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Hedge and Correlation Strategy

  • #2,981
  • Mar 16, 2011 5:03am Mar 16, 2011 5:03am
Quoting Indrek
Firstly, it is all about how you manage your trades. For example, a 2-pair hedge can be paused with the help of third pair any time and continued when market changes. When trading EU and GU, and they both move to "wrong" direction longer term, you can always enter one more trade on EG to fix the situation and come out of the situation later.
It is pure brain work and play with the theory of probability. It is very, very far from mechanical trading, especially using EAs.
Using hedging means that you do not use too big lots and you are ready...
My idea is to let the EA to do the work. If is a a built method, then you always can present it within an EA.

Averaging is a good but a very dangerous way to reduce your looses.
  • #2,982
  • Mar 16, 2011 5:14am Mar 16, 2011 5:14am
Quoting hblekot
You do not trade EURGBP but the difference in speed EUR and GBP change against dollar.

Gap size in pips between EURUSD and GBPUSD does not matter.

Correlation between EURUSD and GBPUSD means more less that when EUR rise 1% against dollar GBP should do the same. When EURUSD and GBPUSD will rise day after day 1% - the gap in pips will be growing because of the difference in volatility but there will be no difference in the speed of growth.

But when EURUSD rise 1% and GBPUSD only 0.5% - there is a gap in speed. You should sell overperforming...
Hi,

I can not understand your idea: you can trade EURUSD+GBPUSD, but you can't tarde GBPUSD+GBPJPY. What is the difference..?
  • #2,983
  • Mar 16, 2011 5:17am Mar 16, 2011 5:17am
Quoting Indrek
Firstly, it is all about how you manage your trades. .
I have been trading this strategy on demo for 7 weeks and live for 3. Not a huge amount of time but I'd like to throw in my 2 pence.

I don't agree that it is impossible to lose that much. It always possible to lose. But I strongly agree that with careful management and a cool head one can get out of most (not all) situations. Since trading this I had two occasions where my floating DD became very dangerously high. Both of these were my fault. The first was unexpected news and the second was two nights ago when I left the EA active overnight during the Asian session. Stupidity and greed. In both cases, using averaging and patience I managed to exit with a small loss covered by the previous week or two of profits.

Like every other FX strategy, it is not purely mechanical and is subject to losses. But we have to manage the trades.

It is very possible that a gap occures and does not come back for a long time. But there is a good probability that the gap will narrow or close at some point. This were entering again at the right time is key, and maybe a third time. So far I have used a maximum of three levels a few times and it made recovery easier. Was it possible it could have gone horribly wrong? Yes.


My lessons for this:
-this is not set-and-forget
-I need to be available to manage the trades if it goes wrong so no EA overnight or when I'm away
-DO NOT PANIC
-be prepared to take managed losses
  • #2,984
  • Mar 16, 2011 5:45am Mar 16, 2011 5:45am
Quoting josch
hblekot,

if you're using correlating triple pairs, you always have risk on the non-identical currency-pair. Don't understand your last sentence - may you explain this a bit more? - Thank you.

josch
The idea of correlation - for example between EURUSD and GBPUSD is that they react the same way against the dollar- that is the value of the dollar in both pairs should be the same. When one rise against the dollar 1% and the other do not- there is divergence you trade on. You will profit when both pairs come again into correlation - and your profit can be made on EUR or GBP side of your trade.


You can of course trade on GBPUSD and GBPJPY - but what you trade is that value of USDJPY will not change.
You will profit only when USPJPY do not really change or when you will be on the right side of the USDJPY move. Your position is not really hedged.

Look what happen with GPBUSD and GPBAUD lately -as someone mentioned it there was a big drawdown on trade on this correlation -it happen because of the massive drop in AUDUSD.

But trading for example GBPUSD against AUDUSD was profitable - of course with proper mm .

Trading on triple pairs just create a lot of risk. You have more possible trade setups - but with sudden drop or rise like in AUDUSD you will suffer a big loss.
  • #2,985
  • Mar 16, 2011 10:13am Mar 16, 2011 10:13am
Quoting vismut
________________
XFD, good advise avoid GBPJPY of trading pairs.
pls., could u b so kind to attach indicators u use (i couldn't find the latest versions among the earlier posts.

Thank U in advanse & lucky tradings!
Hi Vismut

In addition to the EA I only use one indicator, "stochastic diff pairs 1.5b" which isnt the lastest version but works fine for me. You can find this within the thread attachments (page 5).

I have charts open for around a dozen correlations (mix of quads & triplets) but I only apply the EA to those showing correlation above 75%. I check the Mataf site at least weekly to see if I need to watch any other correlations.

I turn it off EA 15 minutes before medium/high impact news until 15 minutes after. I watch all trades in case they dont close properly.

This week has been ok for me so far, 4 out of 5 wins, +46 pips. Max drawdown was again around 60 pips (it was on the losing trade which ended as -10 pips). Perhaps we should start using a stop loss to avoid heavy DD situations eg Roundrock's GA-GU trade. How heavy DD are we talking Roundrock?

