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Trade Correlation

  • Post #1
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  • First Post: Nov 7, 2006 10:28am Nov 7, 2006 10:28am
I would be very interested to hear how others who trade multiple pairs handle their correlation. For example, taking a trade at the same time in EURUSD, GBPUSD & USDCHF is essentially the same trade and trebling one's exposure. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>

* Do you take all three entries (assuming 3 signals) at one third size, or select one market at full size ?
* Which other markets do you trade if you want to avoid the correlation trap (if indeed you think it is worth avoiding) ?<o></o>

Using the 100 day correlation matrix here http://www.mataf.net/en/analysis-correlation.htm , the following group of major pairs and crosses have low correlations of > or = -60 and < or = 60 relative to EURUSD (which I have taken as my base, living as I do in sunny Amsterdam) and to each other (which eliminates many pairs). The number after the pair is the 20 day average daily range in pips.

EURUSD 69
USDJPY 80
USDCAD 77
CHFJPY 41
EURAUD 88
(EURCAD) 95
<o></o>

EURCAD is in brackets as I do not have it on my GAIN platform (my account is a TradeStation forex account via GAIN).
The comparable ranges for GBPUSD and USDCHF are 109 and 81 respectively.
My present feeling is to restrict my Forex trading to the above group, switching GBPUSD for EURUSD on the basis of volatility.

Looking forward to hearing your views.

J.

<o></o>
You saved me a lot of work. Thanks.
Beats workin' for a livin'
Well, PS, I can see you're a happy fellow....

The reason for this thread, which in any event asssumes everyone knows the basics of correlation, is that I see over and over again threads in which traders seem to be trading highly correlated pairs. Putting aside systems in which, say, USDCHF & GBPUSD are used to confirm an EURUSD trade, this strikes me as strange.... .

J.
I was going to post this same thread. I've been demo trading a bunch of USD pairs and most of the time I'm just doing the same trade on every pair. Should one trade the least correlated pairs they can find to diversify their trades?

Quoting jtrade
Well, PS, I can see you're a happy fellow....

The reason for this thread, which in any event asssumes everyone knows the basics of correlation, is that I see over and over again threads in which traders seem to be trading highly correlated pairs. Putting aside systems in which, say, USDCHF & GBPUSD are used to confirm an EURUSD trade, this strikes me as strange.... .

J.
Quoting mickeymickey
I was going to post this same thread. I've been demo trading a bunch of USD pairs and most of the time I'm just doing the same trade on every pair. Should one trade the least correlated pairs they can find to diversify their trades?
I've posted the same question elsewhere and have been amazed at the lack of response... maybe everyone's discussed it all before. However, we all have to make our own decisions : I continue to track all 15 pairs I have available and eyeball the best setups, but only take one trade per highly correlated pair, so I will never have more than 5 trades on at one time.

J.
Hi J
Not sure if you found this thread, but Iso has studied this in great depth, and I'm sure you and he would have a lot to discuss.
http://www.forexfactory.com/forexfor...ht=correlation
Quoting jtrade
I would be very interested to hear how others who trade multiple pairs handle their correlation. For example, taking a trade at the same time in EURUSD, GBPUSD & USDCHF is essentially the same trade and trebling one's exposure. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>

* Do you take all three entries (assuming 3 signals) at one third size, or select one market at full size ?
* Which other markets do you trade if you want to avoid the correlation trap (if indeed you think it is worth avoiding) ?<o></o>

Using the 100 day correlation matrix here http://www.mataf.net/en/analysis-correlation.htm , the following group of major pairs and crosses have low correlations of > or = -60 and < or = 60 relative to EURUSD (which I have taken as my base, living as I do in sunny Amsterdam) and to each other (which eliminates many pairs). The number after the pair is the 20 day average daily range in pips.

