Cross Hedge EURUSD USDCHF

This subject has been discussed in many different ways. The goal of this thread is to define precise entries that sustain very little drawdown and target fast or large profits. Since this is a public forum the information here is presented free of charge as it should be. All I ask is that traders engage a significant portion of their brain capacity to solving problems and testing techniques to benefit the thread. These two pairs are very liquid so please don't worry about upsetting the market with this trading style.

Let's start with entries.
We obiously want to enter the market long in the cross hedge as the EURCHF becomes oversold or appears bottoming. To define this we can use Bollinger bands, CCI, correlations of all currencies involved and multiple timeframes. For the most simple entries I have used Bollinger bands set to default and CCI set to default on multiple time frames. It is possible to reduce the majority of drawdowns with this method.

I like to consult the hourly chart first for direction and try not to trade against the hourly.
In this image we see the sessions shown in color. Brown is London session starting at 7GMT. Then tan is the US session starting at 12GMT and where you see tan end and teal begin is the end of London session. The remaining teal is the end of US session. Typically around open and close of sessions we see influxes of volume that introduce opportunities for us with cross hedging.
In this image we see the hourly EURCHF. CCI is overbought at first in London session then moves to oversold in the US session and finally ends the day overbought at the end of US session. Bollinger bands show ambiguous directional bias until US session when we see the first signs of oversold and then quickly thereafter overbought.

At about 1400 GMT we get confluence to go long the Cross Hedge EURUSD USDCHF. The two timeframes agreed that EURCHF was oversold against both indicators.

Entry Long at 1400GMT. Close at US close 2100GMT.
EURCHF: 1.6433-1.6367= 66
USDCHF: 1.1867-1.1914= 47
EURUSD: 1.3790-1.3794= -4
EURUSD:USDCHF= 43

The attached closed trade was opened at 2:45GMT according to rules similar to those presented thus far.

EURCHF: 1.6433-1.6361=72
USDCHF: 1.1914-1.1853=61
EURUSD: 1.3792-1.3809= -17
EURUSD:USDCHF= 44

Hi THE FxORCE,
Thank you very much for taking time to give some insight. Could you please let know if it would be prudent to short USD/CHF or better to go long on EU/USD before FOMC .

I thought of going long EU/$ even though I am $ bullish always.

Would love to hear your take in this regard.
Thank you very much.

Wow FxOrce

I used to look into this a while ago, there are two quite similar systems on the net that exploit these two pairs, don't know them well, but got the idea from them. My system was very basic to yours, I just went long or short on both simultaneously and waited for a NET profit, closed out and started again. Not a Brainer I know.

I'll definitely keep an eye on this one...

SMJONES,
We are going to work on news trading these pairs. I did today as a matter of fact and I'm still in waiting for the move to mature. If I was live I would have pocketed at 19 pips net gain.

Thanks, my mistake...

My news trade really should have been closed directly after news. We'll see how it matures. The larger timeframes are still overbought so the double short position should get back into profit soon.
Here is a chart of the indicators I'm using to make trading decisions. On the main chart we have a blue and red line representing EURUSD and CHFUSD. When CHFUSD is performing better than EURUSD we have a situation where CHF is appreciating vs EUR pulling the EURCHF down. Typically we can identify the maximum deviation between these cointegrated currencies prior to a retracement. To bolster the reliability of the All USD Pairs indicator on the main chart we have Complex Common which averages each currency and plots it against the currency or currencies of our choice. I prefer to plot CC with individual currencies to avoid interaction with other currencies. This way we see the true EURCHF or EURUSD movement. You see the EUR currency is averaged out inside the CC indicator so you are not seeing EURUSD movement tick for tick but you are seeing EUR movement plotted against USD movement which has been averaged out over 4 pairs to extract the whole market's sentiment of USD or EUR individually. Many times when we find divergence between CC and the price of a pair you'll see the pair correct.

Here are the template, and indicator files.

All USD Pairs.

Ok things are about to get deep in here.
This indicator has been unleashed. All USD Pair. This indicator plots line graphs of all shown pairs on the chart centered back the default 400 bars or whatever you decide is best. I have been able to use 400,300,200 effectively. The idea here is to trade correlated pairs that are at extremes. As we see in this image the AUDUSD and CHFUSD are at extremes. Since the AUD CB just raised rates we'll avoid trading AUDUSD until tomorrow. The next pair is USDCAD and that pair just is not correlated enough to make consistent gains. I'll look to the next pair which is in the congestion with the other liquid majors. The EURUSD or GBPUSD are the farthest away from USDCHF and highly correlated.

Hello,

Do I have your steps down?

1. Prospective trades are determined by the correlation deficiency. Best possible trade is that with a greater correlation deviation.

2. Entry into the hedge will be determined by technicals (your BB, CCI) on the cross pair = to EUR/CHF, GBP/CHF, EUR/GBP etc. Technicals will be used to attempt and find bottom or top of pair.

3. Enter hedge. Or enter the pair EUR/CHF or EUR/GBP etc? Are you using the other (hedge) pairs because of the mentioned liquidity and spreads are likely lower?

Optimal trade would not occur until the most extremely deviated pairs (gbp/usd, chf/usd) cross pair (gbp/chf) has a technical signal to trade. Let me know if I missed a point.

