Best Thread Correlation Trading - Basic Ideas and Strategies
NVP
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still playing those Tag buys ? :smart:
not pretty though with dow ploughing north.......... so your money your call
at the end of the day if I have to call it - the Tag alignment above the 80 and 20 are what matter here as I have given up trying to incorporate all the multiple news items affecting currencies this week ............
GBP getting hammered again .....
N
not pretty though with dow ploughing north.......... so your money your call
at the end of the day if I have to call it - the Tag alignment above the 80 and 20 are what matter here as I have given up trying to incorporate all the multiple news items affecting currencies this week ............
GBP getting hammered again .....
N
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NVP
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This thread is offering up some gems.....look at this on Correation between currencies commentary below...........
ok - Ignore the "Euro" pairings comment in this argument as we are pure currency correlators here and it seems the rest of the forex community will never let go of correlations being measured between 2 pairs instead of just between pure currencie indexes ......it confuses the hell out of everything and is 100% responsible why so few people trade via strengthmeters........but the penny will drop one day :smart:
http://www.forexfactory.com/showpost.php?p=4394974&postcount=2659
I'll chime in on this one, if you don't mind wallstreet...
IMHO: trading this strategy during any major news on any pair you are in is about the worst possible thing you could do.
here's why: Pairs that are highly correlated for a reason. Although the specifics are always going to differ from one country to another... they all add up to one thing -
correlated pairs = very similar economic circumstance.
Most often this is due to geography (think CAD and USD, or EUR and GBP)
but there are other reasons as well, like similar primary industries, similar consumer habits, similar political structures...etc.
So, the ENTIRE REASON correlated market trading works, is when otherwise closely related currencies become overvalued or undervalued relative to their "current perceived value".
So... when two countries have currencies with a high level of correlation, and one of those currencies rises a great deal in price compared to the other...but there has been no economic reason for this to happen... it doesn't "make sense", and the market will correct it...by buying the lagging currency, selling the leading one...or both.
BUT, major economic news is the one thing that can substantiate a large move in otherwise correlated currencies...and that may permanently alter the degree of correlation...
News of changing economic conditions is the one thing that actually destroys this entire systems reason for existing... because changing economic conditions can affect one currency, while leaving the other untouched...therefore permanently altering the degree of correlation between the two.
Give you an extreme example. USD and CAD are very correlated when compared to EUR.
But...say canada raises interest rates, and the U.S. doesn't. Say...canada raises interest rates a full 2% in 6 months, and the U.S. does not raise interest rates at all.
Now, if you were in a trade from 7 months ago that went short EUR/CAD, but long EUR/USD.... what are the odds that your trade is showing a good profit?
Furthermore, what are the odds that the two currency pairs no longer have such a high correlation (it usually is at or above 80%)
I'd figure a good 10% - 20% drop in correlation is a minimum...AND, it can last a VERY long time.... until the U.S. raises interest rates at least...and then, there may be such a large difference, it can take months or years to correct... and all that while, correlation will be greatly reduced.
An even more basic example. Honda and Toyota are public companies. They both make import cars for U.S. consumers. They are the two top asian car companies in the U.S. As stocks go, these would both have a fairly high degree of correlation.
Then, toyota has a "news release" where it says it's cars have defective braking systems, and it will be recalling the last 3 years to replace the brakes.
Do you think these pairs will still have a high degree of correlation when the market opens tomorrow?
So, again... this system can (and will) have terrible breakdowns due to news announcements. Just ask anyone who trades it through an interest rate announcement
Greg
ok - Ignore the "Euro" pairings comment in this argument as we are pure currency correlators here and it seems the rest of the forex community will never let go of correlations being measured between 2 pairs instead of just between pure currencie indexes ......it confuses the hell out of everything and is 100% responsible why so few people trade via strengthmeters........but the penny will drop one day :smart:
http://www.forexfactory.com/showpost.php?p=4394974&postcount=2659
I'll chime in on this one, if you don't mind wallstreet...
