Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Lucid

Correlation Trading and Why It Works So Well

Recommended Posts

As humans we do not come equipped with the ability to deal with the variety and often times confusing aspects of randomness. We are taught from a very young age to strive for perfection, for high scores in school and in sports. This could be our biggest flaw and is the handicap for a lot of traders. There is no perfection in trading and never will be. It is a profession of chance and liability. Traders must learn to put probability in their favor and realize the markets are extremely random. Most traders forecast future price using some combination of fundamentals, indicators, patterns and experience in the expectation that recent history will forecast the probable future often enough to make a profit. This is fine for those 5% of traders that actually make money, but most forget that Randomness controls the forex market and cannot be predicted.

 

THE CORRELATION TRADE

 

Fight Randomness with Randomness by using the Correlation Trade!

Statistically speaking, correlation is the measured relationship between two units over a period of time. Correlation is measured on a range of -1 (perfect negative correlation) to 1 (perfect positive correlation). A positive correlation implies that the two units move in similar directions, the higher the correlation the closer and more accurately these moves are. Conversely, a negative correlation represents opposite movements with a smaller (more negative) number representing a stronger relationship between the opposite movements.

 

So far our correlation strategies have brought our forex managed account great returns and I am so surprised that more people do not discuss and use this method of trading

 

JACE

Share this post


Link to post
Share on other sites

Maybe you would like to post some examples and add some meat to 'the correlation trade' such as finding candidates, trade management, risk control and position sizing. As your post reads right now it is nothing more than an advertisement for the managed accounts you mention. Especially given that you have been a member of TL for 18 months and this post of zero information is the first post you make.....Get the discussion rolling by adding some meat.

 

With kind regards,

MK

Share this post


Link to post
Share on other sites

Hi Lucid.You are right 100% but lets say you have found something, A-B with corallation 1 you still have to forecast future price using some combination of fundamentals, indicators, patterns and experience in the expectation that recent history will forecast the probable future often enough to make a profit. Because A and B trading in the same time frame and what has happend with B two days ago to late to take action for A today.

Share this post


Link to post
Share on other sites

Yes I will start posting more and more stuff as I go but that was just the starter. I copied and pasted it from my site. Our Main Priority is trading so it will be a hit and miss. I will also post trading statement to show people how the Correlation trades really work.

Share this post


Link to post
Share on other sites

Yes Youri you are correct we take a look at the fundamentals every hour of every day. I am not much a believer in the whole indicator mess that everyone gets caught up in. It is all hind site and I have not seen too many traders that really make money using indicators. It is all about Price action. They best way to show how it all works is to post a few live trading videos. I am not sure if the Traders Laboratory will let me do that.d

Share this post


Link to post
Share on other sites
Yes I will start posting more and more stuff as I go but that was just the starter. I copied and pasted it from my site. Our Main Priority is trading so it will be a hit and miss. I will also post trading statement to show people how the Correlation trades really work.

 

 

In the spirit of disclosure, are you here to promote a paid website or share ideas w/ members?

Share this post


Link to post
Share on other sites

Not sure what you are asking. No I do not have a product to sell everything on my site is free education. I trade FX Funds I thought this would be a good Idea to show people how real life funds trade and to show how are correlation works. The truth is most traders lose money and most really do not put in the time or effort it takes to become a great trader. I get weekly phone calls from people who have blown up their account and want us to come on and save them so I thought it would be a good idea to come on a forum and hopefully help a few people out. Like I said I will be able to post our set ups and trades periodically and I will try and answer any question I get regarding correlation trading in a timely manner.

Share this post


Link to post
Share on other sites

Ok let me give you some of the trades that took this last week. Right now the EUR and the GBP are correlating quite well. Now here is how the set up works. This last week we put in a Long EUR/USD and a Short GBP/USD at the same time. When the markets are choppy and in a range then you will get swings in and out of profits when you swing into profits which might take 24 hours or it might take 2 minutes then you close out the trades and wait for another opportunity. We will sometimes take 20 of these a day or we might only take one. I will try and learn how to attach some of the actual trades to show it in real time.

