Correlation In Forex Trading

Looking on the internet at comments about forex trading, one wonders how people expect to make money without having a basic grasp of the principles involved in trading. People tend to rush in, with promises of easy money, but they then discover that it is a lot harder than it looks. This article seeks to identify a fundamental principle that leads to creating a successful trading model, it is founded on the idea of correlation.

Correlation exists where there is a mutual relationship of interdependence between two entities. Why is it that people feel so sure that they can earn money in forex? Surely the reason is that they immediately see that there are patterns, that is, correlation.

We can see that there is correlation between the graph and the yellow line and is is tempting to think that, as a consequence this can be easily traded. The problem is that there are too many unknowns. How could anyone foresee that the price would bounce off of this line? How can we know how high the price will bounce off the line? How can we tell when the price will stop bouncing?

I would suggest that the reason that the majority lose money in currency trading is that although there is correlation in the graphs, yet people fail to realize that the nature of the correlation is very complicated. There is not only a relationship of interdependence between the price and the line on the graph above.

We can see that there would be correlation between these two graphs. Although the price doesn't move directly proportional to the stochastic graph, yet the former generally turns at similar times to the latter. The result is that we have another tool to contribute to our understanding of how the price moves.

I would suggest that this is the nature of currency trading; it involves the accumulation of indicators that correlate with the price and as a consequence contribute to creating a successful trading method.

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Trading Opening Range Breakouts

One of the most common and popular intraday trading concepts is the Opening Range Breakout (ORB) trade. Since its conception, ORB has evolved into a number of different varieties which are often reviewed in the Trading EveryDay Live Trading Room with entries, set ups, and stops.

Ever since the market decline of 2000-2003, the trading environment has become one of low volatility resulting in the propensity for short-term price movements to reverse. In turn, this environment has created chaos with Opening Range Breakout trading. Let's take a look at what this means.

Say that a trader looking at the opening prices from the stock market open interprets a decline at mid-morning as an OBR. If the trader is astute and experienced, three (3) things would come to mind before taking the trade.

1. The trader should look at the entire pre-opening market as the opening range because it is an indication of how U.S. stocks have responded to pre-opening economic reports and Asia and European market developments. The only way you can tell if the new buying and selling information is impacting traders' value assessments is if you break out of that range.

2. A true breakout move should impact all the major market averages and sectors (including, but not limited to, Dow Jones, Standard & Poor's, Russell 2000, etc.) the same way.

3. A valid breakout should also provide us with increased participation as there are lower or higher prices. When this happens, you can be fairly certain that that the "big boys" are "playing" in the move, which allows you to follow in their footsteps.

So did the trader take the trade? Not if the downside move turns out to be a failed test of the overnight lows. The moral of the story is to do what you have to do to figure out how to separate valid ORB trades from false breakouts. That means to continue educating yourself because just as you evolve as a trader, the trading world is evolving as well.

Leroy Rushing is an active, professional day trader; trading coach; and eBook author. He is the Founder and CEO of Trading EveryDay, a distinguished provider of educational trading products and services that are available worldwide.