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FX statistical arbitrage

  • #1
  • First Post: Sep 4, 2007 1:02pm Sep 4, 2007 1:02pm
Yay my 100.00000000000000000000000th post!

im just looking around if this is viable. im reading some stat arb in stock market. basically finding highly correlated pairs, according to arbitrage pricing theory similar ones should have same prices in the market, and any deviations from another will collapse to the single same price. so we exploit this.

but note, stat arb is not same is arb where theres riskless profit. stat arb simply revolves around the idea that prices of similar securities/instrument should be same, or revert to it if different at some point. there are many risks involved, however its attractivness lies in the market neutral nature of the strategy.

however, i know that currency pairs in FX market can vary time to time depending on the time frame. like the jpy pairs, they appear to be strongly correlated from one another at least in shorter time frames (theres a whole list of table of correlation in Kathy Lien's book can't remember em all but shows that correlation changes drastically from - to + in various time periods).

also, stat arb in currency pairs would be a bit more of a releif as you dont have 5000 stocks and 17 million possible pairings to test on.

anyways, let me know what you guys think, i would like to find out more.
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  • #2
  • Jun 17, 2008 2:53pm Jun 17, 2008 2:53pm
May I ask a math question? My question is the following: in stat arb, if you have a basket of semi-correlated securities/currency pairs, what is the math formula which tells you the degree of price fluctuation you can expect on a portfolio basis over various periods of time? ----How do you factor in position size, correlation coefficient, standard deviation of price, etc. for numbers of securities/currency pairs in a portfolio to give you an expectation of the volatility of price movement over X amount of time?

Thanks,

Lenoxer
  • #3
  • Sep 17, 2008 5:47am Sep 17, 2008 5:47am
Stat arb works on fx. It works very well...
  • #4
  • Oct 11, 2008 1:57pm Oct 11, 2008 1:57pm
jatotek you trade stat arb on FX ?

Can you tell me more in this method?

Regards.
Ludo.
  • #5
  • Edited 2:54pm Aug 18, 2010 1:00pm | Edited 2:54pm
so far work well.........
Buy low , Sell high
  • #6
  • Edited 2:05pm Aug 18, 2010 1:16pm | Edited 2:05pm
I know Dreamliner did much work in this area in this thread.
http://www.forexfactory.com/showthread.php?t=160912

I believe, at times, he had some divergence that lasted a very long time,
creating some serious drawdown.

May I ask, what is your determination for overbought and oversold?
Do you use an indicator or multiple indicators or ?
  • #7
  • Edited 8:55pm Aug 20, 2010 8:09pm | Edited 8:55pm
Quoting Intu
I know Dreamliner did much work in this area in this thread.
http://www.forexfactory.com/showthread.php?t=160912

I believe, at times, he had some divergence that lasted a very long time,
creating some serious drawdown.

May I ask, what is your determination for overbought and oversold?
Do you use an indicator or multiple indicators or ?


Intu,
i am using 15-30 min charts and trust my discretion on what is overbought and oversold ( no indicators involved) .... i use small lot sizes and averaging . Mainly I work with EURUSD + USDCHF ; AUDUSD+USDCAD ; and EURUSD+GBPUSD.


I have been trading other systems but havn't seen such a positive risk/reward ratio ..... all comes to small sizes and averaging..... multiple averaging if needed. I am cautious to say this,,, but I dont see how one could get serious drawdowns with proper money management!!!

Let me explain, and if I am wrong, please correct me !!!!

Lets say you are using $20.000 capital for your statarb positions . I would enter with 5mini lots on each pair, ( 1 standard lot total) Using 15-30m chart. Keep avaraging every -100 Or take profit when positions converge.

Theoretically, margin call would hit when position are off 400-500 points....( on 30m time frame). I have not seen that with pairs above.... ever!!!!

I am about to quit all my trading systems and focus on this statarb.


Please get back to me on your experience with it.....what pairs and time frames were you using ??? what exactly cause you drawdowns ???were you highly leveraged??/ Did you use averaging?

Ismail
Buy low , Sell high
  • #8
  • May 12, 2011 9:09am May 12, 2011 9:09am
Hi Ismail,

Can you clarify in which situation you average down:

when the whole position goes against you by 100 points (fractional pips or whole pips?)
when one of the orders goes against you by 100 points (fractional or whole pips)?
or do you mean you keep averaging every 100 US drawdown?

Thanks for your reply

Steven

Quoting ismail
Intu,
i am using 15-30 min charts and trust my discretion on what is overbought and oversold ( no indicators involved) .... i use small lot sizes and averaging . Mainly I work with EURUSD + USDCHF ; AUDUSD+USDCAD ; and EURUSD+GBPUSD.


I have been trading other systems but havn't seen such a positive risk/reward ratio ..... all comes to small sizes and averaging..... multiple averaging if needed. I am cautious to say this,,, but I dont see how one could get serious drawdowns with proper money management!!!

Let me...
  • #9
  • Jun 4, 2019 6:09am Jun 4, 2019 6:09am
Would like to get an update on how things are progressing? Those that stuck to statarb
  • #10
  • Apr 27, 2021 6:47pm Apr 27, 2021 6:47pm
Yes, statistical arbitrage works for FOREX, but it uses completely different principles and patterns, in contrast to similar strategies that use correlation.

Many tests have been done to exploit the correlation and convergence on which these FOREX strategies are based. This strategy will certainly lead to losses and very large ones. Or you will find yourself in a long-term capital drawdown, which ultimately will lead to the loss of your deposit.

In the FOREX market, you can use a statistical arbitrage strategy (buy and sell two currencies at the same time), but you need to use completely different principles and select other currency pairs (not exotic).
  • #11
  • Apr 28, 2021 1:52am Apr 28, 2021 1:52am
Quoting AlexKendo
Yes, statistical arbitrage works for FOREX, but it uses completely different principles and patterns, in contrast to similar strategies that use correlation. Many tests have been done to exploit the correlation and convergence on which these FOREX strategies are based. This strategy will certainly lead to losses and very large ones. Or you will find yourself in a long-term capital drawdown, which ultimately will lead to the loss of your deposit. In the FOREX market, you can use a statistical arbitrage strategy (buy and sell two currencies at the...
I agree with this also there can be divergence of certain instruments. In theory there are 4 separate entities on correlating two pairs and it can be tough to get it completely bang on
  • #12
  • Last Post: Apr 28, 2021 9:13pm Apr 28, 2021 9:13pm
Quoting Forextobe
{quote} I agree with this also there can be divergence of certain instruments. In theory there are 4 separate entities on correlating two pairs and it can be tough to get it completely bang on
This can be achieved. Even with a very high probability that the two currency instruments will converge. You just need to use a completely different approach, not based on positive correlation and covariance ... this does not work in forex. This theory was invented and used in the stock market.
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