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Zeusjoes Market-Neutral Hedge Strategy

  • #541
  • Aug 4, 2008 2:52pm Aug 4, 2008 2:52pm
Indicator Request:
Could some clever guy maybe develop this indicator?
With some extras?

http://img233.imageshack.us/my.php?image=chartly1.jpg

I've found it on my VTTrader. It's called Rate of Change (ROC)
The Formular is simply you can get the Output in Pips or in Percentage.
Here's a screenshot with both plotted on EUR/USD and USD/CHF.
You can easily spot that there is a 2 Pip Divergence between those two.
Now comes the tricky part. USD/CHF could move 10 pips up leaving EUR/USD behind. You'd notice it if you compare these two indicators but since only Close Data is recorded to the graph alot of information is lost. Wouldn't it be interresting to have a candlestick chart as an indicator of the actual spread within the timeperiod?
Timeframe begins -> Price discorralates marking a High on our Candlestick Price Spread Indicator. And so on.


Quote
To calculate the ROC in Points:

ROCPoints = Today's Price - Price n-Periods Ago

To calculate the ROC as a Percentage:

ROCPercentage = ((Today's Price - Price n-Periods Ago) / Price n-Periods Ago) * 100
  • #542
  • Aug 4, 2008 6:31pm Aug 4, 2008 6:31pm
Does anyone know if this a repainting indie?

If so, can anyone please put a time and date on this indie for when we want it to start?

Thanks,
Vip
Attached File(s)
File Type: ex4 OverLayChart.ex4   9 KB | 623 downloads
  • #543
  • Aug 5, 2008 2:56am Aug 5, 2008 2:56am
Hi,
I'm interested with quantitative methods and I'm working currently with sthg like Neutral Hedge.
Let's have a look on my Model ECM, Error Correction Model.
As I woud like, it will help me to forecast the moves of the spread between GBPusd and EURusd.

It's just a first one, beginning, but you can see for example a blue position on it, which is titled "Model Zalezności dlugookresowej",
it is the Longterm Dependence and looks very pretty with GBPusd and EURusd.

At the bottom of the chart, there's ECM, which role is to tell you what moves will be seen on the GBPusd if the EURusd is now at some level.
So we will now then, how would the spread be like.

What you think?
Attached Image (click to enlarge)
Click to Enlarge Name: Mechanizm Korekty Błędem ECM i dane.JPG Size: 89 KB
  • #544
  • Aug 5, 2008 4:22am Aug 5, 2008 4:22am
Quoting guess121
Does anyone know if this a repainting indie?

If so, can anyone please put a time and date on this indie for when we want it to start?

Thanks,
Vip
You can use the previuos version, Overlay chart point/time. What I did, I set the starting date of this indi at a date where synch bars line was at 0 point. For the last two days, the results are super ok with GBPUSD/EURUSD.
I wonder if this method will keep on track like this, I mean if is giving real signals...
I don't say
  • #545
  • Aug 5, 2008 6:10am Aug 5, 2008 6:10am
NowAndLater-

I wanted to ask you if the excellent indicator you posted on the spieler thread would also work if applied to a EUR/GBP chart? Would it be showing divergance between EUR/JPY and GBP/JPY as it moved through the various levels? Sorry if this is a stupid question as the indicator is probably set up especially to track only EUR/CHF but having seen it on a EUR/GBP chart it seems to be quite useful.
  • #546
  • Aug 6, 2008 4:47am Aug 6, 2008 4:47am
I hope this is not another thread that dies!

Any updates anyone?

Regrads,
Vip
  • #547
  • Aug 6, 2008 5:49am Aug 6, 2008 5:49am
Think it's not dying thread cause there is still a lot of things to improve. First of all this is great system for consolidation periods on cross pairs.

Now I'm trying to find out what are the best moments for entry if we've got strong trend on cross pair. Because if we enter to early we will be loosing. My first idea is to look on correlation between EU and GU for "n" periods back (now 200 M5 periods back).
The logic behind this concept: if we've got strong trend on EG then correletion will be going to 0 or to -values. Then no trade. We can trade only when correletion is about 90-100% (EU and GU are in balance in "n" periods time). When we've got this correletion then trade in direction showing by decorreletion period.

When correletion is 90-100% then it means the EG is in sideways trend, but it can still go in the same direction, but if there is one strong movement in one direction then probability of retracement is increasing and also increasing our chance to get some gain.
  • #548
  • Aug 6, 2008 8:08am Aug 6, 2008 8:08am
Quoting magictrader
Think it's not dying thread cause there is still a lot of things to improve. First of all this is great system for consolidation periods on cross pairs.

Now I'm trying to find out what are the best moments for entry if we've got strong trend on cross pair. Because if we enter to early we will be loosing. My first idea is to look on correlation between EU and GU for "n" periods back (now 200 M5 periods back).
The logic behind this concept: if we've got strong trend on EG then correletion will be going to 0 or to -values. Then no trade. We can trade only when correletion is about 90-100% (EU and GU are in balance in "n" periods time). When we've got this correletion then trade in direction showing by decorreletion period.

