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Chapter 37, Part II. Application of Intramarket Correlations.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, May 19, 2012.

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  1. Administrator

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    Part II. Application of Intramarket Correlations. [​IMG]

    Commander in Pips: Since we’ve discussed what correlation is, let’s try to investigate how it could be applied in trading. Sounds interesting, but its application still limited, mostly due to the huge USD role in all Forex transactions. Still, I will provide you with one advanced idea, that maybe you will find useful sometime. But our start point will be thoughts of common sense about correlation.

    [​IMG]


    Pipruit: Interesting.
    Commander in Pips: The obvious ideas of correlation application that we’ve discussed in previous part are as follows:

    1. Exclude misunderstanding of diversification and eliminating of almost offsetting trades. For example, now you know that long position on EUR/USD and USD/CHF simultaneously has not much sense and could be treated as blank and counterproductive. Although previously you may have wrongly treat it as diversification and risk reducing;


    2. Taking into account correlation, you still can diversify your positions. For example, you have long EUR/USD position and want to scale in. Since you know correlation ratios as with GBP/USD as with USD/CHF or other pairs – you may not necessary add another lot of EUR/USD but open long Cable or short USD/CHF. This will add some diversity to your overall position. Besides, if some pair will move faster in your favor – you’ll get more profit. That is also a specific way to use leverage.

    3. The same could be done with risk. For example, you make an analysis of US Dollar index and come to conclusion that it should rise soon. Still you want to eliminate the impact of intrinsic problems of other currencies and are not sure about what pair will give you more profit. So, you may diversify your position based on correlation – enter short not just 3 lots of EUR/USD, but, say, 1 lot EUR/USD, 1 lot GBP/USD and 1 lot long USD/CHF. In this case, if, say, some improvement in the EU will happen – the other pairs will continue to move in favor of the dollar and will give you acceptable overall results.
     
    #1 Administrator, May 19, 2012
    Lasted edited by : Oct 14, 2016
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