Best Thread Correlation Trading - Basic Ideas and Strategies

[NVP]

the ole corrie index is not a bad little tool actually I am gradually concluding....

heres it stripped down on a 5m 20ma corrie setting + a 4h chart with just the USD on there (not replicatable on a pair chart) and gold.....look at the crosses )......interesting ?

remember - most people can only compare traditional Usd pairs to the gold price (eg G/U or E/U) and then proclaim that there is x or y % correlation........but we go one step further dont we ....

my humble opinion is that GBP and a few of the other G8's have no relationship whatsoever with gold........

its the direct 1 to 1 USD vs Gold that is the important relationship as seen through the corries eyes (or any good strength meter)....nothing else can do it

the FXcorrelator "brings currencies to life" and shows their unique characteristics that remain unseen on normal pairs charts.....this thread is all about correlation and you cannot talk forex correlation without identifying the participants seperately in their own natural environment

so heres Correlation 101..........USD generally moves oppositely to Gold price (very useful to use in any USD forex pair play) and when it doesnt that is just as important as it gives you an indication of USD's strength is resisting the "normal" bias....

later........
N

 

[NVP]

Yen Verses S&P ?

heres my second market correlation principle isolated on same corrie index chart.....

I think that S&P30 (WS30 on metatrader) follows yen inversely due to the classic principle of the carry trade.............when markets are rising traders sell yen at low interest rates costs to fund higher yielding returns and potential captial gains on markets and other currencies

again forget Yen pairs.......I think that a lot of the G8 currencies have no relationship whatsover with the markets....

so what do you think ?...........the 5m yesterday was actually cac re correlation but heres the 1h and 4h .....convinced at all ?

personally I think this baby is more useful sometimes identifying when the yen is not moving oppositely to the S&P as it gives clues to its preferred bias when market reverses....

answers on a postcard :smart:
N

 

[NVP]

and last but not least....another of my main "power laws" of correlation

"the Yen and the USD (the Tag team) shalt move together in correlation at all times
and if they are not, then woe betide the trader as the the markets become more difficult to predict....."

i'll tell you why I like the tag correlating as its rediculously simple and uses a second fundamental power law of forex correlation....

forex is a Zero sum game......in other words if you take the G8 currencies on a corrie chart the total of their strength values MUST equate to zero......everything always balances out

so....when your 2 biggest players in global currency volumes traded decide to walk the same path, then guess what......the chances that the majority of other G8 currencies are moving in the opposite direction increases exponentially, providing excellent high probability trading opportunites

and thats why I like the tag to walk the same path.........

Heres the 2 dudes below walking the walk on a 20ma corrie setting 1h and 4h......

waddya think ?
N

 

[NVP]

you heard me moaning yesterday that correlation was poor.....well heres a 15m of last few days.....yesterday was average anyway and then the NFP's made it worse......as I say before if the tag walk the same path then the the profitability of trading other pairs (eg Europair) increases exponentially...........other normal trading rules still pertaining of course

also note how much faster/Volatile the yen is in the direction they both agree on (see how it extends out beyond the USD?).............another trading opportunity I want to discuss at some point...

later....:smart:
N

N

 

[jrplimited]

Hi N,

We got loads of the white stuff here as well - snow I mean and not the sniffing talc powder!

Some great pics and little gem observations above from you yet again. Interesting how yesterday's [Friday] nfp day actually held up remarkably well on the corrie front considering the chaos that it produced when the data was released - notice how the gap up was eventually "filled" when the market retreated late in the afternoon, thats market efficiency for you. BTW; I know phreddy goes for weekend gaps and does very well with that type of strategy.

I like seeing "raw" corrie in the guise of M15 and M5 charts side-by-side displaying only my favourite three of E, G and U and thats how I look for triggers as the M15 gives me an overview of direction, whilst the M5 gives me entry and exit points. Based upon that setup I can then look for that great corrie play of who is the boss and who is the whipping boy and also look to see if the boss starts to exhibit signs of faltering (ie a political coup starts, we Brits are infamous for that after this week!) becuase when that happens the corrie will highlight a challenger for bringing into play.

