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EURUSD USDCHF Hedge Question

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

GEE, MY MISTAKE, IT'S WORSE THEN I THOUGHT.
And to top it off, that stop is averaged out over 5 lots.
Which means, 50 + 40 + 30 + 20 + 10 = MINUS 150 pips.
How many winners do you need to cover that sucker.

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

I didn't say my broker, I said "typically" just to cover that little cost you conveniently left out of your equation.

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.

I guarantee you no "successful scalper" needs a 10 pip move to realize a 5 pip profit and he sure as hell wouldn't be using a same way spread of a negatively correlated pair to do it.

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.

Look, they are NEGATIVLY CORRALATED, so when you buy or sell both at the same time you lose on one and gain on the other almost,but not equally.
This type of order is most often used in a carry trade or as protection.

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

That's great, I'm glad for you. Let me know 2 weeks from now how your doing.
All the luck. I mean it.
Mmont,

Well what can I say, you have highlighted all the reasons my system couldn't possibly work. Guess there is no need for you to try it then.
cre8iveq
Look, don't be put out, it's a discussion forum.
When you put something out there,it's for others to disect, hopefully for ALL to benifit.
If our ideas withstand that, we're that much better off.
As I said before , best of luck.
Cre8iveq, i ran and left yr EA on mt4 now, so well see how it does for me. Can u specify the settings/tweaks some more?
Just so everyone knows, this is what will happen if you sell 1 lot of both the EURUSD and USDCHF. Notice that I've also included a graph of the EURCHF. They are the same. Even if you mess with the lots so that you don't have 1 lot of each, you will still be more or less trading the EURCHF unless you make them completely different like 2 lots of one and 1 lot of the other.
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  • Post #26
  • Quote
  • Edited Jul 6, 2007 11:15am Jul 5, 2007 9:24pm | Edited Jul 6, 2007 11:15am
Quoting SPRTN
Just so everyone knows, this is what will happen if you sell 1 lot of both the EURUSD and USDCHF. Notice that I've also included a graph of the EURCHF. They are the same. Even if you mess with the lots so that you don't have 1 lot of each, you will still be more or less trading the EURCHF unless you make them completely different like 2 lots of one and 1 lot of the other.
The true benefit of this strategy is always missed when a discussion arises.
Yes, trading EUR/USD and USD/CHF is technically the same as buying EUR/CHF, HOWEVER, buying EUR/CHF has NOTHING to do with the strategy of buying the pairs INDIVIDUALLY.

This strategy is an amazing opportunity to trade consistently and profitably on a DAILY basis, regardless of what is going on in the market. You must, however, be diligent with understanding supports and resistance levels, pivot points and SMA's in order to trade these two pairs properly. You must be a confident, decisive trader and understand WHEN you should buy each pair, as thy are never purchased at the same time.

This strategy takes time to understand completely and can be mastered by those who are willing to watch the pair for long periods of time to visually understand how they move. Once you have this understanding, the pair can be traded easily, spending minimal amounts of time in front of the computer.

Before you knock this method, keep in mind that each person who trades this market is looking for a different risk/reward. It's no different then when you go to a casino in Vegas. Not everyone plays blackjack, right? There are many different types of gambling opportunities with different risks and rewards......and that is exactly how the Forex market works. So which table are YOU at when you go to Vegas.......and which strategy do you use when you trade Forex? If you are a gambler.....I bet you'll see some comparisons to the risks you might take gambling, to the type of strategy you use when you trade.
Quoting ForexCoach
The true benefit of this strategy is always missed when a discussion arises.
Yes, trading EUR/USD and USD/CHF is technically the same as buying EUR/CHF, HOWEVER, buying EUR/CHF has NOTHING to do with the strategy of buying the pairs INDIVIDUALLY.

This strategy is an amazing opportunity to trade consistently and profitably on a DAILY basis, regardless of what is going on in the market. You must, however, be diligent with understanding supports and resistance levels, pivot points and SMA's in order to trade these two pairs properly. You must be a confident, decisive trader and understand WHEN you should buy each pair, as thy are never purchased at the same time.

