{"id":1728,"date":"2009-10-26T06:09:53","date_gmt":"2009-10-26T10:09:53","guid":{"rendered":"http:\/\/club.ino.com:80\/trading\/?p=1728"},"modified":"2009-10-29T11:27:15","modified_gmt":"2009-10-29T15:27:15","slug":"the-giant-flaw-in-correlation-trading","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2009\/10\/the-giant-flaw-in-correlation-trading\/","title":{"rendered":"The Giant Flaw In Correlation Trading (UPDATE)"},"content":{"rendered":"

Last week Jason Fielder gave us some general insight on correlation trading, but today he pulls out ALL the stops and dives deep into a proven method for successful correlation trading! Jason said the only way he would teach this much is if I mentioned his free webinar that focuses on correlation trading<\/em>! (Please see Ed note below)<\/p>\n

Ed Note: The webinar has passed and Jason is now making live his Correlation Code, please check it out.<\/a><\/em><\/p>\n

====================================================================<\/p>\n

I have some unfortunate news for you Trader's Blog readers, correlation trading does have one GIANT FLAW.<\/p>\n

While correlations will tell you that a move is about to occur, correlation alone doesn\u2019t tell you which pair is moving or the direction it will be moving in.<\/p>\n

In other words, you know you need to put on a trade, but you don\u2019t know which pair to trade or whether you need to buy or sell short. This massive limitation in correlation trading has stifled traders for years, which is why so few traders use correlations despite its obvious benefits.<\/p>\n

Of the handful of traders who did trade with correlations, most just used it as a filter to increase the accuracy of an already-profitable system.<\/p>\n

Well I for one wasn\u2019t willing to stop there...<\/p>\n

<\/p>\n

You see, as a full-time trader, researcher and system developer, I know that identifying PREDICTABLE VOLATILITY is half the battle. Determining entry and exit points is simply a matter of testing and a whole lot of trial and error.<\/p>\n

It took the better part of 12 months, but eventually my team and I researched, developed and tested 82 different strategies for capitalizing on correlation trades. When the dust settled we were left with only 8 that made cut...and because you're a Trader's Blog reader, I am now going to share one of my favorites with you.<\/p>\n

Follow The Leader<\/strong><\/p>\n

The strategy is called \u201cFollow the Leader\u201d, and while it\u2019s one of the simplest of the 8 strategies my team and I developed, it\u2019s no less important. Honestly I'm giving you this method because I really want you to attend my Correlation Webinar that is on Wednesday! (Ed Note: The webinar has passed and Jason is now making live his Correlation Code, please check it out.<\/a>)<\/em><\/p>\n

The \u201cFollow the Leader\u201d Correlation Trade like all correlation trades, \u201cFollow the Leader\u201d waits until two correlated pairs go \u201cout of whack\u201d, and then quickly capitalizes on the opportunity to scalp some quick pips out of the market.<\/p>\n

Here\u2019s how it works...<\/p>\n

For this system I like to trade the EUR\/USD along with the GBP\/USD. These pairs are positively correlated, so as expected they are more or less moving parallel to one another (as seen on chart below). But when we\u2019re trading with correlation, we\u2019re not only looking at direction...we\u2019re also looking at the RANGE.<\/p>\n

\u201cRange\u201d: The difference between the high and the low prices during a specified period of time.<\/p>\n

We know, for example, that the GBP\/USD normally has a much larger range than the EUR\/USD (NOTE: I don\u2019t have the time right now to go into why the range of the GBP\/USD is larger, but if you look at the two charts side-by-side you\u2019ll be able to see with the naked eye what I\u2019m talking about.). In other words, while these correlated pairs will generally move in the same direction, the GBP\/USD should have lower valleys and higher peaks than the EUR\/USD. So, when we see that the range of the GBP\/USD is lagging behind the range of the EUR\/USD for one bar (see chart), we have a potential trade setup. Once the \u201crange lag\u201d is 20 pips or greater, we take the trade with the expectation that the GBP\/USD will make up the \u201cgap\u201d, and overtake the range of the EUR\/USD within a few bars.<\/p>\n

