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Dreamliner Mar 30, 2009 5:56pm | Post# 1

Hedge and Correlation Strategy
 
Going Home Trading Method!

You can skip the first 99 pages of this thread, as we have changed over time, refining our entries and exits, and developing a much better method. Start reading on page 100 (or even pages 95-96 if you want some background) which is here.

There are 5 Simple Steps to the new “Going Home Trading Method", formerly known as the “Hedging and Correlation” Method. We are still hedging and correlating, just that the new name will help us visualize what we are wanting to accomplish in this trading system, and we have modified our entries and exits after a very long time of practicing.

Most pairs that are positively correlated above 75% "live” below the 20-25% “difference” line on our one indicator that we use (see below—thanks to SMJones for developing it!). This is their home. Sometimes they will travel a little ways away from home (like up to 50%) and occasionally they will make a long trip (over 80%). But of course “there’s no place like home” so they eventually return to under 20%, where they live most of the time. We will open trades when the pairs are away on a trip, helping them to get back home, and we will profit on the way back.

There are only 5 steps to trading this successfully:

1. Go to http://www.mataf.net/en/tools/01-01-correlation and click on “Forex Correlation” under “Tools and Charts”. Put a check on all pairs.

2. Scroll down to “Daily” and note each pair with a positive correlation of 75% or greater (I am currently monitoring 25 pairs, which is very easy to do using the indicator mentioned below).

3. Open 5M charts on your MT4 platform for all the pairs selected in the steps above. Place the “Stochastic Different Pairs 1.4b” indicator on each of the charts.

4.
When a 5M bar (candle, whatever) closes above 80% differential sell the pair that is high, buy the pair that is low.

5. Close at 50%, or lower, depending on your risk tolerance.

This particular method is a short term strategy that has you in and out quickly.

Benefits:

1. No monitoring charts needed. You can set the “Stochastic Different Pairs 1b” to alert you via pop-up on the computer, or email to your cell phone.

2. “Built-in” stop-loss. This means that since we exit at 50% we are out with either a profit or a loss, therefore we do not need to put stop losses on with our trades. We will simply close out when the difference reaches 50%.

3. “Built-in” trend/sideways moving market protection. When nothing much is happening the “difference” percentage drops below 20 and we do nothing.

4. Numerous opportunities to trade throughout the day. You can trade this method anytime of the day or night. No more “first hour of the session only”, though there certainly is more activity during “session” times.

This method would no doubt work for longer time frames as well, and in this thread you can feel free to test different timeframes, different entry/exit criteria, different anything. It would be good if you were to report your findings (even trading negatively correlated pairs, if you have a strong constitution). There are also EAs developed for this method.

Enjoy!

Dreamliner
P.S. I cannot seem to attach the one indicator we use, but if you begin reading on page 100 you will come to it. It is called "Stochastic Different Pairs 1.4b".

P.P.S.S. Many thanks to "Roundrock" for developing an EA!

weekapaugh Mar 30, 2009 6:31pm | Post# 2

What would you consider the minimum and or optimum gap size to enter?

Dreamliner Mar 30, 2009 6:34pm | Post# 3

What would you consider the minimum and or optimum gap size to enter?
That's a good question. As you can see from looking back all gaps result in a cross sooner or later, so any gap is fine to trade. However, the larger the gap the less drawdown, and the more profit potential. Basically I have just been "eyeballing" it; if the gap is as large or larger than in previous times (looking back over the chart) I enter.

I do not have a way of determining gap sizes for entries, maybe that is something we can determine together, unless this system is shown to be bad somehow.

Dreamliner Mar 30, 2009 6:52pm | Post# 4

Profit Calculator
 
By the way, to make it easier to figure your profit on each trade, there is a profit calculator here.

rbrtsha Mar 30, 2009 6:58pm | Post# 5

mt4
 
have you tried the overlay chart indicator for mt 4 in ff?

pipcruiser Mar 30, 2009 6:59pm | Post# 6

Hi dreamliner,

intersting concept

How many trades do you app. take the last week?

BR

PC

Arilou Mar 30, 2009 7:02pm | Post# 7

Hi Dreamliner,

Do you know anything about how the two charts are overlayed? I mean, both charts have a different scale, and they must be somehow fitted together, but it is not obvious how. (Which values of the scales are matched).

I suspect that it is done based on some average values of the visible parts of the charts. Maybe I am wrong, but if not, it means that the relative position of the two lines repaint.

Did you backtest it visually, or in real time?

Dreamliner Mar 30, 2009 7:03pm | Post# 8

have you tried the overlay chart indicator for mt 4 in ff?
I saw one posted in another thread, but it didn't overlay on to another chart, it opened in a second window on the bottom. Do you have one that overlays right on a current chart? Or maybe I just put it on the chart wrong somehow. Post it here if you want to.