Share this post


Link to post
Share on other sites

I think that brownsfan might just have another one nailed to the floor.

 

The correlation is between suckers who might be exploited and junior members of trading boards (sorry to those who are 1:1 on this).

 

The great returns are to another spammer selling managed accounts and forex training courses.

 

Lucid of course means "characterized by clear perception or understanding" which is what Brownsfan and I are displaying for all to see. We are your shining light.

Share this post


Link to post
Share on other sites

So far our correlation strategies have brought our forex managed account great returns and ]I am so surprised that more people do not discuss and use this method of trading

 

Its really not that hard to figure out why a trading board that is made up of guys not swinging 50 mil+ are not so interested in pairs/long-short/stat arb strategies...

Beyond the idea that correlations between 2 instruments are ludicrously unstable on a short enough time frame to not be looking at obvious sector and index beta, this whole idea was milked in the 90s then become a way to market to rich morons who wanted some money with "quants" during the credit bubble.

I guess the retail shysters have finally read some Taleb and figured out after the credit crisis this is good marketing to reference "randomness" and "correlation"...

While I totally agree with your stochastic easement of markets as a whole. Personally, I have zero interest in pairs trading(let alone stat arb) because it doubles my capital commitment while cutting off any positive return from tail risk and just being "lucky"..I eat the risk of being massively wrong, but have hedged myself of being massively right.

Of course though you are in managed forex accounts, and not currency futures..no surprise at all...

Share this post


Link to post
Share on other sites
Ok let me give you some of the trades that took this last week. Right now the EUR and the GBP are correlating quite well. Now here is how the set up works. This last week we put in a Long EUR/USD and a Short GBP/USD at the same time. When the markets are choppy and in a range then you will get swings in and out of profits when you swing into profits which might take 24 hours or it might take 2 minutes then you close out the trades and wait for another opportunity. We will sometimes take 20 of these a day or we might only take one. I will try and learn how to attach some of the actual trades to show it in real time.

 

Hi Lucid,

 

I'm interested to hear what you have to say - I'll keep an open mind, so thanks for your input.

 

One question I have about this trade. Correct me if/where I'm wrong, your structure/position will be as follows:

+EUR, -USD

- GBP +USD

As I see it, your USD position is in fact flat, and what you actually have is long EUR/GBP. I fail to see where correlation comes in to this.

 

If YEN/USD had no correlation to GBP/USD and I did the same, I'd have a YEN/GBP position.

 

Sorry if I'm being stupid, I just dont see where correlation comes into play.

:doh:

Share this post


Link to post
Share on other sites
Ok let me give you some of the trades that took this last week. Right now the EUR and the GBP are correlating quite well. Now here is how the set up works. This last week we put in a Long EUR/USD and a Short GBP/USD at the same time. When the markets are choppy and in a range then you will get swings in and out of profits when you swing into profits which might take 24 hours or it might take 2 minutes then you close out the trades and wait for another opportunity. We will sometimes take 20 of these a day or we might only take one. I will try and learn how to attach some of the actual trades to show it in real time.

 

So basically you are just trading the cross rate (EUR/GBP) long or short....I'm still at a loss on exactly what you are doing because you make it sound more complicated then that....

 

With kind regards,

MK

Share this post


Link to post
Share on other sites

pair trading with currencies are typically an interest rate instrument, such as pairing the euro vs the eurex bond, or one of the majors versus the dollar index.

 

there are many ways to trading pairs, and one need not trade both instruments. we've had success using the ES as the trading instrument paired against the VIX for example.

Share this post


Link to post
Share on other sites

in FX, the second symbol is typically an interest rate instrument, such as the trading the Euro based on the Eurex Bond. Sometimes the dollar index is used.

 

One need not trade both sides, which is called unilateral pair trading by some. For example, we've had success pairing the ES with the VIX, trading just the former.

