Hedge Trading Indicator

Greetings earthlings !
I would really appreciate if someone had the time to help me out and make an indicator for me. The main idea is this:
I would like to test if there's a difference between a trade on a cross-pair and two trades that are USD neutral and thus becomes like the cross-pair trade. Look at the attached chart: Selling 10 lots of EURGBP should be the invert of selling 10 lots of GBPUSD and buying 11.7 lots of EURUSD. To make the two trades USD neutral, the lotssize ratio on EURUSD:GBPUSD should be equal to (1/EURGBP):1. For example, at the time of openning the trades in the bottom of the attached picture, EURGBP's price was at 0.8506. This gives the following lotssizes:
EURGBP: Short 1 lot
GBPUSD: Short 1 lot
EURUSD: Long 1/0.8506 = 1.18 lot (I now the picture says 1.17 but thats an error on my part)
I would like the indicator to have an external input of how many bars back (from the current bar) for which to set the actual profit to zero by opening all the trades regardless of timeframe, or if possible an external input for time (hour/min) and date (year/month/day). Of course the profit at the start of the chosen bar (or time and date) should be negative due to the spreads. I'm not looking for it to open the trades, I would only like it to show the profit/loss as a histogram above/below 0 in terms of pips. As direction doesn't matter, the indicator could open the trades in the direction described above: that is short EG, short GU and long EU with the lotssize as described.

I hope that I've made myself clear enough for someone that is willing to help me out. As you can see I have an indicator in the top-left corner in the picture which shows largest drawdown and win, and the current GBP/EUR ratio, from this I have noticed earlier that the biggest drawdown at one point was -25pips and the biggest win was around +20 pips. The reason I want the new indicator is to see how the acutal loss and profit goes back and forth and to see if the direction has anything to do with the direction of either of the involved currencypairs, wihch is why I want to be able to place the indicator on any of the 3 charts and show the same thing. I would like to now if there's a winning hedge, as this is the true hedge since I'm long EURGBP with the sum of the two trades of EU and GU, and short on the short EURGBP for equal lotssizes.

One last thing: If it's difficult to calculate the +/- pips due to the uneven lotssize of EU, maybe making the lotssize something like the ratio of 100:117.54 (or more) could give a more precise profit/loss calculation. If you have any questions, please let me know. I'll give it a try on the weekend to make an indicator, but I fear that it will take too long time, which is why I have come here and asked for your help.

I am not a programmer or coder and I can't be of any help to you in coding. But my trading style is based on cross-currency interplay I can share with you
my knowledge of how the strings are pulled to make the currency pairs dance.

You find so many futile attempts being made here to find correlations or the strength of the currencies. Why do all that?

Just download litefore.org MT4 platform and you will find 8 single currency indexes from which you will instantly know which single currency is moving.

Instead of making the indicator you do demo trades in lot sizes (as calculated by you) for all seven pairs plus single currency pair to find which currencies can be hedged.

The cross pair play is not easy. Some currencies are liquid some are not. That will also affect the movements of the pair.

NZ currency, (all under the control of market makers) can move in one direction for weeks and months. you see the chart of EurNzd and GBPNZD and you will know what I am talking about. In this case what is your basis of calculating ratio and lots?

My advice is don't spend any time on developing any indicator. Instead use your programming skill to caputre the moves of EURGBP, EU/NZd and GBP/NZD and understand how insider trading is behind those moves and you will make good profits. For these you have to understand how USDJPY is used to pull the strings for all of them.

See the picture and the reason to why I was interested in the situation to begin with, same trade is now up a whole bunch of pips. And it seems to be the other way of the trade of EURGBP. As you can see I've originally sold EURGBP, but the trend on that pair has been up since then. Still the overall trades is positive.

Anyway, I'm would like to know more about what you've written. I love trading and I'm always willing to add some to my trading arsenal. So please do share whenever you have the time. In the meanwhile, I'll try and look into the things you've written.

Hi

I watch EUR/GBP like a hawk (and trade it occasionally !).

What reason would you have to enter the trade the way round you did ? I.E you could have equally bought EUR/GBP and GBP/USD and sold EUR/USD.

Because you aren't continually adjusting your lot size to maintain the size ratio throughout the course of the open trade, you are clearly taking an outright position in one or other pairs, depending on where the pairs move. Of course, this is maybe what you want but for this to be profitable presumably you have a reason for which way round you open the trades.

Perhaps you are just looking for a low risk (which you might get in low volatility conditions for EUR/GBP) way of seeing the difference oscillating a small amount either side of positive/negative.

But EUR/GBP can sometimes move like we just saw so I guess my question is how do you/would you manage that. I.E. were you bullish on EUR/GBP when you put the trades on or just "lucky" ? Were you aiming for this outcome or were you aiming for the small ranging hedge trade oscillating around breakeven ?

If you were bullish EUR/GBP why not just take the trade outright ?

By the way, I assume that pj9100 is talking about looking at the interaction between key pairs to determine what moves fx and to get a better feel for moves.

