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EURUSD USDCHF Hedge Question

  • #1
  • First Post: Jun 9, 2007 12:11am Jun 9, 2007 12:11am
Hi All,

It is common knowledge EURUSD and USDCHF pairs tend to mirror each other. My question is, buy how much... let me explain. One lot of EURUSD is not worth the same as 1 lot of USDCHF. So when one moves up 10 pips, does the other move down 10 pips, or by the same lot dollar amount? (I understand that it won't move exactly the same, but as a general rule, and on average)

I know I have worded this question poorly... I know what I want to say, but having a bit of trouble articulating it... hopefully you get what I mean.
  • #2
  • Jun 9, 2007 8:08am Jun 9, 2007 8:08am
Pull up the charts side by side and compare any point A to point B.
The answer to your question will be readily apparent.
  • #3
  • Jun 9, 2007 9:22am Jun 9, 2007 9:22am
USDCHF moves, as an average, 15% more than EURUSD.
  • #4
  • Jun 9, 2007 1:23pm Jun 9, 2007 1:23pm
Simplest ball park answer lies in the eur/chf chart....
  • #5
  • Jun 10, 2007 6:00pm Jun 10, 2007 6:00pm
Thanks. I've been working on a hedge strategy, and I think it's ready to test.
  • #6
  • Jun 10, 2007 7:07pm Jun 10, 2007 7:07pm
This may be helpful too.
Attached Image
  • #7
  • Jun 10, 2007 10:01pm Jun 10, 2007 10:01pm
OK...there really seems to be no end to this discussion...it really surprises me with all of the math already presented and what not.

First off, you're in correct...it's not common knowledge that the EURUSD, USDCHF mirror each other...the are actually negatively correlated, which means they tend to move in opposite directions. Secondly, correlation doesn't buy you a hedge, sorry to say. Even if they were 99% negatively correlated, you'd STILL have to contend with the uncorrelated movements which means that unless the EUR/CHF keeps moving up, you're not going to win in the long run. You could if you get lucky and happen to start your "hedge" on the day when there is a big and sustained enough move upwards to make your position profitable...but you're not relying on FACTUAL information...you're relying on correlation.

Face it, do a search on these hedges, and you'll see how well they're doing. because the EUR/CHF has been moving up forever. That move could very well continue, but what you're basing your results on is complete and utter fiction.

Get wise, folks...do the math and you'll see the real relationship with this silly idea is that 1 lot of the EUR/USD and 1 lot of the USD/CHF = a EUR sensitive amplification of the EUR/CHF.

Quoting cre8iveq
Hi All,

It is common knowledge EURUSD and USDCHF pairs tend to mirror each other. My question is, buy how much... let me explain. One lot of EURUSD is not worth the same as 1 lot of USDCHF. So when one moves up 10 pips, does the other move down 10 pips, or by the same lot dollar amount? (I understand that it won't move exactly the same, but as a general rule, and on average)

I know I have worded this question poorly... I know what I want to say, but having a bit of trouble articulating it... hopefully you get what I mean.
  • #8
  • Jun 11, 2007 8:13pm Jun 11, 2007 8:13pm
MrMikal,

I'm sure I must have misread your post, because the way I read it, it sounded like you were saying my system won't work. I'm sure that's not what you would have been saying given that you have no idea what my system is. My system is not a swap system, so it does not actually consistently go long on both, or short on both, so I don't really care what happens to the EUR/CHF. In fact, my system would not work if there was 100% correlation, it takes advantages of the little changes.

Will it work? Maybe, maybe not... the little amount of testing I have done so far looks promising, but I have a way to go yet.
  • #9
  • Jun 11, 2007 10:52pm Jun 11, 2007 10:52pm
Cre,

You know, that's a fairly good point. You didn't explain your system, but you did mention "hedge". I suppose that could mean much of anything, really...but with the onslaught of EUR/USD and USD/CHF correlation talk, I merely took a chance and figured it had to be something similar.

The last EUR/USD vs USD/CHF system that was spoken about was introduced by a chap named Mike Jody. Basically, his system was to purchase 1 lot of the EUR/USD and 1 lot of the USD/CHF in hopes he could capture 1% ROI on the hedge. Then, he'd wait for a pullback in the hedge price and then do it again. In the event the hedge was a loser, the hedge would gain a swap.

So the question is, if you're not trying a correlation hedge, why would you care whether or not the USD/CHF and the EUR/USD sported an inverse relation?

To me, it means that you're attempting to trade the pairs concurrently with the expectation that 1 or the other pair would "offset" the other.

Whether you'd like to believe it or not, there IS a tight correlation between all 3 pairs to prevent market exchange arbitrage...so while you don't necessarily directly care about the EUR/CHF, if you have any intention of trading this pairs as a "hedge" (meaning 1 pair is assumed to offset another - or same-direction trades with disparate alotment), then you very much INDIRECTLY care what the EUR/CHF is doing because mathematically, you're trading an amplified (or deamplified) version of the EUR/CHF.

