Correlations between different assets

Hi there,

I would like to learn more about correlations between different assets because I think it would enhance my proper trading decision on Forex before executing a trade position.

To my practical observation, the USDJPY and the Dow Jones have long been strongly correlated - a simple example. Like this, I do not know how to make a trading decision on whether to trade the USDJPY or not. Also, I know the Canadian dollar is a commodity-sensitive when oil price rises or falls that can impact the Canadian dollar. Any moves in the Canadian dollar do not move oil price.

I have another question on the US bond. How can the US bond move the US dollar? I am still trying to understand the relationship between the US bond and the US dollar, but I am still confused. Last year the US bond yield rose which helped the US dollar rising rapidly, but this year is different because the bond yield is falling lower but the US dollar strength is still not over yet but is possibly on about falling soon. This is what the Fed recently announced the possibility of rate cuts which benefits the equities.

Any help would be greatly appreciated.

Thank you.

AUD correlates well with Gold.

AUD/USD, EUR/USD, GBP/USD and NZD/USD correlate well (usually).

GBP/USD also correlates quite well with GBP/CAD and usually also with the Dow.

EUR/USD correlates negatively with USD/CHF.

But! - correlations diverge and converge without any obvious news or causes, they are not direct and permanent physical couplings.

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PS - Check up on the LTCM fiasco for what happens when trades are blindly based on theory of market behaviour rather than evidence. Its good for a laugh.

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This does’t quite answer the OP’s question but it’s a nifty little tool for you FOREX lot.

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Hey Tommor you’re still here.

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Correlation has no predictive power in modern financial markets - traders are so fast that when opportunity appears they quickly make bet thus eliminating trading signals based on correlations.

Basically these are dead trades if you consider some simple examples like Dow and USDJPY. Quantitive analysts build algorithms that process tons of information to find hidden correlations and market inefficiencies, examining some weird links like weather changes in Saudi Arabia and oil supplies in South Korea. Unfortunately we can’t compete with them only with our expertise and skills + retail trading platform with average speed of execution.

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Is professonal trading platform better than retail trading platform? Excuse me, this question may be silly, but I think some brokers may have advanced trading platform for professional traders if they work from home. Is there a difference between professional and retail traders while they using their online trading account?

Of course the difference is in speed and liquidity. You could compare and draw clear differences if you, for example, tried to trade during news on both pro and retail platform. Results are less predictable in Retail platforms, because order execution is slow.

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In my experience on trading during news for practice, I decided to avoid it because it looks like almost gambling. I often look towards the NZD and the CHF for more stable markets (less volatile).

I use a software application called cTrader which I think is very different to MT4 trading platform and others. I have never seen a slow in order execution since I started using this platform for practice in late 2017.

I use this correlation chart

If you click on “more”, it gives you additional asset classes and indexes.

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Well execution doesn’t depend on the trading platform (well optimised platform can win probably 2-3 ms) but rather on the net of liquidity providers that broker employs. Its impossible for a broker to switch between best LPs as the price and conditions they offer change and best available price can wander between providers. Usually brokers don’t bother with that and simply cooperate with prime broker (this model called STP).

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Would it be recommended for daytraders to use STP? I think I still have not studied the difference between STP and ECN yet. My base timeframe is 15-minute which is for intraday trade. Sometimes, I use 2H base timeframe for medium term trades.

Yes for day traders it is ok, but for scalpers its better to look for ECN brokers. Currently I use only ECN brokers (at least they claim that they ECN) - Tickmill, IB, Hotforex and recently started to use Excess.

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IB = Interactive Brokerage? Why did you leave IB? Hope you get on okay with Excess. :slight_smile:

I doubt it. You don’t use Interactive Brokers and HotForex in the same sentence.

Why not use IB and HotForex?

Yeah you may wonder why I use brokers which may really differ in some of their features. But well IB can’t offer me fixed spread account like Hotforex for trading news or events that cause volatility.

Remember that profitable trading opportunities are often hiding under surprising combination of trading platform flexibility + particular market inefficiency. Spotting non-obvious things is the key to earn money there.

But where do you get your information ? On observations only or there are some facts done as well ? Please let us all know, cause it’s kinda important thing, all pairs which ends on similar currency corellates well, as well as commodities in between themselfs.

The one I know is the USD and Gold. When the USD rises, the Gold price falls.