I started to reply to a post http://www.forexfactory.com/showthread.php?t=85097 ans was asked to start a new one because was confusing.
I have been involved in spread trading for years.
First for my private account and then as a hedge fund manager .
I was doing spread trading on futures but not the way it is usualy done.
I was making arbitrage between the correlated eurostoxx future and the french Fce ( cac4 future).
We were a team and made huge profits so decided to built a BVI hedge fund.
The conjonction of volatility becoming lower and automatic robots settled by banks made us change of arbitrage supports .
We built a model for spreading eurostoxx agains S&P futures with great reward.
This one was more complicated because of exchange rate and no same hours of opening for volume.
But a great advantage was because of that no robots could arbitrate it.
When i started tradinf FX my main idea had been to do the same because one of the great advantage of spread trading is that you are more confortable with your position no betting on a direction but more on differences.
There are differents way to do that on FX i will explain the simpliest one which is profitable ( i used it for 1 year with nice rewards) , now i am working with the same philosophy, same pairs but with proprietary formulas for a fine tune.
I am still trading professionaly as an asset manager on FX. With 7 figures account.
1) I am only trading eur/usd and usd/chf for 2 reasons .
First it is the most negatively correlated paire on forex on a long and short term basis.
Second, even if you find one more correlated it will be too much volatil for spread trading the way i do it (forget immediatly of thinking of gbp or jpy involved in spread trading, that is a killer account).
2) Please dont tell me that spread trading these paires is the same as trading eur/chf outright, please dont write that even if you can copy it from supposed serious web site. The ones saying that have never follow days and night as i did the 3 paires together.
3) Contrary at what i have read in this thread entry point is not that important. You have not to find the perfect entry call but one which is #acceptable# ( i will explain later).
4) dont tell me about stops there are no stops in this trading style
5) you need to be capitalised because be prepared to average. Yes i know you are not supposed to do that so please dont tell me . I never average a loosing position in trading outright, spreadtrading is very different. So dont take a 1million position with 10k tio iniate a position
6) Dont look at what was the price of eur/usd 3 years ago and same for usd/chf and tell your paire is not correlated the way you said it was because you have to reactualised the datas several times per month .
Here are the very basic and exemples:
Look at the 3 graphes eur/usd usd/chf and eur/chf : 4 hours or 1 hour candells are ok.
A raisonable entry point is when a divergence appeas on eur/chf .
The more you wait the safer you are but the less number of trades you are going to make.
In theory ( only) the divergence is suppose to stop and go back to neutral as the correlation is strong.
To neutralise the usd problem and be in market neutral ( very important point always put aside by 80% od spread traders) you have to take 1 lot of euro/usd for every 1.5 lot of usd/chf and actualise this ratio each time eur/usd mooves a lot to try to be close to a market neutral position.
So let say eur/chf is -0.20% for example you are in alert because close to an entry point, I recommand at the beginning not entering before 0.25/0.30 divergence but personaly i start building my position at 0.20 divergence.
So you wait -0.25% for exemple as yesterday when i enter a position.
I took 1 position ( meaning 1 eur/usd ans 1.5 usd/chf) long on both :
Long 1 lot euro/usd at 1.5702
Long 1.5 lot usd/chf at 1.0260
Depending on brokers you have to pay the spread let us say that you have 7 pips spread for the 2 buy.
You start with a loss of 7 pips ( 3 on euro/usd and 4 on usd/chf for exemple). You have to wait 0.05% moove your way to cover the spread
Then you wait , if the divergence goes to -0.45 you put one more position ( 1 and 1.5) if goes to -0.65 you put one more ( you can wait longer if you have a small account or want to be more conservative).
If the divergence goes more than 0.65% you wait till 1% ( almost never happen).
That means that you can handle this kind of divergence without being margin called so dont start with a 200 leverage.
Usually it goes rarely over 0.40/0.45.
Yesterday after -0.25% from my memory it goes only -0.32%.
I closed the position few hours after at 1.0324 and 1.5652 ( i closed half when divergence went back to 0 and the remaining at +0.20. We then went to +0.40% ( of course i was short now starting at +0.30( +0.30 and not 0.20/0.25 because i waited for the trend weakening). That is, with the1/1.5 ratio almost 60pips.
Usually you make small profits and some bigs one when averaging 2 or 3 times.
You could have make more ( 70 pips ) by playing eur/chf on that one but it is more difficult to keep a directional position if you are wrong than a hedged one ( from several point of vue and from a psychological one which is the most important part of trading as all of you knows...........Not all of you know that ?
I closed this one this morning ( eur/chf was -0.15%).
I am now waiting -0.30/-0.35 to get in again ( we are -0.15% but i know that compared to to days ago we are close to +0.10 so i will wait a little bit more ( that is one part of the actualisation and fine tuning i was speaking about)
One advantage to be ON on a long position is that you get the swap on the eur/usd and sone brokers are paying a + rollover on usd/chf as well.
This is the simpliest way to be profitable on FX according to me of course.
So where are the risks?
They are in case there is a huge think happening in switzerland or in europe ( i am not speaking of decision rate ( you could say i will never be in a position before an annouvement on rate for exemple) i am more thinking of a blast somewhere.
And for me these is not a risk but during these days by spread trading you can make a fortune as i wil explain 1 day if somebody is interested in.
