Correlation Trading Method

History and Introduction

I have always been interested in the relationship between different currency pairs and how they develop different patterns in relation to each other. Back in September 2010 I started working on a strategy that revolved around my knowledge, experience and research of currency correlations.

Over the next 5 months I undertook extensive forward and back testing until I came up with a complete working strategy in February 2011. The strategy was then forward tested in a demo account over the next 3 months. The results were very good as I made around a return of 100% in those 3 months by risking around 2% per trade. I used a fair degree of discretion whilst forward testing the strategy. This is how I managed to achieve the super % gains – a mixture of the fundamental underlying trading strategy and my own discretion built on my extensive market and trading experience.

Due to both personal circumstances and other trading interests I abandoned this project. I found that I am much better suited to discretionary trading based around order-flow concepts. So the trading strategy essentially fell by the wayside until now.

Over the last few months I have re-visited the strategy and decided to adapt it to a more mechanical strategy which could be learnt by traders of varying experience.

The variation of strategy which I have since produced is based on the same principles as the original strategy, but now it is completely ‘mechanical’ i.e. does not require any discretion. Therefore the actual strategy, entries, stop loss and exits are now completely rule based. Of course without the discretionary / experience based element the strategy is less profitable, but due the mechanical nature anyone can now trade it and as a trader gains experience they can than add discretionary elements to the strategy in order to further increase profits.

The revised version of the strategy has undergone some basic forward testing, however due to constraints (because as mentioned above I myself now trade via discretionary methods) I have not been able to dedicate the time required to test the revised correlation strategy.

It is for this reason that I am looking for traders who are willing to work with me on this strategy and develop statements to evaluate the true potential of the strategy. There will be a small fee involved ($50) for the following reasons:

1. I only require a small group of dedicated traders, thus requiring a small fee will ensure only serious dedicated traders apply. Charging a fee also ensures that I have an obligation to devote the time required to the project.

2. The project will involve me providing significant time and assistance to the group of traders – thus my normal earnings will be reduced during this time.

I will be accepting ONLY 20 people for this project as I want to keep the group to a small dedicated number. At the end of the project (estimated 3 months) every member of course is free to use the strategy and the extensive research as they so wish.

What’s in for you?

If are serious about devoting the time required for this project you can check the basic description of the strategy in the following posts and make a better decision if this strategy is right for or not.

If you are interested and you sign up to the project, you will receive a PDF of the strategy containing full details regarding entry, exits and trade management. Thus the PDF will provide you with EVERYTHING you need to start trading the strategy.

There will also be a Skype group where I will answer questions, share ideas, trade signals and evaluate results. This project will last for approximately 3 months and I will collate and evaluate results on an ongoing basis and if necessary the strategy will be tweaked accordingly.

Think of it as a project where you will be working with me and 19 others who are experienced fully committed traders with common interests.

Like with anything else in this business there is a risk in this endeavor and that is that this method may not work for you and you will end up $50 poorer after 3 months. But the reward is unlimited as you’ll end up with a mechanical strategy that is proven profitable as it would have been scrutinized, tested, evaluating and tweaked if necessary by like minded individuals.

Therefore, after 3 months you will have a profitable trading strategy in your hands with you being fully trained to trade it for just $50.

What’s in it for me?

Obviously there is some income, but it will not even compensate for the 3-4 months of my time that I will devote to this project (outside of trading hours). My main aim is to prove that method is profitable and work with likeminded traders to ensure the strategy reaches its potential.

My interests are highly vested in your success and I will try to do all I can to assist in developing and refining the strategy (if needed) over the 3 month period.

Basic Requirements

The system is pretty simple and straight forward but there are some minor details that require the trader to have a grasp of basic SR trading and to have a basic concept of how to differentiate between Ranging and Trending markets.

It’s not really a big issue though but I don’t want complete beginners asking me to teach them SR and tell them every time if market is in trending or ranging.

I have my own trading to take care off , thus I want to ensure that I am devoting my time to assisting the group so don’t apply if you are a complete beginner. All I require is people have at least 6 months experience with the markets and a fair grasp of the concepts mentioned above – as well as being serious about devoting time to evaluating the strategy and sharing results with the Skype group.

IMPORTANT STUFF.

I would prefer if you contact me via Skype @ Amerca779.

If you dont use Skype, You can send me a PM here or use this contact form on the blog.

Thanks.
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A basic description

The method is based on highly correlated pairs like Eurusd-Usdchf, Audusd-Nzdusd, Eurusd-Gbpusd etc. What we look for is to pairs to move in tandem to each other i.e making higher high’s (HH) together or say making Lower lows (LL) together (one pair making HH’s and other one making LL’s (or vice versa) for inverse correlated pairs). So for an example look at the charts below of Eurusd and Usdchf. Starting from the left you’d see that both pairs were in decent down trends and were making HH’s (uchf) and LL’s (eu). You would see that where I have drawn a red trendline that Eurusd made a new HH but Usdchf failed to make a new HH which gave us the signal to short Usdchf to profit from its weakness. Of course that's not all there is a lot of other stuff like Entry, Exit and Trade management rules and some filters to avoid weak signals which will be provided in the PDF and discussed in the Skype room.
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Here are another two example's.

