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Hedge Trading the US Market using 2 symbols

  • #1
  • First Post: Feb 19, 2020 9:30am Feb 19, 2020 9:30am
Hi everybody,

Lately I have had some success in trading with a hedge involving the US500 and US30 symbol. This is a somewhat of a scalp trade, lasting minutes to a few hours. It can be done on US accounts since its technically not "hedging" in the traditional sense as you are using 2 different symbols. I guess this can be done with futures, CFD's, etc etc.

First a bit of background:

 

  1. Over the last 10 years, the US500 index has outperformed the US30 index almost every year.
  2. On most timeframes from H1 upwards, these two symbols remain above 90% correlation.
  3. With a simple backtest on cTrader using these 2 symbols - Buying the US500 and selling the US30 then closing out both positions when equity reaches a certain level, then repeat, you end up with a nice profit for at least the past 3 years.

So with the above in mind, the method is simple:

 

  1. Simultaneously Sell X amount of indices (depending on your account and leverage) and buy 10 times that amount of US500 (this is how my broker sizes positions, your may be different). So example for 200:1 leverage with $2000 margin, you Sell 0.1 lot US30 and Buy 1 lot US500.
  2. When Equity reaches balance + X amount of profit (generally 10% of total margin used for the trade for me maximum) close both trades.

Some things to consider before placing trades:

 

  1. If markets are up, Make sure US500 is up slightly more than US30 for the day (eg: at 0925 New York time, US500 is up 0.4% and US30 is up 0.3%). If markets are down, then check that US30 is down slightly more than US500 (eg: at 0925 New York time, US500 is down 0.3% and US30 is down 0.4%)
  2. Best time to place this is during US market open hours, preferably right at open. Spreads are lowest during trading hours

I have a basic cBot written for cTrader that places these trades when I click start, then automatically closes out both trades when Equity reaches a certain level. Sometimes it takes 3-4 hours, but I set it and go to bed as the market only opens 22:30 in my local time. Each morning I have woken up with the trade closed, either from the US500 rising slightly faster than the US30 during a market-up day, or from the US30 falling slightly faster than the US500 during a market-down day.

Give it a try on a demo account and tell me what you think. It seems to work most nights with the above market conditions, only thing I haven't decided is whether or not to close out both trades the next day if they didn't close in profit or just let them ride another night, or double down and place the 2 trades again and close them out when they all hit an average profit target (technically a grid, but only 4 positions deep).

Have a play around with it and see what you think. Would be interested to hear feedback, specifically if you can refine this system to make it even more profitable

  • #2
  • Feb 19, 2020 11:11am Feb 19, 2020 11:11am
Quoting Mr4x86
Hi everybody, Lately I have had some success in trading with a hedge involving the US500 and US30 symbol. This is a somewhat of a scalp trade, lasting minutes to a few hours. It can be done on US accounts since its technically not "hedging" in the traditional sense as you are using 2 different symbols. I guess this can be done with futures, CFD's, etc etc. First a bit of background: Over the last 10 years, the US500 index has outperformed the US30 index almost every year. On most timeframes from H1 upwards, these two symbols remain above 90% correlation....
Are you aware that you can have more than one MT4 account with Oanda and Forex.com? Having 2 MT4 accounts with the same broker enables you to sell on one and buy on the other for any currency pair. It's an inconvenient solution to the no hedge rule. Just keep in mind that unfair FIFO rules still apply.
Learn from your mistakes and march on.
  • #3
  • Feb 19, 2020 4:19pm Feb 19, 2020 4:19pm
Quoting here2there
{quote} Are you aware that you can have more than one MT4 account with Oanda and Forex.com? Having 2 MT4 accounts with the same broker enables you to sell on one and buy on the other for any currency pair. It's an inconvenient solution to the no hedge rule. Just keep in mind that unfair FIFO rules still apply.
Absolutely aware, and I live in Australia where I can be fully hedged with 1 currency pair. It was more of a comment for people who can't...

