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Attachments: Hedge and Correlation Strategy
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Hedge and Correlation Strategy

good tool

but are you aware that you're trading EUR/GBP in effect and betting a center of distribution is to be revisited and rest is random market walk...

if you only trade for T+1 day it may work, but for long term it may not be a safe assumption that E/G has a fixed median distribution...

Quoting Dreamliner
Greetings,

Several on here are posting hedging strategies, so I thought I would post one I have been trading for about a week. It has all been positive because I do not use stop losses. I am posting this here because people are usually able to pick holes in the strategy and show where it would fail, and I want to know this before I keep trading it. Here it is:

1. Go do dailyfx.com and click on "charts" and "live charts" and open up a EUR/USD.
2. Click on "instruments" and overlay a GBP/USD chart.
3. Choose any timeframe (I use 30 minutes).
4....
Attached Image
My first trade:

Attached Image (click to enlarge)
Click to Enlarge Name: chart1.jpg Size: 79 KB


+62 pips. The biggest possible loss during the trade was -43 pips. That far the price action went against me at some point.
OK, I've done another one:

Attached Image (click to enlarge)
Click to Enlarge Name: chart2.jpg Size: 85 KB


+26 pips.
Here's a great article I found on spread trading:

http://www.tradingmarkets.com/.site/...les/-74686.cfm

So? Dreamliner is not the only one mad, as some people thought on this thread.
I think I've traded all correlated pairs on this strategy, but have come down to the fact that EUR/USD and GBP/USD are the best simply because they are the most predictable. I use a 5 minute timeframe during active trading times and simply wait for a gap and then enter, knowing the gap will close.

I would not recommend trading this method with a large timeframe as drawdowns can be enormous. Nothing says the pair must come back into correlation, so be careful with this method. Have a max loss that you will take and stick with. Then grab lots of pips until you reach it.

Quoting T.E.Lawrence
Hi Dreamliner,

you've said you currently trade more 'hedge pairs' than eurusd-gbpusd, could you post what pair combinations you use and what are, from your observation, most profitable? Also what time frames do you use and which one you find to be the best?

Thanks for sharing your method, it's really interesting - I'm demo'ing it and it looks damn fascinating.

Keep this thread alive folks and post your charts and observations. I think I've noticed some things that could improve our trading - I have to check it more, than I post my conclusions....
Quoting T.E.Lawrence
Here's a great article I found on spread trading:

http://www.tradingmarkets.com/.site/...les/-74686.cfm

So? Dreamliner is not the only one mad, as some people thought on this thread.
Don't let that article convince you that I'm not mad .
Dreamliner,

that article says (well suggest) that it's really trading eur/gbp:

- when you sell uerusd and buy gbpusd, it's like selling eur/gbp,

is this correct? What do you think about it?
Quoting T.E.Lawrence
Dreamliner,

that article says (well suggest) that it's really trading eur/gbp:

- when you sell uerusd and buy gbpusd, it's like selling eur/gbp,

is this correct? What do you think about it?
Yes, and no. I actually traded EUR/GBP off of the signals from the spread and it is not identical. I prefer to trade the spread pair now. Demo both, see which you prefer.
I checked my last both trades how they have would looked on eur/gbp - the results would be similar (but I don't now actually how much pips I would have gained trading eur/gbp).

But,

when trading two pairs there's a hedging envolved, isn't there?
Another info helping to understand Dreamliner's method:

Plausible Trading Strategy
A plausible trading strategy would be to trade 2 currency pairs based on their correlation's reversion to the mean. You can track the correlation of 2 currency pairs over time and if it gets away from the norm you can place a trade in the direction that will snap the correlation back to the mean. For example if the EUR/USD and the USD/CHF have a correlation of -.9 and the EUR/USD goes on a huge rally while the USD/CHF does not drop as quick you can go short EUR/USD and go short USD/CHF and look for the correlation to snap back to the mean as a result of EUR/USD dropping of the USD/CHF dropping in order to revert the correlation to the historical mean. Of course keep in mind that the correlation is not stagnant and there is no guarantee that it will always revert.

Taken from:
http://www.traderschoicefx.com/learn...rrelation.html
Interesting, not normally the way i trade but played a little today and so far 5 wins out of 5 on the eurusd gbpusd, keeping my eye on this one.

Gez
Seek not to change the world; seek only to change your mind about the world
Quoting T.E.Lawrence
I checked my last both trades how they have would looked on eur/gbp - the results would be similar (but I don't now actually how much pips I would have gained trading eur/gbp).

But,

when trading two pairs there's a hedging envolved, isn't there?
No, it is not an actual hedge; there is no such thing as a 100% hedge when trading currencies, unless you buy and sell the same one at the same time.

They are "correlated" which means it is close, but not an actual hedge. Keep checking against Eur/Gbp and see what you discover.
Are you entering when the gap has exceeded a certain pip amount on the chart?
Quoting weekapaugh
Are you entering when the gap has exceeded a certain pip amount on the chart?
Yes, but it is difficult to explain what it is, because it depends on the number of bars you have on your screen as that affects the scale, and hence the appearance of correlation.

Not sure all that made sense, but basically the chart looks different at different scales. So you have to pick one and stay with it and get used to the way the prices look on that scale.

I hope that helps.
yeah Dreamliner, that makes sense. If you adjust the window size of the chart it redraws the overlay/scale differently.
hello dreamliner:what tf do you use now,5 or 30 min?
Quoting haojzh
hello dreamliner:what tf do you use now,5 or 30 min?
I like to do lower timeframes, try them all, see what you like best.
Hi Dreamliner and others,

have you ever had any loses while trading this method? If so, have you noticed anything why this happened?
Here's another article describing the above method:

http://hyiperz.com/forex-trading-sys...-strategy.html

I'm posting articles and info I've found on the net to help us define more rules for this method or/and to dig up some info on how to avoid entering bad trades.
Dreamliner, do you still use dailyfx chart or some other charting software i.e. mt4 - if so what indicators do you use?
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