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  1. #1
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    Trader's checklist. Part 2

    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:

    Attachment 10923

    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…

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  2. #391
    Registered user Yayami's Avatar
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    Quote Originally Posted by layigold View Post
    There are correlations between trading instruments , some instruments are negatively correlated , some are positively correlated do not even have any correlation existing between them . Two currency pairs are assumed to be positively correlated if they do go towards the same direction 90% of the time while two positive correlated pairs go opposite direction 90% of the times. Example of positively correlated pairs include GBPUSD and EURUSD while that of negative correlated pairs is USDCHF and EURUSD .
    there will be no similarities between trading instruments because market works with imbalance value from trader's transactions around the world. if it's balance then we'll see market move in sideways which always happen after strong trend during correction momentum. this is one of basic knowledge everyone must know about market and its trading process so there's no confusion about it.

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  3. #392
    Registered user ara's Avatar
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    Quote Originally Posted by Value trader View Post
    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.
    What if we use aud/cad instead of aud/usd? I have never used a correlation like that, there is a correlation between AUD and CAD, but I never use aud/usd, eur/usd, usd/cad to analyze the strength of the currency by the 3 pairs correlation method. What is the advantage of analyzing the strength of the currency using this correlation method compared to looking at the currencies strength chart?

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  4. #393
    Registered user Yayami's Avatar
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    Quote Originally Posted by ara View Post
    What if we use aud/cad instead of aud/usd? I have never used a correlation like that, there is a correlation between AUD and CAD, but I never use aud/usd, eur/usd, usd/cad to analyze the strength of the currency by the 3 pairs correlation method. What is the advantage of analyzing the strength of the currency using this correlation method compared to looking at the currencies strength chart?
    trading with cross pairs are less efficient to do because it has wider spreads and smaller volatility. if we choose to trade with audusd we could get at least 50 pips in one day movement. but so far i know about cross pairs, they got so little volatility and small pips movement, approximately about 30 pips or 40 pips. they could rarely reach more than 50 pips unlike with major pairs. we should put this on our understanding and i believe you get this already.

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