But being 100% hedged in one pair sort of defeats the purpose of this method, as you'll always be stuck in negative equity (with spread taken in to account). This method is more to explore the ever so slight difference in the way 2 different symbols move, taking the profit when they slightly un-correlate (I know thats not a real word) whilst still remaining fairly well hedged in case the market turns from positive to negative (or vice versa).

It helps I have a swap-free account too that only charges an admin fee if the position is held open past 10 consecutive days...
  • #4
  • Feb 19, 2020 4:21pm Feb 19, 2020 4:21pm
Quoting Mr4x86
{quote} Absolutely aware, and I live in Australia where I can be fully hedged with 1 currency pair. It was more of a comment for people who can't... But being 100% hedged in one pair sort of defeats the purpose of this method, as you'll always be stuck in negative equity (with spread taken in to account). This method is more to explore the ever so slight difference in the way 2 different symbols move, taking the profit when they slightly un-correlate (I know thats not a real word) whilst still remaining fairly well hedged in case the market turns...
I see. Thanks for the clarification.
Learn from your mistakes and march on.
  • #5
  • Feb 20, 2020 2:41am Feb 20, 2020 2:41am
Nice, thanks for your find. Would be really great if you'd post some of your results using this strategy
Invest with us.PM for more info.
  • #6
  • Feb 20, 2020 3:10am Feb 20, 2020 3:10am
Sounds interesting Mr4x86.
Can you write down what you have done today after NY open?
Thanks!
  • #7
  • Feb 20, 2020 3:17am Feb 20, 2020 3:17am
Can't you just buy an inverse ETF if you're long?
  • #8
  • Feb 20, 2020 5:17am Feb 20, 2020 5:17am
Mr4xx86,
Without any disrespect, you mentioned a 90% correlation of the 2 Indices and yet you still "hedge" when the direction is, say LONG, knowing full well that there is a 90% chance that both will go in the same direction.
With 0,1 lot US30 and 1 lot US500, you will be in trouble from the start?
On what TF do you take your entries?
And finally, would you be prepared to post your entries when you go to bed tonight so that we can compare notes in the morning plse?
Best wishes,
Hercs.
Hercs
  • #9
  • Feb 20, 2020 7:16am Feb 20, 2020 7:16am
Quoting Hercs
Mr4xx86, Without any disrespect, you mentioned a 90% correlation of the 2 Indices and yet you still "hedge" when the direction is, say LONG, knowing full well that there is a 90% chance that both will go in the same direction. With 0,1 lot US30 and 1 lot US500, you will be in trouble from the start? On what TF do you take your entries? And finally, would you be prepared to post your entries when you go to bed tonight so that we can compare notes in the morning plse? Best wishes, Hercs.
Sorry let me clear it up a bit. This is the trade:

US30 = Short
US500 = Long

Margin-wise, 10 lots of US500 is worth the same as 1 lot of US30, at least for my broker. It may be different for yours. Place the 2 trades as I have said and if one moves much larger than the other then you need to adjust your volume, but using 3 different demo accounts on cTrader, this has been the correct lot size for me.

This is a set and forget for most nights, if the market goes up then most of the time the US500 will rise slightly faster than the US30, and you close both out when you reach x amount of profit. Likewise when the market is falling (or even switches up on you half way through the trading session), then the US30 will fall faster than the US500, and you still win.

Does this clear it up for you? I apologise if I'm not making myself clear
  • #10
  • Feb 20, 2020 7:21am Feb 20, 2020 7:21am
Attached screenshots of my trades on my live account from last night.