 

Full disclosure : we offer a pair trading testing strategy for Tradestation, but it's not a signal service and mean to serve as a framework for people to test their pair ideas.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By Jonh Smith
      I searched in google with keywords best forex robot 2019 and in the end I found fxflightproEA from their website fxflightpro.com . if anyone has ever bought, I was interested in their ea. I saw a very small drawdown, and monthly profit looks great.and I see myfxbook profit reaching 50% in 50 days. if there are buy please review here and I say thank you if anyone would like to share here.

      thanks
    • By StraussX
      Hi GUYS, Happy Wednesday!
      I'd like to share daily forex analysis from Followme, hope this information helps your trading.
      Today, Let's focus on AUD and NZD.
      AUDUSD is trading at 0.6761; the instrument is moving below Ichimoku Cloud, thus indicating a descending tendency. The markets could indicate that the price may test the cloud’s downside border at 0.6765 and then resume moving downwards to reach 0.6635. Another signal to confirm further descending movement is the price’s rebounding from the descending channel’s upside border. However, the scenario that implies further decline may be canceled if the price breaks the cloud’s upside border and fixes above 0.6825. In this case, the pair may continue growing towards 0.6905.
       
      NZDUSD is trading at 0.6447; the instrument is moving below Ichimoku Cloud, thus indicating a descending tendency. The markets could indicate that the price may test the cloud’s downside border at 0.6455 and then resume moving downwards to reach 0.6315. Another signal to confirm further descending movement is the price’s rebounding from the resistance level. However, the scenario that implies further decline may be canceled if the price breaks the cloud’s upside border and fixes above 0.6525. In this case, the pair may continue growing towards 0.6645.
    • By Georgebro8
      So I've been 18 for about 4 months, since I turned 18 I started up an account, and basically thought I was doing amazing because of beginners luck, put in some of my savings and managed to do well, some days I would make £200, one day I even made £900, after time I lost my profits and made a loss as well. I've realised I need to spend the time analysing the market and making technical judgments. I'm trying to read more and spend a lot of my time looking at the charts. is there any advice people can give me. and is making 5% a week a realistic goal to set myself? before anyone assumes that im looking for a get rich quick scheme, im certainly not, I see every loss ive made as a lesson and ensure that I learn from each mistake I make. 
      any advice about indicators, strategies, how to analyse the market, or even analysing earning reports would help me.
    • By edakad
      Firebird is an indicator to identify the price spikes in the market. Firebird indicator first calculates a 10-period moving average, then shifts this moving average a certain percentage above and below the 10-period moving average. The shifted averages are drawn on chart as the red and green line. When price touches these lines, price spike is identified. Usually after a price spike, the trend reverses for some time. The indicator can be used to take advantage of this price behaviors. In daily chart usually the 10 period MA is shifted by 2 percent to form the price bands. On lower time frames like Hourly, Four Hour a smaller percentage price shift is used like 0.5% . The important consideration here is most of the price bars must be contained within the upper and lower bands.
      When price reaches above the upper red band, a sell position is opened. When price reaches the lower green band, buy position is opened. Trades can be managed with proper stop loss and take profit. In the picture, Firebird indicator is attached to daily chart of EUR/USD with 2% shift on MA. Note that almost all price bars are within the price bands. And when price extends beyond these bands, price trend reverses and comes back into the bands.

