Its not about the pair its the signal.You should look at as many pairs until you find a good signal.If GBP/USD doesnt give that to you try GBP/CHF ,if that is not good either try EUR/USD.So you should check them all and pick that one which has the best signal.
Where do you think CAD is going?
By following and keeping in mind the movements of all the majors and how they are moving and knowing which have been correlating, you sometimes get a brief glimpse into the future.
In the above example you need only trade CAD but it sometimes certainly helps to follow multiple pairs. Meanwhile, you, following just one pair (not that there is anything wrong with it, btw), have no idea what the overall market is telling you and missed a great trade on another pair.
Disclaimer: This was my primary trading method for a few years. Last November, as many will recall, longstanding, traditional correlations went out the window for an extended period -- so did my relying almost exclusively on this method to pull profits out of the market.
Following multiple pairs for a technical trader is as easy as clicking a button a few times to gain a bit of an alternate perspective or view on what is going on. Your signal on your one pair says "Go long!" Meanwhile, every correlated pair and the indices say, "Go short!"
You may get lucky on the trade but the odds are now definitely against it. Just one of the reasons I follow all the majors (and correlations).
It's funny you should say this as this is the very first trading approach which I used, or at least very close to this. I think I named it divergence between correlated pairs, be it positive or negative correlation. For example I used to track GBP/USD and EUR/USD on an overlay chart so that both pairs are together. If one pair made a higher high and the other correlated pair failed to make a higher high at the same time I would look to short the pair that made the higher high...Simple why really. Two strongly correlated pairs, one pair shows weakness before the other, short the pair that hasn't yet showed weakness.
This approach did work, and it worked very well for almost six months, but then I came across an issue which in all honesty scared me. Correlation between pairs is not constant all the time, right, which means at some point a positively correlated pair will perhaps turn into a negative correlation...ouch.. now you're taking trades and the drawdown starts to kick in.
(I'm the kind of person who hates not being in control (no I don't beat up women) but in terms of trading risk) So I decided to take a different approach to trading a primary correlation based system. I do indeed agree with you that it does work, and when the times are right it can work very very well. However, in my case I was struggling to calculate when and why correlated pairs lose correlation, how long this will last for and indeed when the strong correlation may return - without this correlation the profitable trades start to dwindle (an unknown I was not happy with)
I now spend about 80% of my time following GBP/USD only, and have done for the past few years. I'm sure if I started looking at some other major pairs I could fit this trading approach around them too, but the main reason my current trading system works is because it focuses on a pairs stability, rather than which direction it is moving in or how it may or may not be correlated to other majors.
I still play around with trading on a correlated approach, but have yet to find/develop a rigid foundation which takes into consideration when the correlation changes, a factor which is very much related to profits!
It's good to see someone else trying this approach to trading, an approach which doesn't come to mind so easily and usually requires a good amount of research figure out.
Last edited by Jezzode; 09-16-2013 at 08:39 AM.
Yes, determining when pairs will stop acting silly and get back in line with the rest is, by far, the most troublesome aspect of this strategy which is precisely why it is no longer my primary trading method. Abandoning it entirely is just unthinkable as I traded it for far too long and adopted the method from when I traded only stocks and trading stocks without following the indices is, to me, madness.
When trading the opposite version of this (which I have played around with in the past), trading two correlated pairs that have moved beyond their standard deviations, one long and the other short, expecting a reversion to the mean is just like having your own printing press for money. Until you suddenly find out that pairs reversion trading is really just a very placid and serene lake where lives... the black swan.
If you ever find that rigid foundation for when correlation changes should happen, let me know. It is the object of the ultimate quest and unfortunately, my name ain't Galahad.
The black swan... every traders nightmare right! trying to predict the unpredictable, actually read a good book on that.
The book was called "The Black Swan" by Nassim Nicholas, how convenient! Not to be confused with some ballet dancing book/film also called the black swan.
Maybe you should focus on the major currency pairs first to get a good feel of the markets before moving on to commodity currencies and cross pairs. Do check out my thread on Daily Forex Fundamentals for your daily dose of economic analysis!
"The only cable I watch is the pound baby."