Check the opening and closing times, and you can see where I have made profit during both a rising and falling market in a single session. You see the closing times are hedged pairs being closed out together. Yes I also experimented a little with the NAS100, but that is a different beast which I can't recommend just yet
Attached Image (click to enlarge)
Click to Enlarge Name: Screenshot1.png Size: 44 KB
  • #11
  • Feb 20, 2020 11:16am Feb 20, 2020 11:16am
Quoting Mr4x86
{quote} Sorry let me clear it up a bit. This is the trade: US30 = Short US500 = Long Margin-wise, 10 lots of US500 is worth the same as 1 lot of US30, at least for my broker. It may be different for yours. Place the 2 trades as I have said and if one moves much larger than the other then you need to adjust your volume, but using 3 different demo accounts on cTrader, this has been the correct lot size for me. This is a set and forget for most nights, if the market goes up then most of the time the US500 will rise slightly faster than the US30, and...
Clear enough, thx Mr4x86.
Much appreciated.
Hercs.
Hercs
  • #12
  • Feb 20, 2020 6:36pm Feb 20, 2020 6:36pm
Quoting Mr4x86
Attached screenshots of my trades on my live account from last night. Check the opening and closing times, and you can see where I have made profit during both a rising and falling market in a single session. You see the closing times are hedged pairs being closed out together. Yes I also experimented a little with the NAS100, but that is a different beast which I can't recommend just yet {image}
Hi Mr4x86,

thanks for sharing your strategy, looks interesting.

I have a question, say you trade a 10.000 USD account with 1:100 leverage, what lotsizes would you trade and what % ROI will you shoot for
when closing the trades in TP?

Thanks again

PC
Less is more...
  • #13
  • Feb 20, 2020 11:41pm Feb 20, 2020 11:41pm
Quoting pipcruiser
{quote} Hi Mr4x86, thanks for sharing your strategy, looks interesting. I have a question, say you trade a 10.000 USD account with 1:100 leverage, what lotsizes would you trade and what % ROI will you shoot for when closing the trades in TP? Thanks again PC
I would say start with a demo account, and try for 1 lot US30 and 10 lots US500. This gives you some room to maneuver in terms of draw down and having the ability to place the trade a second time if it moves too far in reverse.

The other thing I have is a swap-free account that only charges an admin fee after holding a position open for 10 consecutive days. This gives me a few days to ride it out if/when it moves into negative equity. My account allows maximum 1:200 leverage on indices so this would be my lot size, the margin requirement would be smaller than yours however.

I would close both trades out after about $100 profit with this lot size just to be safe, especially if you're trying to avoid any swap fees. Whilst experimenting with a demo account you could just leave the trade on all night and see how far into positive and negative equity the trade moves each day, just for your own reference, and set the profit to about 20% below that figure to be sure you hit a profit most days. Get a feel for it, what draw-down you feel comfortable with, and adjust as needed.
  • #14
  • Feb 21, 2020 6:58am Feb 21, 2020 6:58am
Quoting Mr4x86
{quote} I would say start with a demo account, and try for 1 lot US30 and 10 lots US500. This gives you some room to maneuver in terms of draw down and having the ability to place the trade a second time if it moves too far in reverse. The other thing I have is a swap-free account that only charges an admin fee after holding a position open for 10 consecutive days. This gives me a few days to ride it out if/when it moves into negative equity. My account allows maximum 1:200 leverage on indices so this would be my lot size, the margin requirement...
Hi there

thanks a lot, I will give it a shot on demo

Have a nice weekend

PC
Less is more...
  • #15
  • Feb 21, 2020 9:12am Feb 21, 2020 9:12am
Please can you show us an open position with profit and loss.
Your suggestion with 1:10 makes my demo at with DJ30 -0.74 and SP500 -0.77 a loss of around $940. Is this correct.

I'm not sure whether the ratio 1:10 is correct.
  • #16
  • Feb 21, 2020 11:26am Feb 21, 2020 11:26am
which broker do you use?
  • #17
  • Feb 26, 2020 7:58am Feb 26, 2020 7:58am
Interesting, thanks for sharing.
I'd be really interested by the cBot script please, if you don't mind sharing this away also
  • #18
  • Feb 29, 2020 4:44am Feb 29, 2020 4:44am
Hi guys,

Sorry for the late reply, I've been working quite a bit and with family commitments etc I haven't been on this forum.

As you know the latest market drop was pretty hectic, and it made me realise that my ratios long/short were out a little. As such, drawdown was 10% on my account this week (same as stock market). So what you need to do in cTrader is check the margin requirement for each lot size and adjust as needed. This changes every now and then depending on where the US500 and US30 sit for the night. with 0.1 and 10 lot sizes for US30 and US500 respectively my margin was still favoured US500 long, which wouldn't have performed that great. If I had chosen 0.1 and 0.9, I would have broken even or made profit even with the massive correction.

