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Hedge and Correlation Strategy

  • #321
  • Jul 22, 2009 7:31am Jul 22, 2009 7:31am
Quoting Zezdo
Hi,
If you buy gbpusd and sell eurusd it's like selling eurgbp and vice versa, but paying bigger spread, think about that
so obviously you are playing eurgbp like a range, but it has trend some times
Regards!
@ Zezdo

When you buy gbpusd and sell eurusd you DO NOT have to make a bet about long or short. It's unimportant in which direction the market goes. When you are a selling eurgbp you make a bet that it goes down. But what happens when it rises?? Think about that...
  • #322
  • Jul 22, 2009 7:57am Jul 22, 2009 7:57am
Quoting Alderlug
@ Zezdo

When you buy gbpusd and sell eurusd you DO NOT have to make a bet about long or short. It's unimportant in which direction the market goes. When you are a selling eurgbp you make a bet that it goes down. But what happens when it rises?? Think about that...

In my opinion, it's very important where the market goes.
When you buy GBPUSD and sell EURUSD, you are betting that the EUR will become
weaker against the GBP.

Look at the exposures I posted above. They are almost the same.

If you are buying GBPUSD and selling EURUSD, what you are doing if you
break it down is:

Buying GBP / Selling USD - Selling EUR / Buying USD

The USD's cancel themselves out with a bit of change left over, and
you are left with a short EUR and long GBP. Which is basically equivalent to Short EUR/GBP.

You will only profit if the EUR becomes weaker against the GBP.
This is where you see the gap close when the two charts are plotted
against each other.

If the EUR strengthens against the GBP, then you will incur drawdown.

It's a bit tricky to get your head around, but always remember to break
down what you are trading into the individual currencies to find your true
exposure.

Coder
  • #323
  • Jul 22, 2009 8:10am Jul 22, 2009 8:10am
Quoting T.E.Lawrence
So what would you recommend instead of dailyfx charts? Is there any MT4 indicator that shows correlation correctly without repainting?

I also noticed sometimes when I look back at the chart, it's like: where the hell is that gap I traded few hours ago?
I believe your gap is disappearing because the chart's "zero" point is shifting as new bars come in. The indicator I'm writing doesn't repaint, but since everything is based off of the daily open price the respective info is only valid for the current day.

I should be able to post something by Monday.
  • #324
  • Jul 22, 2009 8:33am Jul 22, 2009 8:33am
Quoting Jm1941
I believe your gap is disappearing because the chart's "zero" point is shifting as new bars come in. The indicator I'm writing doesn't repaint, but since everything is based off of the daily open price the respective info is only valid for the current day.

I should be able to post something by Monday.
Looking forward to seeing your indicator, JM!
  • #325
  • Jul 22, 2009 9:43am Jul 22, 2009 9:43am
My take on it - Ultimately we are trading the spread between two pairs if thats our entry.

If we are trading e/u vs g/u and the current prices are : e/u 1.4100 and 1.6300 g/u the the spread/gap is 2200 - one minus the other.

If e/u is above g/u then we long g/u and short e/u and we profit when the spread is greater than 2200 and we loose when it becomes less.

The first image shows the daily spread between e/u - g/u, one minus the other.

The second image overlays this spread with eur/gbp. As you can see there are difference especially when it comes to the daily range - the eur/gbp looks asif it moves with a greater daily range then the spread.

I've been looking at the daily range for two pairs that are correlated - and have been entering long when currency A is at the bottom of its daily range and say currency B is Top of its daily range as safe guard indicator that the currency has made its move for the day and 'Should' bounce back.


Wonder whether Swingman might help with an indicator...

Quoting Jm1941
I believe your gap is disappearing because the chart's "zero" point is shifting as new bars come in. The indicator I'm writing doesn't repaint, but since everything is based off of the daily open price the respective info is only valid for the current day.

I should be able to post something by Monday.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: eurusdgpbusd.jpg Size: 127 KB
Click to Enlarge Name: overlaid.jpg Size: 173 KB
  • #326
  • Jul 22, 2009 12:10pm Jul 22, 2009 12:10pm
Quoting Jm1941
I believe your gap is disappearing because the chart's "zero" point is shifting as new bars come in. The indicator I'm writing doesn't repaint, but since everything is based off of the daily open price the respective info is only valid for the current day.

