Sunday, July 22, 2018

The Correlation Pairs Secret


I would like to open up this report with some rather SHOCKING observations. They
may seem unrelated at first, but bear with me because I promise these observations have
everything to do with YOU becoming a more confident and profitable Forex trader.

Ok, I hope you’re ready because here comes the first “SHOCKING OBSERVATION”…
SHOCKING OBSERVATION #1:
As temperatures INCREASE, sales of ice cream INCREASE as well.
SHOCKING OBSERVATION #2:
As temperatures DECREASE, the volume of clothes that people wear
INCREASES.
Wow, that’s some seriously shocking stuff, isn’t it?

by now you probably realize that I’m joking. Clearly there’s nothing shocking
about these observations. In fact, they’re about as common sense as it gets. Everyone
knows that as the weather warms up, people like to eat ice cream because it’s cooling
and delicious to eat in the summer heat.
Furthermore, we all know that as the weather turns colder, people tend to wear more
clothes because it’s necessary to stay warm.
These relationships (i.e. increased temperatures = increased ice cream sales AND
decreased temperatures = increased clothing volume) are so “common sense” and
fundamental, in fact, that we likely ignore them completely.
But imagine if blatantly obvious relationships like these existed in the Forex market?
And more importantly, imagine if these “common sense” and “fundamental”
relationships could be used to give you an edge and actually increase your trading
accuracy and profitability?

Well believe it or not, these relationships do exist in the Forex market…
They’re called CORRELATED PAIRS, and in this report I’m going to show you how
you can capitalize on these correlated pairs (and correlation trading in general) to make
more money than you’ve ever made before trading the Forex.

I’m even going to give you one of my tested and proven correlation trading strategies
(it’s called “Follow the Leader”) that you can begin trading almost immediately.
But before we get into the trading strategies themselves, we first need to take a closer
look at correlated pairs so you can see how they work (and more importantly) how we
use them to get an unfair advantage over just about every other trader…

What Do Correlated Currency Pairs Look Like?
The first step to profiting from correlated pairs is to learn how to recognize them.
Fortunately for us, that step is actually quite easy as you can see by the screenshot
below:
Even at first glance, you should be able to detect a clear relationship between these two
correlated currency pairs: EUR/USD and USD/CHF
Can you see how they’re almost always moving in opposite directions? Can you see how
when the EUR/USD goes up the USD/CHF tends to go down…and vice-versa?
If not, look again…

As you can clearly see, the charts for the EUR/USD and USD/CHF are almost perfect
mirror images of one another. When the EUR/USD goes down, the USD/CHF tends to
go up. And when the EUR/USD goes up, the USD/CHF tends to go down.
This relationship is known as a NEGATIVE CORRELATION, because these two
correlated pairs (almost) always move in opposite directions of one another.
If the concept of negative correlation is still a bit unclear, think back on the 2nd
“Shocking Observation” I gave you at the start of this report. If you recall…

As temperatures DECREASE, the volume of clothing that people wear
INCREASES.
So in other words, temperature and clothing volume almost always move in opposite directions.

As temperatures DECREASE, clothing volumes INCREASE.
As temperatures INCREASE, clothing volumes DECREASE.
(Think summer bikinis.) 
Ok, by now you should have a pretty firm grasp of NEGATIVE correlation and what it
looks like, so let’s move on to the second type of correlation: POSITIVE
CORRELATION.
The screenshot below is an example of two POSITIVELY correlated currency pairs:

Unlike the previous example, these currency pairs are moving more or less parallel to
one another. Once again, to further illustrate this point I have drawn lines on the chart to
show the correlated movements of these two pairs over time…

This example is similar to “Shocking Observation #1”:
As temperatures INCREASE, ice cream sales also INCREASE.
So once again, since the movement of both temperature and ice cream sales are in the
same direction, this is an example of POSITIVE CORRELATION.
By now you should have a firm understanding of positive and negative correlations and
how to recognize them on a chart, so next let’s discuss why some currency pairs are
correlated and others are not…

It’s All About the FUNDAMENTALS
At this point you’re probably wondering, why are currency pairs (like the EUR/USD and
USD/CHF) correlated in the first place? What causes these positive and negative
relationships to exist?
Well much like our temperature and ice cream and temperature and clothing examples
from before, currency correlations come down to basic fundamentals.
Increased temperatures are correlated to increased ice cream sales and decreased
temperatures are correlated to increased clothing volume for two simple but extremely
powerful FUNDAMENTAL FACTORS: comfort and survival.

People eat ice cream when it gets hot because it makes them comfortable, and
they wear more clothing when it gets cold for the same reason…comfort (and in
some cases survival).
The point is, the factors that drive these correlations are deeply rooted in daily life. They
won’t change! Not this year…not in 10 years…NOT IN 100 YEARS!
The fundamentals behind these correlations are UNIVERSAL!
The same is true for correlated currency pairs…
There are literally dozens of correlated currency pairs, but what follows is a partial list of
some of the most significant pairs, and the fundamentals that back them:

The EUR/USD and GBP/USD, for example, are positively correlated because the base
currencies (i.e. the first currencies listed) of these pairs – the EUR and the GBP –
represent European Union Member States, so they’re very, very similar both from a
monetary policy and from a geographical sense.
In other words, when EU makes a shift in monetary policy or when there’s a major
change in the European economy, both the EUR and the GBP are affected in the same
way, because they’re both European currencies.
The EUR/USD and USD/CHF, on the other hand, are negatively correlated because the
base currency of the first pair (the EUR) and the base currency of the second pair (the
USD) have very different monetary policies, economics and geographic locations. So for
the same reason the previous pairs were positively correlated, these pairs are negatively correlated.