This strategy takes time to understand completely and can be mastered by those who are willing to watch the pair for long periods of time to visually understand how they move. Once you have this understanding, the pair can be traded easily, spending minimal amounts of time in front of the computer.

Before you knock this method, keep in mind that each person who trades this market is looking for a different risk/reward. It's no different then when you go to a casino in Vegas. Not everyone plays blackjack, right? There are many different types of gambling opportunities with different risks and rewards......and that is exactly how the Forex market works. So which table are YOU at when you go to Vegas.......and which strategy do you use when you trade Forex? If you are a gambler.....I bet you'll see some comparisons to the risks you might take gambling, to the type of strategy you use when you trade.
Totally agreed. The debate has been endless but trading these two pairs seperately is very different than buying the EUR/CHF becuase you trade them at different times and they don't move exactly polar opposite. By doing so you take advantage of the correlation, interest, and movement.
"Its not where your at, but where your coming from"
Quoting mrmikal
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.
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.
mrmikal,
What do you think "mirror each other" means?????
It's reference to a reflection....like looking in the water.....
You see the trees on the land and the reflection of the trees in the water is the exact opposite.
The word "correlated" simply means how things are related. When referring to the two pairs, it is NOT a reference to them moving in the SAME direction.....its a reference to them moving in a "similar fashion". When one goes up, the other tends to go down. We all know they do not move 100% in opposite directions, but with this strategy, they don't need to. All one needs to know is how similarily they DO move in opposite directions.
As far as EUR/CHF is concerned, once again, with this strategy, it truly doesn't matter what that pair does, as it has nothing to do with the strategy.
Quote
The true benefit of this strategy is always missed when a discussion arises.
Yes, trading EUR/USD and USD/CHF is technically the same as buying EUR/CHF, HOWEVER, buying EUR/CHF has NOTHING to do with the strategy of buying the pairs INDIVIDUALLY.

Quote
The debate has been endless but trading these two pairs seperately is very different than buying the EUR/CHF becuase you trade them at different times and they don't move exactly polar opposite. By doing so you take advantage of the correlation, interest, and movement.

I totally agree guys with many of the comments you have made. I use this method and it is extremely effective. What helps when using this strategy is keeping on top of support and resistance areas and key prices.I usually zoom out to the weekly and monthly charts, this gives me an idea where the currency is trading in the bigger picture.
Traders that don't understand this method seem always to focus on the word 'hedge'. I don't trade to hedge, I trade to win. I trade both pairs on their own merits.
Repeat: I DON'T TRADE TO HEDGE,I TRADE TO WIN.I TRADE BOTH PAIRS ON THEIR OWN MERITS.
Hedging, in many ways just buys me time. By experience, i found out that many of my stopped out trades became profitable days even weeks later.I found that while i waited for the position(usdchf) to come back, i would book short-term profits on eurusd volatililty.
If you ever look at the usdchf/eurusd,its charting characteristics/patterns are very volatile tend to move about key prices...back and forth we go.It does not compare with say,gbpjpy.Know your market!!!
The key to this system is: correct position sizing and MM, as is for all systems.
If it books pips,its good enough for me.This method is the best for me personally.Others my feel uncomfortable when using this.Each to thier own.
Take care.

Cheers
SK
Quote
Hedging, in many ways just buys me time. By experience, i found out that many of my stopped out trades became profitable days even weeks later.I found that while i waited for the position(usdchf) to come back, i would book short-term profits on eurusd volatililty.

Exactly. This way stops are not needed and the broker does not know what you are up to. You can also average down on the USD/CHF trade that went against you (at about 100 pips) and use short term EUR/USD trades until the USD/CHF comes back. Its slow and takes some time but the equity does grow. Resistance levels are key with EUR/USD. That particular pair has more or less been in a bull run for the last 6 years.

