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How do you use correlations?

  • #41
  • Oct 16, 2006 7:37pm Oct 16, 2006 7:37pm
Quoting mrgreen
The idea of hedging the same pair strikes me as counter productive because it implies that I am not convinced that my position is the correct one. Whenever I get that 'I'm wrong; feeling I get out. Standing aside is also a position.
Are you saying that hedging with a highly correlated pair means you are convinced? To me it still says you don't know where the market is going, which is that feeling you're referring to.

To me you just wouldn't hedge a position if you didn't WANT to be counter-productive. It's the whole purpose to hedge, to counter the possible loss, is it not?

  • #42
  • Edited 8:19pm Oct 16, 2006 7:57pm | Edited 8:19pm
Here's how I am thinking at ATM.
The Scenario: I am in profit and a news announcement is due that has a high probability of moving the market significantly, for or against my profitable position. I want to insure that I don't lose it all and I also am not convinced that the original direction of the move is over and I believe it will continue once the smoke has cleared from the news announcment.
Possible solution:
The hedge would need to be with a non-correlated pair, as one goes down the other would go up.
My intention is to ride out a short term correction caused by the news that has been released. If the market turns back around I close my hedge currency (hopefully in profit) and continue to hold my original pair. If the market does not turn I would close the original and hold the hedge.
This of course does not ensure that you will not take a loss. But I think that if the odds are that the pair is highly non-correlated the above strategy may work. I cannot site any evidence it will work as I have only started to consider the idea.
A hedge of the same pair guarantees that I lose on one of the positions. I only begin to gain back that loss once my original position gains back what the hedge lost. If the non-correlated hedge works I have in essence taken a bit of profit off the table without reducing my original position.

Quoting twinchell
Are you saying that hedging with a highly correlated pair means you are convinced? To me it still says you don't know where the market is going, which is that feeling you're referring to.

To me you just wouldn't hedge a position if you didn't WANT to be counter-productive. It's the whole purpose to hedge, to counter the possible loss, is it not?

In trading, there is no bullshit. You either make money or you don't.
  • #43
  • Oct 16, 2006 8:32pm Oct 16, 2006 8:32pm
Quoting mrgreen
...If the non-correlated hedge works I have in essence taken a bit of profit off the table without reducing my original position.
If it doesn't work you're at a loss. It just seems to me you're playing a coin toss. The point of hedging is to neither take a profit, nor take a loss, at least in a situation like this. So if that's your goal hedge it with the same pair, or just close and reopen.

Maybe my skull is too thick.
  • #44
  • Oct 16, 2006 8:45pm Oct 16, 2006 8:45pm
Quoting twinchell
or just close and reopen.
All Always True, IF you have a system that is 100% accurate.

There are no skulls here. thick or otherwise. Only hearts & minds.
  • #45
  • Last Post: Oct 17, 2006 11:54pm Oct 17, 2006 11:54pm
Quoting StockKJay
I dont quite understand. 80% return is incredible! Would you mind posting a little more information? Would have the returns come whether or not the market retraced in your favor?

I must be missing something (as usual).. probably obvious as well.
If the GBP hadn't drop so far I would not have made 80%. The portfolio was set to earn 40% but because there was a large drop in GBP, taking small 1 mini lot trades all the way down allowed me to catch more pips once it came back up.

Trading for interest is very conservative trading. I also do report trading and use Tlatomi (also on this forum). I am up 50% this month.

But if you have a hard time being ahead at the end of the year, interest trading may be the way to go. You can still get rich doing that. It just takes longer. Also you don't have to be at your computer all day.

To stay on topic, using correlation is a way to stay in the market. I was also long the USD/JPY during the time GBP/USD was dropping. Even though the correlation isn't the best with those pairs I was still able to stay in the market. Then you can collect your interest and be happy.
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