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Hedge and Correlation Strategy

  • #61
  • Mar 31, 2009 10:16am Mar 31, 2009 10:16am
Quoting tokyomaster
This is what the trades look like.
tokyomaster, could you please explain the main concept of using CCI14 and CCI20. I can't get the idea of using that numbers.
  • #62
  • Mar 31, 2009 10:16am Mar 31, 2009 10:16am
Quoting Dreamliner
If we go long EUR/USD and short GBP/USD which direction are we trading EUR/GBP?

If we go short EUR/USD and long GBP/USD which direction are we trading EUR/GBP?

Thank you for helping me understand.
If you are Long EUR/USD Short GBP/USD => LONG EUR/GBP

If you are Short EUR/USD Long GBP/USD => SHORT EUR/GBP
  • #63
  • Mar 31, 2009 10:20am Mar 31, 2009 10:20am
Quoting Dezil
tokyomaster, could you please explain the main concept of using CCI14 and CCI20. I can't get the idea of using that numbers.
Basically the faster CCI12 is greater than the slower CCI20 on the base symbol and the faster CCI12 is less than the slower CCI20 on the hedge symbol and vice versa.

Its by no means the holy grail for entry but better than nothing. Any better thoughts ?
  • #64
  • Mar 31, 2009 11:22am Mar 31, 2009 11:22am
Quoting SmoothTrader
If you are Long EUR/USD Short GBP/USD => LONG EUR/GBP

If you are Short EUR/USD Long GBP/USD => SHORT EUR/GBP
OK, yes, I see now, that makes sense. How about if we go long EUR/JPY and short USD/JPY (or vice versa)? What are we trading then?
  • #65
  • Mar 31, 2009 11:32am Mar 31, 2009 11:32am
Quoting Dreamliner
OK, yes, I see now, that makes sense. How about if we go long EUR/JPY and short USD/JPY (or vice versa)? What are we trading then?

Long EUR/JPY and Short USD/JPY => LONG EUR/USD

Of course these are only close approximates for the equal position because if you are long 100000 EUR you will be short 13130000 JPY and if you are short 100000 USD you will be long 9920000 JPY leaving you out of balance slightly when compared to a straight LONG EUR/USD trade.

Hopefully this helps.
  • #66
  • Mar 31, 2009 11:34am Mar 31, 2009 11:34am
Quoting SmoothTrader
Long EUR/JPY and Short USD/JPY => LONG EUR/USD

Of course these are only close approximates for the equal position because if you are long 100000 EUR you will be short 13130000 JPY and if you are short 100000 USD you will be long 9920000 JPY leaving you out of balance slightly when compared to a straight LONG EUR/USD trade.

Hopefully this helps.
Yes, it does help. I see how this is working now. Thank you.
  • #67
  • Mar 31, 2009 2:35pm Mar 31, 2009 2:35pm
Quoting tokyomaster
You can easily build an EA for the GBPJPY/EURJPY hedge...

if CCI(GBPJPY,12) > CCI(EURJPY,20)
- SHORT GBPJPY
- LONG EURJPY

if CCI(GBPJPY,12) < CCI(EURJPY,20)
- LONG GBPJPY
- SHORT EURJPY

close on profit > x

if you want then i can build an EA to-do this in about 1 hour.
Dreamliner, thank you for this interesting thread and

Tokyomaster thank you for your contribution. Could you please suggest CCI relations for the other correlated pairs. Thank you.

Alfa99
  • #68
  • Mar 31, 2009 3:17pm Mar 31, 2009 3:17pm
Here is a link to a thread started last year with the same or similar concept. There was a lot of work put into developing an EA and some indicators so take time to check it out if you are really interested in pursuing this. No need to reinvent the wheel.
http://www.forexfactory.com/showthre...light=zeusjoes
  • #69
  • Mar 31, 2009 3:38pm Mar 31, 2009 3:38pm
Quoting mackus
Here is a link to a thread started last year with the same or similar concept. There was a lot of work put into developing an EA and some indicators so take time to check it out if you are really interested in pursuing this. No need to reinvent the wheel.
http://www.forexfactory.com/showthre...light=zeusjoes
I'm familiar with that thread and it got lost in a maze of indicators and died.
I wouldn't base anything on it.
  • #70
  • Mar 31, 2009 4:07pm Mar 31, 2009 4:07pm
Quoting findcount
weren't there a thread started by Spieler about a similar strategy involving eur/usd and usd/chf (both buy or sell of course) and things went awry ?

and that's involving the 2 pairs that have the tightest correlation (negative correlation in this case) so using eur/usd and gbp/usd should be much riskier ?

i'm certainly hoping Dreamliner or whoever can come up with a way to make this strategy work, maybe even with other pairs as long as it can work............no more headaches and heartbreaks then...........
Spieler had a strategy like this, and there's a few other ones out there. I've been a fan of not picking a side in the market and demo and live tested a few of those and have been trading some of these, still refining my methods of course. You guys might want to do some stats on average, largest gaps, draw down for the time frames etc. That stuff is pretty easy with excel as long s you download a bit of data, would save you some cash running it live from the get-go because I garantee you'll run into a situation here or there and will either NEED to cut losses or need a lot of capital to wait for that gap to close, I'm thinking weeks to a month or so. I have not traded GU EU against each other but I'll give a go and post some results later.
  • #71
  • Mar 31, 2009 4:19pm Mar 31, 2009 4:19pm
oh btw whoever said trading two pairs is same as one...not true

in some ways better in some worse but it gives you a chance to leg in and out of trades which I know has saved my losses a few times and made me profits if you get the price reactions right when you enter/exit the trades.

