Another correlation thread

1. Usually trading the positive correlation is buying pair A and selling pair B. Or Sell pair A and buy pair B.
2. For negative correlation is buying pair A and buying pair B. Or both selling.

Question for item 1: How to decide which pair to buy or sell?

Same for item 2: How to decide both buying or selling?

Anybody got any insights/comments to share?

Or just keeping to themselves?

When I started out in Forex in the mid-2000's, I was exposed to correlation trading from a mentor. Regardless whether you learn or develop a trading method/strategy with it, the important thing about learning correlations is you begin to get a better understanding of your risk and exposure.

The simple example is buying GBP/USD and buying EUR/USD. It's obvious that with their positive correlation, you're Short the USD. Sure, the correlations can break down, and they break down quite often, but your exposure to one side increases your risk.

When I trade Futures, specifically Index options, I'm never absolutely sure of the direction. As with all trades I have a bias. So lets say the market is down, and overnight the futures are showing red. I will Short an Index, but at the same time go Long another index. There is no perfect hedge in correlation trading, but I've found having 2 trades almost always offset another trade when I'm wrong with direction. I'm probably wrong 50-60% of the time.

I've never day traded, and really never had a desire to. When I trade futures, correlation trading is the only way I would trade.

The mentor that taught me correlation trading in FX way back when did other clever things when he traded pairs. He'd add a 3rd trade until profitability, or he would trade a grid opposite to the losing trade then get out.

Check the correlation between pairs. If they're highly positive/negative correlated, they are probably good hedging pairs. There are more advanced ways to do this but you couldn't do it without programming skills on MT.