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Hedge and Correlation Strategy

  • #1,861
  • Jan 30, 2011 9:32am Jan 30, 2011 9:32am
Quoting 41413592
sir thanks for your reply! just one question,if i trade in M1 which timeframe's correlation should i watch?M1 or M5 or bigger?by the way i lost 72pips in eurusd and usd cad,and -21.9 is in which timeframe?
EUR/USD and USD/CAD have a bad correlation in general. Their daily correlation (according to the indicator) is -21.9 so you should not have traded that pair. You only trade pairs that have a 75+ (or 80+) correlation. On the other hand, EUR/USD and EUR/CAD have a correlation of 79.4 so you should have traded that.

If you are trading the 1-min. time frame, the Stochastic 1.6b indicator should also be 1-min. If you are trading the 5-min. time frame, the Stochastic 1.6b indicator should be on the 5-min. time frame. (The 5-min. seems to be working the best for me)

I will say this once again because I have seen this lead to huge losses, watch out for major news releases and/or major trend lines being broken.
  • #1,862
  • Jan 30, 2011 9:42am Jan 30, 2011 9:42am
I live just south of Medina, but travel to NY and London every week.

Thanks for the chart indicator.

Quoting dryclean
DL I live in CLeveland..... what's up coming here is this your home?


ps here is a overlayline indi for your enjoyment
  • #1,863
  • Jan 30, 2011 10:08am Jan 30, 2011 10:08am
I just want to post a couple of screen shot of what I will be doing. Both of the screen shot are the correlation of NZD/JPY and NZD/USD on the 5-min. time frame. I will be placing my trades on USD/JPY so to make things simple, I just have a USD/JPY 5-min chart showing the correlation between NZD/JPY and NZD/USD. In the first and second screenshot, I would have bought USD/JPY when the 5-min correlation reached 80% and sold when it reached 20%. Both would have reached a profit.

I have looked through each pair that the correlation table shows and have chosen out 5 correlation pairs that I will trade, I suggest you do the same each week. On some pairs, this system perfectly picks out the highs and the lows and on other pairs, it does not work at all.

If you want, I will post more screenshots of other trades.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: USDJPY 1.jpg Size: 302 KB
Click to Enlarge Name: USDJPY 2.jpg Size: 301 KB
  • #1,864
  • Jan 30, 2011 10:16am Jan 30, 2011 10:16am
This sounds great Kowalczyk, please let us know your results as you trade.

Quoting Kowalczyk
I just want to post a couple of screen shot of what I will be doing....
  • #1,865
  • Jan 30, 2011 10:20am Jan 30, 2011 10:20am
Quoting dryclean
DL I live in CLeveland..... what's up coming here is this your home?


ps here is a overlayline indi for your enjoyment
DC,

Any idea why the overlay indicator shows a large price divergence at the green vertical line when the stoch difference is < 5? The chart is EURUSD vs. GBPUSD.

PC
Attached Image (click to enlarge)
Click to Enlarge Name: eurusd vs gpbusd.gif Size: 21 KB
  • #1,866
  • Jan 30, 2011 10:23am Jan 30, 2011 10:23am
Quoting Pip Chaser
DC,

Any idea why the overlay indicator shows a large price divergence at the green vertical line when the stoch difference is < 5? The chart is EURUSD vs. GBPUSD.

PC

Look at the actual currency pairs. I would bet that there is not as big a move on one of those currencies, due to scaling of one chart on the other. And you have one of them mirrored when they are not opposites
  • #1,867
  • Jan 30, 2011 10:36am Jan 30, 2011 10:36am
Quoting smjones
Look at the actual currency pairs. I would bet that there is not as big a move on one of those currencies, due to scaling of one chart on the other. And you have one of them mirrored when they are not opposites

Thanks Scott. The mirroring set to false corrected the problem. Any idea how to extend the look back period for the overlay indicator? I cycled through all the time frames. Maybe it's because the market is closed?
Attached Image (click to enlarge)
Click to Enlarge Name: eurusd vs gpbusd.gif Size: 22 KB
  • #1,868
  • Jan 30, 2011 10:55am Jan 30, 2011 10:55am
It only goes as far back as you see here. It is a exe file I found somewhere can not edit code. I was using it on the pair divergence thread
  • #1,869
  • Jan 30, 2011 10:58am Jan 30, 2011 10:58am
Quoting Dreamliner
I live just south of Medina, but travel to NY and London every week.

Thanks for the chart indicator.
I hang out in Hudson and Mayfield Hts......small world

ps. Now if I can get this going I will be able to buy yoou a beer for sure
  • #1,870
  • Jan 30, 2011 12:11pm Jan 30, 2011 12:11pm
Quoting Pip Chaser
Any idea how to extend the look back period for the overlay indicator? I cycled through all the time frames. Maybe it's because the market is closed?

Run the mt4_ticker posted earlier by Steve here. (thanks Steve!)
This will simulate incoming ticks to mt4 and "kick" the EAs and indicators attached to any charts when market is closed.
When scrolling back with the overlay indi, it needs ticking to update.

Sq
  • #1,871
  • Jan 30, 2011 12:58pm Jan 30, 2011 12:58pm
Subscribed.

This is an awesome thread--thanks to DL, Scott et al for their contributions!
  • #1,872
  • Jan 30, 2011 1:02pm Jan 30, 2011 1:02pm
Quoting zznbrm
Be careful looking at the past on the lower timeframes (like M1). Any missing bars (very common with M1 data) will skew all previous calculations.