I have been involved in spread trading for years.
First for my private account and then as a hedge fund manager .
I was doing spread trading on futures but not the way it is usualy done.
I was making arbitrage between the correlated eurostoxx future and the french Fce ( cac4 future).
We were a team and made huge profits so decided to built a BVI hedge fund.
The conjonction of volatility becoming lower and automatic robots settled by banks made us change of arbitrage supports .
We built a model for spreading eurostoxx agains S&P futures with great reward.
This one was more complicated because of exchange rate and no same hours of opening for volume.
But a great advantage was because of that no robots could arbitrate it.
When i started tradinf FX my main idea had been to do the same because one of the great advantage of spread trading is that you are more confortable with your position no betting on a direction but more on differences.
There are differents way to do that on FX i will explain the simpliest one which is profitable ( i used it for 1 year with nice rewards) , now i am working with the same philosophy, same pairs but with proprietary formulas for a fine tune.
I am still trading professionaly as an asset manager on FX. With 7 figures account.
1) I am only trading eur/usd and usd/chf for 2 reasons .
First it is the most negatively correlated paire on forex on a long and short term basis.
Second, even if you find one more correlated it will be too much volatil for spread trading the way i do it (forget immediatly of thinking of gbp or jpy involved in spread trading, that is a killer account).
2) Please dont tell me that spread trading these paires is the same as trading eur/chf outright, please dont write that even if you can copy it from supposed serious web site. The ones saying that have never follow days and night as i did the 3 paires together.
3) Contrary at what i have read in this thread entry point is not that important. You have not to find the perfect entry call but one which is #acceptable# ( i will explain later).
4) dont tell me about stops there are no stops in this trading style
5) you need to be capitalised because be prepared to average. Yes i know you are not supposed to do that so please dont tell me
. I never average a loosing position in trading outright, spreadtrading is very different. So dont take a 1million position with 10k tio iniate a position 6) Dont look at what was the price of eur/usd 3 years ago and same for usd/chf and tell your paire is not correlated the way you said it was because you have to reactualised the datas several times per month .
Here are the very basic and exemples:
Look at the 3 graphes eur/usd usd/chf and eur/chf : 4 hours or 1 hour candells are ok.
A raisonable entry point is when a divergence appeas on eur/chf .
The more you wait the safer you are but the less number of trades you are going to make.
In theory ( only) the divergence is suppose to stop and go back to neutral as the correlation is strong.
To neutralise the usd problem and be in market neutral ( very important point always put aside by 80% od spread traders) you have to take 1 lot of euro/usd for every 1.5 lot of usd/chf and actualise this ratio each time eur/usd mooves a lot to try to be close to a market neutral position.
So let say eur/chf is -0.20% for example you are in alert because close to an entry point, I recommand at the beginning not entering before 0.25/0.30 divergence but personaly i start building my position at 0.20 divergence.
So you wait -0.25% for exemple as yesterday when i enter a position.
I took 1 position ( meaning 1 eur/usd ans 1.5 usd/chf) long on both :
Long 1 lot euro/usd at 1.5702
Long 1.5 lot usd/chf at 1.0260
Depending on brokers you have to pay the spread let us say that you have 7 pips spread for the 2 buy.
You start with a loss of 7 pips ( 3 on euro/usd and 4 on usd/chf for exemple). You have to wait 0.05% moove your way to cover the spread
Then you wait , if the divergence goes to -0.45 you put one more position ( 1 and 1.5) if goes to -0.65 you put one more ( you can wait longer if you have a small account or want to be more conservative).
If the divergence goes more than 0.65% you wait till 1% ( almost never happen).
That means that you can handle this kind of divergence without being margin called so dont start with a 200 leverage.
Usually it goes rarely over 0.40/0.45.
Yesterday after -0.25% from my memory it goes only -0.32%.
I closed the position few hours after at 1.0324 and 1.5652 ( i closed half when divergence went back to 0 and the remaining at +0.20. We then went to +0.40% ( of course i was short now starting at +0.30( +0.30 and not 0.20/0.25 because i waited for the trend weakening). That is, with the1/1.5 ratio almost 60pips.
Usually you make small profits and some bigs one when averaging 2 or 3 times.
You could have make more ( 70 pips ) by playing eur/chf on that one but it is more difficult to keep a directional position if you are wrong than a hedged one ( from several point of vue and from a psychological one which is the most important part of trading as all of you knows...........Not all of you know that ?
I closed this one this morning ( eur/chf was -0.15%).
I am now waiting -0.30/-0.35 to get in again ( we are -0.15% but i know that compared to to days ago we are close to +0.10 so i will wait a little bit more ( that is one part of the actualisation and fine tuning i was speaking about)
One advantage to be ON on a long position is that you get the swap on the eur/usd and sone brokers are paying a + rollover on usd/chf as well.
This is the simpliest way to be profitable on FX according to me of course.
So where are the risks?
They are in case there is a huge think happening in switzerland or in europe ( i am not speaking of decision rate ( you could say i will never be in a position before an annouvement on rate for exemple) i am more thinking of a blast somewhere.
And for me these is not a risk but during these days by spread trading you can make a fortune as i wil explain 1 day if somebody is interested in.
do you know a solution to meta please 