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Hedge and Correlation Strategy

  • #1,781
  • Jan 28, 2011 9:50pm Jan 28, 2011 9:50pm
Quoting 41413592
yeah you are right,i trade EU/usd cad yeah yesterday there was a huge down move of eurusd,as you said i should prevent trade in the S/R line point ,got it man thank you very much!
Also, watch out for news. The GDP report and the fact that Egypt was up in arms didn't help the Euro much. What I am trying to say is turn on your tv, go to a business network (I use Fox Business Network) and if there is no major economic event, then you are safe to trade. gl in the future.
  • #1,782
  • Jan 28, 2011 9:50pm Jan 28, 2011 9:50pm
Trading just before high impact currency specific news would be less desirable with this method especially if the currency exists only on one side of the correlated pairs.

What I mean is if EURUSD and EURCAD are correlated positively at desired level and the upcoming news would have a high impact on EUR specifically (mainly economic news, it is really difficult to predict the impact of geopolitical news in terms of timing), then the trade can be executed if all entry conditions are met. But if the news is related only to CAD, then I would suggest caution and not to take that trade as only EURCAD will be affected and the previous correlation for which the trade decision has been based on would be totally different after the news. So this news situation can be used as a filter to choose which correlated pairs can be traded.

Just my two cents.

Regards,
  • #1,783
  • Jan 28, 2011 9:53pm Jan 28, 2011 9:53pm
Scott,

Any idea why I can only have 1 instance of the 1.6 indicator which gives the correct big blue/yellow/red text on one chart? If I load the indicator a second time I can either have the top or the bottom currency display the big colorful letters but not both. See chart...
Attached Image (click to enlarge)
Click to Enlarge Name: stoch correlation1.gif Size: 28 KB
  • #1,784
  • Jan 28, 2011 9:55pm Jan 28, 2011 9:55pm
# 2 says 75% or greater POSITIVE correlation and in number 4 it says sell the high and buy the low one. Well if they are 75%+ positive they will move in the same direction 75 % of the time so would it not be smarter to use pairs that are -75% in this way?


2. Scroll down to “Daily” and note each pair with a positive correlation of 75% or greater (I am currently monitoring 25 pairs, which is very easy to do using the indicator mentioned below).

3. Open 5M charts on your MT4 platform for all the pairs selected in the steps above. Place the “Stochastic Different Pairs 1.4b” indicator on each of the charts.

4. When a 5M bar (candle, whatever) closes above 80% differential sell the pair that is high, buy the pair that is low
  • #1,785
  • Jan 28, 2011 9:56pm Jan 28, 2011 9:56pm
Dreamliner,

you have to edit the text on each indicator, I had to make it big like 25 font then go back in and change it to 15. Then you can save template and reload it and they will all be there
  • #1,786
  • Edited 10:11pm Jan 28, 2011 10:00pm | Edited 10:11pm
I am doing that. When I edit the text on the top indicator the text on the bottom goes away. So then I edit the text on the bottom indicator and the top text goes away. I can switch back and forth like this all day long and the text keeps going away

OK I think I have it figured out now, it works somehow

Quoting scali71
Dreamliner,

you have to edit the text on each indicator, I had to make it big like 25 font then go back in and change it to 15. Then you can save template and reload it and they will all be there
  • #1,787
  • Jan 28, 2011 10:01pm Jan 28, 2011 10:01pm
Quoting scali71
eurcad eurusd have a Correlation D1 of 65.4% so 65% of the time these 2 pairs move in the same direction. If we are going to buy one and sell the other shouldnt we be looking for ones that have a -xx correlation as they trade against each other
No. To my understanding, that is the longer term correlation. For example, say EUR/CAD and EURUSD have a 90% correlation (we would not trade a pair that has a 65% correlation). EUR/CAD goes up 20 pips and EUR/USD goes down 25 pips. But we know that in the longer term, EUR/USD and EUR/CAD go the same was 90% of the time. So we would short EUR/CAD and go long EUR/USD knowing that their is a 90% change EUR/CAD will fall, EUR/USD will rise, or both.

The only suggestion I would like to add is watch out for news and strong trendlines / S&R.
  • #1,788
  • Jan 28, 2011 10:01pm Jan 28, 2011 10:01pm
Quoting scali71
I am looking back at eurcad eurusd from today and each time it went above 80 the high one never dropped in price it went up. The low one went up most times. Am I missing something here?
yes you are right ,i had a great loss just that time
  • #1,789
  • Jan 28, 2011 10:02pm Jan 28, 2011 10:02pm
Quoting Dreamliner
Scott,

Any idea why I can only have 1 instance of the 1.6 indicator which gives the correct big blue/yellow/red text on one chart? If I load the indicator a second time I can either have the top or the bottom currency display the big colorful letters but not both. See chart...
Try closing Mt4 and reopen.
  • #1,790
  • Jan 28, 2011 10:05pm Jan 28, 2011 10:05pm
from investopedia

A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

so i think if you trade positive they will move sam direction whatever % is assigned to them. If you are selling high and buying low I beleieve you want to use negative correlative pairs
  • #1,791
  • Jan 28, 2011 10:12pm Jan 28, 2011 10:12pm
Quoting Blackeagle
Trading just before high impact currency specific news would be less desirable with this method especially if the currency exists only on one side of the correlated pairs.