I have read many posts on this pair and have tried using technicals to trade but I find it very tough and time consuming. Using the method you stated above you can have your trades well thought out in advance. Its not easy, but trading the Forex will always be difficult. Mistakes can be traded out of-it just takes time- without abandoning the losing trade.

When you finally start trading this way a strange thing happens: you get a feel for how each pair moves and can make educated guesses on where to place your orders if not at your station.

The key is patience, patience, and a third thing: patience.
"Its not where your at, but where your coming from"
Nice post athalon.I think you and i are on the same wavelength buddy. There are so many positives to trading this way.
You are right on about reading the play.You almost get a sixth sense when you've traded these two pairs for years, and can pick turning levels accurately.And even if you get it wrong,it isnt a big deal.Like you mentioned,its all about the big 'P' word,patience.
Quote
This way stops are not needed and the broker does not know what you are up to.
This was a real clincher for me. There are so many that worry about bucket shop brokers, but for me,i couldn't care if they were bucket shops chasing stops or straight ups playing fair.It doesn't matter.
Also i found that before data releases,i would have technical plays reuined because of announcements,but now i would be glad trading NFP all day everyday.News brings volatility,volatility brings pips.
Take care champ and trade well.

Cheers
SK
Quote
Take care champ and trade well.

You too and nice post.
"Its not where your at, but where your coming from"
I downloaded your ea on Thursday and initiated it on two demo accounts. Overall the accounts equity continues to grow but the drawdwon is fairly large at times leaving the balance below the original amount.

I can't seem to see the logic of when the ea opens and closes trades. At times I have had all eur/usd trades open with all of or at least most of the usd/chf trades closed.

This thread started with a question about hedge so I assume that is the initial goal but there are times that the account is not in hedge at all since only one pair is open and it is in large drawdown. Just curious what the logic is. Nice job on the ea, it does whatever it is doing on a regular basis without any intervention from me.
Over confidence can be a moral hazard.... not to mention a financial one!
FC,

I read both of your posts, and I you have to see that while you may believe in theory that the Market for the EUR/CHF is independent of the markets for the USD/CHF and EUR/USD, it's just not the case, and for good reason.

It sounds reasonable that the EUR/USD and USD/CHF run independently from the EUR/CHF, but if you do the math on the prices at any given point, you'll see that this isn't the case 99.999999% of the time, and the BIGGEST reason for this is the avoidance of ARBITRAGE between the pairs. If what you suggest is true, and the EUR/CHF is COMPLETELY independent then the following equation COULDN'T be true:

Given the EUR/CHF = EC, EUR/USD = EU and the USD/CHF = UC then
EC = EU * UC

However, taking spread into account, the equation is generally true because if it wasn't, then traders would be allowed to take advantage of arbitrage between the pairs. Now, arbitrage DOES ocur, and it occurs often enough to be noticeable, but when free markets work relatively efficiently, the arbitrage HAS to dry up as it pushes the arbitrage closer to equilibrium. It's Economics 101...if you lower the price for the currency below market equilibrium, the quantity demanded will go up, and thus raise the price to equilibrium. Don't fool yourself into believing that the pairs don't have an interest in each other because they do...the products involved in the pairs of the EUR/USD and the USD/CHF include the EUR and CHF which also happen to be the products involved in the EUR/CHF. While it might seem like I'm saying that the USD is irrelevant, I'm not...I'm merely saying that the act of buying both the EUR/USD and the USD/CHF makes the USD irrelevant to the degree that the amount of USD bought <> USD sold.

As far as the mirror, the analogy should be obvious...to mirror means to inversely reflect. The USD/CHF and EUR/USD tend to be inversely correlated, that's the only thing that I meant by mirror.