So my advice to you is this: use 10:1 US500 to US30 when markets are somewhat healthy, close all positions and use 9:1 (US500:US30) when there is a downtrend in the stock market. It has given me great confidence that even with black swan events like we have just witnessed this method will still make profit, or at the very least break even.

Iansett, as per your request I am sharing my cBot script. basic instructions are to only press play once the US market opens, as that is when the spread is the lowest. Default values are optimised for a 20K account. If your broker allows 0.1 lot sizes for US30 then divide everything by 10. Each night weigh up the margin requirements for each symbol and adjust lot sizes as necessary to make them as close to each other as possible. Instructions are at top of source code in case you forget. Enjoy

//Use ONLY US30 Symbol with this bot
//Recommend using default parameters, only change lot sizes
//SAFE Drawdown lot sizes for US30 with 200:1 leverage per account balance:
//$AUD2000: 0.1
//$AUD10000: 0.5
//$AUD20000: 1.0
//$AUD50000: 2.5
//$AUD100000: 5
//$AUD200000: 10
//$AUD1000000: 50

//In bear markets, use a 9:1 ratio of Buy US500 to Selling US30 Volume
//In bull or sideways markets, use 10:1 ratio of Buy US500 to Sell US30 Volume
//recommended for accounts with swap-free option

using System.Linq;
using cAlgo.API;
using cAlgo.API.Internals;

namespace cAlgo.Robots
{
[Robot(TimeZone = TimeZones.UTC, AccessRights = AccessRights.None)]
public class SellUS30ST : Robot
{
[Parameter("US30 Sell Volume", Group = "Basic Setup", DefaultValue = 1, MinValue = 0.1, Step = 0.1)]
public double InitialVolume { get; set; }

[Parameter("US500 Buy Volume", Group = "Basic Setup", DefaultValue = 10, MinValue = 1, Step = 1)]
public double US500Volume { get; set; }

[Parameter("Target profit in pips", Group = "Basic Setup", DefaultValue = 30, MinValue = 1)]
public int AverageTakeProfit { get; set; }

public double balance;
private string thiscBotLabel;

protected override void OnStart()
{
// Set position label to cBot name
thiscBotLabel = GetType().Name;

if (Positions.Count(x => x.Label == thiscBotLabel) == 0)
{
Symbol symbol1 = Symbols.GetSymbol("US30");
Symbol symbol2 = Symbols.GetSymbol("US500");
ExecuteMarketOrder(TradeType.Sell, symbol1, InitialVolume, thiscBotLabel, 0, 0);
ExecuteMarketOrder(TradeType.Buy, symbol2, US500Volume, thiscBotLabel, 0, 0);
}
}

protected override void OnTick()
{

if (Positions.Count(x => x.Label == thiscBotLabel) > 0)
{
{
if (Positions.Where(x => x.Label == thiscBotLabel).Average(x => x.NetProfit) >= InitialVolume * AverageTakeProfit * Symbol.PipSize)
{
foreach (var position in Positions)
{
if (position.Label == thiscBotLabel)
ClosePosition(position);
}
}
}
}
}

protected override void OnStop()
{
// Close all open positions opened by this cBot on stop during backtesting
if (IsBacktesting)
{
foreach (var position in Positions)
{
if (position.Label == thiscBotLabel)
ClosePosition(position);
}
}
}
}
}
  • #19
  • Mar 1, 2020 4:32am Mar 1, 2020 4:32am
Quoting Peluq
which broker do you use?
Pepperstone swap-free account
  • #20
  • Mar 1, 2020 10:26am Mar 1, 2020 10:26am
@Mr4x86
I read all of your post and understood your hedge method. But I don't see your mention about contract size of your broker, because it not similar to another, so that volume will different when we calculate for hedge
What time do you open trade? daily open or US session open?
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