Diversify Your Trades by Using Correlated Assets

Know when you should trade OILCAD or OILRUB or GOLDAUD for that matter. You should also know the significance of trading these correlated assets. Know that this type of trading is extremely advantageous and can result into redeeming trading opportunities. So, there’s no more waiting, get in and learn how to trade correlated assets. Let our expert take you deep into this analysis. Be there and be among leading traders!

Intermediate

19:00 GMT-20:00 GMT
23.02.2017

Mike Roberts

32:10

Webinar Transcript

Hello there Binary traders. Thank you for joining me for another session here at BinaryOnline. Still waiting for the last folks to sign in and we are going to begin this live session in just a second. Okay folks, thank you again for joining me. My name is Mike Roberts and this is our weekly session here at BinaryOnline. As always, these webinars are done live here at the firm and the idea is, of course, to give you folks the best trading ideas on trading tools so you can go ahead and use our platform to generate the experience that you want to have and that is why we do these sessions. I just want to make sure that everybody can hear me loud and clear so if you folks can just send me a quick chat here that you can hear me, that’ll be great and then we can begin.

Thank you everybody.

Correlation trading! In my opinion, the most interesting way to kind of take a look at the markets and what we are going to do, how we operate and everything. Correlation in the financial markets is the most important aspect of the financial market. Everything is correlated in the financial market and, well we know that, everybody knows that that stuff is correlated right? And let’s take a look how we can take advantage, what is the main idea behind correlation and that’s what this webinar is going to be all about.

Welcome Message

Correlated trading can be a real hassle if not properly handled.

If you are unaware of correlation trading then you are at the right spot!

And I tell you folks, everybody knows about correlation and I’m sure that all of you know about correlation. The idea is how to take full advantage of correlation. Why do we need this at first place right?

Table of Contents

What is correlation trading?

Why choose this type of trading?

Diversifying trades with correlation

Implications of fundamental and technical analysis in correlation trading

Diversifying trades with correlation- folks this is the most important sentence that we are going to speak in this session. Diversifying trades or opportunities actually, with correlation. Rule number one in trading, rule number one in investing, is diversification. Diversifying your trading portfolio. That’s the most important thing and what correlation, what we are going to see in this session, id that correlation gives us a way to diversify on any given opportunity which is very very exciting folks.

What is correlation trading?

Assets are paired against each other- very very interesting stuff

Assets traded will have direct correlation with each other

Assets of any classes can be correlated with each other

Utilizing the tendency of assets to move together

Any idea folks? Before I go on to starting correlations, you folks can write down here on chat what kind of correlations ou guys think that we can use or you have questions about specific correlations in the market. Maybe I can help you out.

There is a question here by few clients. What do I mean by correlation in the first place? Not in regards even to trading. So, correlation is an effect of something, of two assets or a situation and an asset, that can be a correlation as well, for example, you know, whatever pops into your mind actually. Just taking it outside the financial arena, then i’m just thinking about when it rains, we buy umbrellas right? So, there is a correlation between rain and umbrellas and maybe there is a correlation between an umbrella and some gloves. So that could be a correlation. Let’s take a look here at few correlations that folks are telling me here:

  • A correlation between ol and gold.
  • An example of Gold and the dollar.

Okay, those are few correlations that are pretty interesting, right? Any currency pair that you see, of course, on a platform, it is a , there is a correlation there, alright. These are a few correlations that I think are very interesting:

Characteristics of Correlation trading:

Example of correlated assets:

Example: OIL VS USDRUB

The two assets generally move in the same direction

The two assets generally move in the opposite direction

Okay, what is the correlation between the USDRUB and oil? Let’s go straight to the charts. The best way to see a correlation, is using, of course, a chart. One chart is equivalent to a thousand words as they say. Jay is asking about a correlation between Apple and Yahoo. There is a strong correlation by the way, between, there was, now it’s not that strong, but there was a correlation between Yahoo and and Alibaba because Yahoo has a big stake in Alibaba, big share in Alibaba that is worth around 30 billion dollars./p>

Let’s start with Yahoo, following Jenny’s remark here and Alibaba. Because it’s not as strong now, I don’t want to go to the long term chart and take a look at this. This is Yahoo in the past, let’s say 5 years and because Yahoo has a big big share of Alibaba, I’m gonna go relative and I’m gonna pick here Alibaba. Alright, the red line is Alibaba and the candlestick chart is Yahoo and what you can see here is because Yahoo itself is not such a profitable company and it’s going to be bought by Verizon, there is a big mess around Yahoo. Then, Yahoo’s stake in Alibaba is very significant. What you can see here, is when Alibaba goes up, Yahoo goes up and vice versa. They are very nicely correlated. You see, it’s almost the same asset[…] I do want to go back to oil and let’s compare oil. Also we’re going to go to a long term chart, you can see it nicely here on a long term chart. OIl is trading right now, this is crude, 54.4 dollars a barrel, overlay and I’m going to pick the USDRUB and you can see that the crude USDRUB, in this case, this is an inverse correlation, meaning a negative correlation. When we saw the Yahoo-Alibaba, it was a positive correlation. Right now we are seeing a negative correlation. Let’s take a look at that. A day chart here and what you’re gonna see is when oil dropped, the USDRUB actually pushed higher […] Now why is this? And you can find the similar correlation to this not only USDRUB. But we’re gonna similar correlations. So, what we understand now is you can have a positive correlation, when both assets move in the same position and you can have a negative correlation when assets move in a negative direction.

Let’s go back to the presentation.