Quoting ForexCoach
mrmikal,
What do you think "mirror each other" means?????
It's reference to a reflection....like looking in the water.....
You see the trees on the land and the reflection of the trees in the water is the exact opposite.
The word "correlated" simply means how things are related. When referring to the two pairs, it is NOT a reference to them moving in the SAME direction.....its a reference to them moving in a "similar fashion". When one goes up, the other tends to go down. We all know they do not move 100% in opposite directions, but with this strategy, they don't need to. All one needs to know is how similarily they DO move in opposite directions.
As far as EUR/CHF is concerned, once again, with this strategy, it truly doesn't matter what that pair does, as it has nothing to do with the strategy.
Well the first of two demo accounts just blew up and margined out even with a 400 to 1 leverage! The other is fairing better which is odd when you would think they would take similar trades. The ea seems to be a random trade generator. It shows some promise if you could program it to close out pairs instead of just the profitable trade on one currency. But this is no hedge if you close out the good trade and leave the bad ones.

Time to move on.
Over confidence can be a moral hazard.... not to mention a financial one!
I have EA running and partly i confirm previous post message - bad trades are left running SOMETIMES, which i account to slippage - EA wants to close, but fails and then not repeats demand to close at new price. Result is not good. Otherwise i find good use for EA, but slippage problem must be accounted for.
Quoting mrmikal
FC,

I read both of your posts, and I you have to see that while you may believe in theory that the Market for the EUR/CHF is independent of the markets for the USD/CHF and EUR/USD, it's just not the case, and for good reason.

It sounds reasonable that the EUR/USD and USD/CHF run independently from the EUR/CHF, but if you do the math on the prices at any given point, you'll see that this isn't the case 99.999999% of the time, and the BIGGEST reason for this is the avoidance of ARBITRAGE between the pairs. If what you suggest is true, and the EUR/CHF is COMPLETELY independent then the following equation COULDN'T be true:

Given the EUR/CHF = EC, EUR/USD = EU and the USD/CHF = UC then
EC = EU * UC

However, taking spread into account, the equation is generally true because if it wasn't, then traders would be allowed to take advantage of arbitrage between the pairs. Now, arbitrage DOES ocur, and it occurs often enough to be noticeable, but when free markets work relatively efficiently, the arbitrage HAS to dry up as it pushes the arbitrage closer to equilibrium. It's Economics 101...if you lower the price for the currency below market equilibrium, the quantity demanded will go up, and thus raise the price to equilibrium. Don't fool yourself into believing that the pairs don't have an interest in each other because they do...the products involved in the pairs of the EUR/USD and the USD/CHF include the EUR and CHF which also happen to be the products involved in the EUR/CHF. While it might seem like I'm saying that the USD is irrelevant, I'm not...I'm merely saying that the act of buying both the EUR/USD and the USD/CHF makes the USD irrelevant to the degree that the amount of USD bought <> USD sold.

As far as the mirror, the analogy should be obvious...to mirror means to inversely reflect. The USD/CHF and EUR/USD tend to be inversely correlated, that's the only thing that I meant by mirror.
Your assumption would be true, if I was placing a buy on both pairs at the same time. You're completely missing the whole strategy of buying both pairs and honestly, we are not even arguing the same point.
Well, what started as a harmless question has really sparked quite a debate hasn't it!! I have been away for a little while, and could believe this turned out to be such a long conversation! In testing this EA, I blew my account, so have dropped it. I still think there is something there, I just don't think I was quite going about it the right way.
It never amaze me how so many people does not realize/accept/believe/understand that Buy EURUSD + Buy USDCHF is equivalent to Buy EURCHF (lottage differs though).

Buy EURUSD and Buy USDCHF *CURRENTLY* works/profitable because EURCHF is bullish!

Try doing this Hedge when the carry trade is unwinding and come back to discuss how much money you make/loss.
Its an art and not a science and you don't place the trades at the same time. Consider the original long CHF trade correct until it moves against you a pre-determined amount based on your risk. At that point place a hedge EUR trade freezing your margin. Ride the long EUR trade until the turning point and take your profit. If the CHF still moves against you average down at 100 to 120 pips. Keep placing short term hedge trades until the CHF comes back. Never have more EUR lots open than CHF so you are always earning interest.

If the hedge EUR trade moves against you, hedge that trade. It's not a fast earner but with interest and resistance points it works.
"Its not where your at, but where your coming from"
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