I should be able to post something by Monday.
That's great! It's all what we need - most of us are intraday traders anyway I think.

What about taking screen captures of eur/usd & gbp/usd and overlaying them in Photoshop?
  • #327
  • Jul 22, 2009 1:18pm Jul 22, 2009 1:18pm
[/quote]What about taking screen captures of eur/usd & gbp/usd and overlaying them in Photoshop?[/quote]

You could do that sure, but its probably easier and faster to;

1) Subtract current price from open price
2) Subtract EURUSD from GBPUSD (current)

This will show you which pair has moved more today, and where, and the relative difference between the 2 pairs.
  • #328
  • Jul 22, 2009 1:47pm Jul 22, 2009 1:47pm
What about taking screen captures of eur/usd & gbp/usd and overlaying them in Photoshop?[/quote]

You could do that sure, but its probably easier and faster to;

1) Subtract current price from open price
2) Subtract EURUSD from GBPUSD (current)

This will show you which pair has moved more today, and where, and the relative difference between the 2 pairs.[/quote]



I prefer visual clues. I'm a bloody artist so I eyeball everything. Math is my enemy.

P.S.

What's wrong with a quoting system?
  • #329
  • Jul 22, 2009 2:19pm Jul 22, 2009 2:19pm
That's funny. I'm an artist as well. Math is not my friend, but I'm pretty good with a spreadsheet.
So if you're going to photoshop them up you need to make sure the chart scale is the same for both and you need to sync them up to the same open point.

Should work...
  • #330
  • Jul 22, 2009 2:59pm Jul 22, 2009 2:59pm
Welcome, Markfx. Glad you are here, and hope that you can contribute in a positive way to what we are trying to do. Hopefully we can all improve.

Right now I'm trading negatively correlated pairs and am making approximately 20% per week on average, trading 4 pairs of crosses when they are gapping open.

Quoting markfx
I've just about finished reading this thread from start to finish and really think it's time to throw my 2 pips into the fire (so to speak).

I've read over and over that trading pairs like EURUSD vs USDCHF is the same as trading EURCHF. That may be true but you miss the point of watching the correlation between the two. It's just a SIGNAL. Like any other indicator signal. It tells you which way to trade it. That's all. The people trading this are just using this relationship to tell them which way to trade.

Now the question of...
  • #331
  • Jul 22, 2009 3:00pm Jul 22, 2009 3:00pm
Swingman, oh Swingman, where are Thou?

Quoting redart007
My take on it - Ultimately we are trading the spread between two pairs if thats our entry.

If we are trading e/u vs g/u and the current prices are : e/u 1.4100 and 1.6300 g/u the the spread/gap is 2200 - one minus the other.

If e/u is above g/u then we long g/u and short e/u and we profit when the spread is greater than 2200 and we loose when it becomes less.

The first image shows the daily spread between e/u - g/u, one minus the other.

The second image overlays this spread with eur/gbp. As you can see there are difference especially when it...
  • #332
  • Jul 22, 2009 5:37pm Jul 22, 2009 5:37pm
Quoting T.E.Lawrence
What about taking screen captures of eur/usd & gbp/usd and overlaying them in Photoshop?
You could do that sure, but its probably easier and faster to;

1) Subtract current price from open price
2) Subtract EURUSD from GBPUSD (current)

This will show you which pair has moved more today, and where, and the relative difference between the 2 pairs.[/quote]



I prefer visual clues. I'm a bloody artist so I eyeball everything. Math is my enemy.

P.S.

What's wrong with a quoting system?[/quote]


Just thought it'd be interesting to subtract e/u from g/u. Here's a 1 year spread.
Attached Image (click to enlarge)
Click to Enlarge Name: gu-eu1year.jpg Size: 146 KB
  • #333
  • Jul 22, 2009 5:43pm Jul 22, 2009 5:43pm
I don't understand the picture, and what do you mean by the word "spread"? Typically we think of spread as the broker cost.

