2 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Instruction (Manual) Document This part should be filled by author before your submission. 1. Information about Author Your Surname ATI Your First Name ATI Your Country ATI Your Email Address ATI Your ID on our website ATI 2. Information for the submitted materials Title of the submitted instruction or manual Correlation Ranking Heat Map Basic Language of Instruction English Key words (at least 3) BONDS, COMMODITY MARKET, CORRELATION ANALYSIS, CORRELATION RANKING HEAT MAP, CURRENCY MARKET, INTERMARKET ANALYSIS, OPTIMUM CHART, STOCK MARKET Date of Completion 27 May 2019 Version of this Document 1.0 3 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Correlation Ranking Heat Map Basic 27 May 2019 www.algotrading-investment.com 4 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Correlation Ranking Heat Map Basic Correlation Ranking Heat Map is the market indicator based on Correlation Matrix. It provides you the very different form of information from typical technical indicators and analysis you are using right now because it calculates market direction by looking at all instruments in the market. Hence, this fresh piece of information can improve your profit and performance for your trading. In this article, we will introduce very basic concept. Reading the article is very important if you do not want to lose money by opening some silly positions against obvious market direction. In fact, the technical indicator like MACD, Moving average, RSI, CCI, etc., are good tools but with a lot of disadvantage at the same time because they never look at other data rather than self-data on one single instrument. Correlation Ranking Heat Map literally covers the blind area of all other technical indicators you are using now. It is unique and powerful tool on the market. Overall Market Direction Recognition Firstly, you need to be able to recognize strong bullish and strong bearish direction of overall market using Correlation Ranking Heat Map. Say you have D1: 0.554% in EURGBP. This means that currently EURGBP was moved 0.554% in daily candle. The number is how much the price was moved in percentage term. The higher percentage is corresponding to the size of box. Hence, it is 5 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com important to recognize the area of green or red colour. In correlation Ranking Heat Map, green colour is corresponding to bullish move. Red colour is corresponding to bearish move. For example, this is how the strong bullish market looks like. Hence, if green area is much greater than red area, this is strong bullish market. Figure 1 This is how the strong bearish market looks like. Hence, if red area is much greater than green area, this is strong bearish market. 6 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Figure 2 Why it is important to recognize overall market direction? It is because this overall market direction shows the direction of money flow. You often heard that you have to follow the money flow of big guys like investment banks and institutional traders to beat the market. That is correct. Correlation Ranking Heat Map is exactly showing where the money is flowing. To beat the market, you really need to have the big picture like this always. Bet your money where the most of money goes always. 7 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Correlated Group Market direction Recognition Now another important level of information is the market direction of correlated group. As I have mentioned before, when important market news or economic data released, they will typically affect multiple of instruments. For example, good earning news in Microsoft will lift up the stock price of other similar companies or highly correlated companies too. Likewise, if increasing risk in global economy will increase the value of Japanese yen and Swiss franc, Gold price, etc. Their movements are highly correlated. Hence, we need to monitor the correlated group instead of watching one single instrument. For example, if you want to trade on GBPUSD, then EURUSD, EURCHF, GBPCHF, GBPJPY, etc. are the correlated group. You can have more of them depending on your data feed. Like before, we need to recognize market direction of the correlated group. Let us stick with GBPUSD example. For strong bullish market direction of the correlated group will look like this (Green area > Red area). 8 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Figure 3 9 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com For strong bearish market direction of the correlated group will look like this (Red area > Green area). Figure 4 Once again, to recognize the direction of correlated group, you need to check the area of green colour or red colour. What you should not do Say you have the Relative Strength Indicator giving you the oversold signal at 30 on GBPUSD. Now shall we enter the buy position or not? If the market direction of correlated group is too strong bearish, then you should do not buy now. It is 10 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com too early to enter. Market can go down further because all the other correlated instruments are heavily penalized for the same reason. Wait until the market direction of correlated group is not strong bearish at least. Figure 5 11 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com This screenshot below shows what is happening next if you have entered at buy position at RSI 30. Well initially, it looked like you are enjoying the profit for few minutes. However, it is just one big bearish bar wiping out all your profit + turning your position to loss. I know this is annoying. You get this kind of trades because you are over relying on technical indicators. Always use multiple of evidence for successful trading. Figure 6 When you trade on other reversal strategy like harmonic pattern or Elliott wave pattern, etc., you can apply the same principle as in this example. 12 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com What you should do Check overall market direction whether they are strong bull or bear. If they are strong bull, then it is much easier to trade with bullish instruments because this is the direction of money flow. If they are strong bearish, then it is much easier to trade with bearish instruments because this is the money flow direction now. It is even better if the market direction of correlated group also agrees to overall market direction. Data Management in Correlation Ranking Heat Map In default setting, Correlation Ranking Heat Map uses daily period for calculation. When the market is just opened, you might need to wait at least 1 hour to few hours to check the market direction. In this aspect, this is like Market profile indicator. As you know, you need to wait few hours for market profile indicator to collect some bar data until it shows you the meaningful profile. You can also use Hourly timeframe for short term trading or weekly timeframe for long term trading. I think daily timeframe is most preferred for day trader because daily movement is important. 13 This document was submitted and shared by trading community to help other traders through www.algotrading-investment.com Free and Paid Version difference In free version, you can only access to some limited feature. For example, you can only check the overall market direction with 10 minutes lagging data. Of course, in paid version, you can access to full features of Correlation Ranking Heat Map in real time. Therefore, you can get the full benefit of market direction of overall market and correlated group in real time. There is big difference in free and paid version. Paid version is much better. We provide both 1-month rental option and full version. You can find more information here about standalone version of Correlation Ranking Heat Map. https://algotrading-investment.com/portfolio-item/correlation-ranking-heat- map/ Alternatively, Correlation Ranking Heat Map is the part of Optimum Chart now. In Optimum Chart, you can just use Correlation Ranking Heat Map without incurring separate cost. https://algotrading-investment.com/2019/04/02/optimum-chart/