Over the past 20 years, I have tested and used numerous trading strategies, but I can confidently say that none rival the correlation and smart money strategies in terms of simplicity, accuracy, and reliability. While 90% of trading strategies are rooted in technical analysis, correlation has a fundamental base, and smart money is the action of institutions and the top 5% of informed world traders.
Correlation refers to the economic relationship between two assets. When this relationship is strong—above 80%—it can be effectively utilized in trading.
For example, the Australian currency (AUD) has a +0.90 positive correlation with gold. This means that these two assets move in tandem 90% of the time. However, when they diverge—where one makes a sharp movement before the other—this creates a reliable trading opportunity. The AUD is considered a commodity-based currency because its value is closely linked to major Australian export commodities, such as gold. Other notable commodity-based currencies include CAD (Canadian Dollar), NOK (Norwegian Krone), and ZAR (South African Rand).
Correlation is a two-sided relationship; in the case of AUD and gold, not only does a change in the price of gold influence the AUD, but significant fluctuations in the AUD can also affect gold prices.
In the highlighted area shown on the 1-hour chart below, the AUD/USD sharply fell from 0.6285 to 0.6265. Following this movement, the price of gold dropped from point A (2868.00) to point B (2850.00). In this scenario, point A represents an optimal moment to take a short position on gold—a classic illustration of how correlation can be used in trading.
As another example, in the subsequent chart, we observe that the value of WTI crude oil (in the highlighted area) decreased from 72.40 to 70.90. This significant decline, coupled with a +0.85 correlation between the CAD and crude oil, indicates that the drop in crude oil prices will likely weaken the CAD within a few hours. A weakened CAD leads to an increase in USD/CAD. As illustrated, this effect started at point A, pushing the USD/CAD from 1.4280 to 1.4360.
USD/JPY and USD/ZAR have a correlation of +0.85. This indicates that when USD/JPY moves, USDZAR is likely to follow, often in a timely manner. For example, if USD/JPY sharply declines from point A (155.60) to point B (154.60), we can expect USD/ZAR to start falling as well, which occurs two hours later at point C in response to this significant movement.
The correlation trading strategy is not only effective for currencies and commodities; it also applies to cryptocurrencies, stocks, and stock indices.
As I said, smart money is the activity of institutional and smart (well-informed) traders, so using smart money in our analysis and entering our trades according to it, means accompanying the top 5% percent of the worldwide traders that results in closing most of our trades in profit. The trick in smart money trading is detecting it on the charts and using it in our favor. Entering smart money into the markets often causes some special patterns in both the price and volume. Liquidity sweep is a common maneuver that is initiated by smart money to provide liquidity for large traders, and it can be seen easily on the charts.
In the figure below, a liquidity sweep maneuver has occurred in the yellow area labeled C. Smart traders pushed the price above the R1 resistance level and then quickly sold, causing the price to drop to the nearest support level. Point D is the ideal place to enter a confident trade along with the smart traders.
If you want to gain a deep understanding of correlation and smart money strategies and learn how to use them effectively in your day trading, I highly recommend the following book. After reading and using this book, you will see a great difference in your trading performance in a short time.
Trading Extreme: A Scientific Framework to Become an Exceptional Trader
Correlation refers to the economic relationship between two assets. When this relationship is strong—above 80%—it can be effectively utilized in trading.
For example, the Australian currency (AUD) has a +0.90 positive correlation with gold. This means that these two assets move in tandem 90% of the time. However, when they diverge—where one makes a sharp movement before the other—this creates a reliable trading opportunity. The AUD is considered a commodity-based currency because its value is closely linked to major Australian export commodities, such as gold. Other notable commodity-based currencies include CAD (Canadian Dollar), NOK (Norwegian Krone), and ZAR (South African Rand).
Correlation is a two-sided relationship; in the case of AUD and gold, not only does a change in the price of gold influence the AUD, but significant fluctuations in the AUD can also affect gold prices.
In the highlighted area shown on the 1-hour chart below, the AUD/USD sharply fell from 0.6285 to 0.6265. Following this movement, the price of gold dropped from point A (2868.00) to point B (2850.00). In this scenario, point A represents an optimal moment to take a short position on gold—a classic illustration of how correlation can be used in trading.
As another example, in the subsequent chart, we observe that the value of WTI crude oil (in the highlighted area) decreased from 72.40 to 70.90. This significant decline, coupled with a +0.85 correlation between the CAD and crude oil, indicates that the drop in crude oil prices will likely weaken the CAD within a few hours. A weakened CAD leads to an increase in USD/CAD. As illustrated, this effect started at point A, pushing the USD/CAD from 1.4280 to 1.4360.
USD/JPY and USD/ZAR have a correlation of +0.85. This indicates that when USD/JPY moves, USDZAR is likely to follow, often in a timely manner. For example, if USD/JPY sharply declines from point A (155.60) to point B (154.60), we can expect USD/ZAR to start falling as well, which occurs two hours later at point C in response to this significant movement.
The correlation trading strategy is not only effective for currencies and commodities; it also applies to cryptocurrencies, stocks, and stock indices.
As I said, smart money is the activity of institutional and smart (well-informed) traders, so using smart money in our analysis and entering our trades according to it, means accompanying the top 5% percent of the worldwide traders that results in closing most of our trades in profit. The trick in smart money trading is detecting it on the charts and using it in our favor. Entering smart money into the markets often causes some special patterns in both the price and volume. Liquidity sweep is a common maneuver that is initiated by smart money to provide liquidity for large traders, and it can be seen easily on the charts.
In the figure below, a liquidity sweep maneuver has occurred in the yellow area labeled C. Smart traders pushed the price above the R1 resistance level and then quickly sold, causing the price to drop to the nearest support level. Point D is the ideal place to enter a confident trade along with the smart traders.
If you want to gain a deep understanding of correlation and smart money strategies and learn how to use them effectively in your day trading, I highly recommend the following book. After reading and using this book, you will see a great difference in your trading performance in a short time.
Trading Extreme: A Scientific Framework to Become an Exceptional Trader