Quoting markfx
You could do that sure, but its probably easier and faster to;

1) Subtract current price from open price
2) Subtract EURUSD from GBPUSD (current)

This will show you which pair has moved more today, and where, and the relative difference between the 2 pairs.


I prefer visual clues. I'm a bloody artist so I eyeball everything. Math is my enemy.

P.S.

What's wrong with a quoting system?[/quote]


Just thought it'd be interesting to subtract e/u from g/u. Here's a 1 year spread.[/quote]
  • #334
  • Jul 22, 2009 5:55pm Jul 22, 2009 5:55pm
Quoting Dreamliner
Welcome, Markfx. Glad you are here, and hope that you can contribute in a positive way to what we are trying to do. Hopefully we can all improve.

Right now I'm trading negatively correlated pairs and am making approximately 20% per week on average, trading 4 pairs of crosses when they are gapping open.
Thanks Dreamliner. Glad I found your thread. Pairs trading has always seemed to me to be a great way to focus one's trading. I'm a little more familiar with using futures and options for hedging purposes, but I'm intreged with the idea of trying to take advantage of the inefficiencies in any market including currencies. I think following the spreads and then jumping in to capture the pips when things get out of balance is a great trading idea. Obviously more work needs to be done but you're proof that there are pips to be made by all.

I congratulate you sir... nicely done!
  • #335
  • Jul 22, 2009 6:01pm Jul 22, 2009 6:01pm
Quoting Dreamliner
I don't understand the picture, and what do you mean by the word "spread"? Typically we think of spread as the broker cost.

You're right. Maybe spread isn't the correct term. It's just a daily chart showing the "difference" between the e/u and g/u.
  • #336
  • Jul 22, 2009 7:02pm Jul 22, 2009 7:02pm
Quoting Dreamliner
I don't understand the picture, and what do you mean by the word "spread"? Typically we think of spread as the broker cost.

I looked at that chart I posted and maybe I should explain further since the clarity isn't as good as the original. This is just a chart for historical or educational purposes. It's not a chart you'd use for trading. It just shows the "gap" between the two currency pairs. So when you see a pair that seems to be spread too far this chart just tells you what the "normal" gap has been. Sort of a TP figure if you will. My charts allow me to type in any pair and add or subtract any other pair and shows the result. Kind of fun to do with all kinds of commodities and stocks. If 2 stocks run in tandum and get a little out of wack then you can jump in a try to take advantage of it.
  • #337
  • Jul 23, 2009 12:33am Jul 23, 2009 12:33am
Well, I've been thinking......

if Dreamliner has been successful trading with dailyfx charts, then maybe they're good afterall.
  • #338
  • Jul 23, 2009 4:44am Jul 23, 2009 4:44am
Spread is right - its what we are doing buying one and selling another - the Spread is the difference between the index's and we profit when the Spread gets bigger if we are long the spread and visa versa - see my previous post.

Quoting markfx
You're right. Maybe spread isn't the correct term. It's just a daily chart showing the "difference" between the e/u and g/u.
  • #339
  • Jul 23, 2009 4:51am Jul 23, 2009 4:51am
Quoting Dreamliner
Look on Mataf and see what pairs you'd like to trade, whether positive or negatively correlated, and choose those you like.

I've been using negatively correlated and making a killing, lately.
Have you found negatively correlated pairs better than positively correlated ones?

By the way - do you watch eur/usd and gbp/usd (while trading these pair) charts to validate your entry points? I.E. :

want to short euro and buy cable - whether euro is at resistance and cable is at support, to see if euro can go up and cable down (so the gap is going to get bigger) or it looks like euro should go down and cable up?
  • #340
  • Jul 23, 2009 5:04am Jul 23, 2009 5:04am
Example to my previous post:

Attached Image (click to enlarge)
Click to Enlarge Name: chart.jpg Size: 81 KB


I've entered few minutes ago (shorted cable, bought euro) - but before this I've had looked at my charts and noticed that cable was at resistance (R1 daily pivot) and euro was at support (daily pivot). So they were both at some reversal points.
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