Time & Price Algorithmic Trading: Intermarket Relationship

Summary

In this lecture on intermarket relationships, the concept of correlated and inversely correlated markets is explored. The key focus is understanding how markets move in sync or opposition, which helps identify high probability trading conditions. The Smart Money Technique (SMT) is introduced as a method to spot market correlations, with high probability SMT signaling potential reversals. Low probability SMT, where markets move out of sync, signals uncertainty and risk. The lecture emphasizes the importance of SMT and CSD (Change in State of Delivery) to confirm reversals. The session concludes with a homework assignment to analyze SMT in real market conditions, setting the stage for future discussions on higher time frame protocols.

Takeaways

• 😀 Intermarket relationships refer to the correlations between different markets (e.g., stocks, commodities) and how they move in sync or inversely correlated.
• 😀 Correlated markets move in the same direction, while inversely correlated markets move in opposite directions, both of which can be used to determine high probability environments for trading.
• 😀 When markets are not moving in sync, it can create confusion about which market is signaling the true direction, leading to low probability trading conditions.
• 😀 Identifying synchronized movement between correlated markets increases the likelihood of profitable trades, while unsynchronized movement decreases the probability of success.
• 😀 The Smart Money Technique (SMT) is used to spot cracks in correlations between markets and helps identify whether a reversal point is forming.
• 😀 High probability SMT occurs when correlated markets (e.g., ES and NASDAQ) move together in the same direction, confirming the strength of a market move.
• 😀 Low probability SMT happens when markets move in opposite directions (e.g., ES moves higher, NASDAQ moves lower), indicating that one of the markets is likely misleading.
• 😀 If SMT is seen at both the highs and lows of correlated markets, it signals low probability conditions, making it difficult to determine which market is correct.
• 😀 In low probability SMT conditions, there is often unclear liquidity, which increases the chance of choppy price action. This makes it essential to reduce or remove risk in such environments.
• 😀 The ultimate goal is to trade in high probability environments where correlated markets are moving in sync, while avoiding low probability environments with mixed signals.

Q & A

What does 'intermarket relationship' mean in trading?

Intermarket relationship refers to how correlated or inversely correlated markets move in sync or in opposite directions. Correlated markets move together, while inversely correlated markets move in opposite directions. Identifying these relationships helps traders understand market trends and make more informed decisions.

Why is it important for correlated markets to move in sync?

When correlated markets move in sync, it increases the probability that the trend in both markets is valid, thereby providing higher confidence in trading decisions. If correlated markets do not move in sync, it creates uncertainty about which market is leading, leading to low probability conditions.

What happens if two positively correlated markets are not moving in the same direction?

If two positively correlated markets, like ES (S&P 500) and NASDAQ, are moving in opposite directions, it creates uncertainty about which market is signaling the true trend. This is considered a low probability condition and is generally avoided in trading.

How does the Smart Money Technique (SMT) help identify high probability conditions?

SMT identifies cracks in correlations between correlated markets, helping traders spot high probability setups. When both markets show similar price movements, it indicates alignment in market direction. SMT also helps identify reversal points, where price changes direction after a period of trend, confirming high probability conditions.

What does a 'cracking correlation' in SMT refer to?

A 'cracking correlation' refers to a situation where two correlated markets show a divergence at certain points, like at the highs or lows. This can signal a potential reversal. If both markets are moving in the same direction at the same time, it suggests high probability conditions.

What is the significance of observing SMT at both the highs and lows of the markets?

When SMT occurs at both the highs and lows, it suggests that the markets are moving out of sync. This creates ambiguity about which market is signaling the true trend. In such cases, the condition is deemed low probability, and traders should avoid making decisions based on these signals.

How do traders handle situations where SMT appears on both the highs and lows?

When SMT appears on both the highs and lows, traders should reduce or remove risk entirely, as it indicates low probability conditions. The markets are not aligned, which increases the likelihood of choppy or unpredictable price action.

What is the relationship between SMT and liquidity draw?

When SMT occurs on both sides of the market (at both the highs and lows), the liquidity draw becomes unclear. This means one market is showing higher prices while the other shows lower, which increases the likelihood of choppy price action and reduces the clarity of the market's direction.

What does 'removal of risk' mean when SMT conditions are unfavorable?

Removing risk means disengaging from the market entirely when SMT indicates low probability conditions. If the markets are not moving in sync, it suggests an uncertain environment, and it is better to step back and avoid entering trades until the conditions improve.

Why should traders be cautious when SMT shows cracks at both the highs and lows?

Traders should be cautious because SMT at both the highs and lows signals conflicting market movements, making it difficult to determine which market is providing the true direction. This increases the risk of choppy, unpredictable price action, making it a low probability environment for trading.