Everything's correlated? :(

[Trader13]

Keep in mind that uncorrelated markets (i.e., price series which have a correlation coefficient near zero) will still move in the same direction half the time. This directional co-movement of 50% is more than a casual observer would imagine for "uncorrelated" markets.

The foundation for your question is that you want some diversification across your trades. My suggestion is that you strive to trade a portfolio of uncorrelated trading strategies, and place less emphasis on a portfolio of uncorrelated markets.

 

[Real Money]

I'd rather lever the piss out of a spread using 95% negatively correlated instruments so that I can absorb risk and leg out into vol spikes. But that's just me!

 

[lentus]

My suggestion is that you strive to trade a portfolio of uncorrelated trading strategies, and place less emphasis on a portfolio of uncorrelated markets.

Why place less emphasis on uncorrelated markets?

 

[lentus]

I'd rather lever the piss out of a spread using 95% negatively correlated instruments so that I can absorb risk and leg out into vol spikes. But that's just me!

Please explain. Not familiar with spread trading.

 

[Real Money]

As far as I know, you are trading a basket to obtain risk off delta but reduce individual asset adverse price movement (counter trend movement to risk off trend direction). Your short side is not strongly (>97.5%) correlated enough to the long side for my tastes is what I mean.

You are effectively playing a correlation strategy which is only (in my opinion) weakly correlated (relative to the gross volatility of the basket).

Personally, I would prefer a long/short of much, much more related instruments to obtain a very effective cross hedge so as to make it safer to lever. Both statistical and fundamental relation.

In my opinion, significant risk in this strategy!

 

[lentus]

As far as I know, you are trading a basket to obtain risk off delta but reduce individual asset adverse price movement (counter trend movement to risk off trend direction). Your short side is not strongly (>97.5%) correlated enough to the long side for my tastes is what I mean.

You are effectively playing a correlation strategy which is only (in my opinion) weakly correlated (relative to the gross volatility of the basket).

Personally, I would prefer a long/short of much, much more related instruments to obtain a very effective cross hedge so as to make it safer to lever. Both statistical and fundamental relation.

In my opinion, significant risk in this strategy!

No, you don't get it. That was an example of what I do NOT want to do. I want to put several trades into my "portfolio" on instruments that have little correlation with each, preferably zero. But the problem I'm seeing is that there are few instruments that are not significantly correlated - either positively or negatively. Hence the title of the thread.

 

[Real Money]

OK. I would tell you to go to http://www.market-topology.com/ and find stocks and etfs with low correlation. This does not help with futures so you will have to refer to Robert Morse's post on that.

I'm assuming you want a diversified portfolio of uncorrelated assets now. You can build such a portfolio with the above website using the correlation feature. The site is free. The only problem is that the strategy may be capital intensive.

If you like to maintain a portfolio of uncorrelated assets, then it is difficult. Cash moves quickly among asset classes and algorithms and robot trading cause significant correlation to occur.

If you follow financial and investing times, funds are consistently reporting increasing levels of correlation over the years.

Sophisticated trader groups and firms are using correlation to obtain greater exposure and control risk. This is one of the reasons for this.

You may benefit from portfolio tools of some kind. Tools that report the beta and rho of held assets. Good Luck.

 

[Dizaj]

Oil and Gold are negatively correlated with USD, but there is time leg in price. This is well known economical theory. However, I am not sure if today we have the same correlations as both gold and USD are going in the same direction. Anyone have explanation for it?

 

[lentus]

Oil and Gold are negatively correlated with USD, but there is time leg in price. This is well known economical theory. However, I am not sure if today we have the same correlations as both gold and USD are going in the same direction. Anyone have explanation for it?

yeah. correlations change. *nods as he's taking in the applause*

 

[murray t turtle]

Oil and Gold are negatively correlated with USD, but there is time leg in price. This is well known economical theory.

However, I am not sure if today we have the same correlations as both gold and USD are going in the same direction. Anyone have explanation for it?

%% Yes
last 2 are considered safe havens.[ Factor in; Bunker Hunt said ''any fool can run a printing press'']