      FireBird.zip
  • Topics

  • Posts

    • Date : 19th October 2021. Market Update – October 19 – USD & Yields Cool, Tech Recovers. USD (USDIndex 93.60) slips -0.6% (-1.0% from last week’s highs) Weak US Industrial production. Yields also slipped and Stocks moved higher led by big tech. Commodities stronger lifting AUD & NZD (RBNZ to move +50bps Nov.24?). APPLE launched new Mac Books with new self-built powerful chips, Bezos, “may have lied to Congress”, FB to recruit 10k in EU to build “Metaverse”. Japanese General Election 31/10, confirmed. NK fire more ballistics into S. China Sea. Evergrande – sentiment lifts a tad – they will pay some onshore coupons today. US Yields (10yr closed 1.584%) down from 1.624% highs, trades at 1.576% Equities moved higher but lost momentum USA500 +15 (+0.34%) at 4486 (NASDAQ +0.84%) – Big movers – TSLA +3.21% & FB +3.26%. USA500.F higher into 4483. Asian equities higher (Nikkei +0.56%) VIX closed down again at 16.77 (new 8 week low) – trades weaker at 16.50 now. USOil back at yet another new 7-yr high, trades at $83.00. Gold lifts on weaker USD & lower yields up to $1777 now from yesterday’s test of the key $1760 support level. FX markets – a weaker USD has – EURUSD 1.1655 Cable at 4-week highs 1.3775 (Bailey up again today) & USDJPY holds 114.00. European Open – The December 10-year Bund future is fractionally higher, as are US futures. Eurozone peripherals are also vulnerable amid the ebb on flow of opinions on how to strengthen and maintain flexibility in existing asset purchase programs after the scheduled end of PEPP. Against that background the flood of BoE and ECB speakers today will be watched very carefully, especially as the data calendar is pretty empty. Stock market sentiment strengthened overnight and DAX and FTSE 100 futures are up 0.2% and 0.1% respectively, alongside broad gains in U.S. futures. Today – US Building Permits & Housing Starts, ECB’s Elderson, Panetta, Lane, BoE’s Bailey, Fed’s Harker, Daly, Bostic, Waller. Earnings – Johnson & Johnson, Phillip Morris, P&G, Netflix, Halliburton, United Airlines, Danone, Ericsson (out already a big beat), Kering. Biggest FX Mover @ (06:30 GMT) NZDUSD (+0.28%) 5th consecutive day higher today breached 0.7100 earlier, and testing 0.7150 now. Faster MAs aligned higher, MACD signal line & histogram trending higher, RSI 81.00 OB but still moving higher, Stochs. 96 and OB. H1 ATR 0.0011, Daily ATR 0.0062. Always trade with strict risk management. Your capital is the single most important aspect of your trading business. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HotForex Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • GOLD (XAUUSD) REBOUNDS ABOVE $1,757 SUPPORT, RESUMES UPTREND Key Resistance Levels: $1,900, $1,950, $2000 Key Support Levels: $1,750, $1, 700,$1,650 Gold (XAUUSD) Long-term Trend: Ranging On October 13, the Gold (XAUUSD) price broke above the moving averages and retested the 50-day SMA. This is an indication that the market is likely to rise on the upside. The uptrend is likely to resume on the upside after retesting the 50-day SMA. The market will rise to retest the $1,820 overhead resistance. XAUUSD will have an accelerated price movement if the resistance is breached. Gold price will retest the previous high of $1,920. On the other hand, the range-bound move will continue if Gold faces rejection at $1,820 resistance. XAUUSD – Daily Chart   Daily Chart Indicators Reading: The 21-day SMA and the 50-day SMA are sloping horizontally indicating the sideways trend. Gold is at level 53 of the Relative Strength Index period 14. Gold is in the uptrend zone and above the centerline 50. Gold is capable of rising on the upside. Gold (XAUUSD) Medium-term bias: Bullish On the 4 hour chart, the Gold price rebounded above $1,757 support and rallied to the high of $1,800. The market has reached the overbought region of the market. Sellers have emerged to push prices down. Meanwhile, on October 13 uptrend; a retraced candle body tested the 61.8% Fibonacci retracement level. The retracement indicates that Gold will rise to level 1.618 Fibonacci extension or $1,818.70 . XAUUSD – 4 Hour Chart 4-hour Chart Indicators Reading Gold is below the 80% range of the daily stochastic. It is in a bearish momentum. The 21-day SMA and the 50-day SMA are sloping upward indicating the uptrend. General Outlook for Gold (XAUUSD) Gold’s (XAUUSD) price has resumed an uptrend after breaking above the moving averages. The current uptrend is likely to reach a high of $1,820.Gold may face another rejection at the $1,820 resistance.   Source: https://learn2.trade 