IMHO: trading this strategy during any major news on any pair you are in is about the worst possible thing you could do.
here's why: Pairs that are highly correlated for a reason. Although the specifics are always going to differ from one country to another... they all add up to one thing -
correlated pairs = very similar economic circumstance.
Most often this is due to geography (think CAD and USD, or EUR and GBP)
but there are other reasons as well, like similar primary industries, similar consumer habits, similar political structures...etc.
So, the ENTIRE REASON correlated market trading works, is when otherwise closely related currencies become overvalued or undervalued relative to their "current perceived value".
So... when two countries have currencies with a high level of correlation, and one of those currencies rises a great deal in price compared to the other...but there has been no economic reason for this to happen... it doesn't "make sense", and the market will correct it...by buying the lagging currency, selling the leading one...or both.
BUT, major economic news is the one thing that can substantiate a large move in otherwise correlated currencies...and that may permanently alter the degree of correlation...
News of changing economic conditions is the one thing that actually destroys this entire systems reason for existing... because changing economic conditions can affect one currency, while leaving the other untouched...therefore permanently altering the degree of correlation between the two.
Give you an extreme example. USD and CAD are very correlated when compared to EUR.
But...say canada raises interest rates, and the U.S. doesn't. Say...canada raises interest rates a full 2% in 6 months, and the U.S. does not raise interest rates at all.
Now, if you were in a trade from 7 months ago that went short EUR/CAD, but long EUR/USD.... what are the odds that your trade is showing a good profit?
Furthermore, what are the odds that the two currency pairs no longer have such a high correlation (it usually is at or above 80%)
I'd figure a good 10% - 20% drop in correlation is a minimum...AND, it can last a VERY long time.... until the U.S. raises interest rates at least...and then, there may be such a large difference, it can take months or years to correct... and all that while, correlation will be greatly reduced.
An even more basic example. Honda and Toyota are public companies. They both make import cars for U.S. consumers. They are the two top asian car companies in the U.S. As stocks go, these would both have a fairly high degree of correlation.
Then, toyota has a "news release" where it says it's cars have defective braking systems, and it will be recalling the last 3 years to replace the brakes.
Do you think these pairs will still have a high degree of correlation when the market opens tomorrow?
So, again... this system can (and will) have terrible breakdowns due to news announcements. Just ask anyone who trades it through an interest rate announcement
Greg
NVP
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and another post...........the dudes on fire
I love this thread but the allure of this system to beginners (and some experienced traders) is that they are constantly seeing net losing positions switching to positive pips again and again ........
The human brain then determines that since the positive "bus" will eventually come along you just sit and wait regardless of the drawdowns ...............and I saw some proposals there re martingaling the loss postions (but not from the main players)
Trading strengtmeters in a basket envionment using EA's is a dangerous game in my book................I dont mind a machine making a noise to tell me to buy or sell............but i'm not giving it my money to trade.........at least not at these low levels of sophistication offered by standard Mt4 software, forum programmers and platforms
I would love to experiment with multiple hedgding systems when the G8 markets is in mega divergence phases (ie when all the currencies are involved in diverging north or south big time).....but even then I would need a system that monitored the total overall basket porfit or loss position and was therefore able to close all positions if the net position went below a predetermined loss level (call it a portfolio stop loss) - something i'm sure the banks and big institutions have
http://www.forexfactory.com/showpost.php?p=4402038&postcount=2707
And here is one reason why trading is so difficult for most people. Most trades one enters are both profitable and unprofitable for some period of time... I mean, who sells the EXACT high before their profit is hit? and on the other side, how often to markets push so fast that an entry price is never profitable before it hits your target?
Since the vast majority (95%+?) are both at LEAST 1 pip profitable and 1 pip unprofitable during some moment during the trade, the question isn't
"since this method/system/etc shows a loss while it is open, why don't I trade the opposite?"
the question really is:
"since ALL systems/methods etc. show both profit AND loss during the time the trade is on... which system will win enough money, enough times, to overcome the losses and show a consistent profit)"
So forget the whole "i got in a trade, and it showed a loss for a period of time before it made a profit" thought. this will ALWAYS be the case unless you sell/buy the exact high/exact low of a move, AND if your profit target is hit before that move reverses.
