Wednesday March 24, 2021 - 12:37:46 GMT
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How to Treat Correlations in Trading
The following is a recent post I made on the AT (Amazing Trader) Forum. It is worth a read as a fickle forex market often tries to correlate with the risk on/risk off mood in the global market. It also highlights the value of being able to identify "real; money" flows driving the price action.
GVI Forex 13:51 GMT March 13, 2021
How to treat correlations in trading.: Reply
This post on the Forex Forum caught my attention as it raises a question of how to treat correlations in trading.
Bond Yield
HK Kevin 17:16 GMT 03/12/2021
Why 10-year bond yield rise to yearly high at 1.635%, but dollar index fell back to 91.6?
Simply put, correlations work until they stop working..
This does not mean you should not pay attention when markets correlate. It tells you what is driving the price action and what the market is focusing on. It also gives a clue how the market will react to news, especially economic data.
As for trading correlations tick by tick, I leave that to HFT algos that have direct access to the markets being correlated. With that said, identifying when correlations are driving the price action gives a good clue for trading.
How to trade when correlations break down.
Either ignore what was working before or take advantage of getting ahead of the curve. In other words, it is like trading the new episode after the old episode ends. Those trading the old episode (I.e. correlations) when a new episode begins (I.e. correlations have broken down) are the ones trading in the wrong side of the market. Those who recognize the change by using AT, can benefit by trading on the strong side of the market.
Let’s take an example from today.
EURUSD sold off as US yields rose sharply.
Then the correlation broke down. 10-year yield dipped back below 1.60%, EURUSD firmed a touch but then did not fall back when yields rose again. It then firmed and stayed bid through the rest of the day.
This was the clue that EURUSD was no longer following US yields and that demand was coming from another source (see chart). In this case, it appeared to be a EURGBP buy order,,as indicated by AT, that created demand for EURUSD.
AT showed the breakdown in the correlation once the LOD was confirmed
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For those looking for a way to follow "real money" flows, see Road to consistent trading profits
Jay Meisler, co-founder
Global-View.com
[email protected]
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