    • XAGUSD Price Analysis – October 19 Silver (XAG) positive fortunes faded around the $23.50 mark, with the price erasing its most recent thrilling bounce above the moving average of 13. During the Monday session, the commodity rose slightly and was last seen lingering near day highs in the $23.22 -$23.40 range. Key Levels Resistance Levels: $24.50, $24.00, $23.50 Support Levels: $22.87, $22.10, $21. 42 XAGUSD Long term Trend: Ranging Today, the white metal has struggled and it’s unable to break above the top range of the surge around $23.50, it is currently trading in the red at $23.22 per ounce. Beyond the $23.50 mark, the bulls may regain a stronger grasp. The XAGUSD pair is held by the rebound trend and the trend may remain in a recovery mode. A closing above today’s upper range, currently at $23.45, might signal a low rebound from the $21.42 level continuation of the rally that began in late September, paving the way for a break beyond the $23.50 barrier. XAGUSD Short term Trend: Ranging Silver (XAG) has a greater range on the 4-hour time frame from late September lows at a level of $21.42, suggesting potential upside. As a result, the metal continues to climb. It has already broken through the previous high of $23.00, signaling that the next upward phase is underway. The pair is expected to find support at $22.87, and a break of that level might take it to the next level of $22.10 support. The pair is expected to hit its initial critical resistance around $23.50, with a break taking it to the next level of resistance at $24.00.   Source: https://learn2.trade 
    • Date : 18th October 2021. Market Update – October 18 – China Slows – Risk-Off to start the week. USD (USDIndex 94.10) holds at highs, Weak data from China (Q3 GDP 0.2% vs 0.5% & Ind. Production 3.1% vs 4.5%) Big misses, Risk-Off tone to start the week. Oil continues to move higher testing key technicals – Yields the driver (again) US 10yr at 1.6%. NZD moves higher – (CPI 2.2% vs. 1.4% & Services PMI’s 46.9 vs 35.6) Auckland lockdown extended. PBOC breaks silence on Evergrande -“can contain contagion”: Risks are (1) other Real Estate Co’s & (2) Wider Economy. US Yields (10yr closed 1.576%) now at 1.60% in Asian trades. Equities moved strongly higher into close. USA500 +33.0 (+0.75%) at 4471 (Dow +1.0%) – Big movers AMZN & MasterCard +3.3%, TSLA +3.0% & BAC +2.8%, FB -1.15%, MRNA -2.31%. USA500.F dips to 4446. Asian equities lower on China news. VIX closed -2.56% at 17.00 (8 week low) – trades up at 17.35 now. USOil back to test new 7-yr highs, trades at $82.75. Gold slipped on higher yields down to $1763 now from Thursday’s test of $1800. FX markets USD remains bid – EURUSD 1.1573 Cable holds 1.3720 (Bailey ‘will have to act’ to curb inflation) & USDJPY higher again at 114.25. Week Ahead – Inflation and PMI data dominate the economic releases, Earnings highlights include: Johnson & Johnson, Procter & Gamble, Netflix, (Squid Games to add $900m in Revenue?) Verizon, IBM, Intel, Tesla, (Musk joined 200+ VW exec’s over weekend) & AT&T. European Open – The December 10-year Bund future is down -53 ticks at 169.05, underperforming versus Treasury futures and pointing to another sharp rise in cash yields at the start of the session. Comments from BoE’s Bailey, will add to pressure in the European part of the session. UK money markets are increasingly pricing in a move from the BoE this year, which is leaving bond market traders worrying about stagflation risks. DAX and FTSE 100 futures are currently down -0.1%. Today – US Industrial Production, Fed’s Quarles, BoC’s Lane, & BOE’s Cunliffe. Biggest FX Mover @ (06:30 GMT) USDCAD (+0.28%) Rallied from 1.2335 lows on Friday to test 1.2400 now. Faster MAs aligned higher, MACD signal line & histogram trending higher & over 0 line, RSI 64.00 & moving higher, Stochs. 95 and OB. H1 ATR 0.0012, Daily ATR 0.00826. Always trade with strict risk management. Your capital is the single most important aspect of your trading business. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HotForex Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • Forex trading is the best way to make some good money online, but you need to have proper skills to achieve success and for that you should practice trading with small capitals.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.