Correlation Divergence - GBP/NZD vs GBP/AUD
Okay, so today we have a potential correlation divergence trade.
As the chart shows, GBP/NZD formed a lower low at Yearly Camarilla S3 Support, but GBP/AUD formed a flat double bottom. Why is this significant? Basically, because these two pairs are highly positively correlated - 90% on a Daily AND Monthly time frame. What one does, the other is pretty much guaranteed to follow. Given that we now have the pairs doing something different, that means we have a correlation divergence. Specifically, we're looking to long GBP/NZD.
Correlation divergences are great, and pretty straightforward, trades to make. You take two highly correlated pairs (can do negatively correlated, but positive is easier to visualise on a chart), and look for instances when they start moving differently. I prefer to look at correlations on a higher time frame than I'm actually trading, as this allows you to then jump down to a lower time frame and identify short-term correlation divergences that you can then reliably trade upon.
It's simple, but it works.
As for potential long targets, there are a few options. Either the previous low at 1.87300ish (4July19) if we're looking at a trend continuation downwards. Or, if this is a proper reversal pattern, we can aim for the resistance zone in the vicinity of 1.911 - 1.919 (the latter is also a Yearly Camarilla Pivot).
Hopefully this works out, but nothing is guaranteed. Don't ignore your stop loss, R/R ratio, and trade management knowledge.
See the related idea below for more information about correlation trades, and why the AUD and NZD are so closely correlated.
Any queries, let me know.
DD
As the chart shows, GBP/NZD formed a lower low at Yearly Camarilla S3 Support, but GBP/AUD formed a flat double bottom. Why is this significant? Basically, because these two pairs are highly positively correlated - 90% on a Daily AND Monthly time frame. What one does, the other is pretty much guaranteed to follow. Given that we now have the pairs doing something different, that means we have a correlation divergence. Specifically, we're looking to long GBP/NZD.
Correlation divergences are great, and pretty straightforward, trades to make. You take two highly correlated pairs (can do negatively correlated, but positive is easier to visualise on a chart), and look for instances when they start moving differently. I prefer to look at correlations on a higher time frame than I'm actually trading, as this allows you to then jump down to a lower time frame and identify short-term correlation divergences that you can then reliably trade upon.
It's simple, but it works.
As for potential long targets, there are a few options. Either the previous low at 1.87300ish (4July19) if we're looking at a trend continuation downwards. Or, if this is a proper reversal pattern, we can aim for the resistance zone in the vicinity of 1.911 - 1.919 (the latter is also a Yearly Camarilla Pivot).
Hopefully this works out, but nothing is guaranteed. Don't ignore your stop loss, R/R ratio, and trade management knowledge.
See the related idea below for more information about correlation trades, and why the AUD and NZD are so closely correlated.
Any queries, let me know.
DD
Comment:
Haha, a buffer***
Trade closed manually:
There was a nice bounce on GBP/NZD, as identified by the correlation divergence - around 130-140 pips.
However, it has now stalled out, AUD/USD is potentially set for a move higher, and the highly correlated GBP/AUD has formed a small bearish pattern. Which means we again have a correlation divergence, it's just in the opposite direction to last time.
So, I'm stepping aside for the moment. I'm waiting to see what happens with the USD, which will in term impact what happens with AUD/NZD/GBP markets.
However, it has now stalled out, AUD/USD is potentially set for a move higher, and the highly correlated GBP/AUD has formed a small bearish pattern. Which means we again have a correlation divergence, it's just in the opposite direction to last time.
So, I'm stepping aside for the moment. I'm waiting to see what happens with the USD, which will in term impact what happens with AUD/NZD/GBP markets.
Target levels are at the most recent high, support zone, and trend-line between 1.8900 - 1.8950, and then a further one at the yearly Camarilla pivot of 1.9200 (add a bugger of 40ish pips either side of that price).
I'm looking for this to be a proper long-term reversal, but I'll monitor price at each key level as it could simply be a bear trend continuation.