Now, allow me to let you in on yet another fact:
Did you know that currency pairs with CAD, NZD and AUD as their base currencies
will all tend to be POSITIVELY correlated with one another?
It’s true, and in this case it has nothing to do with monetary policy, and it certainly has
nothing to do with geography. (After all, Canada and New Zealand couldn’t be farther
apart!)
In this case, the CAD, NZD and AUD are all correlated because all three countries
(Canada, New Zealand and Australia) are heavily dependent on commodity exports,
meaning their currencies all have strong ties to the commodities markets.
Therefore, as commodities move, so too do these three currencies…and typically in the
same directions.
By the way, if by any chance you’ve found this section confusion, please… DON’T
WORRY ABOUT IT!!

I have some good news...
Just like you don’t need to fully grasp the workings of an internal combustion engine to
drive a car, you also don’t need to fully grasp the detailed fundamentals behind the
different currency pair correlations to profit from them!
In fact, all you really need to know is:
Strong fundamentals are behind correlated currency pairs. This gives
you a consistent, predictable model from which to trade.
In other words, just like we can count on increased temperatures remaining correlated
with increased ice cream sales (because it’s backed by FUNDAMENTALS of daily life),
you can also count on the EUR/USD and GBP/USD remaining correlated because they
too are backed by…
…UNIVERSAL MARKET FUNDAMENTALS.

Predictable Volatility = Profit Potential
Now that you understand what correlation is, how to recognize it on a chart and the
fundamentals that back it, it’s now time to discuss how we use correlation to gain an
edge over other traders.
When most traders look at correlated pairs, they focus the bulk of their attention on the
98% of the time that the currency pairs do what they’re supposed to do and remain
correlated.
Not me…I’ve always been more interested in the 2% of the time when correlated
pairs FALL OUT of correlation.

(And if by any chance you're worried 2% doesn't sound like a lot, I can let you in on a
little secret... it's PLENTY often to produce continuous trading opportunities, if you
know what to look for!)
Oh, by the way, I realize it may sound a bit counter-intuitive, to look for a correlation
“fall out” so please hear me out…
You now know that correlations are backed by fundamentals. But not just any
fundamentals…correlations in the Forex market are backed by UNIVERSALE
MARKET FUNDAMENTALS.
In other words, the currency pairs we’re trading aren’t correlated because some overoptimized,
made up indicator says that they’re correlated…
…they’re correlated because REAL-WORLD market forces dictate that they
MUST be correlated.
So why does all this matter and what does it have to do with gaining that “edge” that I
promised?

Well, it’s simple…
If we know that certain pairs are correlated, and that those correlations are backed by
real-world market forces, then the 2% of the time when those pairs fall out of
correlation…we know that something has gone wrong.
We don’t know what has gone wrong, necessarily, but we do know that at least one of the currency pairs isn’t acting like it should.
For example, remember the EUR/USD and USD/CHF?

These pairs have a high NEGATIVE CORRELATION, meaning they should more or
less move in opposite directions to one another.
If all the sudden these pairs fall out of correlation and begin to move parallel to one
another, then we know that something is “out of whack”.
And while it doesn’t happen all that often, it’s these times when things go “out of
whack” that we’re able to gain an edge.
You see, when correlated pairs fall out of correlation, it’s just a matter of time before
they go back into correlation. AGAIN, these are UNIVERSAL MARKET
FUNDAMENTALS that are causing these correlations, and it’s these market

fundamentals that will force the pairs back into correlation.
So here’s what we know…
 We know that something has gone “wrong” because the currency pairs aren’t
behaving like they should…
 We know that the pairs will eventually be forced back into correlation by
real-world, fundamental market forces…
 We know that when the pairs move back into parity (i.e. correlation) that the
“movement” will create significant profit opportunities…

Did you catch that last one?
 We know that when the pairs move back into parity (i.e. correlation) that the
“movement” will create significant profit opportunities…
This is the single most important point of this entire section, so don’t miss it…
When correlated pairs fall out of correlation, a small moment of opportunity is
created because we now KNOW that there will be movement (i.e. volatility) when
the pairs move back into parity. And where there’s VOLATILITY, there’s the
potential for profit.

Here’s the deal: As a trader, it is impossible to profit without movement in the markets.
We NEED volatility or we don’t make money.
But volatility alone isn’t enough. To trade with maximum confidence and accuracy, we
need PREDICTABLE VOLATILITY…and that’s exactly what correlation trading
gives us.
As correlation traders, we know that when correlated pairs fall out of correlation that
they will return. And it’s when things return to “normal” that we’re able to take our
profit.

The Giant FLAW In Correlation Trading
The fact that you’re still reading this report suggests that you’re probably getting excited
about this concept of Correlation Trading. After all…
 Correlation Trading is easy to identify and trade…
 Correlation Trading is backed by proven, timeless, universal market
fundamentals…
 Correlation Trading gives us the PREDICTABLE VOLATILITY we need to
trade with confidence and accuracy…

It all sounds great, doesn’t it!?
Well unfortunately, Correlation Trading does have one GIANT FLAW.
While correlations will tell you that a move is about to occur, correlation alone doesn’t
tell you which pair is moving or the direction it will be moving in.
In other words, you know you need to put on a trade, but you don’t know which pair to
trade or whether you need to buy or sell short.
This massive limitation in Correlation Trading has stifled traders for years, which is why
so few traders use correlations despite its obvious benefits. In fact, chances are you
hadn’t even heard of Correlation Trading prior to downloading this report!
Of the handful of traders who did trade with correlations, most just used it as a filter to
increase the accuracy of an already-profitable system.
Well I for one wasn’t willing to stop there…

You see, as a full-time trader, researcher and system developer, I know that identifying
PREDICTABLE VOLATILITY is half the battle. Determining entry and exit points
is simply a matter of testing and a whole lot of trial and error.

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