As an example, I don't trade this method yet (though I will start testing it soon), but my trading record for february so far is over 70% winning trades... yet when I look back at each trade, I find that EVERY SINGLE ONE showed a loss greater than the spread at some point, and many showed a loss for the first half of the time that the trade was on.
You need to determine 3 points in a trade: An entry, a stop loss, and a target. The secret to profitable trading is knowing that your target will be hit more than your stop loss, OR that your profits will make more money than your losses will give up, or both.
But between the time your target is hit, or your stop loss is hit...you can expect 95%+ trades to be both profitable and unprofitable until they finally hit one of those two points.
Since every successful trading method requires 3 points: An entry, a stop, and a target, why don't you ask yourself the following question:
"If I try to trade the reverse of this system, what rules will I have for entering, taking profits, OR taking losses." I think you'll find entering a trade is the easy part...but coming up with rules that are consistently profitable for profit targets and stops will be very difficult for you to objectively define.
Hope this helps!
Greg
I love this thread but the allure of this system to beginners (and some experienced traders) is that they are constantly seeing net losing positions switching to positive pips again and again ........
The human brain then determines that since the positive "bus" will eventually come along you just sit and wait regardless of the drawdowns ...............and I saw some proposals there re martingaling the loss postions (but not from the main players)
Trading strengtmeters in a basket envionment using EA's is a dangerous game in my book................I dont mind a machine making a noise to tell me to buy or sell............but i'm not giving it my money to trade.........at least not at these low levels of sophistication offered by standard Mt4 software, forum programmers and platforms
I would love to experiment with multiple hedgding systems when the G8 markets is in mega divergence phases (ie when all the currencies are involved in diverging north or south big time).....but even then I would need a system that monitored the total overall basket porfit or loss position and was therefore able to close all positions if the net position went below a predetermined loss level (call it a portfolio stop loss) - something i'm sure the banks and big institutions have
http://www.forexfactory.com/showpost.php?p=4402038&postcount=2707
And here is one reason why trading is so difficult for most people. Most trades one enters are both profitable and unprofitable for some period of time... I mean, who sells the EXACT high before their profit is hit? and on the other side, how often to markets push so fast that an entry price is never profitable before it hits your target?
Since the vast majority (95%+?) are both at LEAST 1 pip profitable and 1 pip unprofitable during some moment during the trade, the question isn't
"since this method/system/etc shows a loss while it is open, why don't I trade the opposite?"
the question really is:
"since ALL systems/methods etc. show both profit AND loss during the time the trade is on... which system will win enough money, enough times, to overcome the losses and show a consistent profit)"
So forget the whole "i got in a trade, and it showed a loss for a period of time before it made a profit" thought. this will ALWAYS be the case unless you sell/buy the exact high/exact low of a move, AND if your profit target is hit before that move reverses.
As an example, I don't trade this method yet (though I will start testing it soon), but my trading record for february so far is over 70% winning trades... yet when I look back at each trade, I find that EVERY SINGLE ONE showed a loss greater than the spread at some point, and many showed a loss for the first half of the time that the trade was on.
You need to determine 3 points in a trade: An entry, a stop loss, and a target. The secret to profitable trading is knowing that your target will be hit more than your stop loss, OR that your profits will make more money than your losses will give up, or both.
But between the time your target is hit, or your stop loss is hit...you can expect 95%+ trades to be both profitable and unprofitable until they finally hit one of those two points.
Since every successful trading method requires 3 points: An entry, a stop, and a target, why don't you ask yourself the following question:
"If I try to trade the reverse of this system, what rules will I have for entering, taking profits, OR taking losses." I think you'll find entering a trade is the easy part...but coming up with rules that are consistently profitable for profit targets and stops will be very difficult for you to objectively define.
Hope this helps!
