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FX pairs have natural levels of correlation – but the correlation will move in a band around the average over time. For example EURGBP and EURCHF are naturally correlated pairs. They share the same front currency and both back currencies are in the European Zone. But while they are naturally correlated, the exact value oscillates within a band.

Some traders use correlation to make actually trading decisions. This is similar to arbitrage, looking for the extremes in the correlation bands and trading for the pair to go back towards the band average.

I mostly use correlation as a portfolio management tool and to decide which of two or more correlated pairs to trade.

Portfolio Management

1) If you have multiple highly correlated pairs ‘on’ at the same time, your portfolio is unbalanced. 2) If you have multiple highly uncorrelated pairs ‘on’ at the same time, you are trading against yourself as there is overlap.

Typically, because correlation amongst FX pairs is transitive, if you have more than three trades going at once you are almost certainly doing one of the above to some extent. A small amount is not usually meaningful, but if either is high, your portfolio is unbalanced and inefficient.

Trade Candidate Selection

Suppose you have two trade candidates that are highly correlated. For example, the EURCHF and EURGBP as above. We’ll assume both show a good Sell Setup. Which do you take as your trade, all other things being equal?

I look at the Transitivity Pair – in this case the GBPCHF. Since a sell setup in either pair means you want the back currency to go up, the Transitivity Pair can show you which of the currencies is stronger. Simply determine which direction is the trend at the time-frame level of the Setup.

Links

There are many good links on Correlation on the Internet. Getting Started in Currency Trading, 3^rd Edition, discusses Correlation and Transitivity on page 237.

A good site for Correlation Tables is – http://www.mataf.net/en/tools/01-01-correlation.

If you use MetaTrader 4, an excellent tool is – http://www.fxalgotrader.com/Website%20Content/Main%20Pages/Forex%20Analysis%20Tools%20for%20Metatrader/Correlation%20Indicator%20for%20Metatrader.html.

Trade Check List

Correlation is one of the final items on my Checklist before pulling the trigger on a trade. The other two: 1) The Take-Profit (TP) to Stop-Loss (SL) ratio, making certain it is within my Trader Profile parameters and 2) Pending or just released News on either currency in the pair.

To my thinking NinjaTrader has always been the trading platform with the mostest. Unfortunately Version 6.5 had gotten a bit long-in-the-tooth, it could be slow and had some small but annoying buglets.

I’ve spent some time now with NinjaTrader Version 7 and am very impressed. It is much faster, has some new features and while I am sure it is not perfect I’ve not found a single bug in it.

Ninja just simply has the best charts of any of the competitive platforms, IMHO. While I am not a big fan of their SuperDOM I find the Market Analyzer and Stategy Analyzer to be very useful tools. NinjaScript, the supporting development language is a flavor of C# but has custom features just for market development. The Wizard allows non-programmers to build quite robust indicators – and is a great tool for learning NinjaScript as you can click ‘See Code’ to understand the pertinent underlying code.

NinjaTrader may be used for stocks, commodities and/or FOREX. NinjaTrader is compatible with over 100 broker-dealers and – for FX traders – is aligned with some of the best brokers in the business.

NinjaTrader offers a free Demo which can be used for every functionality short of real-time trading. Their new Kinetick data subsidiary www.kinetick.com offers free EOD data to use with the Demo.

The initial learning curve for NinjaTrader is a bit steeper than for example MetaTrader because of its very robust set of features and the fact more of the platform resides on the client-side. But Ninja offers a full schedule of Live and Recorded webinars to get you started. Their Forum is now quite robust and well moderated, also.

As I mentioned in the past two editions of Getting Started in Currency Trading the NinjaTrader support is far-and-away the best in the business.

I know migration to a different platform is no fun. But NinjaTrader 7 is such an awesome package you owe it to yourself to at least take a look.

We’ve had reasonably good success with the EUR pairs this year. They have tracked well Goodman-wise and contrary opinion has worked, also. The ‘EURO Crisis’ is now in its fourth iteration. If you look back, you can see these crises were a pretty good indication of an imminent turn. It is always darkest before the dawn, they say.

I will state again, at least the European countries are dealing with their debt. Perhaps not in the manner I would suggest J – but at least recognizing it exists and taking proactive measures. In the good old US of A not only is everyone in complete denial, but instead of attempting to reign in the debt we are throwing more money at it – $600B USD the latest shot from the Federal Reserve.

It is a long-standing truism that democracies are wont to let a deflationary spiral occur, allowing the debt wash away, the market clear itself to begin afresh. So, in Europe, we have something of an outside-the-box approach in that regard.

I first suggested Inflation – rather than Deflation might be a story in the early summer of 2009 when I suggested longs in Silver and Gold and began the SOYHD Futures Partnership to take advantage of a boom in commodities I thought would occur between 2009 and2011. Looking at the commodity charts we see most of them did in fact have some nice runs from late 2009 to late 2010 – and have backed of the past two months. If you ogle Wheat, Sugar, Cotton you’ll see them just about right at the TPs of the bull moves.

To wit, in commodities I expect SPSs to form in 2011 which would be Stage 2 of a major bull market. That would be followed by the classical Stage 3 ‘blow-off’ when prices basically become unglued, head for the moon.

Now let’s get back to the EURO. It hit our 1.42 objective and now we have this very interesting chart:

EURUSD 1-Day – Compressed – A possible ‘3-Template with a complex-complex FPS-SS.

At the top we were ‘2’ Over giving us a +/- 2 Carryover. You can see the SS measurement Over-Under with the red bracket furthest to the right.

We also have a 1-2-3 Down from the top. You can see the Over-Under with the dotted red lines and left-most brackets.

I would watch this pair quite carefully on the 1-Hour chart, looking for a PTS Up to form, then nibble at the long-side. Initially, a move to the TP of the Down 1-2-3 (1.35xx) or the Return Point at 1.3795 might be in the cards.

If the Down 1-2-3 is an SS to the FPS from 1.18xx to 1.42xx then we have a long term measurement to the 1.54-1.56 which of course is near the old all time highs for this pair.

TIP: Remember, as matrices propagate it is at the TP areas where we look for clues to see if the Dominance (primary trend) is going to change course.

Keep in mind this is a very long term chart with long term projections. Use 1-Hour for getting in closer, entry formations and timing. Even if these projects are correct, one may need to nibble multiple times to get aboard.

For example, MetaTrader and TradeStation are probably the most stable. But NinjaTrader has the richest feature set and most powerful scripting language. Unfortunately, there continue to be delays with Version 7; the beta 22 has just been released. 

I recently spend some time reviewing another platform: MultiCharts, www.multicharts.com. It has a solid feature set, though not as strong as either NinjaTrader or MetaTrader. It has also just added a number of broker-dealers who support it for FX. 

The MultiChart claim to fame appears to be its scripting language, PowerLanguage. PL is almost (but not quite) 100% compatible with TradeStations EasyLanguage. This is great of course because of the massive program and code language available in EasyLanguage. EL has also been around for decades, so it is very stable. 

All the scripting languages are now very robust – most traders can certainly build whatever they need with them. If not, a straight API is still a possibility. There is also NeoTicker, www.tickquest.com which although rather complex, allows programming in just about any language. 

I was not particularly impressed with the MC charts, although they can of course be customized with PowerLanguage. There are also a number of third-party add-ons for Wizards – programs which allow the non-techie to create indicators and expert advisors. The MC forums appear to be quite active which is a plus since I found vendor support somewhat lacking at this time 

MultiCharts is definitely worth a look-see and I intend to review it in more depth soon.