Jesse Livermore and Correlations,

Jesse Livermore also used correlation to gauge the strength/weakness of stocks by comparing them to their peers and importantly to time the turn of the big trends.

I will follow up with some example's from his book in next few posts.

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"And there is another thing to remember, and that is that a
market does not culminate in one grand blaze of glory. Neither
does it end with a sudden reversal of form. A market can and
does often cease to be a bull market long before prices
generally begin to break. My long expected warning came to me
when I noticed that, one after another, those stocks which had
been the leaders of the market reacted several points from the
top and for the first time in many months -- did not come back.
Their race evidently was run, and that clearly necessitated a
change in my trading tactics.

It was simple enough. In a bull market the trend of prices,
of course, is decidedly and definitely upward. Therefore
whenever a stock goes against the general trend you are justified
in assuming that there is something wrong with that
particular stock. It is enough for the experienced trader to
perceive that something is wrong. He must not expect the tape to
become a lecturer. His job is to listen for it to say "Get out!"
and not wait for it to submit a legal brief for approval.

As I said before, I noticed that stocks which had been the
leaders of the wonderful advance had ceased to advance. They
dropped six or seven points and stayed there. At the same time
the rest of the market kept on advancing under new standard
bearers. Since nothing wrong had developed with the companies
themselves, the reason had to be sought elsewhere. Those stocks
had gone with the current for months. When they ceased to do so,
though the bull tide was still running strong, it meant that for
those particular stocks the bull market was over. For the rest
of the list the tendency was still decidedly upward.

There was no need to be perplexed into inactivity, for
there were really no cross currents. I did not turn bearish on
the market then, because the tape didn't tell me to do so. The
end of the bull market had not come, though it was within
hailing distance. Pending its arrival there was still bull money
to be made. Such being the case, I merely turned bearish on the
stocks which had stopped advancing and as the rest of the market
had rising power behind it I both bought and sold.

The leaders that had ceased to lead I sold. I put out a
short line of five thousand shares in each of them; and then I
went long of the new leaders. The stocks I was short of didn't
do much, but my long stocks kept on rising. When finally these
in turn ceased to advance I sold them out and went short five
thousand shares of each. By this time I was more bearish than
bullish, because obviously the next big money was going to be
made on the down side. While I felt certain that the bear market
had really begun before the bull market had really ended, I knew
the time for being a rampant bear was not yet. There was no
sense in being more royalist than the king; especially in being
so too soon. The tape merely said that patrolling parties from
the main bear army had dashed by. Time to get ready.

I kept on both buying and selling until after about a
month's trading I had out a short line of sixty thousand shares
-- five thousand shares each in a dozen different stocks which
earlier in the year had been the public's favourites because
they had been the leaders of the great bull market. It was not a
very heavy line; but don't forget that neither was the market
definitely bearish.

Then one day the entire market became quite weak and prices
of all stocks began to fall. When I had a profit of at least
four points in each and every one of the twelve stocks that I
was short of, I knew that I was right. The tape told me it was
now safe to be bearish, so I promptly doubled up."

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Now if you read what i have highlighted in bold font and see the trade example's of Eursd-Uchf and Eurusd-Gbpusd i posted earlier, you would see the similarity clearly in both methods.

Well great minds think alike.

More to come.
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"Last year, after the general bull movement was well under
way, I noticed that one stock in a certain group was not going
with the rest of the group, though the group with that one
exception was going with the rest of the market. I was long a
very fair amount of Blackwood Motors. Everybody knew that the
company was doing a very big busines. The price was rising from
one to three points a day and tile public was coming in more and
more. This naturally centered attention on the group and all the
various motor stocks began to go up. One of them, however,
persistently held back and that was Chester. It lagged behind
the others so that it was not long before it made people talk.
The low price of Chester and its apathy was contrasted with the
strength and activity in Blackwood and other motor stocks and
the public logically enough listened to the touts and tipsters
and wiseacres and began to buy Chester on the theory that it
must presently move up with the rest of the group.

Instead of going up on this moderate public buying, Chester
actually decline,. Now, it would have been no job to put it up
in that bull 'Market, considering that Blackwood, a stock of the
same group, was one of the sensational leaders of the general
advance and we were hearing nothing but the wonderful
improvement in the demand for automobiles of all kinds and the
record output.

