Trader's checklist. Part 2

[Value trader]

Hi, traders. Let’s continue talking about trader’s checklist. The beginning is here. In other words, there are some important observations that trader has to take into consideration. Too much analysis is harmful, but analysis is harmful as well – in this case, trader loses sense of big picture and will end up blindly following the price.

6. Is there any correlation between trading instruments?

Markets are traded on its own most of the time, but sometimes there are cases when market is driven by a single idea – for example, weakening US dollar or «flight-to-safety» (when market reevaluates risk and traders move funds from «risky» assets to «less risky»).

Correlation analysis can give you the clue – is there any financial instrument that goes against major fundamental tendency? If you capture one, you can sometimes find good opportunity that could not be identified with any other type of analysis.
There are several major «groups» within currency market that can help us.

European currencies: EURUSD, USDCHF (chart should be upended), EURGBP and other EURUSD crosses. GBPUSD is standing alone from this group, but sometimes it correlates with EURUSD.

Commodity currencies: AUDUSD, USDCAD (chart should be upended). AUDUSD often (but not all the time) correlates with gold - XAUUSD
There can be a correlation between currencies in a group, you may spot some opportunities, when one instrument underperforms. They key here is to identify «leading» instrument and «laggard». It’s not an easy task though.
According to my opinion, it is much easier to spot situations when the whole market is accumulating (or distributing) US dollar, but one instrument, say, goes in the opposite direction. It’s impossible for any market participants to fight fundamental factors.

For example, look at the picture below:

correlation.png

Do you see anything unusual here? Of course, USDCAD is weakening against US dollar, it’s obvious. Other pairs are gaining against US dollar, so there might be something wrong building on USCAD. And, it was a good opportunity to sell USDCAD, it was one of the most profitable swing trades that I have made on my account.

I don’t care why USDCAD is moving against the market – I just see it and act upon this anomaly. Reasons for that may lay outside of traditional market logic. For example, sometimes market is manipulated in a short-term perspective to hold the price above or below some levels to let large option or forward contracts expire worthless. We will not talk about this now, it just happens.

But I have to warn you not to play the «correlation game». It occurs when trader automatically thinks that one instrument automatically goes after another and acts in an impulsive manner. It ends up poorly.

So, as you see, keeping an eye on correlations sometimes can be very beneficial and helpful. Of course, good setups are quite rare, but if you have a tool that can help you find good trading idea, why not to use it?

to be continued…

[luvestruck7]

Market movement depend upon many factors.
I trade as per moving average and the news ( whether released or to be released).
Some time market movement can be drive by big players as they either create huge long/ or short position which cause market in one direction and small traders can not sustain in that wave.
So always trade with knowledge + proper money management can bring you success in Forex trading.

[thenight]

Do you see anything unusual here? Of course, USDCAD is weakening against US dollar, it’s obvious. Other pairs are gaining against US dollar, so there might be something wrong building on USCAD. And, it was a good opportunity to sell USDCAD, it was one of the most profitable swing trades that I have made on my account.

The reason why EURUSD and AUDUSD in bullish condition but USDCAD in bearish is very simple, I already marrk the reason. It's because USD putted in the last currency pair in both of EURUSD and AUDUSD but it placed in the first currency pair in USDCAD. So, I think it's normal.

[mortuza]

I read your first post about trading checklist and it was helpful. but in this post you told about currency. I also agree with that. We need to do choose some pair only to analyze and trade on them. It is good we do some backup pair or pair to analyze only, but our trading pair should be fixed.

[aa1]

traders checklist is a technique used by the trader before there trade .trade check that at the time of trading what they have actually planned about the trade and when everything is up to the mark they start there trade and this is termed as traders check list.

[jumilah]

traders who are in the business is able to survive well with the analysis of which is determined in this trade we can and can truly determine the trade according to our analysis of the trade so that we could do a trade in accordance with a basic foundation in business whether we can achieve and we choose for the sake of our trade

[aa1]

traders checklist is a list of things to do in there trade and before executing there trade trader make use of these check list to reconfirm that all the things and planning required for his trade is done so that he can get good profit from the market.

[fxaddictor]

Currency correlation can end at any time and on a given day it is could be very risky if you think to hedge an earlier losing position with the correlated currency as both wrong positions can give you much more losses then you first think so. So , overall currencies correlation is not good for trading prospect for new comer or even for experience trader sometime. specially when you look to protect the earlier position

[kamarul]

i don't think so. i think it is a very difficult way to earn money because forex trading is a very risky business and here you can lose all that you have if you don't have any knowledge and experience in the forex market. even having a knowledge can't guarantee you to earn consistently in the forex trading business. you need a good strategy to beat the forex market.

[Jamuna]

I am completely newbie and trying to gather the required knowledge and skill from this forum. This educator is very important to me and I am able to learn new things from this educator. I think, good trading strategy is very important to become gainer in this profession and trying to create my own proved strategy. This educator will help me obviously.