We've spoke and taught about correlation trading before here on the Trader's Blog, but today I've asked Jason Fielder a multi-time guest blogger to give us his insight on correlation trading. Jason has told me that he will be responding to all comments and questions you post below. Also he wanted me to give you a heads up about his new Correlation Cheat Sheets In fact, the momentum is so strong, Correlation Trading is the cover of this months Futures Magazine! As soon as you understand this methodology, not only you will understand WHY it's so powerful, you'll immediately want to get your hands on a few correlation strategies.
OK, enough intro and talk But imagine if blatantly obvious relationships like these existed in the Forex market? Fortunately for us, that step is actually quite easy, all you need to do is open 2 pairs on your chart, one that will take up the top half of the screen and the next that will take up the bottom half f you screen each will stretch from the right to the left of your screen. Even at first glance, you should be able to detect a clear relationship between these two correlated currency pairs.
Unlike the previous example, these currency pairs are moving more or less parallel to one another. What causes these positive and negative relationships to exist? Well much like our temperature and ice cream and temperature and clothing examples from before, currency correlations come down to basic fundamentals.
People eat ice cream when it gets hot because it makes them comfortable, and they wear more clothing when it gets cold for the same reason…comfort and in some cases survival. The point is, the factors that drive these correlations are deeply rooted in daily life. Strong fundamentals are behind correlated currency pairs.
This gives you a consistent, predictable model from which to trade. You now know that correlations are backed by fundamentals. The report won't be availibe forever, so I suggest you go grab it now, and open your world to highly profitable Correlation Trading!
Cant access your link for the cheat sheets, it say my email address used here successfully has an invalid format? I found Jason approach and insight very informative. It gave me insights into the markets that I had not thought of. I appreciate people like Jason who take time to share thier knowledge and insight to help the beginners like myself. It is always better to go down a path that has been traveled before.
Thanks, Jason, a great article. Adam was actually the one that exposed me to pairs trading years ago. Every "good" hedge fund manager uses this trading method in some way. This is wrong imo. Are markets right or wrong, smart or stupid? It doesn't matter as there is no absolute reference; all is relative to market participants perception; were they wrong? No problem, we reverse and crash. I must admit that we're all looking for explanations and rationale thinking to base our trades or make predictions, etc.
Many time, it's true, fundamentals resurface or are the foundation for a trend. But very soon after the trend is started, it's just herding. From Gambling to Trading: Your Final Trading Secret. Another great post Jason! All these analysis trying to explain what's behind every move are just noise imo.More...