Greg
NVP
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hey all
i'm nearly at close on this thread...heres a nice summary , but remember they all constantly refer to correlation based on 2 PAIRS correlating (and not 2 single currencies as I do on the FXcorrelator)
assuming the pairs are sharing 1 common currency lets say this is E/U (black) and G/U (red) below...........what doesnt this deviation between the Euro and the GBP tell us using a standard pair chart ?
Ans - what the Usd is doing in terms of direction and volatility..........and thats vital to anything I am going to design....
Still a great great thread though
Many thanks DL/others to bring the concept of correlation into light...I was always curious how this concept can be traded in the forex market.
So let me see if I got the picture right...pls correct me if I am wrong!
Attached picture is the conceptual idea of trading a positive correlation:
pair A in black
pair B in red
Event A: Both pairs moving in the same direction along with their stoch...
Event B: Pair B moves away from Pair A, stochA -> overbought > 80
stochB -> oversold < 20
Event C: Pair B resumes correlating with pair A along with their stoch...
During Event B: Sell pair A & Buy pair B when stoch diff >60 (80-20)
Exit when stoch diff <= 50
Attached Thumbnails
i'm nearly at close on this thread...heres a nice summary , but remember they all constantly refer to correlation based on 2 PAIRS correlating (and not 2 single currencies as I do on the FXcorrelator)
assuming the pairs are sharing 1 common currency lets say this is E/U (black) and G/U (red) below...........what doesnt this deviation between the Euro and the GBP tell us using a standard pair chart ?
Ans - what the Usd is doing in terms of direction and volatility..........and thats vital to anything I am going to design....
Still a great great thread though
Many thanks DL/others to bring the concept of correlation into light...I was always curious how this concept can be traded in the forex market.
So let me see if I got the picture right...pls correct me if I am wrong!
Attached picture is the conceptual idea of trading a positive correlation:
pair A in black
pair B in red
Event A: Both pairs moving in the same direction along with their stoch...
Event B: Pair B moves away from Pair A, stochA -> overbought > 80
stochB -> oversold < 20
Event C: Pair B resumes correlating with pair A along with their stoch...
During Event B: Sell pair A & Buy pair B when stoch diff >60 (80-20)
Exit when stoch diff <= 50
Attached Thumbnails
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NVP
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hey all
a few changes coming to my thread from tommorow
1) the usual morning, lunchtime and pm roundup post of my normal standard fxcorrelator
(80/20's and the Dow)
BUT - no more endless posts from me regarding interim action (which have been at times more like Tweets really havnt they)....I havnt got the time and i'm sure they are distracting and tedious for anyone folowing this thread
anything I load here I want to be more useful to us all as either discussing things or helping one another ......an ongoing commentary of the tags journey is only for chatrooms !!
I want to talk and share a lot more about convergence plays as well as you will see over
the next 24 hours
N
a few changes coming to my thread from tommorow
1) the usual morning, lunchtime and pm roundup post of my normal standard fxcorrelator
(80/20's and the Dow)
BUT - no more endless posts from me regarding interim action (which have been at times more like Tweets really havnt they
)....I havnt got the time and i'm sure they are distracting and tedious for anyone folowing this thread anything I load here I want to be more useful to us all as either discussing things or helping one another ......an ongoing commentary of the tags journey is only for chatrooms !!
I want to talk and share a lot more about convergence plays as well as you will see over
the next 24 hours
N
NVP
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hey all
In order to talk about convergence plays we need to be sharing the same screens and settings
heres a new variation of the mighty FXcorrelator and i've also loaded here a template to attach to it once you have it working...............
i'll explain in the next thread what it does and what those bands do :smart:
if people can do some simple research on the internet re using Mt4 to ensure they know how to load this indicator properly and also how to load a template it will cut down a lot on responding to helping people on this thread
note loading the indicator is virtually the same as the insructions at this post
Page 448 Post #3580
cheers
NVP
In order to talk about convergence plays we need to be sharing the same screens and settings
heres a new variation of the mighty FXcorrelator and i've also loaded here a template to attach to it once you have it working...............
