How to Trade a Correlation Strategy

I cant find ant http: The decisions made Thursday to push for Buy Now Licence to Financial Freedom. There are people on spot fx market making desks who do this, and people are now also trying to replicate this with machines harder than you think but you need to be lightning fast AND have access to customer flow typically in order to be able to close the deal i. Originally Posted by jgerousis. Aug 8, , 1: When the second bar closes, the range is now lagging by 15 pips.

This forex correlation strategy which you are going to learn here is based on a behavior known as Currency Correlation. Before I get into the rules of this currency correlation strategy, I will have to explain what currency correlation .

Correlation Strategy

The strategy is called "Follow the Leader," and while it's one of the simplest of the eight strategies I learned, it's no less important. The "Follow the Leader" correlation trade, like all correlation trades, waits until two correlated pairs go "out of whack" and then quickly capitalizes on the opportunity to scalp some quick pips out of the market. These pairs are positively correlated, so as expected, they are more or less moving parallel to one another as seen on chart below. But when we're trading with correlation, we're not only looking at direction, we're also looking at the range.

Range is of course the difference between the high and the low prices during a specified period of time. I know this is an extremely high probability trade because "Fundamental Law" dictates that the pairs must remain in correlation, so therefore we know that they will eventually snap back.

It is a strategy that has been backed by market fundamentals and testing for years, and I've also found it to be one of the most accurate and profitable intraday strategies I've ever traded. That's enough of a lag to take notice, but it's not enough to take the trade yet. I like to see at least a pip lag before I take the trade, so I'll watch it for another bar and see what happens.

When the second bar closes, the range is now lagging by 15 pips. It's still not enough for me to take the trade yet, but the fact that the range lag still hasn't corrected itself and is actually growing wider has me very excited. I'll wait and watch it for one more bar and see if the "range lag," or "crack," widens enough for me to take the trade.

The third bar has closed, and the "range lag" has now widened to 24 pips. In correlation trading the objective is to find currency pairs that are highly correlated, meaning that when one pair moves in any given direction the other pair also moves in that same direction.

This correlation can be confirmed by using the Oanda correlation chart: Once you have confirmed that you are looking at two pairs that are highly correlated to one another, you will want to then look into the charts and compare the price action over the past year. TradingView makes this very convenient with the ability to overlay charts. It is during these times when the correlation cracks that provides us with the immensely profitable and essentially risk free trading opportunities.

If you notice on the chart throughout the past year you will see highlighted in yellow boxes all of the times when the correlation has cracked and a gap has formed.

We can look at these moments and estimate the average maximum gap in correlation and use this information to gauge when to take a correlation trade on this pair.

If the lot sizes were increased as the account equity grew the results would logically be substantially higher. It is a popular misconception and there is no shortage of opinions and documentation to support the opposing views on this topic but it has little or no relevance to my strategy.

It does not matter if it is true. It does not matter if it is false. And it does not matter if you believe 2 currency pairs form a synthetic version of a third currency pair. The comparison or debate would be extremely multifaceted and the subsequent resolve would serve no benefit to the correlation strategy discussed here.

The purpose of trading the two currency pairs simultaneously includes but is not limited to the benefit of the pseudo-hedge. This is something that cannot be accomplished by trading one currency pair.

The fundamentals, logic, and concepts behind the strategy can be as simple or as complicated as you choose to make them. Aug 8, , 5: Originally Posted by sparxfx. It is a popular misconception Aug 9, , 6: Originally Posted by GammaJammer. So am I right in saying you would, for example be long eurusd and long usdchf same size? If so, you have just spent a page describing something I can summarise for you in two words. If there are only two pairs, and you knock out the dollar exposure you're trading a cross.

Of course if you trade more than the two pairs simultaneously thats a little different, but from the sounds of things you're predominantly just trading crosses. Aug 9, , 9: Aug 9, , There are people on spot fx market making desks who do this, and people are now also trying to replicate this with machines harder than you think but you need to be lightning fast AND have access to customer flow typically in order to be able to close the deal i.

More pairs are now traded on the other ECNs, but for ease of use, Reuters and EBS are still ahead imho, and that is a big factor when you have milliseconds to do the trade. And if you think I'm joking how fast you need to be, trust me - these guys are unreal.

They look like they're playing track and field on their keypads. Most retail traders don't have access to anything more recent than daily charts, but that's probably fine. If you need intraday I suggest getting the formula and building a spreadsheet although wouldn't bother myself.

Aug 9, , 1: Not an opinion mate - it's fact. Oct 2, , 1: Any ideas about other pairs to hedge against them?

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Nov 09,  · Scroll down to “Daily” and note each pair with a positive correlation of 75% or greater (I am currently monitoring 25 pairs, which is very easy to do using the indicator mentioned below). 3. Open 5M charts on your MT4 platform for all the pairs selected in the steps above. Forex Correlation, like other correlations, is a term designated to signal correlation between two of the pairs. When two sets of data are strongly linked together, we say they have a high correlation. Pankaj Bhaban the Most rated registered MQL developer since , over rating since start, completed more than + strategies presents Fx Correlation Launched March .