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Hedge and Correlation Strategy

  • #2,681
  • Feb 15, 2011 7:06am Feb 15, 2011 7:06am
This is actually close to Nanningbob's Sixths Lines countertrend trading method.
NNB's method is based on the assumption that price should come back to its median line when it gets really far away.
Steve Hopwood has developped an EA for this method (TOB : "The Old Beast").
It works well with ranging pairs, but when a trend develops you can get in pretty bad DD.

Our 2-correlated-Pairs baskets are supposed to be much more "stable" than individual pairs, and we can clearly see that from the Profit Basket indicator, where the profit line goes up and down very slowly compared to regular pairs movements.

So, if we would be using "TOB" / Sixths method on these baskets, we should be in much better situations, don't you think so ?

We should give it a try...

That would require to adapt TOB to use the Basket instead of an individual pair.

Steve, any thoughts on this ?

Sq
  • #2,682
  • Feb 15, 2011 7:13am Feb 15, 2011 7:13am
SQ,

Just reading it. Thanks a lot for the indicator.

Will come back to you if i have questions.

In fact i was trading manually with your basket profit indicator for the last two days with great success. I was buying the basket when basket profit is at bottom and selling the basket when basket profit was on top.

Ths revised ones will give a new edge.
Intraday only.
  • #2,683
  • Feb 15, 2011 7:27am Feb 15, 2011 7:27am
SQ,

Would you suggest entry at > st. dev 2 or around 2?

Exit around SMA line ?
Intraday only.
  • #2,684
  • Feb 15, 2011 7:36am Feb 15, 2011 7:36am
Quoting squalou
Yes Roundrock, trading correlated pairs like this shows better potential, but that would be on higher timeframes / longer term.

So I coded the SMA and StdDev lines into the Basket Profit indicator, to see if that would give an edge.
It plots the SMA(100) line on top of the Profit Basket line, and calcs the stddev of the Profit-line-to-SMA difference.
Similar as Bollinger Bands, except that we don't use the same amount of periods for the SMA and the StdDev:
we want a short-term SMA to stay close enough to the price line, but we want to use the...
Hi Sq,

Pls bear with me if I've got this wrong. The Profit line is a function of a buy and sell taken at a specific point in time. Over the course of the day, this line will fluctuate, and will always reflect basket p/l based on trades entered (buy/sell) at that one point in time.
At what point would you need to reset that point, since logically the profit line becomes increasingly irrelevant as time goes on. Hope this makes sense.

Pardy
  • #2,685
  • Feb 15, 2011 7:51am Feb 15, 2011 7:51am
Quoting Pardy
Hi Sq,

Pls bear with me if I've got this wrong. The Profit line is a function of a buy and sell taken at a specific point in time. Over the course of the day, this line will fluctuate, and will always reflect basket p/l based on trades entered (buy/sell) at that one point in time.
At what point would you need to reset that point, since logically the profit line becomes increasingly irrelevant as time goes on. Hope this makes sense.

Pardy
You can reset the "Point zero" with the blue vertical line called "Basket BE Reference".
If you don't see it on the screen, you'll find it in the "Objects list";
Then just change its date to today for instance, then you can move it with the mouse directly on the screen;
This will reset the basket "0.00" profit line to that point.

You would typically put the "BE reference" line to the bar when you open your trade, so you can follow the profit/DD curve live.

The actual Basket Price level is irrelevant by itself, as we are trading the difference between trade opening and closing points.
It's like trading on any regular Pair : what matters really is the difference in the pair's price, not the price itself (appart from psych price levels of course).

Sq
  • #2,686
  • Feb 15, 2011 7:56am Feb 15, 2011 7:56am
Entered around st. dev. 2 and exit around std.dev.1. euraud/eurusd basket.

Took 18 pips. Could not wait more.
Intraday only.
  • #2,687
  • Feb 15, 2011 8:04am Feb 15, 2011 8:04am
Quoting navk
SQ,

Would you suggest entry at > st. dev 2 or around 2?

