Profiting from Correlations and Confluence

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By James Helliwell

Hello traders,

I hope you’ve had a good week. In last week’s blog I shared a few of the latest Checklists from our Monthly Report and also the key markets that I’m focusing on currently – including equities, gold and the Japanese yen. The theme of the post was prioritising quality over quantity in terms your trading this month, as we looked to our Checklists to filter out the noise and confluent scores providing greater conviction in particular markets.

Trading Club members had first access to this week’s update on Wednesday when our real-time video analysis was released. Whilst I cannot reveal all the new scores here just yet, you can of course see them right away as a Club member at www.milliondollartraders.com. Let’s get started!

Here’s the main theme driving markets this week. Perhaps no surprise, it involves Donald Trump. The key news is that (as we correctly identified in our earlier Trading Club video analysis) investors should not expect stimulus any time soon, as Trump effectively withdrew from passing a $2.2 trillion bill to prop up the ailing US economy.

The impact of this was felt immediately in financial markets, with risk assets including equities selling off sharply on the news. Gold also fell.

With an increasingly noisy narrative, its perhaps best to focus on the Checklists for the 3 markets we highlighted last week. Here’s our US equities Checklist, which held a clear positive score as we began October.

Whether you bought and held from the beginning of the month, or waited for either of the oversold hourly RSI signals on the 2nd or 6th, your PnL would be now be up around 4% (not too shabby given that the market shed a similar amount in last month’s much touted sell off).

Clearly, sticking to your process puts you in a much better position to profit than reactively trading the news or on emotions. This is why Lex and I do what we do here at the Academy as so many retail traders (and even some institutional investors) fail to do this consistently – and it shows in their performance!

I mentioned that there were 3 markets that I was focusing on more closely this month. Having covered the first, which was my favourite (aka ‘most probable’) setup, lets now turn to gold. I can now reveal the score which I previously withheld here as a courtesy to our paying members last week. As you can see, we have a positive score of +1.5 which suggested gains in the month ahead.

Although I was a little more sceptical of the timing of this trade on Wednesday, in the hope of a sudden move towards 1750 setting up “the buying opportunity of the year” going in to 2021, it seems as though the monthly time horizon of the Checklist is playing out as would otherwise be expected of our process. The oversold hourly RSI at the time of the recording proved to be a great setup, and those of you who had the courage to buy it would be up over 2%. Even if you held from the beginning of the month when the score was published, you would have made 1.65% to-date.

I may have been greedy in hoping for that deeper correction earlier in the week, and frankly the Checklist proved to be more accurate than my opinion. Whilst I wasn’t expecting the sell off to be driven by the fundamentals captured by our process, I was hoping that emotional selling on the news of deferred stimulus might cause a sudden overreaction which would be an absolute gift to me in the hopes of establishing a large position in gold heading towards year-end. Anyway, that’s something to explore another day…

The third and final market on my watchlist was USD/JPY, which was one of the markets that produced a conflicting signal to the scores from our equities and gold Checklists. Although the process suggested owning the yen (thus short USD/JPY), I used discretion to disregard this setup given the positive scores for equities and gold, which tend to be positively correlated to USD/JPY.

This decision, aided by the lack of alignment with our other correlated Checklists, proved to be correct as USD/JPY in fact rose (consistent with the positive relationship to gains in equities and gold). If you really felt strongly in the setup (which I didn’t) then you may have opted to wait for an ‘overbought’ reading in the RSI which occurred on the 7th and would have been profitable if held.

Nonetheless, this was the setup I chose to ignore in favour of equities and gold, which proved to be the right call. As I explained last week, trading is a lot easier when everything is aligned, though that rarely occurs. When there is inevitable conflict amongst some of the scores, understanding correlations and looking to the Checklists for confluence can really increase the odds in your favour.

If you would like to join us for our analysis in real-time including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to milliondollartraders.com and take your financial knowledge to the next level right away!

Have a great weekend,

James

Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information. For more information go to www.milliondollartraders.com

© Copyright 2020 Lex van Dam Financial Education. Further distribution prohibited.

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