I have seen something like this using CHF as the central curreny on FF - I'm sure there are tons of variations on this.

Hope you don't take my questions the wrong way - genuinely interested in what you are trying to achieve.

Regards


Andrew

Hi French. I think it's impossible to take your questions in the wrong way!

There was no reason to take the trade in the direction I did. I just wanted to see how the profit would oscillate when EURGBP was trending in one direction or the other, and if that would depend on the direction of how I entered the three trades.

But reading what you wrote, I must be mistaken, because I thought it would be a true hedge, and that I didn't need to do any adjustments as the trade went along. And I haven't thought about why I would need to, would you care to explain?

So basically I want to see if there's a difference in going long or short EURGBP and the other direction on EURUSD and GBPUSD to make a "true" (or what I think is anyway) hedge and see if there's a way to pull any profits from the oscillations.

Hi N&L

It is a bit of a paradox this.

Overall, I guess the reason you would or would not want to adjust amounts throughout the course of the trade depends on what you are trying to achieve in the first place.

I suppose the simplest way to illustrate what I was thinking about with adjusting traded units throughout the trade is just to do this calculation:

if you had been setting up and entering your three trades at the price as things developed after you put on the original trade (shown on your last chart EG at 0.9044, GU at 1.6364 and EU at 1.4795) you would not need 11.7 units of EU but you would need 11.06 units of EU

The fact that as the prices relationships with each other changed you DID NOT gradually tweek the units traded, means that you had that exposure.

The paradox (for me) is that of course, I'm being stupid by suggesting anyone would want to continually tweek units traded to be perfectly hedged because a) its impractical/impossible to do perfectly, b) its expensive to do with transaction costs, and c) most of all, it would defeat the object of the exercise to begin with.

However, I am guessing that what one might have originally expected to see is an oscillation of P&L quite close to the zero level but in a fairly tight band. If the thought is that the EG is a good pair to have in an "arbitrage sandwich" for whatever reason, one might assume that when it is slightly in profit then the trades could be unwound, then possibly even put them on in the other direction. This is what I thought you were thinking about and what I have seen discussed using CHF. In that system, I think there was a tolerance of so much (relatively small) and when it hit one side of the band, the trade was flipped. If it went outside the band, the trade was pulled completely until it got back within some "normal range" (I'm trying to recall if this is correct but not entirely sure).

So, when your position made so much money, my gut feel is that it is because it went outside the normal range because the GBP got whipped, EUR did appreciate and of course, the EURGBP had that big move up, first towards the breakout zone at 0.8835 and then extending to well in to the 0.90xx.

While this price development took place, you did NOT fiddle with the volumes traded and kept that exposure. All things being equal, it could have gone the other way (although in hindsight, the way things did go was plain to see - lol, I didn't take any of the trades partly because I am not really trading while learning and partly as I have a large exposure to EURGBP because of a move to Europe from UK which is still unhedged).

The overall issue is the degree of correlation between the pairs one would use and their relationship to each other. The system I have seen talked about with CHF was, I gather, one that at the time had very strongly correlated pairs in play albeit the correlation changed within some tightly observed limits.

Does my explanation make sense ? I'm happy to have any of my assertions corrected as my head is a bit fuzzy now.

Definitely interesting though.

Andrew

Your explanation makes sense, and I get what you write. It's very interesting though because this means that you can never be perfectly hedged (except from where prices are at the exact point of entering the trades), as you'd have to keep adjusting the trades.

This I find interesting as well. The total move (in the direction of the open trades) on EURGBP is today about +500 pips, but the profit for the other leg is about 750*1.17 (EU) + 70 (GU) = +948 pips. Of course there's a difference in pipvalue, as the pipvalue for EG is today's value of GU. So the total profit would be -500*1.6430 + 948 = 126 pips.

So by just opening the EG trade long, we would have been up for 822 pips (500*1.6430), but by putting on a hedge we're only up be 126 pips... Could we use this information in a clever way?

Hmmm...There must be something of worth to be taken from this...

... I don't think so, unfortunately. At least not from the point of view of pure arbitrage.

I used to be an energy trader in the UK - and arbitrage was my bread and butter, giving me steady income, some of which was then used for pure speculation. I would get in to trades in an apparently inefficient manner (broker costs, counterparty risk, margin requirements, etc), a little in the way you described when you broke your 3 trade results down.

For instance, the simplest example was I would buy Summer 09 (Q2 + Q3), and sell Quarter 3 09, thus net buying Q2 at a better price than I could have bought it outright (crazy but when markets are new, as you well know, there are all sorts of inefficiencies and a certain illiquidity). The more interesting trades I liked to do were to buy the weekends in the whole calendar year for example then sell a proportionate quantity of the whole calendar year being balanced over volume but I had the weekend/weekday spread exposure (these energy contracts we spot deliverable contracts - in other words, physical). Often, a few weeks later I would buy the weekdays in the whole year at a discount (because it was mispriced due to being a non-standard contract) from someone else and match them with the weekends I already had and sell some more calendar year, unwinding my spread in the process.