Exit around SMA line ?
This has yet to be determined...

StdDev definition tells that price has 95% probability to be between +/-2*SD, and only 68% within +/-1*SD.

So, there is a much better chance of going back into the 2*SD then the 1*SD.
But of course this happens less often (5% prob only to get out of the 2*SD band).

I would suggest to wait for the price line to come back inside the 2*SD band to enter the trade, rather than jumping in right when it is going out.

Just looking at the EU/-GU basket curve now, and you'll see what i mean:

Attached Image (click to enlarge)
Click to Enlarge Name: eu-gu.gif Size: 37 KB


Sq
  • #2,688
  • Feb 15, 2011 8:16am Feb 15, 2011 8:16am
Quoting navk
Entered around st. dev. 2 and exit around std.dev.1. euraud/eurusd basket.

Took 18 pips. Could not wait more.
That is probably a good start.
When the "cat" comes back home, it usually likes to look around in the backyard... unless it is really hungry!

Humm... now i see it going away again!

Like Roundrock said, set a reasonable fixed TP rather than waiting too long.

Sq
  • #2,689
  • Edited 8:34am Feb 15, 2011 8:16am | Edited 8:34am
Hi Sq,

Have dragged the blue reference line to a different point, however the p/l line did not change - could you check that on your chart please.

It might be an idea to add an ext setting to the indicator by way of gmt time, which then plots the p/l from that point. So for example at 0 ( representing midnight gmt) it would start plotting. When it got to a signal, trade is then taken, till it reverts to mean, at which point the line is reset at that point, and we wait for the next extreme.

Regards.

Edit: Apologies, it is working by shifting the scale for p/l.
  • #2,690
  • Feb 15, 2011 8:19am Feb 15, 2011 8:19am
Quoting Pardy
Hi Sq,

Have dragged the blue reference line to a different point, however the p/l line did not change - could you check that on your chart please.

It might be an idea to add an ext setting to the indicator by way of gmt time, which then plots the p/l from that point. So for example at 0 ( representing midnight gmt) it would start plotting. When it got to a signal, trade is then taken, till it reverts to mean, at which point the line is reset at that point, and we wait for the next extreme.

Regards.
It needs an incoming tick to adjust the lines.
You can also simply "refresh" the chart.
I just tried and it works fine.

sq
  • #2,691
  • Feb 15, 2011 8:40am Feb 15, 2011 8:40am
Quoting squalou
This has yet to be determined...

StdDev definition tells that price has 95% probability to be between +/-2*SD, and only 68% within +/-1*SD.

So, there is a much better chance of going back into the 2*SD then the 1*SD.
But of course this happens less often (5% prob only to get out of the 2*SD band).

I would suggest to wait for the price line to come back inside the 2*SD band to enter the trade, rather than jumping in right when it is going out.

Just looking at the EU/-GU basket curve now, and you'll see what i mean:

Attachment ...
I understand.

I have read somewhere, when there is maximum volatility, the price band at the maximum can reach std. dev. 3. Would it be worth to add std. dev. 3 too ?

I am seeing eurcad/eurjpy. If there was std.dev 3, the profit line would have touched std.dev.3.
Intraday only.
  • #2,692
  • Feb 15, 2011 8:47am Feb 15, 2011 8:47am
eurcad/eurjpy chart with basket profit indicator.

The profit line would have touched std.dev.3 if it was there.
Attached Image (click to enlarge)
Click to Enlarge Name: eurcad-eurjpy.gif Size: 40 KB
Intraday only.
  • #2,693
  • Feb 15, 2011 9:07am Feb 15, 2011 9:07am
SQ,

And of cource with all your best efforts, we expect finally EA adding bb inputs.