As you know, I'm not a fundemental person when it comes to fx and what the future holds but two things always remain firmly in the back of mind whenever trading and they are:-

a) UK and USA economies are very fragile, debt is high, political agenda spending has yet to be curbed, treasury (Gits, T-Bonds etc) debt issues are becoming harder to "sell" to the markets, maybe requiring boost through interest rates. The UK is the worse of the two but the US wont take much bad news to turn around their so called faint recovery.

b) Euro zone economies are all over the place right now with Germany and France slowly recovering but also having to pull almost all second and third tier economies with them, how much dragging of a three wheeled cart will theses two powerhouses of the Euro zone tolerate? Greece's credit rating downgrade demonstrates just one aspect the ECB has to address as I suspect that will happen to a few other countries, the other is it's fiscal "rule" concerning borrowings expressed against income - just how many constituants of the Euro zone actually conform to that right now? - as this will be tested to extremes very soon unless the "recovery" shoots into stellar orbit; another pig just flew past my window when I wrote that....

Those two spine chilling thoughts always have me emphasising short trades as opposed to long trades at the moment - ie I'll look to let a short trade "run" further than a long trade, because one of these days I might get lucky and be in a short play when some unexpected bad news gets out!

I've got two lovely youngish daughters and when I think about the UK's debt problem and how the future generations are going to have to pay that off, the whole affair is very worrying indeed. Eeek! Writing that lot makes me want to reach for a bottle of the red nectar and drown my sorrows, and its still daylight.... Someone call the Betty Ford clinic for me please!

Have a good weekend and regards,
Simon.

 

[NVP]

Hi N,

We got loads of the white stuff here as well - snow I mean and not the sniffing talc powder!

Some great pics and little gem observations above from you yet again. Interesting how yesterday's [Friday] nfp day actually held up remarkably well on the corrie front considering the chaos that it produced when the data was released - notice how the gap up was eventually "filled" when the market retreated late in the afternoon, thats market efficiency for you. BTW; I know phreddy goes for weekend gaps and does very well with that type of strategy.

I like seeing "raw" corrie in the guise of M15 and M5 charts side-by-side displaying only my favourite three of E, G and U and thats how I look for triggers as the M15 gives me an overview of direction, whilst the M5 gives me entry and exit points. Based upon that setup I can then look for that great corrie play of who is the boss and who is the whipping boy and also look to see if the boss starts to exhibit signs of faltering (ie a political coup starts, we Brits are infamous for that after this week!) becuase when that happens the corrie will highlight a challenger for bringing into play.

As you know, I'm not a fundemental person when it comes to fx and what the future holds but two things always remain firmly in the back of mind whenever trading and they are:-

a) UK and USA economies are very fragile, debt is high, political agenda spending has yet to be curbed, treasury (Gits, T-Bonds etc) debt issues are becoming harder to "sell" to the markets, maybe requiring boost through interest rates. The UK is the worse of the two but the US wont take much bad news to turn around their so called faint recovery.

b) Euro zone economies are all over the place right now with Germany and France slowly recovering but also having to pull almost all second and third tier economies with them, how much dragging of a three wheeled cart will theses two powerhouses of the Euro zone tolerate? Greece's credit rating downgrade demonstrates just one aspect the ECB has to address as I suspect that will happen to a few other countries, the other is it's fiscal "rule" concerning borrowings expressed against income - just how many constituants of the Euro zone actually conform to that right now? - as this will be tested to extremes very soon unless the "recovery" shoots into stellar orbit; another pig just flew past my window when I wrote that....

Those two spine chilling thoughts always have me emphasising short trades as opposed to long trades at the moment - ie I'll look to let a short trade "run" further than a long trade, because one of these days I might get lucky and be in a short play when some unexpected bad news gets out!