What I mean is if EURUSD and EURCAD are correlated positively at desired level and the upcoming news would have a high impact on EUR specifically (mainly economic news, it is really difficult to predict the impact of geopolitical news in terms of timing), then the trade can be executed if all entry conditions are met. But if the news is related only to CAD, then I would suggest...
I completely agree with you. Today, the possitive GDP report favored the USD. The debacle in Egypt favored the USD a lot and weaked the EUR a lot. So the USD got a lot stronger, the CAD was just about even and the EUR got a lot weaker. That is why it was a bad idea to trade the EUR/USD and EUR/CAD correlation yesterday.

The great thing about this system is that it used a 1-min. --> 5 min. time frame so you have a much lower probability of having an open trade when a random economic event occurs that only affects one currency.
  • #1,792
  • Jan 28, 2011 10:13pm Jan 28, 2011 10:13pm
Quoting Pip Chaser
L - eurusd
s - usdchf
d > 70%

Post #1669 This is a neg corr pair and one was short and one was long
  • #1,793
  • Jan 28, 2011 10:15pm Jan 28, 2011 10:15pm
Scali if you use negative correlated pairs you are doubling your risk and making your trades 100 percent directional. We are hedging, not directional trading.

Study how EUR/USD and USD/CHF move together. If you go long EUR/USD and short USD/CHF you are trading in one direction, you are not hedging, you are doing the opposite of hedging. You might as well just trade EUR/USD long.

If you trade negatively correlated pairs you are doubling your risk and doubling your reward, which is fine if you have the kahoonas to trade that way.

Quoting scali71
from investopedia

A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

so i think if you trade positive they will move sam direction whatever % is assigned to them. If you are selling high and buying low I beleieve you want to use negative correlative pairs
  • #1,794
  • Jan 28, 2011 10:16pm Jan 28, 2011 10:16pm
Look at any 2 pairs from today that are + correlative and when it went above 80 the majority of the time moved the same direction. You are lucky if you break even doing it that way. Look at any 2 pairs that are _ correlative and they move in opposite directions the majority of the time which allows the short and buy hedge to win
  • #1,795
  • Jan 28, 2011 10:19pm Jan 28, 2011 10:19pm
OK my friend, you win; you trade negative correlated pairs and report back to us your results. How does that sound? That will be a good way to compare, some of us trading negatively correlated and others positively correlated.

P.S. for any newbies, please expect HUGE drawdown trading negatively correlated pairs.

Quoting scali71
Look at any 2 pairs from today that are + correlative and when it went above 80 the majority of the time moved the same direction. You are lucky if you break even doing it that way. Look at any 2 pairs that are _ correlative and they move in opposite directions the majority of the time which allows the short and buy hedge to win
  • #1,796
  • Jan 28, 2011 10:19pm Jan 28, 2011 10:19pm
EURUSD USDCHF are negative -28.8 on daily correlation as well so the short and long would work


Quoting Dreamliner
Scali if you use negative correlated pairs you are doubling your risk and making your trades 100 percent directional. We are hedging, not directional trading.

Study how EUR/USD and USD/CHF move together. If you go long EUR/USD and short USD/CHF you are trading in one direction, you are not hedging, you are doing the opposite of hedging. You might as well just trade EUR/USD long.

If you trade negatively correlated pairs you are doubling your risk and doubling your reward, which is fine if you have the kahoonas to trade that way.
  • #1,797
  • Jan 28, 2011 10:20pm Jan 28, 2011 10:20pm
Quoting scali71
from investopedia

A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

so i think if you trade positive they will move sam direction whatever % is assigned to them. If you are selling high and buying low I beleieve you want to use negative correlative pairs
That is true, but assuming we use daily or hourly correlation (which I believe we do), the two pairs will move the same direction 90% of the time. Think of it this way. Lets say EUR/USD and EUR/CAD have an hourly correlation of 90%. 5 minutes into the start of a new hourly candle, EUR/USD is down 20 pips and EUR/CAD is up 25 pips. Their is a very high probability that the two will close in the same direction, which means that EUR/USD would have to go up, EUR/CAD would have to go down, or both. In which case, we would buy EUR/USD and short EUR/CAD. That is the simple way of looking at it. Obviously it gets more complicated but those are the basics.

In short, just because a pair has a high correlation on the higher time frames doesn't mean it has the same correlation on the low time frame.
  • #1,798
  • Jan 28, 2011 10:20pm Jan 28, 2011 10:20pm
Quoting scali71
from investopedia

A correlation of +1 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -1 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

so i think if you trade positive they will move sam direction whatever % is assigned to them. If you are selling high and buying low I beleieve you want to use negative correlative pairs
If you want to profit from imbalances in regards to negatively correlated pairs by hedging, normally you need to do the same operation for both pairs such as buying both EURUSD and USDCHF. In that case, while EURUSD goes up, for example, USDCHF goes down and if EURUSD goes up more or USDCHF moves down more or vice versa, then you profit.

With this strategy, you are doing opposite transactions, one buy and one sell, based on stoch which tells you one of the positively correlated pairs that should move in the same direction is overbought and the other one is oversold and the strategy assumes that this imbalance will lessen after you open the position and while it lessens, you will profit.

Hope this helps.
  • #1,799
  • Jan 28, 2011 10:22pm Jan 28, 2011 10:22pm
Dreamliner, not trying to get in a pissing contest here. Just trying to wrap my hands around it and the pair you said to compare is a negative daily pair. I am just trying to understand and make money like everyone else
  • #1,800
  • Jan 28, 2011 10:26pm Jan 28, 2011 10:26pm
Quoting scali71
Dreamliner, not trying to get in a pissing contest here. Just trying to wrap my hands around it and the pair you said to compare is a negative daily pair. I am just trying to understand and make money like everyone else
Just understand long term correlation does not mean short term correlation and you should be good to go.
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