Should I be concerned about uncorrelated markets? | Forex Factory

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Should I be concerned about uncorrelated markets?

  • #1
  • First Post: Apr 19, 2012 5:53pm Apr 19, 2012 5:53pm
All the pairs I trade are based off the USD, and in many successful trades I've observed correlation between the pairs (i.e. rising EUR/USD falling USD/JPY)

When I determine which direction to trade, I look at each chart independently and see if there's valid signals

It makes sense that these pairs can be uncorrelated, as each represents an entirely different country/economy. Additionally, some currencies are classified differently than others like NZD and CAD which are commodity currencies.

But I always get nervous when I notice that the trades I've entered aren't all correlated in direction

Should this be a concern? Would it be better for me to sit on the sidelines when the trade signals I'm receiving are not in correlated direction?
  • #2
  • Apr 19, 2012 9:48pm Apr 19, 2012 9:48pm
I tend to trade based on the individual charts/ pairs merit. If the entry looks good I’ll take it, even if my cross-pair analysis doesn’t show synchronicity.

That said, I’ll still assess “cross-pair analysis”,……when pairs are synching it gives more confidence, but if they aren’t it doesn’t stop me taking the trade.

For example. I had a short set-up on the euro last week, aussie and kiwi were dragging their feet. I took the euro trade anyway, the TP was reached…….kiwi and aussie eventually caught up.

Here’s a useful tool http://www.forexticket.co.uk/en/tools/01-01-correlation
  • #3
  • Apr 19, 2012 11:03pm Apr 19, 2012 11:03pm
thanks for your response and the link!
  • #4
  • Apr 19, 2012 11:14pm Apr 19, 2012 11:14pm
Quoting neuron
All the pairs I trade are based off the USD, and in many successful trades I've observed correlation between the pairs (i.e. rising EUR/USD falling USD/JPY)
Aboui the time you think you have the "correlation" figured out, it may change.

Quoting neuron
When I determine which direction to trade, I look at each chart independently and see if there's valid signals
That's it exactly. Trade each chart based on your method.

Quoting neuron
It makes sense that these pairs can be uncorrelated, as each represents an entirely different country/economy. Additionally, some currencies are classified differently than others like NZD and CAD which are commodity currencies.
Of course it makes sense. You're answering your own questions.

Quoting neuron
But I always get nervous when I notice that the trades I've entered aren't all correlated in direction

Should this be a concern? Would it be better for me to sit on the sidelines when the trade signals I'm receiving are not in correlated direction?
IMHO it would not be better for you to sit on the sidelines. Trade your method. You can also look at other pairs (non US) to see why/how things might be changing. The GBP pairs for example.


caution... I may be a troll, for whatever that means

oh yeah.... LOL !
When the Joker is in the deck.. fear not and play it well
  • #5
  • Apr 20, 2012 2:48pm Apr 20, 2012 2:48pm
Neuron, it makes sense that any pair that has a common currency will move in a similar fashion. That being said, I still view a currency pair as a distinct entity and make a trading decision only based on what I see for that pair only.
My trades are based on the pair that best fits my criteria for the entry.

Cross checking can be helpful. As an example, my view is that at least temporarily, the GBP/USD will be contained under 1.6150. My question is, "Will it be a correction only or a new trend. The question comes in an indirect way when I look at the EUR/USD. With the recent break of 1.3210, i tells me it is headed to circa 1.3400, so it might suggest the GBP/USD is only correcting.


Quoting neuron
All the pairs I trade are based off the USD, and in many successful trades I've observed correlation between the pairs (i.e. rising EUR/USD falling USD/JPY)

When I determine which direction to trade, I look at each chart independently and see if there's valid signals

It makes sense that these pairs can be uncorrelated, as each represents an entirely different country/economy. Additionally, some currencies are classified differently than others like NZD and CAD which are commodity currencies.

But I always get nervous when I notice that...
  • #6
  • Apr 21, 2012 2:02am Apr 21, 2012 2:02am
Quoting neuron
All the pairs I trade are based off the USD, and in many successful trades I've observed correlation between the pairs (i.e. rising EUR/USD falling USD/JPY)

When I determine which direction to trade, I look at each chart independently and see if there's valid signals

It makes sense that these pairs can be uncorrelated, as each represents an entirely different country/economy. Additionally, some currencies are classified differently than others like NZD and CAD which are commodity currencies.

But I always get nervous when I notice that the...
I think that is actually a good idea, to look at multiple correlated pairs, and see if they are also showing a well-defined pattern. Why?
Cause then more and more market participants will notice that pattern and trade it => self-fulfilling prophecy and the pattern should have a higher probability of succeeding than normally.
However I didn't test it out, so this is just a theory of mine.
  • #7
  • Apr 22, 2012 9:57pm Apr 22, 2012 9:57pm
Speaking of cad and nzd, you have to watch out for cointegrated pairs, see my post: http://www.forexfactory.com/showthre...93#post5598693

long the dollar against both of these, you will see each rise and fall at different times. At first may seem like inverse correlation to the uninitiated. But after looking at the candles for a while you can see that's not the case.

Similar situation to other commods trading against eachother comes down to technicals more than whatever the dollar is doing. Adjustinmg hedge proportions to average price movement like the arbomat recommendations let you profit from the cointigration. This is insane, I feel like I just entered a new world of trading thats purely mechanical/mathematical and not at all technical analysis. A somewhat freeing feeling!

Quoting neuron
All the pairs I trade are based off the USD, and in many successful trades I've observed correlation between the pairs (i.e. rising EUR/USD falling USD/JPY)

When I determine which direction to trade, I look at each chart independently and see if there's valid signals

It makes sense that these pairs can be uncorrelated, as each represents an entirely different country/economy. Additionally, some currencies are classified differently than others like NZD and CAD which are commodity currencies.

But I always get nervous when I notice that...
Skype: heliosphan187
  • #8
  • Last Post: Apr 23, 2012 1:57pm Apr 23, 2012 1:57pm
awesome replies, thanks!

I will continue to analyze and base my trade decisions off individual charts, I learned long ago there is no "should be" direction in market movement, just what is happening now

Correlated trades do seem to hold more strength, and non correlation may warrant a double check, but it shouldn't be a deciding factor on trade direction
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