I've got two lovely youngish daughters and when I think about the UK's debt problem and how the future generations are going to have to pay that off, the whole affair is very worrying indeed. Eeek! Writing that lot makes me want to reach for a bottle of the red nectar and drown my sorrows, and its still daylight.... Someone call the Betty Ford clinic for me please!

Have a good weekend and regards,
Simon.

Hi Mate

I sympathise re your worries helping the next generation....my teenage niece and nephew also face a new world where earning a living provides totally different challenges to 20 years ago....employment is gradually evolving into more fragmented segments where any good well paid job (from 5 years at univ) will bury you by 30 (long hours mega responsibility and impossible targets)....part time will become more prevalent....and any attempt to run a small business will become even more mired in red tape and taxes....same across the west so we are not alone....and standards will fall even though we will all try to ignore it with newer phones, Gadgets and another 2,000 cable channels to drug us all into denial and a fuzzy haze of reality......

the new markets all come from historic poverty and low income expectations so they are hungry and do not have anything to lose......jees its frightening how our levels of comfort and satisfaction in the west are so different....global markets are shifting

also totally agree on all finance comments above........the more I study the markets and read expert commentaries the more I realise the world is becoming a much more volatile place to make a buck and that the old adage of solid pensions funds and savings and risk allocation blah blah just aint worth a toss anymore....

volatility is becoming king and I actually am starting to realise that we are on the fronteer of possibly the best ever time to trade FX as long as you know your stuff..........its always liquid and generally will behave fairly predictably if you know what your looking for and what you are doing ...i'd back trading it anyday against commodities or even equities over the next year of turmoil.....

cant wait...........just a bugger i'm full time elsewhere but where theres a will theres a way......for example how can a FX researcher/non-trader have 20,000+ views on a best T2W thread ?

although as discussed before.....having you riding shotgun with the pro calls and observations is a real boost to the site so thanks again.....

that reminds me ......wheres phreddy and his 3 duck action .....phreddy are you still around?......

more observations here over the weekend...........I have all the time in the world at the moment to post unless the wife kills me due to us being trapped in house together for much to long now

N

 

[NVP]

Hi all

the weekend weather is giving me the opportunity to do a lot of thread surfing across FF and TSD-forex sites and also been corresponding with JRP and chewing some corrie Cud...

Jees......without giving to much away the more i learn about JRP the more I realise how experienced and talented he is as a trader and how lucky i am to have him posting here....if only he would wear that Karen Brady dress for me then i would be in Trading heaven....

on the Thread lurking front I find myself drawn a lot to Basket/Hedge trading and relative currency strength threads as they are what a lot of my observations are based on....I cant talk (drone ? ) about currency relationships without having my corrie (a strengthmeter) seperate them out and identify them as individual entities for analysis and discussion.

heres one of the best examples of a good thread......a few indicators thrown in and some good analysis from contributors who follow the way of the strengthmeters.....

http://www.forexfactory.com/showthread.php?t=109599
(ps posts # 14,39,54 and 83 are real gems....also ForexHarry's shameful touting of the Heatmap software is almost embarrassing, but some of his points are quite interesting....and someone from the james 16 group even posts at times......:smart:.)

Generally though most of these threads eventually wither and die because :-

1) Strengthmeters are great to show relationships but no one can ever seem to agree on entry points and exit points or strategies to capitalise on what they see....theres a lot of chopping and changing trying to incorporate every nuance of the markets (inevitably) unpredictable behaviour at times which means that good ideas are buried due to chasing the market....

2) a lot of the devised strategies are basket/Hedge style approaches (multiple pair entries that claim to self balance and correlate together) that means no Stop losses can be used although they claim synthetic stop losses exist within the systems themselves........this is a big no no for most traders

3) the systems all appear to be mainly based on convergence signals (eg the E/U and CHF/U charts could show a high divergence and the Euro and CHF normally move together so they must converge back........musnt they ? :whistling).......most traders prefer trend following or some sort or another as core to their trading strategies

4) multiple entries mean multiple trades and normally EA's (automated trading) are used to manage the system.............do I need to talk about most traders fears re EA's ?

