Hi there,
This is a quick question about the correlation of EURGBP and GBPCHF and the trading 14 pairs straight method.
As we know EURGBP is a BUY pair and GBPCHF is a SELL pair.
After doing some investigation these two pairs seem to have a pretty good negative correlation. This means of course that when EURGBP is going up in price you will find that GBPCHF is going down or when EURGBP is going down GBPCHF is going up.
Because EURGBP is a BUY pair and GBPCHF is a SELL pair and since they have a pretty strong negative correlation these two pairs tend to stick together either in the top half of the basket (i.e. profit) or in the bottom half of the basket (i.e. loss).
When trading 14 pairs straight it would appear that these two pairs would be at odds with each other.
For example let us assume the top and bottom anchor pairs change so that an opportunity arises for a 14 pair straight "BUY" trade. In effect let us say that a BUY pair takes over the top position in the basket and then a couple of hours later a SELL pair takes over the bottom position in the basket.
My understanding is that this is a good signal to initiate a BUY of all pairs. If I do this then the expectation would be to see both EURGBP and GBPCHF to go up in price over time. However given the strong negative correlation between EURGBP and GBPCHF if EURGBP goes up in price there is a strong possibility that GBPCHF will go down which isn't so good since we would actually be long on GBPCHF.
Am I missing something here with regard to the trading of 14 pairs straight?
How does the strong negative correlation between EURGBP and GBPCHF affect trading of these pairs in the context of the Basket Trading System in general.
Regards,
Laurence.
This is a quick question about the correlation of EURGBP and GBPCHF and the trading 14 pairs straight method.
As we know EURGBP is a BUY pair and GBPCHF is a SELL pair.
After doing some investigation these two pairs seem to have a pretty good negative correlation. This means of course that when EURGBP is going up in price you will find that GBPCHF is going down or when EURGBP is going down GBPCHF is going up.
Because EURGBP is a BUY pair and GBPCHF is a SELL pair and since they have a pretty strong negative correlation these two pairs tend to stick together either in the top half of the basket (i.e. profit) or in the bottom half of the basket (i.e. loss).
When trading 14 pairs straight it would appear that these two pairs would be at odds with each other.
For example let us assume the top and bottom anchor pairs change so that an opportunity arises for a 14 pair straight "BUY" trade. In effect let us say that a BUY pair takes over the top position in the basket and then a couple of hours later a SELL pair takes over the bottom position in the basket.
My understanding is that this is a good signal to initiate a BUY of all pairs. If I do this then the expectation would be to see both EURGBP and GBPCHF to go up in price over time. However given the strong negative correlation between EURGBP and GBPCHF if EURGBP goes up in price there is a strong possibility that GBPCHF will go down which isn't so good since we would actually be long on GBPCHF.
Am I missing something here with regard to the trading of 14 pairs straight?
How does the strong negative correlation between EURGBP and GBPCHF affect trading of these pairs in the context of the Basket Trading System in general.
Regards,
Laurence.