EURUSD 69
USDJPY 80
USDCAD 77
CHFJPY 41
EURAUD 88
(EURCAD) 95
<o></o>

EURCAD is in brackets as I do not have it on my GAIN platform (my account is a TradeStation forex account via GAIN).
The comparable ranges for GBPUSD and USDCHF are 109 and 81 respectively.
My present feeling is to restrict my Forex trading to the above group, switching GBPUSD for EURUSD on the basis of volatility.

Looking forward to hearing your views.

J.

<o></o>
Peter - thanks very much for the link : I managed to miss it when I searched prior to starting this thread .


J.
Quoting Isotonic
the problem with these data providers is that they're much too short term in focus, you also don't know what data they're using and how good it is. i found problems with mataf and wouldn't recommend them. oanda fxlabs is much better but still has a 2 year limit.

you would be better off working it out yourself. short term correlation will include a lot of noise in much the way trading off smaller timeframes.
Hi, Iso - just read through your interesting comments on the other thread.

Do you think 100 day correlation is too short term ? It seems to me that one either has to revealuate every 3 months or so OR take a much longer view. However, there is also the issue of really getting to know the pairs you trade, so for the time being I am going to restrict my trading to the pairs I listed in post # 1 :

GBPUSD 109
USDJPY 80
USDCAD 77
CHFJPY 41
EURAUD 88

Of course, the research never stops....

J.
Interesting thoughts, Jtrade.

One thing to consider, specially if you are not going for big swings only, is the different spread between eurusd, usdchf and cable.
Quoting Triton18
Interesting thoughts, Jtrade.

One thing to consider, specially if you are not going for big swings only, is the different spread between eurusd, usdchf and cable.
Hi, Triton18,

With the possible exception of CHFJPY, I am aiming for first target areas of at least 55 pips, so spreads are less significant than with a shorter term method. Even so, I would still prefer cable to the other majors due to average daily range.

Have a great weekend everyone - I am off to the movies to see Borat, so I am hoping for a good laugh !



J.
correlation is one of the most important things to watch, even if you are a noob.
100% of traders are losers. Just that some win more than they lose!
If I am trading say Euro, CHF and Cable. If they all set up together, for one of my edges I might:

1. Take the one with the best technical set up or

2. Split risk between 2 or 3.

I take each situation on it's merit and try to be flexible.

However, if I am going long Cable off a S level, I always check Euro and CHF (you could also check Yen) the moments before entering to check they have not broken their relative S (R For CHF) level, at that moment.

Interesting article attached.
Attached File(s)
File Type: pdf Currency Personalities.pdf   706 KB | 1,899 downloads
  • Post #13
  • Quote
  • Last Post: Aug 16, 2007 2:10pm Aug 16, 2007 2:10pm
It is very important to trade mostly uncorrelated pairs (if you plan on opening multiple simultaneous trades). Correlated pairs should be used to CONFIRM your trades only. In other words if you want to trade GBP/USD because of its volatility, then also have a look at EUR/USD and USD/CHF (negatively correlated). If either or both of those pairs are giving you a similar setup, then you can enter your trade with that much more confidence. If EUR/USD and USD/CHF are giving you the opposite signal, then you might want to wait out the GBP/USD trade.

Anyway, if you do trade highly UNcorrelated pairs, your risk is spread out and you can actually put full or near-full risk on each trade. What I mean is that if you normally risk say 2% of your account, then you can set up your trades so that EACH of your trades puts 2% (or nearly) at risk, instead of a COMBINED risk of 2%, because you are trading SIMULTANEOUS UNCORRELATED EVENTS. What this amounts to actually is like leveraging time, so your equity curve should rise more quickly. Just be careful not to cut any corners on your analysis because you are trying to trade too many pairs at once to take advantage of this phenomenon .

Also, please remember that trading a pair only for its volatility is sometimes a mistake, as it can often carry a higher spread that can dip into your profits. I have a feeling you already know that (and a lot of brokers offer the same spread on EURUSD and GBPUSD anyway) but I just thought I'd mention it anyway.
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