This week, the Topstep coaches are giving a high-level rundown on the correlations between different products and assets, how they move in tandem or inversely with each other, and how you can take advantage of them when looking for trade entries and exits.
Here’s What Our Coach’s Have To Say
Trader Shout Outs
Over the last few weeks, Funded Trader James B. has been consistently booking profits and slowly building up his Funded Account. Today, he kicked it into high gear and is currently up nearly $5K trading Nasdaq futures. We absolutely love to see good things happen when our traders stick to their trading plans and practice proper risk management. Keep it up James, we’re looking forward to following up with you soon!
Correlations can exist between multiple products and assets on pretty much any timeframe and can either be positive or negative. A positive correlation occurs when two markets are moving in the same direction, and a negative correlation occurs when two markets are moving in opposite directions.
To give you a basic understanding of trading correlations, I’ll walk you through one of the simplest and most common setups traders look for. The “Follow the Leader” setup is arguably one of the most popular positive correlation trades there is. Fundamentally, this setup involves two markets; primary and secondary. The primary market is the leader, and the secondary market is the follower.
To enter a trade, you simply wait for the primary market to make a move, then execute a trade in the secondary market, expecting it to mimic the movement of the primary market. The same concept applies when exiting the market.
This Is Not Foolproof
Trades like this need to be closely monitored because there are plenty of other factors that can influence the correlation between the two markets. And while they may move in tandem one day, that does not necessarily mean they will continue to move in the same direction in the future.
As Mick notes in the video, you should also stay on the safe side and only execute trades in the market you’re comfortable with. By this I mean, make sure you understand the fundamental and technical aspects of any market before attempting to trade it. This will protect you from being blindsided by an unexpected move caused by things like economic releases or severe weather patterns.
Short-term market correlations used for day trading have become increasingly rare over the years, so if you do happen to spot one, take some time to track it before diving in, it might save you some money.