Does it make sense to take the same trade on two correlating pairs?
For Example, if NZDUSD and AUDUSD are showing the same thing, should I take the trade on both pairs?
Sometimes I set an entry order on both but will often close one or the other as soon after they’re triggered as possible. Keeping both open would simply double the total risk. Occasionally, entry by twin orders is made more effective as despite the correlation, one might not be triggered at all.
I usually notice that if you regard AUD and NZD as siblings, when both currencies are bullish, the junior sibling is often more bullish. Likewise when both are bearish the junior is more bearish. Same goes for EUR and CHF, and to some extent for USD and CAD. Sometimes this aspect of the siblings’ relationship breaks and the larger currency becomes the more bullish/bearish sibling - this rift can possibly signify a market rotation, though don’t treat it as absolute.
Thanks, Its the first time I’ve heard someone mention “junior sibling”, I understand what you mean by that but is it possible for you to refer me to some resources that would broaden my knowledge relating to that?
No. You are doubling your risk if you are trading both products in the same direction of the correlation. Pairs trading has been around forever, look it up. Most people buy one, and sell the other to take advantage of short term breakdowns in correlation and eventual mean reversion.
I’m sorry, this is my own thesis and even for me its still a matter for observation and research.
Although these two currency pairs have the same correlation with the USD, they are still two completely different pairs, you can see the history of these two currency pairs, I still trade both of them for a while if they give command signals