Remember, we know this is an extremely high probability trade, because \u201cFundamental Law\u201d dictates that the pairs MUST remain in correlation, so therefore we know that they will eventually \u201csnap back\u201d. Like I said, it\u2019s a simple strategy, but because it\u2019s backed by market fundamentals it\u2019s one of the most accurate (and profitable) intra-day strategies I've ever traded.<\/p>\n

OK, let's check out the chart as mentioned above:<\/p>\n

\"\"
\nRight now the range of the GBP\/USD is lagging the EUR\/USD by 8 pips. That\u2019s enough of a lag to take notice, but it\u2019s not enough to take the trade yet.<\/p>\n

Remember, I like to see at least a 20 pip lag before I take the trade, so I\u2019ll watch it for another bar and see what happens...<\/p>\n

\"\"<\/p>\n

When the second bar closes, the range is now lagging by 15 pips. It\u2019s still not enough for me to take the trade yet, but the fact that the range lag still hasn\u2019t corrected itself (and is actually growing wider) has me very excited.<\/p>\n

I\u2019ll wait and watch it for one more bar and see if the \u201crange lag\u201d or \u201ccrack\u201d widens enough for me to take the trade...<\/p>\n

\"\"<\/p>\n

The third bar has closed, and the \u201crange lag\u201d has now widened to 24 pips. That\u2019s greater than the 20 pip minimum I need, so I\u2019m going to take this trade and go long on the GBP\/USD.<\/p>\n

My expectation is that the GBP\/USD will at a bare minimum make up the 24 pip \u201crange lag\u201d or \u201ccrack\u201d...and possibly even go beyond that since historically the range of the GBP\/USD is supposed to be LARGER than the EUR\/USD<\/p>\n

And again, when we\u2019re trading with correlation and something goes \u201cwrong\u201d (as is the case with this \u201crange lag\u201d), that usually means there\u2019s a profit opportunity just around the corner. \ud83d\ude42<\/p>\n

Now that we\u2019re in this trade, let\u2019s watch it and see what happens next...<\/p>\n

\"\"<\/p>\n

As you can see, the very next bar the GBP\/USD made up the \u201crange lag\u201d and returned to
\n\u201cnormal\u201d just as we expected it to. We then exit the trade at the end of the bar and
\npocket the 24 pips.<\/p>\n

So there you have it\u2026the \u201cFollow the Leader\u201d strategy!<\/p>\n

So to recap, all you need to do is:
\n1) Watch these 2 pairs simultaneously.
\n2) Track the movement of both pairs at the close of each bar.
\n3) Once you see one of the pairs begin to pull away, pay attention because you are now looking at a potential trade setup.
\n4) Calculate the \u201crange lag\u201d or \u201ccrack\u201d and when it exceeds 20 pips, you\u2019re ready to pull the trigger, and you know what your target will be, as it will be always be about equal to the \u201crange-lag\u201d!<\/p>\n

I\u2019m confident that this one strategy alone will make you a more confident, accurate and profitable trader, as these trades are ultra high probability trades to take, and I LOVE when they set up...<\/p>\n

Now that I've given you a PROVEN method of Correlation Trading I ask that you please take time on October 28th to come to my webinar where I'll REALLY teach you about Correlation Trading! Ed Note: The webinar has passed and Jason is now making live his Correlation Code, please check it out.<\/a><\/em><\/p>\n

Jason Fielder
\nThe Correlation Trading Webinar FREE sign-up<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Last week Jason Fielder gave us some general insight on correlation trading, but today he pulls out ALL the stops and dives deep into a proven method for successful correlation trading! Jason said the only way he would teach this much is if I mentioned his free webinar that focuses on correlation trading! 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