Follow The Leader Correlation Forex System

Like all correlation trades, “Follow the Leader” waits until two correlated pairs go “out
of whack”, and then quickly capitalizes on the opportunity to scalp some quick pips out
of the market.
Here’s how it works…
For this system I like to trade the EUR/USD along with the GBP/USD. These pairs are
positively correlated, so as expected they are more or less moving parallel to one another
(as you can see in the screenshot on the next page).
But when we’re trading with correlation, we’re not only looking at direction…we’re
also looking at the RANGE.

“Range”: The difference between the high and the low prices
during a specified period of time.

We know, for example, that the GBP/USD normally has a much larger range than
the EUR/USD. (NOTE: I don’t have the time right now to go into why the range of the
GBP/USD is larger, but if you look at the two charts side-by-side you’ll be able to see
with the naked eye what I’m talking about.)

In other words, while these correlated pairs will generally move in the same direction,
the GBP/USD should have lower valleys and higher peaks than the EUR/USD. So, when
we see that the range of the GBP/USD is lagging behind the range of the EUR/USD for
one bar (see screenshot below), we have a potential trade setup.

Once the “range lag” is 20 pips or greater, we take the trade with the expectation that
the GBP/USD will make up the “gap”, and overtake the range of the EUR/USD within a
few bars.

Remember, we know this is an extremely high probability trade, because “Fundamental
Law” dictates that the pairs MUST remain in correlation, so therefore we know that they
will eventually “snap back”.
Like I said, it’s a simple strategy, but because it’s backed by market fundamentals it’s
one of the most accurate (and profitable) intra-day strategies I've ever traded.

Ok, so let’s go back and take a look at the chart

Right now the range of the GBP/USD is lagging the EUR/USD by 8 pips. That’s enough
of a lag to take notice, but it’s not enough to take the trade yet.

Remember, I like to see at least a 20 pip lag before I take the trade, so I’ll watch it for
another bar and see what happens…

When the second bar closes, the range is now lagging by 15 pips. It’s still not enough for
me to take the trade yet, but the fact that the range lag still hasn’t corrected itself (and is
actually growing wider) has me very excited.

I’ll wait and watch it for one more bar and see if the “range lag” or “crack” widens
enough for me to take the trade…

The third bar has closed, and the “range lag” has now widened to 24 pips. That’s greater
than the 20 pip minimum I need, so I’m going to take this trade and go long on the
GBP/USD.

My expectation is that the GBP/USD will at a bare minimum make up the 24 pip
“range lag” or “crack”…and possibly even go beyond that since historically the range
of the GBP/USD is supposed to be LARGER than the EUR/USD
And again, when we’re trading with correlation and something goes “wrong” (as is the
case with this “range lag”), that usually means there’s a profit opportunity just around
the corner.
Now that we’re in this trade, let’s watch it and see what happens next…

As you can see, the very next bar the GBP/USD made up the “range lag” and returned to
“normal” just as we expected it to. We then exit the trade at the end of the bar and
pocket the 24 pips.

So there you have it…the “Follow the Leader” strategy!
So to recap, all you need to do is:
1) Watch these 2 pairs simultaneously.
2) Track the movement of both pairs at the close of each bar.
3) Once you see one of the pairs begin to pull away, pay attention because you are
now looking at a potential trade setup.
4) Calculate the “range lag” or “crack” and when it exceeds 20 pips, you’re ready to
pull the trigger, and you know what your target will be, as it will be always be
about equal to the “range-lag”!

I’m confident that this one strategy alone will make you a more confident, accurate and
profitable trader, as these trades are ultra high probability trades to take, and I LOVE
when they set up...