Now, of course, I have no idea what your system is, so if it's completely not based on the idea of correlation hedging, then you're right...my points are very irrelevant...however, given the recent rash of correlation hedge excitement, I felt it necessary to interject some logic...if not at least to make system developers think outside that box.

By all means, carry on, though...If you're not actually hedging the EUR/USD with the USD/CHF, then I'm totally interested in what you're attempting to show here.

Quoting cre8iveq
MrMikal,

I'm sure I must have misread your post, because the way I read it, it sounded like you were saying my system won't work. I'm sure that's not what you would have been saying given that you have no idea what my system is. My system is not a swap system, so it does not actually consistently go long on both, or short on both, so I don't really care what happens to the EUR/CHF. In fact, my system would not work if there was 100% correlation, it takes advantages of the little changes.

Will it work? Maybe, maybe not... the little amount of testing I have done so far looks promising, but I have a way to go yet.
  • #10
  • Jun 12, 2007 5:51am Jun 12, 2007 5:51am
Quoting mrmikal
Cre,

By all means, carry on, though...If you're not actually hedging the EUR/USD with the USD/CHF, then I'm totally interested in what you're attempting to show here.

I wasn't actually attempting to show anything. I am not a very experienced forex trader, and at the moment, I am learning more than I am teaching on this forum. My post was a question. Hopefully when I have gained lots of knowledge, I can start contributing more.

Having said that, for the sake of conversation, I will explain my system, I would be interested in hearing your feedback. You may still say it's crap, but at least it will be an educated opinion.

Ok, start by taking a position short (can be long first, doesn't really matter) on both EURUSD and USDCHF. If the net position of these 2 trades get to 5 pips profit, close both positions, and got long (the opposite of the first time) on both. Again, if the net position is positive 5 pips, close out and reverse. When the net position goes against you by 10 pips (notice I say when, not if), take another position in the same direction as the first (similar to martingale). Again, as soon as these 2 trades are 5 pips positive, close them out... only this time do not open reverse. Only open reverse when all trades are closed out. Continue to open trades as it goes against you every 10 pips, taking the 5 pips profit where possible. When any pair has gone 50 pips against you, close them out and take the loss. I know this will happen, I don't claim it to be a "win every trade" system, but the theory is that because the pair are so closely correlated, it will take a while to split 50 pips, and in the mean time, you are picking up lots of 5 gains.

I haven't perfected the EA yet, but I have been watching the pair for a couple weeks now, and had the EA have traded correctly, I would have done well. This is not to say I am confident I have a winner yet, but it looks promising.

So, what do you think?
  • #11
  • Jun 12, 2007 6:16am Jun 12, 2007 6:16am
Cre,

Well, I see sort of what you're doing...but you do realize that when you're buying both or selling both the EUR/USD and USD/CHF, you're technically buying or selling an EUR-amplified EUR/CHF, right? Mathematically, it works out the same way.

It may not totally seem that way, but you could probably do the math and figure out exactly how prices could move in relation to each other.

I, personally, thinnk that regardless of what MY logic is telling me, that you're going about figuring this out absolutely correctly, and I totally commend you. I could be completely off my rocker (and I'm not even that old). I definitely think you should get some data behind this FIRST...

Quoting cre8iveq
I wasn't actually attempting to show anything. I am not a very experienced forex trader, and at the moment, I am learning more than I am teaching on this forum. My post was a question. Hopefully when I have gained lots of knowledge, I can start contributing more.

Having said that, for the sake of conversation, I will explain my system, I would be interested in hearing your feedback. You may still say it's crap, but at least it will be an educated opinion.

Ok, start by taking a position short (can be long first, doesn't really matter) on both EURUSD and USDCHF. If the net position of these 2 trades get to 5 pips profit, close both positions, and got long (the opposite of the first time) on both. Again, if the net position is positive 5 pips, close out and reverse. When the net position goes against you by 10 pips (notice I say when, not if), take another position in the same direction as the first (similar to martingale). Again, as soon as these 2 trades are 5 pips positive, close them out... only this time do not open reverse. Only open reverse when all trades are closed out. Continue to open trades as it goes against you every 10 pips, taking the 5 pips profit where possible. When any pair has gone 50 pips against you, close them out and take the loss. I know this will happen, I don't claim it to be a "win every trade" system, but the theory is that because the pair are so closely correlated, it will take a while to split 50 pips, and in the mean time, you are picking up lots of 5 gains.

I haven't perfected the EA yet, but I have been watching the pair for a couple weeks now, and had the EA have traded correctly, I would have done well. This is not to say I am confident I have a winner yet, but it looks promising.

So, what do you think?
  • #12
  • Jun 13, 2007 3:29am Jun 13, 2007 3:29am
I'm working on the data, and I'll let you know how it goes... in the mean time, what does "EUR-amplified EUR/CHF" mean?
  • #13
  • Jun 13, 2007 6:14am Jun 13, 2007 6:14am
cre8iveq
Well your broker will love you,for the short time you remain solvent.

