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Ask Your Advocate: Another Perspective on Correlation Trades

23 Years ago | January 15, 2014 1/28/23, 12:00 AM

By John M Bland

Correlation trades can be complex. For instance, U.S. stocks are highly correlated with the USDJPY, and for what I feel are specious reasons, equity traders follow the USDJPY very closely. A relationship I have followed for many years is between the USDJPY and The Nikkei, which makes a lot of sense because Japan's economy is heavily impacted by its export sector. So it follows that the Nikkei is highly correlated to the S&P. A retail trader can certainly trade these correlations in the futures markets, but it can be a lot harder than it appears in a world dominated by algos, because when you dive in you find that everything is correlated and they all tend to trade simultaneously.

Therefore, there is no hope of "jobbing" short-term differenentials in tightly correlated instruments because the algos will be there before you will even see them. Another angle is when you see the relationships starting to change in a longer-term time perspective, but this type of trade requires some careful fundamental and technical analysis before you jump in. 

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