Entry : +2 or -2.
Exit : +1 or -1 with optional exit by pips.
Intraday only.
  • #2,694
  • Feb 15, 2011 9:29am Feb 15, 2011 9:29am
EU has been loosing against GU in hourly chart. Hence it is worth look for selling opportunities in eu-gu basket using this indi in 5 min TF. so,you will not see DD.
Intraday only.
  • #2,695
  • Feb 15, 2011 10:06am Feb 15, 2011 10:06am
Interesting. I just found this article describing exactly same technique. They suggest to use higher TF to calc st.dev and also use RSI to enter. http://forex.thedaintyarchstudio.com...pairs-trading/
  • #2,696
  • Feb 15, 2011 10:15am Feb 15, 2011 10:15am
Quoting squalou
Yes Roundrock, trading correlated pairs like this shows better potential, but that would be on higher timeframes / longer term.

So I coded the SMA and StdDev lines into the Basket Profit indicator, to see if that would give an edge.
It plots the SMA(100) line on top of the Profit Basket line, and calcs the stddev of the Profit-line-to-SMA difference.
Similar as Bollinger Bands, except that we don't use the same amount of periods for the SMA and the StdDev:
we want a short-term SMA to stay close enough to the price line, but we want to use the...
hi dear squalou, but for now there is not new ea for try this new indicator ?

thank you for all !
  • #2,697
  • Feb 15, 2011 10:42am Feb 15, 2011 10:42am
i have an idea. however need a small Ea for it to test it.

i believe someone with experience can make this in 5 mins or less.

all that is needed is an EA that at every new bar it should open a buy order and a sell order.

i use 5 minute timeframe.

so at every 5 minutes it will open a new buy and a sell order. need nothing to close orders. dont look at candle before or trend going. or whatever. all needed every 5 minute open a buy order and sell order. that is it.

as bonus could be possible to specify correlation pairs in the EA. for example at this moment GBPJPY and GBPUSD of last week are still down a lot. so in Ea i can specify which pairs i want to have those buys and sells every 5 minutes for. but even if that is not possible no problem. i can do by hand.

for the moment i still have those bad trades from last week open and i think using a small EA like this could be part of a solution.

if anybody has some time to spare and could make this simple Ea would be ace.

thanks
  • #2,698
  • Feb 15, 2011 10:58am Feb 15, 2011 10:58am
Quoting trade4fun
i have an idea. however need a small Ea for it to test it.

i believe someone with experience can make this in 5 mins or less.

all that is needed is an EA that at every new bar it should open a buy order and a sell order.

i use 5 minute timeframe.

so at every 5 minutes it will open a new buy and a sell order. need nothing to close orders. dont look at candle before or trend going. or whatever. all needed every 5 minute open a buy order and sell order. that is it.

as bonus could be possible to specify correlation pairs in the EA. for example...
what to buy and what to sell ? how long u do this ? till the combined spread eats 50% equity ?
  • #2,699
  • Feb 15, 2011 3:03pm Feb 15, 2011 3:03pm
i don't understand what could give an egde to trade now the equity with BB's MA's? it is the same then trading the usuall chart with one pair.

don't loose the focus. i give a link from bilbiss the last week, which he shows how divergence happen between correlated pairs of highs and lows. after reviewing some charts this could give an edge.
  • #2,700
  • Feb 15, 2011 3:04pm Feb 15, 2011 3:04pm
Great idea sq, i hope Steve will do this for us. I think this could be a good improvement for this method.


Quoting squalou
This is actually close to Nanningbob's Sixths Lines countertrend trading method.
NNB's method is based on the assumption that price should come back to its median line when it gets really far away.
Steve Hopwood has developped an EA for this method (TOB : "The Old Beast").
It works well with ranging pairs, but when a trend develops you can get in pretty bad DD.

Our 2-correlated-Pairs baskets are supposed to be much more "stable" than individual pairs, and we can clearly see that from the Profit Basket indicator, where the profit...
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