Intermarket Trading Strategies

8

Intraday Correlations

Probable impossibilities are to be preferred to improbable possibilities.

-Aristotle

8.1 RELATIONSHIPS BETWEEN DIFFERENT TIME FRAMES

The analysis of correlations of weekly yields is not really very useful to day traders or short-term traders of stock index futures.

But what about intraday relationships?

In Table 8.1 you can see the correlation of percentage changes between the DAX, the Euro Stoxx 50 and the S&P 500 and the DOW e-mini futures for different time intervals ranging from five to 1500 minutes (25 hours). One trading day for the DAX and Euro Stoxx futures is 14 hours so the correlation study, although calculated over a three-month time span, involves only up to two days of percentage changes.

An empirical relationship between time (in minutes) and correlation, which is not so obvious from Table 8.1, unravels when the correlation is plotted vs. time in the graph in Fig. 8.1. You can see that the correlation increases exponentially up to a certain time increment (about 75 minutes) when it suddenly loses steam and starts to level out.

To assist traders I have derived the following empirical equations to convert correlations between different time frames.

For the DAX-Euro Stoxx relationship:

(8.1)

and

(8.2)

Table 8.1 A total of 10 870 5-minute bars ...