It was thus plain that the inside clique in Chester were
not doing any of the things that inside cliques invariably do in
a bull market. For this failure to do the usual thing there
might be two reasons. Perhaps the insiders did not put it up
because they wished to accumulate more stock before advancing
the price. But this was an untenable theory if you analysed the
volume and character of the trading in Chester. The other reason
was that they did not put it up because they were afraid of
getting stock if they tried to.

When the men who ought to want a stock don't want it, why
should I want it? I figured that no matter how prosperous other
automobile companies might be, it was a cinch to sell Chester
short. Experiences had taught me to beware of buying a stock
that refuses to follow the group-leader.

I easily established the fact that not only there was no
inside buying but that there was actually inside selling. There
were other symptomatic warnings against buying Chester, though
all I required was its inconsistent market behaviour. It was
again the tape that tipped me off and that was why I sold
Chester short.

One day, not very long afterward, the stock broke
wide open. Later on we learned officially, as it were that
insiders had indeed been selling it, knowing full well that the
condition of the company was not good. The reason, as usual, was
disclosed after the break. But the warning came before the
break. I don't look out for the breaks; I look out for the
warnings. I didn't know what was the trouble with Chester;
neither did I follow a hunch. I merely knew that something must
be wrong."

Another one that's in play as you see two perfectly correlated pairs. Au kept on going and made a new low but Ucad failed to respond by not making a new high.

So we would go short ucad to profit from this sign/warning of weakness. How are we gonna get in and are there any reasons to not to take this trade? where to put stops and how to manage the trade and how we're gonna exit will be detailed in the PDF and discussed further in the chat room.
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The trade dint triggered.
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Its not a method where you get 1-3 trades a day and manage them tight and tryin squeeze every pip out of the market (nothing wrong with that).

The way i built it is aimed at catching big trends and right from the top/bottom. Win rate for me is always been around 50% on 10-20 trades/month but i got 2-3 big runners (200-400 pips) every month which paid well for the losses and pushed me into green too. Stop trailing is also aimed at giving the trades max freedom to stay in the trend as long as possible.
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Hmm, that is very interesting strategy! Am I right that it is counter trend strategy? Did you try to use it in a direction of trend?

I don't think you came up with this idea. I thinK you got it from Billbss on this forum.

Ha Ha ha.

I said i came up with the strategy which is entries, exits, trade management and most importantly filters. I dint invented or came up with the basic "idea".

I dont know anyone who is teaching something or selling something in this bussiness who can claim that they invented their stuff out of nothing (except Darkstar in a sense that his methods were not discussed anywhere in retail sector) .

If you've had read the posts about Jesse Livermore you would't have made that comment as i made it clear that what he was doing was and what i have here is the same thing, he was doing it 100 years ago so how can i say i came up with it?

I also read Billbss thread and that's along with many other sources about the subject. Again i dint invented anything, i just did my research and testing and built something that worked.
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Well every trade is counter trend.

But it also depends on how one reads the trends too.

I highlighted an area with a rect on uchf chart, lets assume Uchf dint made a new LL and we had a long setup.

Now is that a counter trade or a trend trade?

So it all depends upon the traders definition of the trends and the situation we are in.



P.S there is a setup in Uchf-Eu in play, lets see.
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Interesting read Nasir, Í've been focusing last year on a similar approach but on a much smaller TF, 1M. In general I watch how price approaches key areas. Top and bottom picking confirmation is taking place by watching correlations. A big difference is that I didn't build in any mechanical triggers "yet". Still backtesting results in order to eventually finetune the strategy with possible mechanical triggers.

My basket consists of EUR/USD, GBP/USD while using dollar index and USD/CHF as a guide.

Few similar examples can be found in my own topic which was created around a week ago.

http://www.forexfactory.com/showthread.php?t=361684

I'll make sure to keep following your topic, good luck!

Nasir,
did you backtest your strategy? I see that you use MT4 which is easy to program the strategy and backtest. Will you be able to provide MT4 tester screenshots if possible?

The trade resulted in a loss. When markets are trending hard we can incur some losses but if you use a little discretion you can avoid some signals like above.

So in the start we go with rules of the method strictly but as we gain experience we can start to incorporate discretion into out trading to get better results.
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Hey Robert,

Thanks for the interest mate. I will also take a look into your thread when get time.

I have't tried this method anything below 1h. But maybe in future we may try lower time frames after the group has mastered the strategy and ready to experiment with it.

No i have not back tested it ever. As stated in my first post only forward tested it .

Also i dont think you can run mt4 tester on two pairs at the same time.
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Here is another one. Chart says it all.
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see that yr chart is more on H4. does it also work in LTF like H1 or M30

Yes it is possible to trade only one pair in MT4 but you can analyze both while trading any one. Other words, you can run backtest for EURUSD and analyze it against GPBUSD. Does it make sense?