The two assets generally move in the same direction

The two assets generally move in the opposite direction

These are the main types of correlation. There could be an asset that goes up when another asset goes up and could be an asset that goes down when a different goes up. In both scenarios we are talking about correlation. Let’s take a look at the same asset oil and we’re gonna take a look at a positive correlation of oil. I’ll show you oil versus another currency pair, for example USDCAD. So you can see pretty much the same thing. We saw a drop in oil, a rise in the USDCAD. Oil hit bottom again back in February 2016, 26,000 a Barrel and the USDCAD reached magnificently 1.45, an amazing movement by the USDCAD. When the USDCAD goes up or the USDRUB that means that the second currency, the Russian ruble or the Canadian dollar, they are actually going down, right? On the red chart, the red line, when this goes up, then that means the Canadian currency is depreciating. The reason why is that the, both Canada and Russia export a lot of oil and when they export a lot of oil and oil prices dropped, that means that they were losing money. These countries, they were losing millions and billions of dollars and again, if Canada exports close to 2 million barrels a day, Russia exports and manufactures around 10 million barrels a day, when oil prices jump, that is bad news for their own currency and the the USD VS their own currency goes negatively with the price of oil. That is the reason why we have this negative correlation. […]

If you wanna take a look at oil versus an asset with a positive correlation, then we can just take an oil company like Exxon. Let’s take Exxonmobil and you are gonna see a positive correlation all of a sudden right? The line chart is Exxon which is a very big oil company, the candlestick chart is the price of oil and you can see that both assets are moving pretty much in the same direction. When one one asset goes up, the other asset goes up, when one asset goes down, the other asset goes down. You can see that very nicely here on the chart. We did see kind of a break up in this correlation. Correlations have expiry times. You’ve got to understand when to use them and when to not. We’ll get to that in a moment.

Why choose this type of trading?

This type of trading can be applied for any asset. It is an excellent way of supporting investments and minimizing risks and I want to talk about this right now and this is maybe the most important thing about correlation. After I show to you these types of correlation, you understand that there are correlations in the market and that they are very interesting to trade on. One of the main rules in trading is, as I mentioned, not to put all eggs in one basket but to diversify. When you diversify your trading, you reduce risk and when you reduce risk, then you can maintain the same profits without that amount of risk because your risk is spread out in the entire portfolio and that is the main idea behind correlation.

Do not go solo with this option!

Why?

Cannot be used as a sole main strategy to be traded, should always be part of a bigger trading strategy.

Use by keeping in mind proper fundamental and technical analysis.[…]

Diversifying trades with Correlation

SOME EXAMPLES:

OIL is such a commodity very often traded in correlation with other currency pairs.

OIL VS USD/CAD

OIL VS USD/RUB

Note that Canada and Russia are big oil exporters.

Alright, so diversification is really really important when we are trading with correlation, that is the idea behind correlation. Any given event that you can think of, if you are given a few assets and you understand correlation, you can trade more on more assets and you can activate your account much more, you don’t have to wait for another opportunity because the opportunity is big enough to accommodate all the things that you want to do. So here it is, OIL VS USD/CAD, OIL VS USD/RUB.

Another such example ;

  1. GOLD VS AUD/USD
  2. GOLD VS USDCHF

Any rise in Gold prices should also mean an upward rise for the AUDUSD since Australia is a big exporter of Gold.

However, Gold has a negative correlation with the USDCHF, as any rise in GOLD can mean a slip in the USDCHF. This is because Switzerland’s money is backed by Gold Reserves./p>

Another very interesting correlation here which I really like, I considered the FANG- Facebook, Amazon, Netflix and Google.Google is right now Alphabet, but when the FANG was invented a few years ago, Google was, what we know today as Alphabet and there is a very a very nice correlation between these 4 stocks. This correlation was actually invented by a stock analyst named Cramer at CNBC and he invented this correlation which I find very interesting. We’ve traded based on this. What is the correlation here? Actually the correlation here, is that when you see this shift from cable TV to livestreaming, that means that more people are looking at Amazon livestreaming and, of course, Netflix live streaming. Now who are the companies that are advertising on live streaming? That is of course, Facebook and Alphabet which make for around 60 or 70 percent of the advertising on the internet. So, all of a sudden, if you got a good report by Netflix or a good report by Amazon, you got companies like and Facebook which are pushing higher as well.

Time to Put What You’ve Learned into Practice

There is a strong correlation between these four giant technology stocks because they provide live streaming and a huge platform for advertising.

Folks, if you watch cable TV, and that is part of the reason there is a negative kind of correlation between these stocks, for example Walt Disney. Walt Disney is the owner of ESPN and ABC cable TV.

These stocks rise together if a bullish sentiment is generated on the trading market.

EXAMPLES ARE:

  1. AMAZON VS NETFLIX
  2. ALPHABET VS FACEBOOK

So, that is pretty much the idea with correlations. The idea of correlation is:

  1. To understand the market movements
  2. To reduce risk, to diversify your trading portfolio using other assets

Implications of fundamental and technical analysis in correlation trading

TRADERS USING PAIR TRADING OFTEN USE:

Fundamental Trading Analysis to confirm the findings through fundamentals

Technical Analysis is the best add-on a trader can use to support the rest of the trading, to derive proper trend indications.

Every trader uses correlation tactics, it’s a must for traders and what you got today, is a nice glimpse of a lot of different correlations that we have in the market. Instead of trading one asset, on every trading opportunity you have, you can actually trade four or five assets, making your trading much more deep and much more diversified.

So time to put what you’ve learnt into practice. I hope you folks have enjoyed this session. Folks, next week, same time, same day, different topic. My name is Mike Roberts, I really enjoyed doing this session and answering your questions and giving you information to make you better traders. I hope you enjoyed this, I’m looking forward to meeting all of you next week. Thank you everybody and have a great, fantastic weekend. Good luck at your trading folks. Byebye for now.

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