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Correlation - Good Way to Trade?

  • #1
  • First Post: Edited 8:47am Dec 11, 2012 1:55am | Edited 8:47am
I upload one picture, i trying trading EURUSD with GBPUSD.
Looks at picture and understand.
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  • #2
  • Dec 11, 2012 8:10am Dec 11, 2012 8:10am
it is called correlation ....... eur, gbp, aud, nzd are all positive correlated currencies


the correlation coefficient is .69 which is pretty strong....... if you do a linear regression on returns you get
the intercept at .000153 and eur= .882142

so the formula is = .882142* x = + .000153 (x= 1 euro)

you can use this to calculate your position size and the amount of expected movement of the gbp per movement of the euro....works well with hedging, diversifying and so forth you can also take the sigma (gbp)/sigma(euro) to get broad spectrum idea of the the risk.
AVT INVENIAM VIAM AVT FACIAM
  • #3
  • Dec 11, 2012 8:54am Dec 11, 2012 8:54am
I remember reading about a correlation trading strategy back in the day. It was for eurusd and usdchf. Whenever the correlation coefficient drops below average, you initiate you trade in the lagging instrument.
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  • #4
  • Dec 11, 2012 9:06am Dec 11, 2012 9:06am
Quoting TPOTrader
I remember reading about a correlation trading strategy back in the day. It was for eurusd and usdchf. Whenever the correlation coefficient drops below average, you initiate you trade in the lagging instrument.
yeah but it is like everything else, you are still speculating on correlation ....There is a whole array of geo-political events, fiscal policy, monetary policy that can break correlation.

the jpy correlation to the euro is -.13 or so ......that is very weakly negatively correlated. There is a reason for that....the BOJ easing policy
AVT INVENIAM VIAM AVT FACIAM
  • #5
  • Dec 11, 2012 9:22am Dec 11, 2012 9:22am
Quoting the redlion
yeah but it is like everything else, you are still speculating on correlation ....There is a whole array of geo-political events, fiscal policy, monetary policy that can break correlation.

the jpy correlation to the euro is -.13 or so ......that is very weakly negatively correlated. There is a reason for that....the BOJ easing policy

http://www.myfxbook.com/members/Zinke/nh-hedge/201075

this is one year of using my EA basing in correlation!
  • #6
  • Dec 11, 2012 11:33am Dec 11, 2012 11:33am
Quoting Zink
http://www.myfxbook.com/members/Zinke/nh-hedge/201075

this is one year of using my EA basing in correlation!
impressive!!!

I use correlation in my trading as well so I do not want to come off as dismissive

I do want to stand my ground on the fact that correlations breakdown and it is by no means a sure thing.....instruments are affected by their own national forces and events and all price is efficient to certain extent minute to minute, tick to tick. I use it to hedge my exposure on long term positions, increase my market position, diversify ...etc But cannot be the holy grail.
AVT INVENIAM VIAM AVT FACIAM
  • #7
  • Dec 12, 2012 1:53am Dec 12, 2012 1:53am
Quoting Zink
http://www.myfxbook.com/members/Zinke/nh-hedge/201075

this is one year of using my EA basing in correlation!
what pair do you use? when you make decision open position and close position?
  • #8
  • Dec 12, 2012 2:00am Dec 12, 2012 2:00am
If I tried to trade EURUSD and USDCHF colleration, I was expecting a big gap, but it is very risky. I tried EURUSD and GBPUSD, but trades must be open for long. I would like to focus only on EURUSD, but I have no strategy.
  • #9
  • Dec 12, 2012 2:56am Dec 12, 2012 2:56am
This sort of trading can work for a while. I used to do it with stock market indices and made a fair amount of profit. You don't need a stoploss, because you are short one and long the other.
The idea is that the correlated pair will always return to the mean/average.
There comes a time, that the pair will steadfastly move in opposite directions or move apart for an extended period and eventually you will have to pull the plug.
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  • #10
  • Dec 12, 2012 3:06am Dec 12, 2012 3:06am
I should also point out that what you have actually done in your chart is open a long position on EURGBP.
But by opening 2 separate positions, your only achievement is to double the spread.
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  • #11
  • Dec 12, 2012 8:19am Dec 12, 2012 8:19am
Quoting Gumrai
I should also point out that what you have actually done in your chart is open a long position on EURGBP.
But by opening 2 separate positions, your only achievement is to double the spread.

Does it make a difference if you go long 2 lots in 1 currency or 1 lot in 2 currencies? You still pay spread for 2 lots how you divide them doesn't make a difference or am I mistaken?
  • #12
  • Dec 12, 2012 12:37pm Dec 12, 2012 12:37pm
Quoting Kilian19
Does it make a difference if you go long 2 lots in 1 currency or 1 lot in 2 currencies? You still pay spread for 2 lots how you divide them doesn't make a difference or am I mistaken?
You wouldn't go long with 2 lots, just 1.

