Actually I wanted to post it as a new thread in the strategy forum, but I'm not allowed yet as I'm a Junior member in Forex Factory.
But I found replying to this post should be ok to look for help.
Basically Correlated Pairs (Gold / Silver) (S&P / Nas) (...) move like DNA strands: they will cross each other, and then they will move away one from another like an elastic, to move together again later, and this sequence is repeated over time.
How can we take advantage of this sequence?
When they are far away from each other, at the maximum extension of the elastic, we can Sell the one above and Buy the one below.
No matter what, they will later cross each other again, and we will close both the position at the crossing.
At the closing we will have 3 scenario:
1) If the cross occurs between the Buy and the Sell, both trades are in profit.
2) If price closes above the Sell, the Buy will be in profit and Sell in loss, with the profit of the Buy bigger than the loss of the Sell.
3) If price closes below the Sell, the Sell will be in profit and the Buy in loss, with the profit of the Sell bigger than the loss of the Buy.
So, no matter where the price closes, we will have a NET of the 2 positions in profit.
A drawdown may occur if after we place the trades, the elastic enlarge even more, so we will have for some time both trades in loss. In this case we may also think to add a position as no matter what, the 2 pairs will cross each other again later.
It can be used on any time frame. I expect more trades on smaller timeframe with small profit each, and I expect fewer trades on bigger timeframe, but with bigger profit each.
What we will need?
1) We will need an overlay indicator which put the 2 pairs on the same chart.
2) We will need an indicator which indicate something like the strength of the divergence, which will help us to filter and to place the 2 trades at their maximum extension. For example, if this indicator has a scale of 0-100, we may consider to place the trades everytime the indicator goes above 80.
3) We will need a calculator which give us the equivalent position sizing of the trades to be placed for the 2 pairs.
What do you think? Can it be done?
Thanks in advance for answering.