i'll explain in the next thread what it does and what those bands do :smart:
if people can do some simple research on the internet re using Mt4 to ensure they know how to load this indicator properly and also how to load a template it will cut down a lot on responding to helping people on this thread
note loading the indicator is virtually the same as the insructions at this post
Page 448 Post #3580
cheers
NVP
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Kruspe_Svk
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Hey N,
finally I´m back for a while (still busy :|),
oh, great convergence template, I´m glad you give your attention to convergences again. I can´t wait what you (hope we) will find about that :smart:
btw. do you use any other currency strength meters, or something like that ?
thx, K
NVP
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ok
the attachment below shows what you s/be seeing on loading the indicator and then loading on the template I have provided
we have
1) the central Zero dotted line
2) 2 Greeny lines ( 1 above / 1 below Zero) that represent the Neutral Zone where Curencies like to hang out inside when they are just crusing in chill mode......this is where we are also hoping at least 1 of our convergence trade candidates will end up if we make a trade.....
think of it like in baseball as when the player is running for 4th base and dives in to win the innings ......we will need this to be happening regularly to make mega money on our trades !
3) 2 medium size red Touchdown lines...............c'mon you know these guys as they generate my famous the Jackson 5 TOUCHDOWN VIDEO !
4) 2 new thick Red Hyperextension lines............jees think of this as if the football player has run through the touchdow line and then ouy of the damn stadium !!.....a currency out here is at 98%+ normal divergence....and the air is very very thin !!
sooo there are the lines .......next how it works
N
the attachment below shows what you s/be seeing on loading the indicator and then loading on the template I have provided
we have
1) the central Zero dotted line
2) 2 Greeny lines ( 1 above / 1 below Zero) that represent the Neutral Zone where Curencies like to hang out inside when they are just crusing in chill mode......this is where we are also hoping at least 1 of our convergence trade candidates will end up if we make a trade.....
think of it like in baseball as when the player is running for 4th base and dives in to win the innings ......we will need this to be happening regularly to make mega money on our trades !
3) 2 medium size red Touchdown lines...............c'mon you know these guys as they generate my famous the Jackson 5 TOUCHDOWN VIDEO !
4) 2 new thick Red Hyperextension lines............jees think of this as if the football player has run through the touchdow line and then ouy of the damn stadium !!.....a currency out here is at 98%+ normal divergence....and the air is very very thin !!
sooo there are the lines .......next how it works
N
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NVP
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how it works :smart:
ok its pretty simple really...........the distance between each band is about the same and represents 1 band - ok ?
the higher the number of bands between 2 currencies = the higher the potential for them to retrace and generate some pips
if you are happy with the Gap then sell the higher and buy the lower as a pair as they both start to retrace.....dont trade until at least 1 starts retracing !! :whistling
sooo - at the max levels of 6+ bands between 2 currencies (see below) bet your grandmother on that trade as it CANNOT get any better (well nothings 100% but its sure close):smart:
there are some more subtle rules coming next so dont dissapear !!!
N
ok its pretty simple really...........the distance between each band is about the same and represents 1 band - ok ?
the higher the number of bands between 2 currencies = the higher the potential for them to retrace and generate some pips
if you are happy with the Gap then sell the higher and buy the lower as a pair as they both start to retrace.....dont trade until at least 1 starts retracing !! :whistling
sooo - at the max levels of 6+ bands between 2 currencies (see below) bet your grandmother on that trade as it CANNOT get any better (well nothings 100% but its sure close):smart:
there are some more subtle rules coming next so dont dissapear !!!
N
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NVP
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i'm going to finish by bringing some Correlation rules in to help you
any pairs in the same tribes can be traded on lower Band extentions
I would be tempted at 3 bands for any combos here and if it goes
higher before you enter even better (we need to refine these though) !
