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Ask Your Advocate: Do correlation trades work and can I trade them?

23 Years ago | January 10, 2014 1/28/23, 12:00 AM

Question for the Advocate:

Do correlation trades work and can I trade them?

 

 

 

 

 

jay meislerYour Advocate Says:

This is a good question as correlation trades seem to be a big part of trading, especially on an intra-day basis. The one that stands out currently is the JPY vs. Nikkei correlation.

I can answer your question with a question. Does it make sense to trade the JPY based on short-term or intra-day moves in the Nikkei or vice versa?

A case can be made for trading the trend on a correlation basis but why should the JPY move in lockstep with intra-day moves in the Nikkei or vice versa? For me it makes no sense to correlate on such a short time frame but you can’t ignore it if the market is hyper focused on correlation trades, especiaslly using algos to trade that way. In other words, correlations may work even if the rational for trading that way, especially on a very short-term basis, does not make a lot of sense.  

Can you as a retail trader correlation trade?

This really depends on your time frame because if you are looking to trade very short-term, you cannot compete with the correlation algos that have better market access, tighter spreads and higher transaction speeds. They will beat you to the punch every time, even if you try to automate trading. This does not mean you should not be aware of correlations as they often drive price action but the danger in becoming too hyper focused on correlations is that there are times they do not work and you better have deep pockets if you follow them blindly. So if you want to trade correlations, be selective on the days that they are obviously leading the market.

 Feel free to contasct me with any comments and to submit your Ask the Advocate questions at

jay@tradersadvocate.com

 

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