I’m sure every trader reading this has come across this problem – the lack of trade setups.
Perhaps you’re used to trading on the H4 or Daily chart and ideal trades don’t come by that often.
Then you start to consider options such as:
- Maybe I should jump down to the shorter timeframes to find more trading opportunities
- Maybe I should eliminate some of my rules to increase the probability of finding a “valid” trade
- Or maybe there is just something wrong with my system that is not picking up enough trades
But today, I’ll share with you a technique that helps me to find more trading opportunities out of my system, without breaking my rules.
Ever heard of the term – correlation?
According to dictionary.com, correlation means the degree to which two or more attributes or measurements on the same group of elements show a tendency to vary together.
In FX trading, being directly correlated means the two currency pairs tend to move in the same direction. Being negatively correlated means the two currency pairs tend to move in the opposite direction.
For example: Given that EUR/USD and AUD/USD share a highly positive correlation – this means that a fall in EUR/USD will also lead to a similar degree of bearish action in AUD/USD
You can find out more on the correlations that the different pairs share through this tool: https://www.oanda.com/forex-trading/analysis/currency-correlation
Note: This is NOT a sponsored post. It is a tool that benefitted me in understanding the relationship that the FX pairs share.
However, today we’re not talking about the correlation between different currency pairs. We’re talking about 1 currency versus other currencies. Which means when we’re looking at AUD, we’re looking at AUD/USD, AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, EUR/AUD, GBP/AUD, etc. – everything that has an AUD in it.
Perhaps an illustration would be clearer:
If we’re watching a nice setup forming on AUD/USD, but hey, all of a sudden, it starts to run further and further away from your ideal entry price. Now, the risk to reward has started to diminish, making it less attractive to get in the trade.
Does that mean you’re all out of options, having to look for new setups in the market again?
Now, you start looking for possible setups in AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, EUR/AUD, GBP/AUD, especially those that have yet to move much, and hopefully they present a reasonably attractive risk to reward ratio too.
Instead of having just 1 setup, you now have another 6 more chances at finding an entry to go short or long the AUD, based on which pair you choose, all without breaking your system rules!
Remember I mentioned at the start of the week I had a bias in shorting the AUD/USD?
(AUD/USD – Ready for Next Move Down?)
AUD/USD ran before I could enter with my trade rules.
I found AUD/CAD and netted a cool +2.81% gain on it, which was yielded the same effect as AUD/USD.