Group 1 - Euro, GBP and CHF any combo
Group 2 - CAD,Yen,USD
Group 3 - AUD and NZD....(and i'll pay you a £1m if they ever get above 4)
target a 1 band convergence from entry or even better - a target pip level
We will be discussing this over the weeks now re exit
any other combo is 4 or above to trigger and again target some set pips or a 2 band currency fall as you can generate some fast moves from these dudes - smash and grab !
will add rules to this as we progess but thats enough for now corrie compardres ....lets see what happens and shout if you see one from tomorrow - i'd love a few volunteers to help test drive and tune this with me
bring it on ........Corries got a brand new bag
N
any pairs in the same tribes can be traded on lower Band extentions
I would be tempted at 3 bands for any combos here and if it goes
higher before you enter even better (we need to refine these though) !
Group 1 - Euro, GBP and CHF any combo
Group 2 - CAD,Yen,USD
Group 3 - AUD and NZD....(and i'll pay you a £1m if they ever get above 4)
target a 1 band convergence from entry or even better - a target pip level
We will be discussing this over the weeks now re exit
any other combo is 4 or above to trigger and again target some set pips or a 2 band currency fall as you can generate some fast moves from these dudes - smash and grab !
will add rules to this as we progess but thats enough for now corrie compardres ....lets see what happens and shout if you see one from tomorrow - i'd love a few volunteers to help test drive and tune this with me
bring it on ........Corries got a brand new bag
N
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NVP
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and heres the trailer that gives you a flavour!!!........:smart:
you dont need the indicator in the video now as i have given you a new improved one
in the earlier 2 threads - same rules though re the suffix stuff
the touchdown line makes an appearence and again dont worry its in the template ive provided you with that previous post - in fact you now have 6 !!
NOTE - on the new settings we now have that EUR/CAD trade equates to 4.5 band width
max before it retraced
N
you dont need the indicator in the video now as i have given you a new improved one
in the earlier 2 threads - same rules though re the suffix stuff
the touchdown line makes an appearence and again dont worry its in the template ive provided you with that previous post - in fact you now have 6 !!
NOTE - on the new settings we now have that EUR/CAD trade equates to 4.5 band width
max before it retraced
N
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NVP
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practice makes perfect...........
heres last 3 days...........tell me what you see
i'll actually give you a hint to save the eyeball pain...........only currencies outside the first (inside) red bar will be potentially tradable so focus on them and possible combinations
if nothing is outside the reds then no covergence trades are available
(and you should be trading my 80/20 tag team stuff !!!!!)
make it easier ?...........Now tell me fridays big trade !!!
N
heres last 3 days...........tell me what you see
i'll actually give you a hint to save the eyeball pain...........only currencies outside the first (inside) red bar will be potentially tradable so focus on them and possible combinations
if nothing is outside the reds then no covergence trades are available
(and you should be trading my 80/20 tag team stuff !!!!!)
make it easier ?...........Now tell me fridays big trade !!!
N
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NVP
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hey all
again I'd like to say........please please dont be put of by my light and breezy approach to trading and training........it doesnt have to be serious looking dudes with 50 years in a pit to be good stuff.....believe me
this stuff rocks , and it will get much better with your help
N
again I'd like to say........please please dont be put of by my light and breezy approach to trading and training........it doesnt have to be serious looking dudes with 50 years in a pit to be good stuff.....believe me
this stuff rocks , and it will get much better with your help
N
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Kruspe_Svk
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Jees N,
you are offering a damn good stuff, great job sir,
I've just watched your trailer and that´s it, the way how I´d like trade...when some currency cross your touchdown lines it´s only matter of time to came back (and I take it as only one sureness of forex, or it´s only my wrong feel ?)
btw. I´m little confused about currency correlations (I have to deeply think about it, some helpfull ideas how to solve my problem, or show me the way ?) ... can I somehow discover it from pairs correlation ?
thx K
you are offering a damn good stuff, great job sir
,I've just watched your trailer and that´s it, the way how I´d like trade...when some currency cross your touchdown lines it´s only matter of time to came back (and I take it as only one sureness of forex, or it´s only my wrong feel ?)
btw. I´m little confused about currency correlations (I have to deeply think about it, some helpfull ideas how to solve my problem, or show me the way ?) ... can I somehow discover it from pairs correlation ?
thx K