The explanation is rather technical. But, for example, bar #500 on the EURUSD M1 chart does not necessarily have the same open time as bar #500 on the EURCAD M1 chart. They are very likely out-of-sync with each other due to missing bars. So, when you put the Stochasticdifferentpairs indicator on your EURUSD chart, the historical calculations for EURCAD may be incorrect, depending on the number of missing...
I trade on the 5-min chart so I don't think that thats a problem but thanks anyways.
  • #1,873
  • Jan 30, 2011 1:06pm Jan 30, 2011 1:06pm
Quoting Caillou
I want to say THANKS a lot to Dreamliner (the creator of the system), Scott (the creator of indicators) and Spud (without him and his idea of Mimic Price Stochastic 100, 1, 1 , this thread will not have been rebirth).
Quoting Caillou

About Negative Correlated Pairs, I think it worth to be tested. How Stochastic reacts when Diff > 80% : did they converge quicker with positive correlated pairs or with negative correlated pairs? A backtest would be easy..... I will do it later.....



I would like to say thank you very much to all of you for the hard work that you're putting into this thread.

I cannot agree more with Dreamliner about how dangerous it is to trade negative correlated pairs this way. You can blow your account in no time if you are not careful. But, I think there is a solution that I am going to try starting tonight. EURUSD and USDCHF futures contracts are POSITIVELY Correlated at about +56 with USDCHF contract on top. If the difference goes up to about +80 I'll sell USDCHF and buy EURUSD.
  • #1,874
  • Jan 30, 2011 1:12pm Jan 30, 2011 1:12pm
Quoting smjones
I found a possible bug in the global variable sets that I have fixed in this version 1.6b

BTW:

If anyone wants it, here is my version of Tradeable Correlations with the Stochastics added.
You can set the time frame of the sto independent of the chart that the table is running on.
You can set it to only show pairs that meet both the correlation criteria and the Stochastic criteria, using...
All we need now is the spread. Please.
  • #1,875
  • Jan 30, 2011 2:03pm Jan 30, 2011 2:03pm
After some more extensive backtests, this is what I have found (maybe I´m wrong of course):

1.- Timeframe: I´m going to trade just M5, in M1 the resulting pips movement is so short that lots of time profit is erased by the spread. M15 could be good too but a diff above 80% is not frequent.

2.-Correlation: Trading negative correlated pairs could give us good profits but sometimes the DD could be big and very important too, extremely long. So I will trade only positive correlated pairs.

3.- Entry: A Diff above 80% might be the most profitable entry.

4.- Exit: I have tested 50%, 20%, Stochastic cross and even a diff 20% in opposite direction. For me (just an opinion) the Stochastic cross shows the best balance between safety and profitability.

Next week I will try to trade live (very small size) all pairs according the "Tradable Correlation" Dashboard by Scott.

I think this system could be very robust and profitable, we only have to optimize the variable settings.......

Thanks again to Dreamliner, Scott, Roundrock and everyone who invest their time and sometimes their money to improve this strategy.
  • #1,876
  • Jan 30, 2011 2:03pm Jan 30, 2011 2:03pm
Quoting Kowalczyk
I just want to post a couple of screen shot of what I will be doing. Both of the screen shot are the correlation of NZD/JPY and NZD/USD on the 5-min. time frame. I will be placing my trades on USD/JPY so to make things simple, I just have a USD/JPY 5-min chart showing the correlation between NZD/JPY and NZD/USD. In the first and second screenshot, I would have bought USD/JPY when the 5-min correlation reached 80% and sold when it reached 20%. Both would have reached a profit.

I have looked through each pair that the correlation table shows and...
This is a very good way to play the strat. Ive been doing something very similar. Essentially, I want to ensure that Im only trading the majors..Cable, Euro, USD/JPY, Aussie, Loonie and Swissy. These will be the only pairs I will actually trade and will wait for the correct correlations/Stoch Diffs to line up
  • #1,877
  • Jan 30, 2011 2:09pm Jan 30, 2011 2:09pm
So far as per Oanda, EU High 1.3614 and Low 1.3575.

It will be a few hours before seeing real spreads show on Oanda.

Hopefully we will see how all the spreads are on the pairs were discussing.
  • #1,878
  • Jan 30, 2011 2:31pm Jan 30, 2011 2:31pm
L - eurusd
S - euraud
D > 70%
5M
Attached Image (click to enlarge)
Click to Enlarge Name: eurusd vs euraud.gif Size: 23 KB
  • #1,879
  • Jan 30, 2011 2:35pm Jan 30, 2011 2:35pm
There he goes again, chasing pips ...

Hey, where are you located? My IBFX demos have not woken up from their weekend hibernation yet to give any signals.

Quoting Pip Chaser
L - eurusd
S - euraud
D > 70%
5M
  • #1,880
  • Jan 30, 2011 2:37pm Jan 30, 2011 2:37pm
Excellent thoughts here Caillou, well done!

Quoting Caillou
After some more extensive backtests, this is what I have found (maybe I´m wrong of course):

1.- Timeframe: I´m going to trade just M5, in M1 the resulting pips movement is so short that lots of time profit is erased by the spread. M15 could be good too but a diff above 80% is not frequent.

2.-Correlation: Trading negative correlated pairs could give us good profits but sometimes the DD could be big and very important too, extremely long. So I will trade only positive correlated pairs.

3.- Entry: A Diff above 80% might...
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