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Lucid

Correlation Trading and Why It Works So Well

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As humans we do not come equipped with the ability to deal with the variety and often times confusing aspects of randomness. We are taught from a very young age to strive for perfection, for high scores in school and in sports. This could be our biggest flaw and is the handicap for a lot of traders. There is no perfection in trading and never will be. It is a profession of chance and liability. Traders must learn to put probability in their favor and realize the markets are extremely random. Most traders forecast future price using some combination of fundamentals, indicators, patterns and experience in the expectation that recent history will forecast the probable future often enough to make a profit. This is fine for those 5% of traders that actually make money, but most forget that Randomness controls the forex market and cannot be predicted.

 

THE CORRELATION TRADE

 

Fight Randomness with Randomness by using the Correlation Trade!

Statistically speaking, correlation is the measured relationship between two units over a period of time. Correlation is measured on a range of -1 (perfect negative correlation) to 1 (perfect positive correlation). A positive correlation implies that the two units move in similar directions, the higher the correlation the closer and more accurately these moves are. Conversely, a negative correlation represents opposite movements with a smaller (more negative) number representing a stronger relationship between the opposite movements.

 

So far our correlation strategies have brought our forex managed account great returns and I am so surprised that more people do not discuss and use this method of trading

 

JACE

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Maybe you would like to post some examples and add some meat to 'the correlation trade' such as finding candidates, trade management, risk control and position sizing. As your post reads right now it is nothing more than an advertisement for the managed accounts you mention. Especially given that you have been a member of TL for 18 months and this post of zero information is the first post you make.....Get the discussion rolling by adding some meat.

 

With kind regards,

MK

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Hi Lucid.You are right 100% but lets say you have found something, A-B with corallation 1 you still have to forecast future price using some combination of fundamentals, indicators, patterns and experience in the expectation that recent history will forecast the probable future often enough to make a profit. Because A and B trading in the same time frame and what has happend with B two days ago to late to take action for A today.

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Yes I will start posting more and more stuff as I go but that was just the starter. I copied and pasted it from my site. Our Main Priority is trading so it will be a hit and miss. I will also post trading statement to show people how the Correlation trades really work.

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Yes Youri you are correct we take a look at the fundamentals every hour of every day. I am not much a believer in the whole indicator mess that everyone gets caught up in. It is all hind site and I have not seen too many traders that really make money using indicators. It is all about Price action. They best way to show how it all works is to post a few live trading videos. I am not sure if the Traders Laboratory will let me do that.d

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  Lucid said:
Yes I will start posting more and more stuff as I go but that was just the starter. I copied and pasted it from my site. Our Main Priority is trading so it will be a hit and miss. I will also post trading statement to show people how the Correlation trades really work.

 

 

In the spirit of disclosure, are you here to promote a paid website or share ideas w/ members?

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Not sure what you are asking. No I do not have a product to sell everything on my site is free education. I trade FX Funds I thought this would be a good Idea to show people how real life funds trade and to show how are correlation works. The truth is most traders lose money and most really do not put in the time or effort it takes to become a great trader. I get weekly phone calls from people who have blown up their account and want us to come on and save them so I thought it would be a good idea to come on a forum and hopefully help a few people out. Like I said I will be able to post our set ups and trades periodically and I will try and answer any question I get regarding correlation trading in a timely manner.

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Ok let me give you some of the trades that took this last week. Right now the EUR and the GBP are correlating quite well. Now here is how the set up works. This last week we put in a Long EUR/USD and a Short GBP/USD at the same time. When the markets are choppy and in a range then you will get swings in and out of profits when you swing into profits which might take 24 hours or it might take 2 minutes then you close out the trades and wait for another opportunity. We will sometimes take 20 of these a day or we might only take one. I will try and learn how to attach some of the actual trades to show it in real time.

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I think that brownsfan might just have another one nailed to the floor.

 

The correlation is between suckers who might be exploited and junior members of trading boards (sorry to those who are 1:1 on this).

 

The great returns are to another spammer selling managed accounts and forex training courses.

 

Lucid of course means "characterized by clear perception or understanding" which is what Brownsfan and I are displaying for all to see. We are your shining light.

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  Lucid said:

So far our correlation strategies have brought our forex managed account great returns and ]I am so surprised that more people do not discuss and use this method of trading

 

Its really not that hard to figure out why a trading board that is made up of guys not swinging 50 mil+ are not so interested in pairs/long-short/stat arb strategies...

Beyond the idea that correlations between 2 instruments are ludicrously unstable on a short enough time frame to not be looking at obvious sector and index beta, this whole idea was milked in the 90s then become a way to market to rich morons who wanted some money with "quants" during the credit bubble.

I guess the retail shysters have finally read some Taleb and figured out after the credit crisis this is good marketing to reference "randomness" and "correlation"...

While I totally agree with your stochastic easement of markets as a whole. Personally, I have zero interest in pairs trading(let alone stat arb) because it doubles my capital commitment while cutting off any positive return from tail risk and just being "lucky"..I eat the risk of being massively wrong, but have hedged myself of being massively right.

Of course though you are in managed forex accounts, and not currency futures..no surprise at all...

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  Lucid said:
Ok let me give you some of the trades that took this last week. Right now the EUR and the GBP are correlating quite well. Now here is how the set up works. This last week we put in a Long EUR/USD and a Short GBP/USD at the same time. When the markets are choppy and in a range then you will get swings in and out of profits when you swing into profits which might take 24 hours or it might take 2 minutes then you close out the trades and wait for another opportunity. We will sometimes take 20 of these a day or we might only take one. I will try and learn how to attach some of the actual trades to show it in real time.

 

Hi Lucid,

 

I'm interested to hear what you have to say - I'll keep an open mind, so thanks for your input.

 

One question I have about this trade. Correct me if/where I'm wrong, your structure/position will be as follows:

+EUR, -USD

- GBP +USD

As I see it, your USD position is in fact flat, and what you actually have is long EUR/GBP. I fail to see where correlation comes in to this.

 

If YEN/USD had no correlation to GBP/USD and I did the same, I'd have a YEN/GBP position.

 

Sorry if I'm being stupid, I just dont see where correlation comes into play.

:doh:

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  Lucid said:
Ok let me give you some of the trades that took this last week. Right now the EUR and the GBP are correlating quite well. Now here is how the set up works. This last week we put in a Long EUR/USD and a Short GBP/USD at the same time. When the markets are choppy and in a range then you will get swings in and out of profits when you swing into profits which might take 24 hours or it might take 2 minutes then you close out the trades and wait for another opportunity. We will sometimes take 20 of these a day or we might only take one. I will try and learn how to attach some of the actual trades to show it in real time.

 

So basically you are just trading the cross rate (EUR/GBP) long or short....I'm still at a loss on exactly what you are doing because you make it sound more complicated then that....

 

With kind regards,

MK

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pair trading with currencies are typically an interest rate instrument, such as pairing the euro vs the eurex bond, or one of the majors versus the dollar index.

 

there are many ways to trading pairs, and one need not trade both instruments. we've had success using the ES as the trading instrument paired against the VIX for example.

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in FX, the second symbol is typically an interest rate instrument, such as the trading the Euro based on the Eurex Bond. Sometimes the dollar index is used.

 

One need not trade both sides, which is called unilateral pair trading by some. For example, we've had success pairing the ES with the VIX, trading just the former.

 

Full disclosure : we offer a pair trading testing strategy for Tradestation, but it's not a signal service and mean to serve as a framework for people to test their pair ideas.

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