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Correlation between index futures
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Correlation between index futures

  #1 (permalink)
Elite Member
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Correlation between index futures

I have read threads in the futures.io (formerly BMT) forum where various comparisons are made between the different futures contracts but I have been unable to see if anyone has looked at the correlation between the various instruments. I have been looking at ES, 6E, 6A, CL, NQ, TF, YM and FESX to see if there is a consistent correlation between any of them. In other words, if ES rises, would it be expected that one or more of the others would also rise and vice versa. The purpose of my study is to identify a number of instruments each one different to the others. In this way, one instrument forms a hedge for others. To trade 2 instruments that track the same way is like doubling the trade on either one and increasing losses in a losing trend, whereas different moves can balance losses with profits as in a hedge. Does this make sense?

I have seen this type of analysis of forex pairs and many systems are based on the findings but I have not seen it for futures. If anyone could point me to such analysis I would be most grateful - could save heaps of time - there is no point in reinventing the wheel! TIA.
Karl

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  #3 (permalink)
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This absolutely makes sense, but I am not going to say much more about it!

It is best to the work oneself. Just do correlation studies on the markets you are considering.

You could also add another dimension to this by doing spreads...

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  #4 (permalink)
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I believe the ES leads most other indices and also 6E.

But the catch-up is almost immediate, I suppose only the bots can exploit this and it is anyway them who are pushing the other instruments along with the ES.

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  #5 (permalink)
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scartree View Post
I have read threads in the futures.io (formerly BMT) forum where various comparisons are made between the different futures contracts but I have been unable to see if anyone has looked at the correlation between the various instruments. I have been looking at ES, 6E, 6A, CL, NQ, TF, YM and FESX to see if there is a consistent correlation between any of them. In other words, if ES rises, would it be expected that one or more of the others would also rise and vice versa. The purpose of my study is to identify a number of instruments each one different to the others. In this way, one instrument forms a hedge for others. To trade 2 instruments that track the same way is like doubling the trade on either one and increasing losses in a losing trend, whereas different moves can balance losses with profits as in a hedge. Does this make sense?

I have seen this type of analysis of forex pairs and many systems are based on the findings but I have not seen it for futures. If anyone could point me to such analysis I would be most grateful - could save heaps of time - there is no point in reinventing the wheel! TIA.
Karl

a word of caution here. especially if you're comparing index futures with CL or 6E.

"normally" higher oil prices is not good for stocks (inflation). but these days it goes most of the time hand in hand. economy is weak and any sign of an improvement (even higher oil prices) is a good sign. so you have to know what the market is looking for.

"normally" a weaker dollar is a good sign for stocks. (great for american companies operating outside the u.s.) but there are also moments where the stock market favors a stronger dollar. (interest rates would play an important role).

as far as what instrument is leading, you'll find different views. some say the dow transport is a leading market. some say TF is a leading market. but also here the economy must taken in consideration. if economy is weakening some investors feel safer with blue chips and more defensive stocks. if there's an improvement you might see more investors buying small caps and more cyclical stocks.

when looking at spreads, what makes perfect sense is the same instrument, but different expiration. unfortunately very difficult to compete against the profs. currency pairs is an option. what I find very dangerous is a spread in stocks (same sector). like going long a bank stock and shorting another bank stock. it just might be your bad luck that some big investors are switching from the one you're long into the one you're short.

so I believe it's very important to look at all those instruments, but I would say there's certainly NOT a consistent correlation.

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Thanks Silvestor

I guess your last paragraph really sums it up. There are times when the various instrument seem to be dancing to the same tune but there are other times when they are moving in opposite directions. It would be convenient if there was a consistent correlation but that seems unlikely. Guess I shall continue using the regular suspects and keep an eye on the times when they seem to move either with others or in opposite directions. There are so many variables, even time of day when different markets are open, has an effect.

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scartree View Post
Thanks Silvestor

I guess your last paragraph really sums it up. There are times when the various instrument seem to be dancing to the same tune but there are other times when they are moving in opposite directions. It would be convenient if there was a consistent correlation but that seems unlikely. Guess I shall continue using the regular suspects and keep an eye on the times when they seem to move either with others or in opposite directions. There are so many variables, even time of day when different markets are open, has an effect.

Indeed! There are actually too many variables for my poor brain to keep up....

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Silvester17 View Post
so I believe it's very important to look at all those instruments, but I would say there's certainly NOT a consistent correlation.

This is the conclusion I've reached as well. Sometimes markets are directly correlated, other times inversely, and the important thing is that the level of correlation is not consistent over time.

This is the primary reason I recently began trading ES, instead of CL: CL has been following the equities so closely recently that, while it does have a "mind of its own," it responds to equities technicals as often as it does its own, sometimes more so. While ES will be at the HOD and struggling, for example, CL will be struggling too, even though the level it's at is not technically a level where it "should" encounter resistance.

All markets are interrelated. The euro/usd, US equities, commodities, and countless other markets can have an effect on one another. It's difficult enough to trade one market well, so adding others to watch for correlations is IMO only a complication.

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  #9 (permalink)
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As @Lornz stated, correlation exists between certain futures... do some homework and perform your own analysis and you will find them... asking for them is like asking for someone to show you how to drive without bothering to read the manual.. keep in mind that correlation will change depending on the date, day, time, etc... so they are ever evolving, and as such, one should re-evaluate them often, hence why one needs to do one's own homework to understand and determine, knowing once that something is correlated does not mean it has the same degree or that will continue forever... and as @Lornz stated, they are the whole idea behind using spreads..

you can calculate correlations via excel, via multicharts, ninjatrader, marketdelta... or even via specific software that is made to determine correlation... and also co-variance, which is just as important as being able to find the relationships between two instruments... I find the best tools for quickly handling the calculations to be matlab and mathematica.. IMO of course...


Last edited by sysot1t; October 8th, 2011 at 08:42 PM.
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  #10 (permalink)
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Sounds way too complicated for a simpleton like me.

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