When correletion is 90-100% then it means the EG is in sideways trend, but it can still go in the same direction, but if there is one strong movement in one direction then probability of retracement is increasing and also increasing our chance to get some gain.
You also need to take into account the fact that one lot EURUSD does not equal one lot GBPUSD, because if you trade them one lot on each side. one is going to make more money and also potentially lose more money
  • #549
  • Aug 6, 2008 9:05am Aug 6, 2008 9:05am
Quoting smotty
You also need to take into account the fact that one lot EURUSD does not equal one lot GBPUSD, because if you trade them one lot on each side. one is going to make more money and also potentially lose more money
In this strategy as I understand it you are not necessarily looking to be absolutely market neutral and you dont need the perfect hedge in terms of lots. The reason being that when decorrelation occurs it is because one pair has either risen or fallen way more than the other pair in such a way that it is out of synch thus causing this decorrelation. By placing your trade after this decorrelation has happened you are supposed to benefit from the resulting correction of that particular pair that leads to the inevitable correlation at some point.
  • #550
  • Aug 6, 2008 9:16am Aug 6, 2008 9:16am
And this is why we can make money. If we always adjust lot size to valatility then we will always have zero sum. Thing is how to know wich pair will be have more volatility then other one.

Now I try to look at EUR/USD and reverse USD/CHF (CHF/USD) it looks more correlated pairs so drowdowns should be smaller (gains also but more confident). And also EUR/CHF looks like to move more sinusoidally then EUR/GBP. Sinusoidally movement of cross pair is the key to this strategy.
  • #551
  • Aug 6, 2008 10:54am Aug 6, 2008 10:54am
Quoting magictrader
The logic behind this concept: if we've got strong trend on EG then correletion will be going to 0 or to -values. Then no trade. We can trade only when correletion is about 90-100% (EU and GU are in balance in "n" periods time). When we've got this correletion then trade in direction showing by decorreletion period.

When correletion is 90-100% then it means the EG is in sideways trend, but it can still go in the same direction, but if there is one strong movement in one direction then probability of retracement is increasing and also increasing our chance to get some gain.

This is exactly what happened to me on Sunday night / Monday. The strong move in EURGBP produced a substantial loss in my demo account; about -121 pips.

I think what we need is a hedge against EG trends. If it was convenient (which it is not) it would be nice to be able to buy out-of-the-money call/put options on EG and strangle it about 60 pips above and below its recent avg spread. That would allow us to make money on the GU-EU correlation trade as EG oscillates sideways. Then if EG broke out of the range one of our options would protect us.

Can anyone else think of a way to hedge EURGBP while we play the GU-EU spread oscillation?
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  • #552
  • Aug 6, 2008 11:09am Aug 6, 2008 11:09am
Dear Spikey,

How expensive is it to strangle a position?

Thanks,

Lenoxer
  • #553
  • Aug 6, 2008 1:00pm Aug 6, 2008 1:00pm
Quoting Lenoxer
How expensive is it to strangle a position?

Lenoxer
I don't know what exchanges are trading Forex options, so I haven't been able to see any prices.

The CME (which trades currency futures their options) has a Euro FX future and options (not a currency "pair", though). As the Sept Future is trading at 1.5388 the Sept 1.5450 call is at 19 pips which is $237.50, and the 1.5300 is a whopping 108 pips (which is overpriced today because of the drop in the future's price) which equates to $1,350. So this totals $1,587.50. But again, this is not really equivalent to EURGBP options.

But if it were, you could set the strangle and trade the GU-EU hedge for the next 4 weeks, assuming it stays in the range, and make $400 to $600 several times a week, then close the options for whatever they're worth then. If the price moved close to or passed one of your option positions the price of it would go significantly up to cover most, if not all of the costs.

Anyone else have any thoughts on this?
  • #554
  • Aug 7, 2008 5:03am Aug 7, 2008 5:03am
Quoting PipStar
In this strategy as I understand it you are not necessarily looking to be absolutely market neutral and you dont need the perfect hedge in terms of lots. The reason being that when decorrelation occurs it is because one pair has either risen or fallen way more than the other pair in such a way that it is out of synch thus causing this decorrelation. By placing your trade after this decorrelation has happened you are supposed to benefit from the resulting correction of that particular pair that leads to the inevitable correlation at some point.
Hi Pipstar

thanks for the reply. Yes i understand what you are saying but lets say that eurusd is the pair thats out of synch if you trade still trade one lot of each pair the movement or potential profit is going to be alot less because you should be trading something like 1.26 lots eurusd to 1 lot gbpusd.

