A symbol can have pip multiplier with $5 per tick. Another symbol can have pip multiplier with $25 or even $250 per tick. $5 tick value with 100 pips volatility can be matched with a symbol with 20 pips volatility but with a tick value of $25. Both preferably trading in similar times? (a) Do not put pressure on margin deposit load by requiring posting...
when i enter ,it starts going opposite,when i open sell trade,it takes u turns and starts going up.
  • #26
  • Jun 5, 2021 3:14pm Jun 5, 2021 3:14pm
Perhaps one could try to use correlation as an indicator of whether an instrument may have an up or a down day. The study would be to identify what forex currency X did the day before the stock market opened and what stocks are expected to follow that lead, or vice versa.

I recall back in the day one trader used a stock as an indicator to trade GJ. Another trader used Aussie dollar did the night before in order to try to trade Oil. A study like that could be helpful. But the main gist is to use markets that are open at differing time periods.

Perhaps you could even break currencies down into the asian session, the NY session, the London session etc. to find correlations with stocks. An indicator like that would be cool.
  • #27
  • Jun 7, 2021 3:21am Jun 7, 2021 3:21am
Quoting simnz
{quote} I have worked as a financial journalist and understand the business of weaving stories. It was only when I looked deeply into the auction bidding process, the appointment of official market makers in most of the markets and the non existence of designated markets makers in countries like India, I realised rotation of liquidity is the key. What triggers the liquidity is known to insiders. By trial and error methods I have to guess on the number of triggers that could be used on a daily basis and when should I bet. It is like a game of chance...
I have vaguely understood after reading your explanation. Did you refer to a system that track the volatility of all major assets, and by comparing the relative performance of those (% correlated/uncorrelated) we can tell where is the money flow out of and where is the money flow into?

For example if A correlated 70% to B, and -80% to C, a move up +x% in A "should" correlated with +y% in B and -z% in C. Then we look at A performance and having exact calculation where should B or C at?
  • #28
  • Edited 5:14am Jun 7, 2021 4:21am | Edited 5:14am
Quoting alps99
{quote} I have vaguely understood after reading your explanation. Did you refer to a system that track the volatility of all major assets, and by comparing the relative performance of those (% correlated/uncorrelated) we can tell where is the money flow out of and where is the money flow into? For example if A correlated 70% to B, and -80% to C, a move up +x% in A "should" correlated with +y% in B and -z% in C. Then we look at A performance and having exact calculation where should B or C at?
Yes that is the idea.
CFD Assets should have similar levels of volatility, requiring a margin less than 15% of the contract value, as well as open and close hours to match cash market or floor hours. No preference for any asset because the trading is based on
following the bidding tactics or antics. Hours of trading should be such that some symbols are consolidating while other assets are trending or retracing, keeping drawdown under control and with less load on margin.

By trial and error, form a pool of 8 to 20 symbols and set up a matrix that helps the trader to treat it as an Auto pilot Margin/Drawdown manager giving relief to the trader who wants to focus on observing the wet and dry liquidity waves flow and be in a position to trade 10 symbols without worrying about money management.
Practice makes a person perfect
  • #29
  • Jun 8, 2021 1:00am Jun 8, 2021 1:00am
Maybe this picture will make it more clear.
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Practice makes a person perfect
  • #30
  • Jun 8, 2021 2:05am Jun 8, 2021 2:05am
what a great conversation.. i'm so eager to learn more from you all.. subscribed..
  • #31
  • Jun 8, 2021 5:25am Jun 8, 2021 5:25am
Quoting simnz
Maybe this picture will make it more clear. {image}
i never seen this kind of system before, or i thought it's so complicated to closely measure this kind of money transfer between asset classes and thought this thing is more about prevailing sentiment or judgement than quantitative. So this is totally new approach for me. Did you trade it before?
  • #32
  • Jun 8, 2021 6:46am Jun 8, 2021 6:46am
Quoting alps99
{quote} i never seen this kind of system before, or i thought it's so complicated to closely measure this kind of money transfer between asset classes and thought this thing is more about prevailing sentiment or judgement than quantitative. So this is totally new approach for me. Did you trade it before?
I accidentally found this concept in my quest to have a simple tool to balance the books by finding two opposite performing assets. A very simplistic accounting idea for maintaing margin deposit in balance.
Practice makes a person perfect
  • #33
  • Edited 4:05am Jun 9, 2021 3:52am | Edited 4:05am
EURUSD kept reaching to sell side liquidity below recent swing low. The current upward move is aimed to take some liquidity above. There're series of swing high above current market price are possible buy side liquidity
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Looking at the chart overlay between EURUSD and US treasury futures (UST). These 2 are linked to each other via US interest rate. The theme is yield up (mean bond, notes been sold), Dollar up & EURUSD down and vice versa (Need to say that because market now is seeking for high yield. Although it is not true in every case).
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They are not moving together, like step by step, but sure the US yield is the engine drives movement of EURUSD.
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we can see at the first box when UST move up, and then pause -> EURUSD still try to drive higher but fail. Imagine your car moves because of inertia, not because you speed it up. The second box, UST drop and
  • #34
  • Edited 4:40am Jun 9, 2021 4:29am | Edited 4:40am
Quoting alps99
EURUSD kept reaching to sell side liquidity below recent swing low. The current upward move is aimed to take some liquidity above. There're series of swing high above current market price are possible buy side liquidity {image} Looking at the chart overlay between EURUSD and US treasury futures (UST). These 2 are linked to each other via US interest rate. The theme is yield up (mean bond, notes been sold), Dollar up & EURUSD down and vice versa (Need to say that because market now is seeking for high yield. Although it is not true in every case)....
what do i mean market does not always seek for yield? because sometimes it moves for different reason. Take alook at this chart.
The red line - "DE10Y-US10Y" is the yield different between 10 year Treasury (Germany - US), as German bund yield is proxy for EUR rate.