Without going into the basic merits or demerits of your system and only looking at the financial aspects.

As I understand it, you exit on 5 net pips profit for 2 positions, that means you need typically 12 gross pips to cover the spread. Almost 2 1/2 x profit goal.
Your stop loss is 10 pips which means 17 pips and is almost 3 1/2 x your profit goal.
Plus you re-enter losers but if they turn profitable you exit w/ the same 5 pip profit.

This is a prima fascia case for disaster.

The spread will eat you up and the losses will spit you out.
  • #14
  • Jun 14, 2007 3:11am Jun 14, 2007 3:11am
mmont,

There are so many things to comment on about your post, where do I start. First of all, I don't know where you got the 10 pip stop from, you seemed to have plucked that out of the air, it's a 50 pip stop... and even then it is not a stop in the traditional sense (nor is the take profit).

Not sure what broker you are using where you are copping a 7 pip spread between the EURUSD and the USDCHF, maybe you should shop around, but the point is semi valid. Yes, it needs to go up 10 pips for me to make 5 pips profit, but so what. For a start, scalpers do this all the time.

What you don't seem to appriciate is that the system relies on the fact that EURUSD and USDCHF are closely correlated, but not exactly. If this is the case, the system makes money. When they become exactly correlated, it doesn't make and it doesn't loose... and when they become not nearly correlated, it looses money. If it is close to correlated, it makes money.

History says, they are very often close to correlated.

I have got the EA working properly now, and made 100 pips in the first 24 hours. It's by no means proof that it works, but it's a promising start.
  • #15
  • Jun 14, 2007 3:44am Jun 14, 2007 3:44am
Hi
I also came across this idea about a year ago, but did not do much testing as I wanted to get my real trading up to speed firts.

I recently revisited the idea, as I thought to myself an extra 10 pips a day with a no brainer trading would be nice, meaning no studying of charts, market hours involved or even news events.

My idea for an EA was to enter a trade and wait for a 10 pip profit and exit and re-enter.

Now I have not got the EA yet, but did manual testing of this and was able to get 10 pips neto profit a day exept for the last Long that is still lying there for about 5 days now, so this one will need to be taken with overnight interest aswell, and if I do decide to take the lost and close them out, I will only lose about 10 plus interest.

I like the idea becuase of the close negative correlation that they have. You will surle need to go a long way before getting margin called if anytime.

Get an EA that does this, deposit money in a separate account of you active trading... call it the holy grail and let it RIDE... taking your extra x amount of pips at the end of the month.

any one interested in help biulding the EA ???
  • #16
  • Edited 9:05am Jun 14, 2007 6:07am | Edited 9:05am
Try this broker, the more you trade the less pips you get { Link Removed }
  • #17
  • Jun 14, 2007 3:41pm Jun 14, 2007 3:41pm
Quoting Fx1618
Get an EA that does this, deposit money in a separate account of you active trading... call it the holy grail and let it RIDE... taking your extra x amount of pips at the end of the month.

any one interested in help building the EA ???
Hi cre8iveq and all that follows this thread...

check out this thread http://www.forexfactory.com/showthread.php?t=13015
by Tbreaker and his FINEXX Correlation System EA
Any one knows if Tbreaker is still around?

and cre8iveq, are you willing to share your EA?
  • #18
  • Jun 14, 2007 3:56pm Jun 14, 2007 3:56pm
Quoting cre8iveq
Hi All,

It is common knowledge EURUSD and USDCHF pairs tend to mirror each other. My question is, buy how much... let me explain. One lot of EURUSD is not worth the same as 1 lot of USDCHF. So when one moves up 10 pips, does the other move down 10 pips, or by the same lot dollar amount? (I understand that it won't move exactly the same, but as a general rule, and on average)

I know I have worded this question poorly... I know what I want to say, but having a bit of trouble articulating it... hopefully you get what I mean.

One pip on Eur is $10 USD
One pip on CHF is $8.13 USD
1/8.13 = 1.23
Therefore for every 1 lot of Eur you buy, buy 1.23 CHF
  • #19
  • Jun 14, 2007 4:48pm Jun 14, 2007 4:48pm
This will fluctuate with the rate of the USD/CHF.

*shrugs* what's the point of this...you're just buying 1 lot of the EUR/CHF using this math.

Quoting bazza
One pip on Eur is $10 USD
One pip on CHF is $8.13 USD
1/8.13 = 1.23
Therefore for every 1 lot of Eur you buy, buy 1.23 CHF
  • #20
  • Jun 15, 2007 6:54am Jun 15, 2007 6:54am
Sure, Have never attached a file to a post, so hopefully it should be there. My code is nice an neat, but i am not too big on the comments, sorry. Let me know if you have any questions. It seems to be doing what it is meant to.
Attached File(s)
File Type: mq4 Hedge3.mq4   7 KB | 899 downloads
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