In that case would it not be better to concentrate on gbpusd and only trade when that is the one thats out of synch. Do i make sense or have i totally lost the plot
  • #555
  • Aug 7, 2008 5:27am Aug 7, 2008 5:27am
Quoting smotty
Hi Pipstar

thanks for the reply. Yes i understand what you are saying but lets say that eurusd is the pair thats out of synch if you trade still trade one lot of each pair the movement or potential profit is going to be alot less because you should be trading something like 1.26 lots eurusd to 1 lot gbpusd.

In that case would it not be better to concentrate on gbpusd and only trade when that is the one thats out of synch. Do i make sense or have i totally lost the plot
When GU and EU are out of sync, there is no "one" that is out of sync. They both are. You don't know how they will move to get back in sync. If you choose one of them, it may not move, at all and the other make the correct move to reestablish the synchronization.
  • #556
  • Aug 7, 2008 10:14am Aug 7, 2008 10:14am
billbss, Most of the time one of the pairs will be primarilly responsible for the out of sync state. High impact good/bad news concerning specifically GBP, for example, causing large scale strengthening or weakening in that currency, a spike, would be causal. The process of returning to the sync state would most likely be a result, to a large degree, of GBP returning (retracing) toward the price level where it was before the high impact news event, rather than EUR catching up. Pippo
Vincit qui se vincit.
  • #557
  • Aug 7, 2008 11:04am Aug 7, 2008 11:04am
Dear Spikey,

The idea of buying an OTM strangle is attractive from a MM point of view. You would then feel comfortable trading with higher leverage. The question is, can you pay for it with 1-2 weeks of trading and then be able trade the "free" hedge for a couple of weeks after that for profits. How and where can one price and buy either a EURGBP or EURCHF strangle?

Thanks,

Lenoxer
  • #558
  • Aug 7, 2008 1:22pm Aug 7, 2008 1:22pm
Quoting Lenoxer
How and where can one price and buy either a EURGBP or EURCHF strangle?
Lenoxer
That's the problem. It's not currently convenient to buy Forex Options. Oanda has some info on Forex Options on their website, but it's not real apparent on where to go to trade them (other than to a bank).
  • #559
  • Aug 7, 2008 3:43pm Aug 7, 2008 3:43pm
Hi Mike.... been noodling this (your question about how to handle the extended out of synch runs....) a bit.

Here are some ideas that I am pursuing....
1) Have a maxloss, and take the lumps as they come. Assumes the loss runs are few and far between, far outweighed by the "usual" swings... (this has been my approach....)

2) defiined risk (loss) options... but hard to do, if not impossible...

3) don't get in in the first place... by this I mean tailor our entry a bit better... I have been looking at a two stage system... first, our price differenctial (delta) gives us the GO when we are far apart, however we define that. Up to now, we would enter at that point.

Rather, don't enter yet, look to something to indicate a REVERSAL, and only enter when the price differential and/or other indicators show us thing are returning... If they keep going and going, we don't enter. One idea I am looking at is the RSI-15 of EURGBP on one time frame GREATER. If we are at 15m for our GU/EU combo, then we look at 30m EG for confirmation. Something like this: For a Long GU, Short EU entry, we want the price differential at or beyond our threshold, then we want the EG-30m RSI to be > 70, but don't enter UNTIL it breaks the 70 line AGAIN, from ABOVE. (opposite at the 30 line for the converse trade...)

Just sort of thinking out loud .....
  • #560
  • Aug 7, 2008 4:46pm Aug 7, 2008 4:46pm
Quoting mrkam
Hi Mike.... been noodling this (your question about how to handle the extended out of synch runs....) a bit.

Here are some ideas that I am pursuing....
1) Have a maxloss, and take the lumps as they come. Assumes the loss runs are few and far between, far outweighed by the "usual" swings... (this has been my approach....)

2) defiined risk (loss) options... but hard to do, if not impossible...

3) don't get in in the first place... by this I mean tailor our entry a bit better... I have been looking at a two stage system... first, our price differenctial (delta) gives us the GO when we are far apart, however we define that. Up to now, we would enter at that point.

Rather, don't enter yet, look to something to indicate a REVERSAL, and only enter when the price differential and/or other indicators show us thing are returning... If they keep going and going, we don't enter. One idea I am looking at is the RSI-15 of EURGBP on one time frame GREATER. If we are at 15m for our GU/EU combo, then we look at 30m EG for confirmation. Something like this: For a Long GU, Short EU entry, we want the price differential at or beyond our threshold, then we want the EG-30m RSI to be > 70, but don't enter UNTIL it breaks the 70 line AGAIN, from ABOVE. (opposite at the 30 line for the converse trade...)

Just sort of thinking out loud .....
Of your choices, #1 is the easiest to implement while #3 is probably the most wise. My problem with #3 is it requires more screen time, unless SwingMan or others can code an indicator that sends me an email when the EG-30m RSI is crossing the 30 or 70 line heading toward the middle (this would be great).

So right now I lean toward #1. Do you have any recommendations for a reasonable TP & SL combination using 1 lot GU & 1.2 lots EU position size?
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