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There's a technical pattern, a flag consolidation or reaccumulation if you will - So the odd was 50/50. The yield spread line said this pair is seriously overvalued. Sell on rally.
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In this period EURUSD slowly slide down while yield spread up. It was money return to buy US's assets while global economy relatively weak vs US's and also classic action of fly to safety as investors afraid of late cycle recession. Take a look at this Bloomberg track on Global PMI (as manufacturing activities) at Sep 2019.
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  • #35
  • Jun 9, 2021 5:34am Jun 9, 2021 5:34am
Another piece of the puzzle is Eur yield. Using inverted Euro bond futures as below. Why inverted? The currency follow yield, and yield inverted vs price.

Attachment gStill, this has a influence on performance of EURUSD, but less significant than US yield. So we have 2 line as the directional indicator for our currency pair.

Can we have a bit technical analysis here? Not on traded asset but on our benchmark.
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UST up should drive yield down -> result USD down and EURUSD up. Meanwhile, we also see EU bond up (the inverted chart point down), this should drive EUR down and EURUSD down. So there is 2 contradict forces: 1 push up and 1 push down. The USD will lead.
A quasimodo pattern on UST chart. It's reasonable for the expectation that this should at least pause ater reaching that area. Now during the time EURUSD went up, there's divergence. So when UST pause, the "push up force" disappear expect EURUSD close gap with the "push down force"
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Again today the divergence seen when both UST and Euro bond up. 1 push up force and 1 push down force. The EURUSD is following UST but again it's reaching the resistance area
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  • #36
  • Jun 10, 2021 12:02am Jun 10, 2021 12:02am
The balance point is what you're not seeing on those pics.


Peter
Real Trading is not gambling.
  • #37
  • Jun 10, 2021 3:19am Jun 10, 2021 3:19am
Quoting PeterCaleb
The balance point is what you're not seeing on those pics. Peter
Could you further explain that?
  • #38
  • Jun 10, 2021 4:03am Jun 10, 2021 4:03am
The financial markets are not made up of martians sitting there with galactic satellite broadband internet buying and selling all week. They are real individuals and entities that all leave a paper trail. ALL of them. People run into trouble when they try to hyper-specialize eg - "price action", "trends", "market maker", "futures volume data" etc etc.

I have observed that people have alienated themselves from the real world and the real markets and now are addicted to "data". One cannot explain and understand a situation with just data, one must appreciate the whole situation in total. THIS is the balance point. Where virtual life meets real world-real life.

Eg - Government, Company, Employee, Investor, Capitalist, Commercial money manager, Underwriter, Industrialist and so on.

People have lost touch with reality and need to find their way back to real life. The balance point is where price and time negotiate and people and entities make decisions.

This means that people need to stop partitioning their analysis and do ALL of it. The fundamental and technical. The money elements and the risk ingredients (ALL of them).

There is only really one way to skin a cat - where the cat is skinned properly and clean.

I hope that helps. And I'm sorry for butting in here. simnz pointed this thread out to me re: UST and EU and I saw what was being said etc.


Peter
Real Trading is not gambling.
  • #39
  • Edited 5:55am Jun 10, 2021 4:13am | Edited 5:55am
Quoting PeterCaleb
The financial markets are not made up of martians sitting there with galactic satellite broadband internet buying and selling all week. They are real individuals and entities that all leave a paper trail. ALL of them. People run into trouble when they try to hyper-specialize eg - "price action", "trends", "market maker", "futures volume data" etc etc. I have observed that people have alienated themselves from the real world and the real markets and now are addicted to "data". One cannot explain and understand a situation with just data, one must...
Could you be even more specific on this? like real analysis on combining some of those things in current economic condition and how it affect current market. I am interested. Thanks
  • #40
  • Jun 10, 2021 5:19am Jun 10, 2021 5:19am
Not sure about the past, there are various variable and mix result, but clearly in recent period the market see this as a sign of excess liquidity and a short short for Dollar. Here's yesterday article

https://www.reuters.com/business/us-...rs-2021-06-09/
https://www.marketwatch.com/story/wh...in-11621904689

Quote
“Either there is too much cash or not enough collateral,” he told MarketWatch. “It’s two sides of the same coin.”

I would translate it into: Either the Fed takes money out of market or Market give it back to the Fed. This is not exact 2 sides of the coin. Depend on how market view it: The Fed is imposing discipline on market or the Market tells the Fed "we have enough cash, please take it back!". The former is a dollar bull and the latter is a dollar bear.

Reverse repo vs Dollar index since 2014
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and here's Google search for it
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Recent episode
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it began to surge from mid March this year, and the dollar began to fall from earlier in April.
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