As well as for arbitrage purposes, sometimes this would be a way of picking up or offloading more volume in what was an illiquid market, by legging in to a trade.

But, it seems clear that lack of liquidity and arbitrage are not relevant in fx (at least in a way that is relevant to the retail trader and the way we access the market).

I certainly agree though that looking at correlated pairs is interesting in itself and an indicator where you could represent what you were originally after would help identify the nature of any interrelations. As I mentioned about the CHF thing earlier, I guess a fair few people must already be doing something like this in a way that they would like to think of it as arbitrage. In the end though, there is still some risk and I think it is important to know exactly what this risk is.

Andrew

The real "indicator" for the 3 pairs you traded is just the price of the EUR/GBP contract, which shows that GBP/USD and EUR/USD are not now extremely well correlated (compared to say the period prior to mid 2007).

I still maintain (for the record) that there is no "edge" to be had in the trading of the three pairs, either by adjusting the trade quantities as price changes (to ensure better hedging) OR especially if the quantities aren't adjusted (as you just end up building an outright position that you could have taken anyway).

As already mentioned though, there is definitely some value in understanding these three - when GBP rebounded from support and EUR stalled against the dollar, this strongly supported the correction lower in EUR/GBP - I see that a few traders on FF read it like this too.

Andrew

Thx for your inputs Andrew, much appreciated. I'll just continue trading my baby: breakouts

This is not my text, I copied this long time ago,....hope it helps!

The cross currency pair is nothing except the relationship of the strength between the underlying two pairs. Basically, the cross is nothing more than an algorithm of the relationship between the underlying pairs. The cross does not move on it's own accord, as in a standard supply and demand relationship.
There are 9 possibilities of correlation (in the Strength-Weakness relationship), but before I list them, I must state that an understanding of the BASE currency (the FIRST pair listed in a currency combination) and the DIRECTION of the candles is an absolute MUST to understand strength and weakness. Strength is occurring in the BASE currency and is demonstrated by a candle moving UP. The opposite is true, as well, going down. This can cause some confusion when one sees the USD getting stronger against one currency and at the same time get weaker against the other (this is what happens when the GBPUSD moves more than say, the USDCHF. When the USD gets equally stronger against both the GBP and the CHF at the same time, the GBPCHF stays FLAT. It can be a bit confusing to fully grasp this when trading strength and weakness, but like anything, practice sharpens the skill. Taking 30 full minutes of fully observing this at a busy time in the market, will make the relationship with the cross clear. I's a good exercise for newer cross traders.
Example: GBPUSD candles moving up STRONG and USDCHF candles moving UP STRONG = GBPCHF moving up STRONG (Actually this means that the USD is getting weak against the GBP and at the same time the USD is getting strong against the CHF) Interpret: Candles on BOTH GBPUSD and USDCHF are moving up together strong = STRONG move up on GBPCHF (but, at almost 1.7:1 ratio!! GBPJPY doing this is almost a 2:1 ratio!)

The 9 Strength-Weakness Correlation positions:
1. GBP/USD Up and USD/CHF Up - Cross will move UP STRONG (Primary trade objective moves)
2. GBP/USD Down and USD/CHF Down - Cross will move DOWN STRONG (Primary trade objective moves)
3. GBP/USD Up and USD/CHF Down equally - Cross will REMAIN FLAT (Don’t trade these moves)
4. GBP/USD Down and USD/CHF Up equally - Cross will REMAIN FLAT (Don’t trade these moves)

5. GBP/USD Up and USD/CHF FLAT - Cross will move UP MODERATELY (Can bring decent profits)
6. GBP/USD FLAT and USD/CHF Up - Cross will move UP MODERATELY (Can bring decent profits)
7. GBP/USD Down and USD/CHF FLAT - Cross will move DOWN MODERATELY (Can bring decent profits)
8. GBP/USD FLAT and USD/CHF Down - Cross will move DOWN MODERATELY (Can bring decent profits)
9. GBP/USD FLAT and USD/CHF FLAT - Cross will remain FLAT (Market is undecided – leave alone)
_______________________________________________________________________________________________

I was experimenting with this for some time.....
Those are my 2 old indicators wich I still use from time to time!
It is most important to remember that almost all pairs have a different pip value, and you NEED to include that to your calculations!!!
When playing with the triarbs, the best indicator is the divergence.
Correlation trading like this is actually a type of Triangular Arbitrage, where we are exploiting the ineffieciencies of the market (completely legal and respectable) and knowing these 9 possibilities brings about a greater awareness of looking at two currencies and getting enough valid information to trade a third / cross currency.
Most people think that the crosses move on their own accord, with separate support and resistance, etc. like the underlying currencies. The crosses hit S and R when the underlying currencies do, not on their own! But it truly looks like the crosses are moving on their own accord a chart! This is the biggest understanding about crosses.
Regards