On Monday, we started talking about market correlation…
And how to identify correlation between markets using the Hawkeye Fatboy indicator.
Today, though, I want to follow up and talk about why understanding market correlation is beneficial for our trading.
Now, there are benefits to trading both correlated and non-correlated markets.
First, the advantage to trading non-correlated markets is portfolio diversity.
For example, if one asset or instrument you’re trading is going up, and a non-correlated instrument you’re trading is going down…
It helps to bring balance to your portfolio and reduce the amount of overall risk you’re exposed to.
Now on Monday, I showed you how I keep my Fatboy set to track the four major indices — the Nasdaq, the S&P, the Dow, and the Russell.
But I also track gold and crude oil, which are two uncorrelated markets in regard to the equities indices.
Again, this helps me maintain some balance in my portfolio.
If I see equities trending down, I may increase my gold or crude oil positionings to hedge those trades to a degree.
Now, the advantage to trading correlated markets is that it enables you to hold multiple positions in markets that are trending in the same direction.
What’s more, trading correlated markets can give you more confidence in your positions, as they can serve as additional confirmation that the trades are trending in your favor.
Of course, the degree of correlation can change within both correlated and uncorrelated markets.
That’s why it’s important to have a reliable system or indicator that can help you see precisely what degree of correlation the markets you’re trading are in at any given time, which is precisely what the Hawkeye Fatboy is designed to do.
Now if you’re not yet trading with the predictive power of Hawkeye and you’d like to learn more about our proprietary suite of indicators, you can watch a comprehensive training class by clicking right here.
Once you have the fundamental tools in place for reading and understanding volume in the markets, you can make the most of market correlation using a tool like the Fatboy.