I have been following Dreamliners excellent thread for a number of days and came up with an alternative to using variance in stochastics to trigger a trade. My basic idea is to calculate the difference in pips between one pair and another and watch the ebbs and flows to give you clues as to where it might go next. The reality is working out slightly better than I had anticipated so I thought I would start a seperate thread to discuss this method and improvements to it.
I am not a coder and so have had to use a custom indicator buillder from the internet but so far I have built something close to what I want. All of the indicators required can be found on the following page. There are templates and instructions too. I won't post them here because they will undoubtedly be changed and improved as time goes on.
http://www.forexfactory.com/showthre...60912&page=215
First off let's go through the previous system using stochs. Basically the idea involves waiting for the stochs in two correlated pairs such as gbpusd and audusd to vary by a difference of around 80%. This means in theory that one pair is getting ahead of each other and the two are probably due a correction to the norm. The idea is then to sell the pair with the highest stochs and buy the pair with the lower stochs so that as the prices move together again you will make a profit on one or both of the pairs. Profits are generally quite modest and it is sometimes necessary to sit through a period of drawdown before go your way.
I was thinking about this and it came to me that if you are considering two pairs such as gbpusd and audusd then it would surely be possible to calculate the difference in pips between the two pairs and ascertain a range. Once the pips difference got near the top of the range then you would be able to sell the pair with the highest pip value and buy the pair with the lower pip value in the expectation that as the correlation kicked back in the difference in pips would decrease hence making money on your hedge.
I have attached some charts below illustrating what I mean. The first is a one hour chart of gbpusd with audusd underneath. This shows how the pip difference indicator works. Notice the ebbs and flows and the resistance at the first line at the top.
The second chart is a possible trade in gbpusd vs audusd. I have very roughly marked where you may have taken a trade as the pips difference bounced from resistance and headed lower. I have tried to roughly mark the entry and exit points and as you can see you would have taken nearly 20 pips from both pairs as they moved closer together.
The third chart is a 4hour chart zoomed out with s and r levels on it. This can't be a coincidence that certain levels keep being touched and so must be as a result of s and r on the price chart.
The last chart is an hourly chart again as it is looking as I write this on a Sunday afternoon. On Monday I would be looking for the pips difference to either close above the line in which case I would want to buy gbp and sell aud as I would expect the pip difference to be getting larger. If it moves and closes a little lower than the previous consolidation I would trade the other way expecting the pip difference to go lower.
This may well be as clear as mud at the moment so I will have to watch it for a few days myself in order to post trade examples. I have in no way perfected the entry and exit points so discussion is definitely needed on that.
One thing worth mentioning is that we are only trading pairs with a correlation of more than 80% over the last 50 days and the 4 hour chart goes back quite a bit more than that so the correlation is going to have changed. What interests me is the s and r effect on the one hour time frame over maybe 50 periods. It does tend to range bouncing from one s and r to another which makes me think there is an opportunity to take money from the markets following these ebbs and flows of the correlation and the pip difference. We'll see. Thanks for reading this far, post a comment!
I am not a coder and so have had to use a custom indicator buillder from the internet but so far I have built something close to what I want. All of the indicators required can be found on the following page. There are templates and instructions too. I won't post them here because they will undoubtedly be changed and improved as time goes on.
http://www.forexfactory.com/showthre...60912&page=215
First off let's go through the previous system using stochs. Basically the idea involves waiting for the stochs in two correlated pairs such as gbpusd and audusd to vary by a difference of around 80%. This means in theory that one pair is getting ahead of each other and the two are probably due a correction to the norm. The idea is then to sell the pair with the highest stochs and buy the pair with the lower stochs so that as the prices move together again you will make a profit on one or both of the pairs. Profits are generally quite modest and it is sometimes necessary to sit through a period of drawdown before go your way.
I was thinking about this and it came to me that if you are considering two pairs such as gbpusd and audusd then it would surely be possible to calculate the difference in pips between the two pairs and ascertain a range. Once the pips difference got near the top of the range then you would be able to sell the pair with the highest pip value and buy the pair with the lower pip value in the expectation that as the correlation kicked back in the difference in pips would decrease hence making money on your hedge.
I have attached some charts below illustrating what I mean. The first is a one hour chart of gbpusd with audusd underneath. This shows how the pip difference indicator works. Notice the ebbs and flows and the resistance at the first line at the top.
The second chart is a possible trade in gbpusd vs audusd. I have very roughly marked where you may have taken a trade as the pips difference bounced from resistance and headed lower. I have tried to roughly mark the entry and exit points and as you can see you would have taken nearly 20 pips from both pairs as they moved closer together.
The third chart is a 4hour chart zoomed out with s and r levels on it. This can't be a coincidence that certain levels keep being touched and so must be as a result of s and r on the price chart.
The last chart is an hourly chart again as it is looking as I write this on a Sunday afternoon. On Monday I would be looking for the pips difference to either close above the line in which case I would want to buy gbp and sell aud as I would expect the pip difference to be getting larger. If it moves and closes a little lower than the previous consolidation I would trade the other way expecting the pip difference to go lower.
This may well be as clear as mud at the moment so I will have to watch it for a few days myself in order to post trade examples. I have in no way perfected the entry and exit points so discussion is definitely needed on that.
One thing worth mentioning is that we are only trading pairs with a correlation of more than 80% over the last 50 days and the 4 hour chart goes back quite a bit more than that so the correlation is going to have changed. What interests me is the s and r effect on the one hour time frame over maybe 50 periods. It does tend to range bouncing from one s and r to another which makes me think there is an opportunity to take money from the markets following these ebbs and flows of the correlation and the pip difference. We'll see. Thanks for reading this far, post a comment!