The Correlation Cheat Code for Traders!
Imagine you are a caveman.
Nakita mo na tinamaan ng lightning ang isang puno.
Umapoy.
You discovered fire for the first time.
You learned how to create a fire on your own.
Nadiscover mo na andami pa lang gamit ng fire.
Natuto kang magluto. Natuto kang magpawarm sa gabing malamig.
You discovering fire was the best thing that could’ve ever happened sa buhay mo.
The discovery of fire to a caveman is the same as the discovery of correlation to a trader.
The moment a trader discovers na may mga currency pair, stocks at crypto coin na correlated ay parang caveman sila na nakadiscover ng fire.
Let’s discuss what correlation is and why most traders consider this as some form of a “cheat code” sa trading.
Correlation describes when two variables move together.
Sa forex market ang may best example ng correlation.
May mga tinatawag na correlated pairs.
Let me give you some definition mula sa Google AI about correlated pairs.
Correlated pairs in forex are currency pairs that tend to move in the same (positive correlation) or opposite (negative correlation) directions. Examples include the positive correlation between EUR/USD and GBP/USD, and the negative correlation between EUR/USD and USD/CHF. These relationships are important for traders to manage risk, as highly correlated pairs can be used for hedging or diversification.
What is currency correlation?
Positive correlation: The two currency pairs move in the same direction.
A strong positive correlation (e.g.,0.80 to1.00) means that when one pair rises, the other also tends to rise.
Negative correlation: The two currency pairs move in opposite directions. A strong negative correlation (e.g.,-0.80 to1-.00) means that when one pair rises, the other tends to fall.
Correlation coefficient: This is a value between -1 and1 that indicates the strength and direction of the correlation. A value of 1 means a perfect positive correlation, while -1 means a perfect negative correlation. A value near 0 indicates little to no relationship.
Examples of correlated pairs
- EUR/USD and GBP/USD: Often have a strong positive correlation because both the Euro and British Pound are influenced by the US Dollar, and the economies of Europe and the UK share some similarities.
- EUR/USD and USD/CHF: Usually have a strong negative correlation. When the EUR/USD pair rises (meaning the EUR is strengthening against the USD), the USD/CHF pair tends to fall (meaning the USD is weakening against the CHF).
- AUD/USD and NZD/USD: Often show a strong positive correlation due to the similar economic drivers for Australia and New Zealand, such as commodity prices and trade with China.
- USD/CAD and Oil: There is a strong negative correlation between the USD/CAD pair and oil prices. As oil prices (traded in USD) rise, the Canadian Dollar (CAD) strengthens, causing the USD/CAD pair to fall.
The Problem
The first time mo malearn ang correlation or ang correlated pairs ay parang siya na ang solution sa trading problems mo. Para kang nakakita ng key.
“OMG! Why haven’t I discovered this earlier???”
Yung iba they even take it further to the point na may inaassign sila na numbers sa mga correlation. 0 to 10 para sa positive correlation at 0 to -10 naman para sa negative correlation.
10 para sa pinakamalakas na positive correlation at -10 naman para sa pinakamalakas na negative correlation.
Kapag bago mo pa lang nalaman ang correlation ay its a mindblowing idea.
“OMG umaakyat ang EURUSD!Umaakyat din ang GBPUSD!”
“OMG umaakyat ang EURUSD! Bumabagsak ang USDCHF!”
The problem comes when you start to apply those ideas sa actual trade na.
Nakita mo na umaakyat ang EURUSD. You go long sa correlated pairs niya na GBPUSD. After few minutes bumagsak ang EURUSD at bumagsak din ang GBPUSD.
Minsan naman nakita mo na umakyat ang EURUSD. You go long sa GBPUSD. Panay akyat ng EURUSD while GBPUSD goes down hard.
Minsan nakita mo na umaakyat ang USDCHF. You shorted EURUSD. Instead bumagsak ay umakyat din ang EURUSD.
Napapakamot ka na lang ng ulo mo wondering “what is going on?”
“Akala ko ba correlated pairs work???”
Yung idea at theory about correlation is true.
To think na you can somehow use it as a cheat code sa trading is just you either being naive or you lack the understanding na walang magical shortcut into sure profits sa trading.
Honestly, mas madami pang napapahamak kakatrade ng correlated pairs kesa sa kumita.
Some forex pairs might be correlated but they do not have a predictable movement na pwede mong kunan ng timing para sa repeated success in trading.
Game of probability ang trading. Walang may nakakapredict ng market price and market movements with 100 percent certainty.
Let me show you some of my scalp trades today para lang may point of reference ka at hindi theory lang ang discussion sa blog na ito.
Take a look:
AUD/USD and AUD/JPY are generally positively correlated because they are both influenced by the Australian dollar pero nakashort ako sa AUDJPY while nakalong sa AUDUSD yet both sila ay nagbigay sa akin ng gain.
Here is another one.
Short sa EURUSD while long naman sa GBPUSD pero both ay nagbigay sa akin ng profit.
They are correlated pero they moved differently.
I took those trades at the same time.
Let’s move on naman sa stocks.
Ang correlation naman sa stocks ay more on sectoral correlation.
Ang idea ay kapag umakyat ang isang sector in general ay aakyat ang mga stocks na related sa sector na yun.
Let’s take the financial sectors.
Mga bank stocks.
Kapag up ang financial sector ay up ang mga banks.
Kapag up si BDO then you can buy MBT kasi aakyat din siya.
They belong sa iisang sector.
Yan ang idea pero hindi ganyan ang reality sa trading.
Kahapon down si BDO while up si BPI.
Let’s move on sa isa pang pinakapopular na gamit ng correlation.
Gold and Silver trading.
Kung down ang USD ay up ang GOLD at SILVER.
Kung up ang USD ay down ang GOLD at SILVER.
Generally, yes but if you use that idea sa trade mo ay you will be in for a rude awakening.
Madami nang nasunog at nawipeout kakalong sa GOLD while USD is down.
Instead umangat ang GOLD ay bumagsak ng malalim muna bago umakyat.
Conclusion
Walang holy grail sa trading.
Walang shortcut. Walang cheat code.
If you think na ikaw lang yung kauna-unahan na trader na nakadiskubre at namindblown sa correlation then you are dead wrong.
Matagal nang idea yan at madami na ang nagtry then nasunog sa kakatime ng market gamit ang correlation.
It sometimes work but so does a broken clock diba?
Kahit nga simpleng RSI oversold lang eh sometimes it works din but you don’t go and treat RSI oversold as some cheat code.
Heto ang fact.
NO ONE CAN PREDICT THE MARKET MOVEMENTS!
Believing na may nakita kang tool to predict the future sa trading is foolish.
Believing na may cheat code ka sa trading is foolish.
Marami na ang naunang naniwalang may ganyan na naubos lang ang pera kakachase at kakapilit prove ng paniniwala nila.
Instead maghanap ng shortcut or magic ay learn how to trade properly.
Yan ang best approach.
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You can succeed in trading at pwede ka naman din magfail but at least you had the opportunity to at least try.
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