Correlation Secret

How can I make money from Correlation?

Well, remember, in the previous section, I just showed that I can prove MATHEMATICALLY which currency pairs will follow eachother, and which ones will look like “mirror images”. But if you look very closely, you will notice very small differences between the two example charts, even though they look very very similar.

As an example, the corr-example-neg.jpg chart shows a move, from one edge of the chart to the other in the EUR/USD chart of about 37 pips. However, the chart just below it, which is the negatively correlated USD/CHF chart, only shows a move of about 23 pips. There is a difference in the two moves of 15 pips (37 pips in the EUR – 23 pips in the CHF). So, we KNOW they move in the same way, and we KNOW that it isn’t always by the same amount. We can literally pocket the 14 pips difference.

Let’s use the below chart for a trading example.

If you were to have an indication of the EUR going up, but you didn’t know by how much (which is one of the biggest pitfalls of trading), you would then buy both the EUR/USD and the USD/CHF. Since they are inversely correlated, we already know one is going to go up and one is going to go down…so we know we are going to lose on one currency, and gain on the other. The key is to know which currency is stronger (we have indicators in the course for that).

Back to the above trading example:

EURUSD BUY 1.4585 (far left side of the chart)
- at the same time we put on a USDCHF BUY 1.0359 (far left side of the chart)

When we get to the right hand side of the chart:

• The EUR is now at 1.4622, for a gain of +37 pips
• The CHF is now at 1.0336, for a loss of -23 pips
• For a NET GAIN OF +14 total pips.

BUT I can hear you saying “but what if you picked the wrong direction??”

Here’s how we get our trades wrong, because no system is 100% correct. But you have to think about it like this…if we had not created the correlation trade, and just traded the EUR, we would have lost a whole lot more money. Lets assume, in this same example, we SOLD both currencies instead of bought — we picked the wrong direction.

• The EUR would, instead of gaining +37 pips, lost -37 pips.
• The CHF would, instead of losing -23 pips, would gain +23 pips.

So, instead of losing a full 37 pips in our EUR trade, by taking the correlation trade instead, we only lost 14 pips. We just saved ourselves 38% of the money we WOULD have lost if we did not take the correlation trade.

How else do you trade correlation >>

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