One of the best tools that e-mini traders possess is the ability to look at correlated markets and profit from them. I should point out, at this point, that there is no 100% correlation between 2 given markets, but many markets are related to each other and can be useful and determining future price movement on the contract you are trading. You can add a great deal of confidence to your e- mini trading by learning which markets are related to each other (either positively or negatively) and how those markets might help in determining potential e-mini trades.
· The markets are positively correlated.
· The markets are negatively correlated.
· The markets are non-correlated.
I personally enjoy trading positively correlated markets and use this tool to my advantage nearly 100% of my trading time. Negatively correlated markets can be just as useful and certain contracts can be identified that have very strong correlations to each other. On the other hand, a non-correlated market is of little use to the average trader because they supply little or no information that will be useful when trading.
I am a very active NASDAQ futures trader and the Russell 1000 (and other Russell contracts). I truly enjoy this pair of correlated markets. Most of the time, there is a strong positive correlation between the NQ and the Russell contracts. Why? It’s pretty simple; most of the stocks in the Russell index are on the NASDAQ exchange. In my experience, the NQ generally leads the Russell indexes; so you will find yourself taking and NQ trade and then a subsequent trade on the Russell. One word of caution, however, before you jump into and NQ and subsequent TF trade make sure that the positive correlation exists on the NQ and TF exists before trading. It is not unusual, though not common, for the Russell index to have a day when it is wandering along its merry way and pays little or no attention to what is occurring on the NASDAQ index. My point here is a fairly simple one and that is to make sure the indexes are moving in tandem and don’t assume they are moving in tandem.
An example of negatively correlated market would include the Euro futures contract (6E) and the dollar futures contract (DX). What this means is fairly simple: when the dollar index is moving up the euro index will generally be moving in the opposite direction. I never trade the euro without having a dollar chart on the screen. This practice will save you from diving into trades that are non-correlated to other markets; in this case we are talking about the dollar/euro. Dollar up = Euro down.
The purpose of this short article is simply to introduce you to the concept of correlated markets. There are many other correlated markets that exist and I urge you to explore these correlations as you can greatly improve your trading performance by understanding which markets are related to each other.
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