PDA

View Full Version : Is it really possible to have more than one position?



AMR
02-12-2008, 11:20 AM
I do not have all that much experience with FX yet, but it seems like everything is either moving together or moving completely opposite to each other.

How would the more experienced players handle this? I've been watching all the USD pairs move together, the EUR/JPY move the same way, and other crosses moving nearly identically. Is it truly possible to build uncorrelated positions in FX?

arco
02-12-2008, 01:43 PM
I had this saved to Word and it goes someway to explaining.........

Basically, the correlation number gives you an estimate of how closely pairs move together or how opposite their actions are over a period of time. Knowing how closely correlated currency pairs are is a great way of measuring exposure and risk.
This information is extremely useful when you have an open position and wish to open another position. For example:
I have an open AUD/USD short position. I notice a possible long setup with the EUR/USD. I want to find out what the correlation is between these 2 pairs. Consulting a 5-day correlation table shows a correlation value of .24. What this tells us is that the correlation is low and the 2 pairs don’t move in the same way. Therefore going short on AUD/USD and long on EUR/USD should not affect each others position.
What if the correlation was high between 2 pairs. The correlation between the EUR/USD and USD/CHF on a 5-day correlation table is -.96. This tells us that there is an extremely negative correlation between these pairs. This number indicates that these pairs have a strong propensity to move in opposite directions. Therefore, going long in one and shorting the other would be almost the same as doubling up on the position. As a result, this would open your portfolio to a higher amount of risk.

Tables here..................

http://www.mataf.net/en/tools/correlation-table

____________________________

According to Oanda's heat map of currency correlations, the USD/JPY and EUR/GBP are the least correlated pairs to the GBP/USD. (Aug 08)

http://forexblog.oanda.com/20080822/forex-correlation-heatmap-tabl/

arco
02-12-2008, 02:02 PM
AMR - some more info for you..........................

The following is our monthly correlations update for November. As we have previously mentioned, correlations between different currency pairs shift over time, therefore it is of utmost importance to regularly follow changes in correlation. We have also included the 3 month and 1 year correlations to give traders a better sense of historical trends and added 6 month trailing correlations as further confirmation of the correlation results.
In order to be an effective trader, it is also important to understand how different currency pairs move in relation to each other. There are a few reasons why this is significant, but most importantly, it allows traders to understand their exposure. That is, having a portfolio that consists of the EURUSD and GBPUSD is different from having a portfolio that consists of the EURUSD and USDCHF. As indicated in the tables below, over the past year, the EURUSD has had a strong positive correlation (+0.96) with the GBPUSD and a strongly negative correlation with USDCHF (-0.99).
Therefore having a long EURUSD and long USDCHF exposure would generally lead to negated or nearly zero profit or losses because when the EURUSD rallies, USDCHF will sell off the majority of the time. Of course, these two currencies have different pip values, so the P/L may not be exactly zero. On the other hand, holding long EURUSD and long GBPUSD exposure is similar to doubling up on the position since the correlation is so strong.
Furthermore, we can tell from our tables that correlations shift with time. The GBPUSD and NZDUSD have a relatively strong positive correlation (0.83). This relationship broke down quite a bit this month however as we see a one month correlation of (0.14). Having this knowledge will allow traders to effectively diversify and manage their portfolios. Shifts such as these can be partially explained by changes in the severity of monetary policy or changes in unique domestic conditions.
Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends.
http://images.tradingmarkets.com/2005/Lien/KL120105-01.gif
http://images.tradingmarkets.com/2005/Lien/KL120105-02.gif
Kathy Lien



http://www.tradingmarkets.com/.site/Forex/Commentary/forextacta/12012005-47616.cfm

peat
02-12-2008, 02:27 PM
There does seem to be a lot of correlation at times. Elliot Wave maintain that IATSM - its all the same market and this is based on expansion or contraction and I interpret this in a currency perspective as being risk vs caution eg when people accept risk then certain pairs will generally rise eg AUD/Yen

I think to get fundamentally different trades going you need to differentiate between the blocs. Eg there is the USD bloc and this means against Eur GBP Chf AUD NZD CAD and there will tend to be a high correlation with those. Within that lot you've also got the sub bloc of AUD NZD and CAD that are called the Com Dols.
Note that I didnt include Yen because the Yen crosses form their own bloc and they tend to move together but note the USD/Jpy doesnt always move in correlation with USD/Chf so I see them two (tho both USD obviously) as in different bloc.

Then theres the true crosses that arent in one of those blocs such as Eur/GBP and AUD/NZD.

Then you've got the triple links as I have just this very minute named them eg USD/CHF EUR/USD and Eur/Chf where obviously the relationships round the circle of those three pairs are fixed which doesnt of course make them predictable. The other eg of this is Eur/USD USD/JPY and Eur/JPY

So sometimes it does seem difficult to trade without correlation but it is possible. Can be interesting to look at exotic pairs such as the Scandinavian cross NOK/SEK to get a trade going that is not going to increase your exposure to the general USD up or USD down scenario.