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Hedge and Correlation Strategy

  • #181
  • Jun 29, 2009 4:18am Jun 29, 2009 4:18am
My current trade:

Attached Image (click to enlarge)
Click to Enlarge Name: chart.jpg Size: 211 KB


Up till now the biggest possible loss could be -65 pips. Still in the trade, waiting for currencies to cross.
  • #182
  • Jun 29, 2009 9:09am Jun 29, 2009 9:09am
Here's another article. It is related to stock trading and I'm not sure it can be applied to currencies. Like to chose an entry point, the author suggests to check for 2 X stddev of the ratio (1 stock divided by the other).

In the case of the GBPJPY/EURJPY correlation, it would signify taking 2 X stddev of EURGBP for the entry point. But currency pairs are already ratios. Only food for thoughts.

Chamane
  • #183
  • Jun 30, 2009 2:25am Jun 30, 2009 2:25am
Quoting T.E.Lawrence
My current trade:

Attachment

Up till now the biggest possible loss could be -65 pips. Still in the trade, waiting for currencies to cross.
My first loss. I closed this trade today - -160 pips. I consciously let it go to see how much loss it could bring and how bad trade unfolds.

I've read that some people think that if you let go a bad trade it finally will generate some green pips in the end. But I don't think it's true. That trade after a while was generating more and more red pips. So we have to define some exiting rules.

I think that watching eur/gbp is vital. By observing eur/gbp behaviour during that trade I knew it's going in wrong direction.
  • #184
  • Jun 30, 2009 2:29am Jun 30, 2009 2:29am
So maybe when entering the trade i.e. - long eur/usd & short gbp/usd - we should watch eur/gbp for potential to go up.

Or use eur/usd / gbp/usd correlation gap to trade eur/gbp.
  • #185
  • Jun 30, 2009 3:32am Jun 30, 2009 3:32am
My today's trade:

Attached Image (click to enlarge)
Click to Enlarge Name: chart.jpg Size: 184 KB


+59 pips.
  • #186
  • Jun 30, 2009 3:35am Jun 30, 2009 3:35am
Signing up.

Lenoxer
  • #187
  • Jun 30, 2009 3:58am Jun 30, 2009 3:58am
Wiki knows what we are doing here:

http://en.wikipedia.org/wiki/Pairs_trade
  • #188
  • Edited 6:04am Jun 30, 2009 4:19am | Edited 6:04am
If you want to know more or maybe everything about this strategy just put

statistical arbitrage

in google. After few years of reading please come back and post the most important things (no more than 200 words).
  • #189
  • Jun 30, 2009 5:31am Jun 30, 2009 5:31am
Hi Indrek.

What pairs are long and short in your combination?

Thanks.

Quoting Indrek
Hello everybody,
I like the idea to hedge a combination of pairs. Has anybody tried the combination of GBPJPY, EURJPY, GBPUSD and EURUSD? If to take into account the ATR and pip value of these pairs, they seem to be quite equal.
If trading this combination, nobody can say that we trade EURGBP or USDJPY or whatever into one direction only
I will try demo it for sure.
Indrek
  • #190
  • Jun 30, 2009 5:46am Jun 30, 2009 5:46am
New trade:

Attached Image (click to enlarge)
Click to Enlarge Name: chart.jpg Size: 195 KB
  • #191
  • Jun 30, 2009 5:47am Jun 30, 2009 5:47am
Quoting T.E.Lawrence
If you want to know more or maybe everything about this strategy just pur

statistical arbitrage

in google. After few years of reading please come back and post the most important things (no more than 200 words).
one of the problem we have trading this way is that the overlay chart you are looking at redraws because it based on the highs and lows (on the history it looks very good). But if we measure the two charts, for example EURUSD GBPUSD from a static point in the time the charts will not cross for a very long time, so to say you will see only two parallel line on a some distance from each other.

I've got loss today too on the same trade.
  • #192
  • Jun 30, 2009 5:57am Jun 30, 2009 5:57am
Well, the history is not important here. What is important is the current gap, the current decorrelated state of both currencies. But I decide to trade small time frames i.e. 5 min - it results in enough good profit, i.e. my morning 5min trade gave +59 pips.

Anyway, remember that I'm also just checking this strategy on demo. For me it also looks too good to be true. What I really want to find out is how bad trades develop.
  • #193
  • Jun 30, 2009 6:18am Jun 30, 2009 6:18am
Quoting T.E.Lawrence
Well, the history is not important here. What is important is the current gap, the current decorrelated state of both currencies.
are you looking for the gaps on a history data? i frankly believe the overlay charts lie. and think that we should look for a entry points somehow other way.
  • #194
  • Jun 30, 2009 6:19am Jun 30, 2009 6:19am
Check this out:

http://forex.thedaintyarchstudio.com...pairs-trading/

the most detailed article on pairs trading so far, with rules and stuff.




........which is nice.
  • #195
  • Edited 7:52am Jun 30, 2009 6:57am | Edited 7:52am
By the way, do we have some good MT4 indicator for overlaying pairs?
  • #196
  • Jun 30, 2009 7:42am Jun 30, 2009 7:42am
T.E. Lawrence, the trade you took the loss on would definitely have come back to profitability. Not to say that you should have hung on to it, because next time you do it might never come back . Just saying this one would have.

One way to trade this might be:

When gap is large creating the opportunity to say buy eur/usd and sell gbp/usd, do that and also sell eur/gbp. So:

buy eur/usd
sell gbp/usd
sell eur/gbp

Talk about being hedged!

Who knows?
  • #197
  • Jun 30, 2009 7:59am Jun 30, 2009 7:59am
So I guess if one were to never close out a losing trade with this, it would be best to look back somehow over a few years of data and see what the most drawdown would have been, and prepare for the worst as to not get hit with a margin call. Can anyone do this relatively easily?
  • #198
  • Jun 30, 2009 8:09am Jun 30, 2009 8:09am
Quoting jeffreytp
So I guess if one were to never close out a losing trade with this, it would be best to look back somehow over a few years of data and see what the most drawdown would have been, and prepare for the worst as to not get hit with a margin call. Can anyone do this relatively easily?
Not that I know of, would be interested to hear if anyone can do this. Also, remember that there is no guarantee that it will EVER come back into correlation.
  • #199
  • Jun 30, 2009 8:56am Jun 30, 2009 8:56am
Quoting Dreamliner
Not that I know of, would be interested to hear if anyone can do this. Also, remember that there is no guarantee that it will EVER come back into correlation.
Read the wikipedia article I posted link to. Read about drifting. I've already experienced drifting.
  • #200
  • Jun 30, 2009 11:47am Jun 30, 2009 11:47am
Why dont you contact SwingMan. He built loads of correlation indicators for overlays etc. The problem is how big is the gap and will it get bigger. They experimented with 5M EURUSD and 5M USDCHF charts whereby the gap was greater than 1000. It worked until the gap went onto 2800 blowing your margin. There is a couple of hundred pages on a thread here about it but in the end they all gave up trying to identify when to enter based on the gap size. Also news and/or economic indicators are a killer with this methodology.

Attached is one of his overlay indicators.
Attached File(s)
File Type: ex4 NeutralHedge Overlay_v4.ex4   11 KB | 1,117 downloads
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