Dreamliner Mar 30, 2009 7:05pm | Post# 9

Hi Dreamliner,

Do you know anything about how the two charts are overlayed? I mean, both charts have a different scale, and they must be somehow fitted together, but it is not obvious how. (Which values of the scales are matched).

I suspect that it is done based on some average values of the visible parts of the charts. Maybe I am wrong, but if not, it means that the relative position of the two lines repaint.

Did you backtest it visually, or in real time?
I don't know anything about how they are overlaid at all. I just have traded this live since last week. The only backtesting I did was to visually examine it and notice the correlations.

Dreamliner Mar 30, 2009 7:15pm | Post# 10

Hi dreamliner,

intersting concept

How many trades do you app. take the last week?

BR

PC
I've taken a total of 7 so far, but I must admit I took some on the 1 minute timeframe last night. Two trades to be exact, each for a win of 2 percent of the account balance.

pipcruiser Mar 30, 2009 7:17pm | Post# 11

http://www.forexfactory.com/showthread.php?t=156747

I saw one posted in another thread, but it didn't overlay on to another chart, it opened in a second window on the bottom. Do you have one that overlays right on a current chart? Or maybe I just put it on the chart wrong somehow. Post it here if you want to.

qweabc Mar 30, 2009 7:20pm | Post# 12

or you can trade eur/gbp. Buy eur/usd and sell gbp/usd = buy eur/gbp, and vice-versa. Look at the chart of eur/gbp, and you'll notice that over the long term, eur strengthened.... there is definitely correlation between the pairs, but will it be like this in the future? Unlikely considering eur/gbp's history, and volatility.

rbrtsha Mar 30, 2009 7:25pm | Post# 13

try this
 
1 Attachment(s)
found on ff....make mirroring false and its exactly the same as daily fx charts
download in the indicators folder and just attach to an open chart
ex. open eur/usd chart and then attach indicator and when you want gbp/usd overlayed just put in all caps GBPUSD and if its a mini then put a small m after that and it should work perfectly
OverLayChart.mq4

Dreamliner Mar 30, 2009 7:30pm | Post# 14

Thanks much. This is what I just posted over there:

This is the exact indicator I am looking for for the strategy I trade which can be found here.

I am having difficulty putting this indicator on the chart. I am simply wanting to show the correlation between EUR/USD and GBP/USD.

There are two indicators in this zip file. The "Correlation Indicator Chart Lite" and the "Correlation Indicator HST Lite." Do we place both of them on the chart? And if we want EUR/USD and USD/GBP do we just place both indicators on say the EUR/USD chart and put "GBP/USD" in the "Symbol 1" slot?

Dreamliner Mar 30, 2009 7:35pm | Post# 15

found on ff....make mirroring false and its exactly the same as daily fx charts
download in the indicators folder and just attach to an open chart
ex. open eur/usd chart and then attach indicator and when you want gbp/usd overlayed just put in all caps GBPUSD and if its a mini then put a small m after that and it should work perfectly
Thank you, but nothing at all shows up when I load the indicator with the settings you mention above. It is as if I did not put the indicator on the chart. Nothing changes. Any other suggestions?

Dreamliner Mar 30, 2009 7:38pm | Post# 16

found on ff....make mirroring false and its exactly the same as daily fx charts
download in the indicators folder and just attach to an open chart
ex. open eur/usd chart and then attach indicator and when you want gbp/usd overlayed just put in all caps GBPUSD and if its a mini then put a small m after that and it should work perfectly
This works, if taking off the "m" (even if it is a mini account). Thank you.

Dreamliner Mar 30, 2009 8:01pm | Post# 17

Pic of Today's Trades
 
1 Attachment(s)
I don't know how to post a pic of a chart, but I am going to try.

If you can see the pic, the entry point is at the left of the screen, when there is a fairly large gap (shown by two arrows for entry). Green candles are EUR/USD which in this case you sell because it is on top. Red candles are GBP/USD which you buy because it is on the bottom.

The exit is on the far right of the screen, again using two arrows to show the exit point.

I cannot tell what the profit would be on this trade because this indicator does not give "data" for the overlaid chart for backtesting. If it did, I think we could show a substantial number of pips gained.

P.S. Just eyeballing this trade, it was worth approximately 10 percent of account balance.
pics.doc

billbss Mar 30, 2009 8:02pm | Post# 18

1 Attachment(s)
Here's a good indicator for this.
It puts several pairs on the same screen.
Put "no color" on the pairs you don't want.
All_usd_pair.mq4

Dreamliner Mar 30, 2009 8:07pm | Post# 19

Here's a good indicator for this.
It puts several pairs on the same screen.
Put "no color" on the pairs you don't want.
Thanks Bill. I see you're doing something similar. Does this indicator give "data" for both pairs when running mouse over the bars?

billbss Mar 30, 2009 8:08pm | Post# 20

Thanks Bill. I see you're doing something similar. Does this indicator give "data" for both pairs when running mouse over the bars?
It shows line graphs of the closing price.
It will give the close prices when you run your mouse over them.


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