My question is, is there any way to easily determine which currencies are correlated? I am working on a trend following strategy based on a 30 week SMA, the system is almost always in the market. I am wanting to find 10 to 15 pairs that are not as correlated to trade this system. I don’t mind if there are a few correlations but I don’t want to trade 10 pairs that are doing the same thing all the time. Any help would be great
The only way to really have a set of uncorrelated pairs is to only trade ones that do not share any currency in common. For example: USD/JPY, EUR/CHF, GBP/CAD, AUD/NZD. As soon as any two pairs share a currency between them they automatically become heavily correlated. It makes it very hard to diversify since there are only 8 “majors”.
Before you go any further I recommend you have a read of this - Correlation and dependence - Wikipedia, the free encyclopedia
I have used correlation in the past and it can be quite effective, but as with everything else in Forex, don’t read too much into it.
No Holy Grails.
And it never stopped people from looking
Take my advice correlation changes and in my experience all pairs are somehow correlated. If you have various charts opened just trade the one with better chances at that moment. Avoid to open more than one order at the same time.
Regards.
Yeah, just don’t trade on two pairs like, let’s say, EURUSD and USDCAD at the same time.
If that was done by this,It makes it very hard to diversify since there are only 8 “majors”.
Each pair, which is not one of the major pairs, is correlated with the major pairs. For example, if you analyze the EUR/JPY then you have to analyze separately EUR/USD & JPY/USD. But the most important thing is the strong correlation between the US stock markets and the USD. If you know how to analyze indices, it will be much easier for you to determine the USD direction.
In short the two most correlated currency pairs at present is going to be GBP/USD and EUR/USD, take a look at them both on an overlay chart, they almost mirror each other with new highs and lows…and when they don’t…well you don’t need me to tell you…there is a trade set-up in formation 
Regarding your EURUSD / USDCAD comment…
That’s what market makers and the “Smart Money” would like you think. However, my personal hedging strategy would prove you otherwise. In fact, 2 pairs that share a common currency are perfect candidates to trade in unison. It’s HOW you set up your orders that determines whether you’ll experience a profitable outcome or not.
Correlation is a gray area, because pairs do tend to correlate – but in a RANDOM fashion (and for a random amount of time). Disparity between the same two pairs occurs just as often, but may not be as noticeable unless you know what you’re looking for (and why).
Trust me, I’ve worked with many trading experts and ‘gurus’ behind the scenes over the past 7 years, and have seen it all. Most of it is based on “traditional” (and flawed) thinking, which is why most folks find themselves buying dozens of trading systems, software, and services over many years - before finally coming to the realization that it’s all based on the same underlying foundation (which is basically the same principles and “rule sets” we’ve been brainwashed to follow).
Remember…
The more people who think and act the same way, the easier (and more profitable) it is for the “Smart Money” to predict your next move and position themselves to take you out. It’s not your fault, but the truth is you’re basically telling the school bully where you’re hiding your lunch money. It’s “easy picking” for them from that point onward.
That’s the way the forex market has always been (as well as most other markets), and will continue to be - unless you implement a trading method that’s contrarian to common thinking. And by that, I’m mostly referring to your attitude towards risk protection, money money management, and performance stats.
I’ve been fortunate enough to identify a very specific pattern on a 3rd party trading tool that basically tells me when any 2 currency pairs are in a state of disparity (in fact, I don’t even look at my charts when making a trading decision… I only use MT4 to execute my trade orders). I wait for this disparity to reach a certain level, and then enter each position in a specific direction, at a specific moment. Once the setup is in motion, I activate an EA to manage and monitor the positions for me, and walk away.
It’s the easiest, most profitable method I’ve every traded… and it goes against 99% of all the traditional “trading rules” and nonsense logic that you see peddled throughout this industry on a daily basis.
The sooner you realize contrarian thinking is a good thing, the quicker you’ll find yourself in profit (with longevity).
I’m not claiming I have the “holdy grail” (boy, do I hate that term - it’s so misused), or anything like that. However, I trade with 100% confidence each and every time I take a valid setup, and know - at some point in the immediate or near future - that my closed equity balance will be more than it was prior to taking that setup.
I can’t explain how I know that without disclosing my methodology in detail (which I won’t do without a NDA in place), so I’ll refrain from doing so. Just know that you’re in the position to steer away from conventional thinking, and carve-out your own in-road to consistent profit generation. The longer you’re trading with the herd, the more likely you’ll end up a victimized statistic – courtesy of the market makers.
I don’t expect everybody here to agree with me, as most folks here are probably students of the very same gurus or traders who preach traditional trading rules, etc. I was too previously, so believe me… I understand.
Sorry if any of this seemed to have ventured off the correlation topic. It’s actually all interrleated, so just take into account what I’ve shared with you here. Correlation is not as cut and dry as most think – it’s definitely a gray area that requires a technological edge to exploit its true profit opportunities.
This goes beyond the nature of this thread, so will stop here for now. Send me a PM if you need clarification on anything.
Hope this helps.
All the best,
Marty
-martymr
im guessing that your trading approach, in a nut shell, is to wait for two correlated currency pairs to have divergence/convergence between one another. so if one makes a new low, and the other fails to make a new low, then you buy into the pair that made the low. And the opposite for when a new high is made and the other correlated currency pair fails to make a new high, you sell into the high.
This usually results in you selling into levels of supply and buying into demand, which is not what most people have been taught to do with their trading methods. This form of analysis, which is actually common here on babypips is a spin of from the smart money tool used my ICT, and also myself for that matter. Smart money will aid you in the direction of the turning points once it has decided to take out enough stops…
I think im very close…lol
You may also check currency correlation to check how the currency correlations have been changing during the recent past as compared to overall average.
Hi Marty! nice ot hear that. I’ve been on the pip for the last 6 years and got similar tool. I was just wondering whether the tool you use is pairtrade finder? I have been using this one on a demo since recently and not too bad.
cheers
David
Read my strategy… statistical arb/pairs trading by kelton.
Thanks!