if you are seriously pursuing this, think about multiple positions and stacking more on as the gap gets larger, also...timing is very important..be wary of news unless you like and know how to trade them. consolidation areas are gold so if you get tight ranges around S&R areas you can make some $ until the thing breaks out, just be careful when it does break so it's not a huge break if you want to hold the position

Sorry my ideas are a little all over the place, been a bit busy
  • #72
  • Mar 31, 2009 4:26pm Mar 31, 2009 4:26pm
Quoting mackus
No need to reinvent the wheel.
Another correlation thread with some interesting content:

Individual Currencies And Relative Strength
http://www.forexfactory.com/showthread.php?t=109599
  • #73
  • Mar 31, 2009 11:47pm Mar 31, 2009 11:47pm
Quoting tokyomaster
This method fails at some point with margin call because of de-correlation, divergence, spread, swap interest, ranging markets etc.
I completely agree, wish I knew that then


i have personally experienced this without a stop loss there is no chance, basically because of decorellation it happens rarely and suddenly and you'll find the pairs just keep going in the opposite direction on and on. By that time you have so much confidence in the method you're trading at quite a high dollar value per pip a large move and you either lose most of your account or if you're stubborn and still hold on believing they will get back to the corelation you'll lose everything with a margin call.

Its somewhat like averaging down it fools you into believing it works because if you're lucky you'll have strings of wins and this only reinforces your belief in the method. You strongly believe that the corelation will keep your drawdown in check like its done for many months

Its great Dreamliner has brought this up and I encourage everyone to experiment and tweak it but I urge or rather I PLEAD no one go live with this without extensive forward testing. I lost a live account with this method a couple of months after starting out and everything was great till that point.
  • #74
  • Apr 1, 2009 1:02am Apr 1, 2009 1:02am
This method is guaranteed to fail without a stoploss even with a stoploss I don't believe it is going to be profitable in the long run, dont let short term results fool you. This shouldn't discourage anyone from trying out and sharing new ideas though you can never know what some one might hit upon.

Once again I plead with everyone not to go live with it without at least a couple of months of extensive forward testing.
  • #75
  • Edited 2:36am Apr 1, 2009 2:06am | Edited 2:36am
Yes, the term "hedge" is pretty misleading here. Like somehow it's safe to not have a preset bailout point because the pair correlation provides safety from things going too far against you. For sure sitting on a losing trade based on some thinking like "it has to come back soon because these pairs are highly correlated" is a recipe for disaster.

That being said the area of pairs correlation does help to look beyond the one-dimensional world of common chart studies into what the currency markets are actually doing. In so doing its efficiencies and inefficiencies are, to some degree, revealed. The overall undercurrent of the market is also "exposed". I'm just putting out my initial observations here, and no doubt, demonstrating some lack of in depth knowlege. So, take it for what it's worth. I do feel that the area of correlations could be of great value.
Oh yeah, use a stop loss folks. Please.

Edit: Re-reading the post it seems possible that it may be misunderstood as being critical of the thread-starter which it is not at all! I'm learning from studying the thread, the approach and the contributions from everyone. Thanks Dreamliner! This type of trading strategy and others which are similar, are prone to misunderstanding and misuse though, I'm afraid. That's what I was trying to get at. I'll shut up now. LOL.
  • #76
  • Apr 1, 2009 5:53am Apr 1, 2009 5:53am
The Neutral Hedge Indicator used in a previous post is pretty reliable for entry. Early days but so far i have 20 out of 20 hedges closed in profit. I am using lots of 0.10 and take profit of £10.

£214.73 is impressive for 6 hours of trading. I just wish i could get hold of the source code for the indicator so i could build it into an EA. Then we could forward test 24/5 and see when/if/where the drawdowns occur.

It would seem that the timeframe used is key on how quickly the hedge is closed in profit.

One other thing i am looking at is LONG in one timeframe and SHORT in a different timeframe. That also looks interesting.
  • #77
  • Apr 1, 2009 6:15am Apr 1, 2009 6:15am
Following on....

I asked a friend of mine who still works for Barclays trading floor about this hedge idea...

"Basically you need to trade the GBPJPY/EURJPY hedge outside of London and European sessions. ie. 5.00pm - 7.00am GMT. Reason being, news alerts/statements can affect GBP and not EUR, vice versa. This is generally what causes the hedge to unwind with large DD. Whereas, the american/asia sessions will affect both in parallel".

That aside you still have the problem of what to LONG and what to SHORT. But if you can get that right more times than not and follow the correct trading session then you should be ok.

Does anyone have the source code to Neutral Hedge Overlay ?, then i can build an EA to trade this idea on auto.
  • #78
  • Apr 1, 2009 8:15am Apr 1, 2009 8:15am
After hearing talk about a neutral hedge iundicator i came accross this indy..

http://preview.shareapic.net/preview5/015869039.jpg

Does anyone know what it does? Or better what does the returned number refer to..
Attached File(s)
File Type: ex4 #PH#PriceDivergence#01.ex4   6 KB | 1,584 downloads
  • #79
  • Apr 1, 2009 10:38am Apr 1, 2009 10:38am
If only it was always this easy.
Attached Image (click to enlarge)
Click to Enlarge Name: hedge.gif Size: 51 KB
  • #80
  • Edited 1:24pm Apr 1, 2009 1:22pm | Edited 1:24pm
Quoting Postrock
After hearing talk about a neutral hedge iundicator i came accross this indy..

http://preview.shareapic.net/preview5/015869039.jpg

Does anyone know what it does? Or better what does the returned number refer to..
I have to check it out later and see when im at my own computor and can down load it , but I think maybe its something like when you look for divergence with macd . They just may have maade it easy to see with lines and a histgram also : IE : If price is ggoing up and the line is going down or the histo or volume price should go the way volume went soon , macd is a awsome indicator to see that and this one you found maybe also .....Cheers:nerd:
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