On a side note, I still like AccuCharts and ***/JPYs better to find correlation deviation than the USD Pairs indicator. I do know MetaTrader has a lot of extra perks, though as far as correlation goes and personally organizing myself, I work better with AC. I will try and contribute to the prosperity of the thread, correlation is just too fun not to like

You got it, KJay.

We need to really nail down the correlation deficiency. There are periods where these pairs undergo "revaluing" like around CB talks. You'll see GBPUSD float away from EURUSD as the GBP is "reweighted" against other pairs by major banks. We want to capitalize on the over correction but we don't want to get caught in the middle of a correction so we avoid GBP for a day after the BOE/CB talks. Mainly we want to catch small intra day correlation deviations/deficiencies. Staying in these trades for days increases our exposure and chance of getting caught in a reweighting.

The major movement of these pairs is going to be dictated by the cross pair ie. EURGBP or EURCHF. Granted we are not trading EURCHF exclusively we are trading a synthetic instrument with 3 legs. If long 1lot EURUSD 1lot USDCHF we are essentially: Long EUR 100,000, Short CHF 120,000, Short USD 37,000. Mainly we are long EURCHF but there is exposure to USD depending on current exchange rate so we can play USD news with this trade. The EURCHF tends to follow the USD index despite being weighted short the USD index. I believe the reason for this is EUR is weighted more heavily USD than CHF.

Yesterday I played a double short EURUSD USDCHF before FED release. I was in profit quickly but decided to leave the position on to see what effect USD reweighting might have. It seems in retrospect that EUR became stronger than CHF which supports my hypothesis that EUR itself is more USD exposed than CHF. There are valid reasons for this hypothesis number 1 being the anti dollar is Gold and CHF is the closest cointegrated to Gold. AUD is also cointegrated to Gold as CAD is cointegrated with Oil.

Cross pairs ie. GBPCHF, EURCHF are more volatile than Cross Hedged Pairs ie. (EURUSD/USDCHF), (EURUSD/GBPUSD).

We are not hedging in the true sense. If you look up Cross Hedge you'll find it's completely appropriate for our situation. We are hedging out some volatility for a smoother trade. If we consider each currency pair is truly its own instrument as each are weighted differently with USD and EUR etc. We can create our own synthetic pair to fit our unique risk tolerance.

Pairs are chosen based on deviation/deficiency. These pairs want to trade on top of one another; therefore, EURUSD and CHFUSD should be directly on top of one another. Any deviation is deficiency. When we have a significant deviation between the two pairs we have less risk when entering (Avoid reweighting periods around CB speak) If GBPUSD is trading well above EURUSD on the hourly chart then we switch to the 15min then to the 5min chart and see the same is true. The GBPUSD is trading overvalued against the EURUSD on all timeframes. We will then focus our efforts on the EURGBP for technical entry. If GBPUSD is overvalued against EURUSD we'll be looking for entry at oversold EURGBP on all timeframes. We are looking for GBPUSD to return to parity with EURUSD in less than a day. Parity on our charts is synthetic and subjective as the origin changes with every new bar. Depending on the charting package used or indicator used the pairs are overlaid on the chart according to a preset "bars back" variable which by nature will change visual correlation within a range constantly. This is why we need confirmation from multiple timeframes because we are never really sure that the 5minute timeframe alone is correct. Same goes for 15min and 1hr obviously. However if all agree we can more safely say that in fact GBPUSD is overvalued against EURUSD.
Entries are taken at technically advantageous opportunities. If we are trading Long EURUSD USDCHF we are looking for EURCHF to be oversold thus reducing potential drawdown. Since we are looking to take a position for less than 1 day we can look initally to the 1 hour chart for technical indicators then to 15 minute and finally to 5minute. If all charts agree that EURCHF is oversold against Bollinger and CCI indicators we can enter with very little drawdown in most cases.

Reweighting/Revaluing by Central Banks can occur anytime. If we hear for example, that SNB Swiss National Bank has downgraded it's GDP expectation, we can expect a reweighting will occur most likely devaluing CHF against EUR and GBP as well as other currencies.

FxORCE,

Thanks for the above explaination. I had put the template on my charts and was trying to figureout what I am looking for...

What you shared above gives me a little more to chew on.... and a lot more to "look for".

Thanks.

Bruce

This indicator is slightly different than the Complex Common indicator I've previously posted to show Currency strength. This version relies on percentage strength and seems to be more accurate as it does not move as quickly yet uses a larger history to average the movements of currencies. Now when we see both indicators identify the same currency as being the most deviated we can more safely trade

In this image we see a chart of EURUSD. CCFp cumulatively shows EUR strength is ready to retrace against USD which will move the EURUSD down on the 15 min chart. The CC indicator shows EUR and USD are at parity and perhaps they are for the present moment and we'll see a consolidation or retracement now prior to the selloff to regain equality on the CCFp between the EUR and USD.
Indicators:
EUR=Maroon
USD=White

Hi FXORCE

Very interesting low risk method; however it is very hard to read your charts in order to grasp the essence of the method as to entries.

How often does the opportunity to take a trade arise? Can we have a trade per day?