5) the systems are self contained and do not allow the trader an opportunity to incorporate experience and subjectivity to the trade.......although this can be done quite easily I believe....

6) with the greatest respect most of these threads are very academically driven by phd style programmers who focus on getting the coding polished and tidy rather than the results being generated....and if you cant programme something into the indicator (ie trader sixth sense and experience, price action etc etc) wheres the academic fun it that ? :whistling

7) strengthmeters, heatmaps and associated systems are as dry as crackers to most traders...shiny and pretty, but not as good as some simpler indicators and old fashioned screen time

so in short I am learning a lot as I go .........but am pretty comfortable sticking to my ideas as they are developing here on this thread - just trying to incorporate my simple "power law" correlation rules (inter forex & other markets) together with price action principles, plus the fundamental effects of news releases (although that bit is still lacking from the jigsaw a lot).....

in developing your own style and strategies - slowly slowly catchy monkey and never add something that doesnt truely contribute positively to the mix....its just baggage and will only overcomplicate things ultimately (although its always worth constantly trying and testing such things like I do here and on my more private forum)

later.......
NVP

 

[NVP]

Hmmmmm


as I sit here surfing FF threads and drinking coffee a rediculous quesion has to be asked.....

are there any brokers actually offering intraday trading on synthetically created currency indices ?

eg does anyone offer trades on the us dollar index intraday.....or the yen index or the Euro index etc etc etc ?

this is from that thread I suggested in previous post

I don't have the time to program this myself. If I did, I would use good baskets with published formulas [e.g. The Markit iBoxxFX indices]. An alternative, which may have been mentioned here, is the MT4 platform from ForexLTD (US$ and EUR indexes only), or Straighthold Investment Group, Inc. but their baskets are somewhat odd.

could save me a lot of time and pain !
N

 

[NVP]

W/C 11th update

ok fight fans....heres the 1000/1 corrie on the right and my infamous corrie index on the left (similar high MA setting to show real time price movements) both on a 4H T/F

what do we see ?

right lets look at the markets (left chart) first.....the markets are all displaying good positivity arnt they....ok Dax (blue) and S&P30 (Grey) are more flattish, but to me everything says markets are doing ok so Tag s/be relatively in a downwards bias at moment

and they are (right chart).....usd (green) took a recent hit (gold up) and therefore could still be considered bearish as well as the more obvious Yen (Yellow)....

generally this action would have indicated some nice buy europair/sell tag trades but the Europair are languishing as you can see below everthing.....just shows how depressing the news is at present for these guys and will take something a lot more positive to lift the gloom and the prices next week....

meanwhile the 3 traditional Commodity currencies are riding high and have been the best trades to make against the Tag in recent weeks......

So what should we trade ?

aaahhh.......thats the secret isnt it.....depends what pairs you want to trade and also what news is coming next week....

generally if the markets keep holding or even moving up then Tag should stay suppressed and will allow some nice sells.....I would guess that USD may retrace up a little early next week as it has fallen fallen quite a way into a resistance line now ....(use lower TF and gold falling to help confirm)......if it breaks thru that line well fill your boots selling it

Trade GBP opposite to USD and use those S/R levels shown as breakout signals.....

Euro looks a little over cooked (?)....watch that resistance line

is AUD overbought now and heading for a fall ?......well NZD (turquoise) seems to be falling now and CAD (Brown) retraced but that doesnt mean that AUD will fold...that needs some bad catalyst news....or other non tags getting real good news and moving back upwards against it....

so thats it.......prediction is for gypsies and economists - neither of whom I suggest you ever believe...or give money to .....

until tomorrow
N

 

[montmorencyt2w]

Hi Neil et al,

Well I haven't had the time to devote to this thread that I would have liked, but I like to keep in touch from time to time.

I mentioned once before Ashraf Laidi, and just thought it might be worth mentioning him again (www.ashraflaidi.com) .