Long 1 lot EURUSD plus
Short 1 lot GBPUSD is exactly the same as
Long 1 lot EURGBP

The OP is not trading correlation, simply trading long EURGBP
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  • #13
  • Dec 12, 2012 12:43pm Dec 12, 2012 12:43pm
Quoting LazyLobster
Heh-heh... I got one for ya... put on yer favorite indicators on all three charts and wait for the Euro to go up, the Yen to go down, and and buy on the Eur/JPY. Easy Peezy.. Works best on scalping, with MTF IMHO, so I don't use it anymore because swing is my thing. Also, I don't hedge. But you might check it out. Other currencies work as well. I seen similar work using Ichimoku using the Indexes as a map to trade currencies, but never tried it really. Many folks try to avoid correlations by not buying the Pound and the Euro at the same time, because...
Wait for the Euro to go up against what? And wait for the Yen to go down against what?
If you wait for the Euro to go up against the yen and for the Yen to go down against the Euro, what you are waiting for is the EURJPY to go up and then jumping in long. That is called trend trading.
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  • #14
  • Dec 12, 2012 1:01pm Dec 12, 2012 1:01pm
Guys, coleration its bad way for me. I want trade only one pair.
If i want strong singal, i must use big Timeframe, right?
H1 or H4 its ok? And indicators? I dont know, SnR levels,
and? Is somewhere technical analysis online for example
for EURUSD.

Sorry for me bad english, i am from Czech Republic.
  • #15
  • Dec 12, 2012 1:54pm Dec 12, 2012 1:54pm
Quoting Cheezy
Guys, coleration its bad way for me. I want trade only one pair.
If i want strong singal, i must use big Timeframe, right?
H1 or H4 its ok? And indicators? I dont know, SnR levels,
and? Is somewhere technical analysis online for example
for EURUSD.

Sorry for me bad english, i am from Czech Republic.
There are so many different indicators and different traders use them in different ways. There is no magic indicator that will make you a super trader. You have to experiment and find what works best for you.
The higher timeframe charts are more reliable. I find the 5 minute charts very difficult to trade. 15 minute charts are easier and best traded during the London/US sessions.
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  • #16
  • Dec 12, 2012 2:11pm Dec 12, 2012 2:11pm
Quoting Gumrai
There are so many different indicators and different traders use them in different ways. There is no magic indicator that will make you a super trader. You have to experiment and find what works best for you.
The higher timeframe charts are more reliable. I find the 5 minute charts very difficult to trade. 15 minute charts are easier and best traded during the London/US sessions.
Ok sir, thanks for information. I know, i must search good indicators for me.
M15 TF its good for intraday trading? Not give me much false signals?
  • #17
  • Dec 12, 2012 3:03pm Dec 12, 2012 3:03pm
Quoting Cheezy
Ok sir, thanks for information. I know, i must search good indicators for me.
M15 TF its good for intraday trading? Not give me much false signals?
There will always be false signals, they can't be avoided unfortunately. You can only hope to keep those false signals to a minimum.
There are many threads here on FF with different methods, but be aware that most of the posters on the threads will give details of the brilliant trades that they have had AFTER they have happened. You can always find a good trade after it has happened. So don't believe everything that you read.
By all means try out these methods, but don't think that you are doing something wrong when you are unable to get similar results to what others are claiming.

If you have no idea where to start, the best indicator that I use is the DMI. It is the ADX indicator, but only using the +DMI and -DMI.
You could look at the H4 chart and when green DMI is above the Blue DMI only take long trades and vice versa.
Go down to M15 and enter trades when the M15 DMI concurs with the H4 DMI.
You may find that it works for you or that you are able to incorporate it into your own trading style.
Try it out on demo, nothing is infallible.
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  • #18
  • Dec 12, 2012 3:45pm Dec 12, 2012 3:45pm
Quoting Gumrai
There will always be false signals, they can't be avoided unfortunately. You can only hope to keep those false signals to a minimum.
There are many threads here on FF with different methods, but be aware that most of the posters on the threads will give details of the brilliant trades that they have had AFTER they have happened. You can always find a good trade after it has happened. So don't believe everything that you read.
By all means try out these methods, but don't think that you are doing something wrong when you are unable to get similar...
Sir, looks good, u can use for smaller timeframes? I would like try first trading
on small timeframes. Why number 25?
  • #19
  • Dec 12, 2012 4:13pm Dec 12, 2012 4:13pm
Quoting Cheezy
Sir, looks good, u can use for smaller timeframes? I would like try first trading
on small timeframes. Why number 25?
The number 25 is part of the ADX indicator. When the ADX line is above 25 and rising, it indicates the strength of the trend. Note: the rising ADX has no relation to the direction of the trend, just the strength. ie a risng ADX can indicate whether a downtrend is strong and a falling ADX can indicate that a downtrend is weakening.
As I have the ADX line the same colour as the background, it doesn't show, so the 25 is irrelevant.
If you want to see all 3 lines , just put the standard Average Directional Movement Index on your chart, it's under Indicators/trend.

Yes, you can use it in the smaller timeframes, but you will get a lot more false signals, especially when the market is ranging, but that is true of nearly all indicators.
That's why I suggest that you look at the H4 chart first and only trade in the H4 direction.
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  • #20
  • Dec 12, 2012 8:47pm Dec 12, 2012 8:47pm
Quoting the redlion
yeah but it is like everything else, you are still speculating on correlation ....There is a whole array of geo-political events, fiscal policy, monetary policy that can break correlation.

the jpy correlation to the euro is -.13 or so ......that is very weakly negatively correlated. There is a reason for that....the BOJ easing policy

Some currency pairs are co-related to some degree. If you trawl through the Web you should be able to find some currency co-relation tables.

But trading based on the co-relation coefficient alone is just amateur because there are market and geo-political events that can influence a currency pair regardless of their co-relation with other pairs.

Use the co-relation coefficient as one of your factors for your trading decision but you should not be trading off it.
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