QuantumLogicTrading
Short

TRADING CORRELATION PT 1- EURUSD: SELL EUR$ ON DXY MOVES HIGHER

FX:EURUSD   Euro Fx/U.S. Dollar
This 2-part article will look at the practical application of correlations in trading and show how to use correlation inferences to exploit the statistical advantages they offer.

On the 4h time frame, the highest day-tradable timeframe imo we see EUR$ has an exclusively negative and almost 1for1 correlation with the dollar index             (or dollar "market"), however, despite popular belief EU actually has a mixed and weak correlation with GU (as we see the EU v GU correlation move from positive to negative several times).

This relationship is backed up by EU price action currently trading at +2sd of the mean, whilst GU performs the stark opposite at -2sd of the mean.

We can use this information in 2 ways to trade the 4h time frame - please bear in mind this is the 4h timeframe only, corrs differ using different time-frames.

1. We know that EU and GU dont hold any confident correlation thus we SHOULDNT make trades based for EU based on GU - despite many people often trading EU based on GU moves.

2. Instead, we know 4h EU is highly correlated with the $ Market, thus we CAN make trades based on $ Index moves - so personally, i will wait for the $index to move/break higher, at which point i will then SHORT EU, since they have a 90%+ negative correlation relationship which is rising atm.

- This imo gives us a perfect entry signal, once $ Index moves up we can then short the overweight EU which is trading at highly volatile levels above its average .

I also like short EU fundamentally for:

FOMC hawkish or hike on the 16th - must push eur$ lower
BREXIT 23rd june - UK Referendum imo has NOT yet been priced at all in downside euro's yet (especially compared to GU, this is the main driver for the increase in negative corrs between the two pairs currently)
ECB poor econ management - Eurozone is STILL suffering with below 0% inflation and 10%+ unemployment, i think this trend will continue throughout the year and ECB will have to do more printing/ issue more EURO             supply side, thus moving EU down - especially if the FOMC hikes and the Monetary policy diverges more.

I will shortly release a follow up article, looking at a higher time-frame to illustrate the different tradable inferences we can make.
Corelation trading of major vs DiXY is what is the most interesting me at the moment. The thing is that DiXY has in it's "body" compounds that are fixed and not true at the moment of the trade (not well balanced in time as forex volotality grew in time the idea of DXY calculation went old). Creating a hybrid of DiXY - a Index that is plot as market depth layer delta in base of time related incident taken as nonlinear time frequencies aka price action events ( sth more resambling.. multidimensional fixed time base function) of multiple entities in respect to it's fixed compound quantificators.

The key to understanding Dixy is the idea of IT at that time of it's creation and the expired (nowadays) possibilities of it's data propagation ( back then) and self-awernes.
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QuantumLogicTrading MasterDisaster
6 months ago
Hi MD, I totally agree, the proportional value of the index has been the same for some 20/30 years - they havent changed the proportional USD crosses to match supply/demand (liquidity) OR indeed to reflect volatility.

Nonetheless, whatever the DXY is made up of, as long as the correlation lines up or is able to suggest a past relationship - it can still offer information that may be useful when trading (even with the poorly aligned components).
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