He does talk about correlation, but maybe it's from a slightly different approach to yours. Actually I don't think anyone else is doing exactly what he is doing (at least not for free on the web). He calls it intermarket analysis, and it seems to be an interesting mix of fundamentals (news/data releases and similar), and technical analysis.

My own trading at the moment is quite heavily influenced by Ashraf' Laidi's approach and analysis, plus a bit of price action, gut instinct and seat-of-pants. I have also been influenced by www.thegestalt.com (Chris Matthews), and what he calls "Global Macro". (Having said that, CM was plugging The Correlation Code guys quite heavily at one time, which made me go "hmm....").

I used to be a pure "price action" person, but became a little disillusioned after seeing so many apparently random and unexpected (by me) moves, and thought to myself that there must be a bit more to it than the way particular price bars fall out together. The market moves for a reason or for many reasons, and I set out to try to learn about the way the markets fitted together.

Correlation comes into this, but in a way it's a bit like price action. It's all very well to know that pair A/B are correlating with pair X/Y and also with stock index Z, but wouldn't it be even better to know why? If one can do that, then maybe it's taking it to the next level.

Anyway, for what it's worth, and paraphrasing heavily, AL is currently bullish on USD, bearish on EUR/USD, bearish GBP/USD, bullish Oil, probably bullish Gold (maybe after a dip). This is medium term stuff, and there may still be some fallout in the other direction for a while, following NFP.

I personally trade 1H+ charts and try to hold for at least several days, but I also like to take money off the table, so I don't always manage to hold more than a day. I'm not afraid to use large stops. My views on risk:reward are probably a bit unorthodox. I'm also slightly influenced by "Bird Watching in Lion Country".


OK, time to watch Wallander, then it's nearly time for the markets to open

 

[phreddyinbg]

Where's phreddy? You might well ask...internet problems from thursday last. Links to broker very patchy, cable feed on and off, today we will lose power for most of the day due to installation of some gubbins...

OK were off: USD at the bottom of the pile and Oz$ at the top.
USD/AUS has opened and gapped up and continued up...will it come back to fill the gap?

 

[jrplimited]

Hi phreddy,

Welcome back! Sounds like you had loads of problems lately.

I just managed to catch your post before retiring for the night (red nectar sleeping juice is kicking in!) as I was setting up mt4 ready for this morning's oncoming bun fight.... Can see the gap you are referring to and usually (as you know) the market "efficiency" will at some point re-visit this in the guise of filling the void.

Gaps of EU and GU are some of the best as they frequently get filled before the following day's full session really gets under way, unfortunately though for me these cannot be followed as giggling juice effects hit before anything actually happens - unless I havent got the specs on, in which case price graphs alaways appear to be doing exactly what they are really not doing. Eeek!

Have a good one finding those gaps and trade well - best regards,
Simon.

 

[NVP]

Hi all


now I have internet acccess (as you can see from my postings at weekend)

but this morning the (steam driven?) ole main PC would not start.....

it has now after a few choice words but must be something wrong with
the switch....PC your days are numbered (when I can get to pc world !)

(update coming and I'll respond to the posts above)
N

 

[NVP]

Hi Neil et al,

Well I haven't had the time to devote to this thread that I would have liked, but I like to keep in touch from time to time.

I mentioned once before Ashraf Laidi, and just thought it might be worth mentioning him again (www.ashraflaidi.com) .

He does talk about correlation, but maybe it's from a slightly different approach to yours. Actually I don't think anyone else is doing exactly what he is doing (at least not for free on the web). He calls it intermarket analysis, and it seems to be an interesting mix of fundamentals (news/data releases and similar), and technical analysis.

My own trading at the moment is quite heavily influenced by Ashraf' Laidi's approach and analysis, plus a bit of price action, gut instinct and seat-of-pants. I have also been influenced by www.thegestalt.com (Chris Matthews), and what he calls "Global Macro". (Having said that, CM was plugging The Correlation Code guys quite heavily at one time, which made me go "hmm....").

