AUD/USD - AUD/JPY Correlation

[aBadTrader]

I recently got onto a live trading account with Pepperstone. I really enjoy cTrader by the way but I digress.

After watching both pairs very closely for the last week, I noticed there were particular times of the day where I would notice correlation between the pairs, which at times did diverge from each other for a period of time, only to go back to very similar movements.

IF anyone wants to have a look-see, check out the two pairs for yesterdays trading between 3pm (sydney time) and midnight. It was crazy. I made the initial mistake of taking a short on the AUD/USD and a long on the AUD/JPY. Needless to say it was a disaster.

On a side note, did everyone enjoy trading yesterdays AUD/USD pair? IT was the easiest trading day I have ever experienced and learned that my exit points were ridiculous and in need of further honing.

 

[CanOz]

You might be able to chart the spread between the two pairs....this would show you how often they diverge....typical ranges

 

[Wharris]

You'll probably notice audusd and gbpaud negative correlate, a lot of the time the jpy pairs correlate between aud, usd, gbp and eur. This is why i personally stick to trading to one or 2 pairs. I paid a lot for my education in drawdown learning such things lol.

 

[aBadTrader]

I paid a lot for my education in drawdown learning such things lol.

Tell me about it. something tells me I am no where near paying my "student loans".

 

[InsvestoBoy]

You might be able to chart the spread between the two pairs....this would show you how often they diverge....typical ranges

Or just look at the chart of and trade USD/JPY...

 

[CanOz]

Or just look at the chart of and trade USD/JPY...

Is that really the same thing? The difference between the two pairs?

 

[InsvestoBoy]

Is that really the same thing? The difference between the two pairs?

Unconstrained arbitrage pretty much dictates that it must be, at least for the ratio. Otherwise there would be an awful lot of free money on the table. You have to use the ratio, not the "difference" (A minus B) because the denominating currency is different making the chart of the difference untradeable.

; (1/2) / (1/3)
	1.5
; 3/2
	1.5
; (1/3) / (1/2)
	~0.66666666666666666667
; 2/3
	~0.66666666666666666667

Simple maths, think of AUD as "1", USD as "2" and JPY as "3". The ratio of (AUD/USD) / (AUD/JPY) is JPY/USD and the ratio of (AUD/JPY) / (AUD/USD) is USD/JPY.

 

[InsvestoBoy]

correlation between the pairs, which at times did diverge from each other for a period of time, only to go back to very similar movements.

All you have observed is the movement of USD/JPY.

 

[CanOz]

Unconstrained arbitrage pretty much dictates that it must be, at least for the ratio. Otherwise there would be an awful lot of free money on the table. You have to use the ratio, not the "difference" (A minus B) because the denominating currency is different making the chart of the difference untradeable.



Simple maths, think of AUD as "1", USD as "2" and JPY as "3". The ratio of (AUD/USD) / (AUD/JPY) is JPY/USD and the ratio of (AUD/JPY) / (AUD/USD) is USD/JPY.

Thanks mate, perfectly explained. For some reason i had a butterfly spread in my head