I used to be a pure "price action" person, but became a little disillusioned after seeing so many apparently random and unexpected (by me) moves, and thought to myself that there must be a bit more to it than the way particular price bars fall out together. The market moves for a reason or for many reasons, and I set out to try to learn about the way the markets fitted together.

Correlation comes into this, but in a way it's a bit like price action. It's all very well to know that pair A/B are correlating with pair X/Y and also with stock index Z, but wouldn't it be even better to know why? If one can do that, then maybe it's taking it to the next level.

Anyway, for what it's worth, and paraphrasing heavily, AL is currently bullish on USD, bearish on EUR/USD, bearish GBP/USD, bullish Oil, probably bullish Gold (maybe after a dip). This is medium term stuff, and there may still be some fallout in the other direction for a while, following NFP.

I personally trade 1H+ charts and try to hold for at least several days, but I also like to take money off the table, so I don't always manage to hold more than a day. I'm not afraid to use large stops. My views on risk:reward are probably a bit unorthodox. I'm also slightly influenced by "Bird Watching in Lion Country".


OK, time to watch Wallander, then it's nearly time for the markets to open

Hi mike !

AL sounds like someone I gotta study...on it later today....would love you onboard more for your comments and observations..we are totally on the same wavelength

I read the ole birdwatching PDF a few years ago so will revisit..cant remember what the gems were though to be honest in it....

N

 

[NVP]

Where's phreddy? You might well ask...internet problems from thursday last. Links to broker very patchy, cable feed on and off, today we will lose power for most of the day due to installation of some gubbins...

OK were off: USD at the bottom of the pile and Oz$ at the top.
USD/AUS has opened and gapped up and continued up...will it come back to fill the gap?

welcome back partner...........we missed you !

read post #1109 my comments for the week there :-

http://www.trade2win.com/boards/for...g-basic-ideas-strategies-139.html#post1028700


N

 

[NVP]

Hi phreddy,

Welcome back! Sounds like you had loads of problems lately.

I just managed to catch your post before retiring for the night (red nectar sleeping juice is kicking in!) as I was setting up mt4 ready for this morning's oncoming bun fight.... Can see the gap you are referring to and usually (as you know) the market "efficiency" will at some point re-visit this in the guise of filling the void.

Gaps of EU and GU are some of the best as they frequently get filled before the following day's full session really gets under way, unfortunately though for me these cannot be followed as giggling juice effects hit before anything actually happens - unless I havent got the specs on, in which case price graphs alaways appear to be doing exactly what they are really not doing. Eeek!

Have a good one finding those gaps and trade well - best regards,
Simon.

3rd power law of Correlation Trading ?

dont drink and trade !

N

GOVERNMENT

 

[NVP]

morning action 11th Jan

Hi dudes

here we are ...late on parade ...sorry

Nice opening on GBP so far....bullish...few pips on breaking the 15m 7am bar (see red horizontals on pair)

Euro is flat....no surprises

Tag team correlating thumbsup....and the current range to date for the day being tested downwards at this moment....a break would mean continuation of course so buy G/U

gold futures bullish supporting a further tag fall (corrie index is off the page here)

N

 

[NVP]

hi all

just spending a little time with my newbie showing her my scalping ideas

sooooo frustrating on last few bars

gold was bullish...USD turned down but we picked the wrong horse in GBP that decided it wanted to fall as well.......while alongside the Euro/Usd popped up a lovely 10 pips....

if someone can suggest how we can identify/predict that E/G relationship I will pay them £1m !!

N

 

[NVP]

11.05 update

hey all..........

not to bad today is it ?

gold and Crudeoil are generally bullish and that is keeping USD underwraps and falling....Yen is correlating nicely to USD (although equity markets are more bearish currently on low T/F's).........so its really about picking your moments to buy G and or E as thats the currencies our scalping calls here are restricted to

I suspect JRP our resident F/T trader is making a few pipitoes so far........we'll find out later when he checks in

N

 

[NVP]

5m main chart in centre indicating that USD is not keen to breach.........end of the tag fall for a while ?

gold and oil consolidating down a little as well...hmmmm

N