Would it make sense to apply a SL of around 70 pips (combined) to avoid those dangerous scenarios where a pair just keeps on going and going? So far in my 4 weeks I dont believe any of my trades have exceeded 70 pips DD, but I didn't monitor DD on every single trade.
  • #2,986
  • Mar 16, 2011 12:06pm Mar 16, 2011 12:06pm
Quoting Zr-fx
My lessons for this:
-this is not set-and-forget
-I need to be available to manage the trades if it goes wrong so no EA overnight or when I'm away
-DO NOT PANIC
-be prepared to take managed losses
Trading is a job for me. It may be sometimes hard and often it is boring but it is just a job.
Dreaming about easy solutions for earning big money quickly is not serious approach to what forex really is.
But hedge trades in fact are set-and-forget style as long as you do not use too big lots.
  • #2,987
  • Mar 16, 2011 12:09pm Mar 16, 2011 12:09pm
Quoting Xfd
Would it make sense to apply a SL of around 70 pips (combined) to avoid those dangerous scenarios where a pair just keeps on going and going? So far in my 4 weeks I dont believe any of my trades have exceeded 70 pips DD, but I didn't monitor DD on every single trade.
From my experience, it is not a good idea. Besides, 70 pip SL is tiny. Trade smaller lots if you cannot survive some 100-200 pip drawdown if needed.
Remember that at the time you have a huge drawdown you possibly take many other trades that give profit. So, overall you have all chances to be above breakeven even when some trades are in deep minus.

EDIT: I am not saying that this system causes 100-200 pip DD. What I am saying is that it is best to have a reasonable free buffer on your account that would allow not to care about DD and sleep well every night, whatever is happening to your open trades.
  • #2,988
  • Mar 16, 2011 1:23pm Mar 16, 2011 1:23pm
Quoting Xfd
Hi Vismut

This week has been ok for me so far, 4 out of 5 wins, +46 pips. Max drawdown was again around 60 pips (it was on the losing trade which ended as -10 pips). Perhaps we should start using a stop loss to avoid heavy DD situations eg Roundrock's GA-GU trade. How heavy DD are we talking Roundrock?
Instead of GA-GU trade - trade EURAUD-GBPAUD and stay neutral to aussie

Instead GBPUSD-GBPJPY - trade EURJPY-GBPJPY and stay neutral to yen.

That should limit the drawdown to some reasonable size.

Otherwise - with triple correlation you are exposed to extreme change in non hedged pair - like now in yen or aussie
  • #2,989
  • Mar 17, 2011 2:18am Mar 17, 2011 2:18am
based on recent japan meltdown, i changed my entry criteria

1. selection of pairs is the KEY. I check these conditions before i pick the pairs, i do this every day morning

a. corelation must be above 80. check mataf for confirmation
b. check the sto diff movement history for last 3-5 days, use Stochastic different pairs 1.7b indi for this. if the movement is within 10-80, then its good. if it exceeds 80 and stays there for long time or hitting 80 too frequently, its nit good. also if it hts 80 and drops down quickly its good
c. remove crazy pairs like gbpjpy, nzdjpy, gbpchf, eurchf, gbpaud...
d. i prefer tripltes only. but u can try quads too with above rules

2. once u select pairs, next is entry criteria. i use different sto diff for diff pairs. based on movement history it could be 80, 85 90.

3. i add only once. if the combined DD goes to 30 pips, then i add another equal lot

4. lotsize is crucial. chose conservatively

5. stoploss is MUST. put some number. but put always. i prefer 80 pips (combined for both lots)

6. exit is by sto diff 15 or combined pips 15
  • #2,990
  • Mar 17, 2011 8:20am Mar 17, 2011 8:20am
Quoting hblekot
The idea of correlation - for example between EURUSD and GBPUSD is that they react the same way against the dollar- that is the value of the dollar in both pairs should be the same. When one rise against the dollar 1% and the other do not- there is divergence you trade on. You will profit when both pairs come again into correlation - and your profit can be made on EUR or GBP side of your trade. ...
hblekot,

I fully agree with your statement. But - trading (forex or any other item) never is a one-way to profit only. As mentioned earlier in this thread, there is a concept behind trading those correlations, that the economies of those pairs are similar in many, not all points. So if the correlation last 50 days was given, there will be a possibly high probability, this will last next days.

There are coming up surprising market data, changed values? - Trader has to be aware of and manage it. This -may be the losses- is cost of business.

josch
trading is war - life is simple
  • #2,991
  • Mar 17, 2011 11:29am Mar 17, 2011 11:29am
Quoting roundrock
based on recent japan meltdown, i changed my entry criteria .....
roundrock,

nice to hear of your valuable information. I am not using very strict rules, partly as you. But I am wondering if the R/R of 15 PIPs (or covering at 15% stoch) and a SL of about 80 (which should happen not very often) will let you have a satisfying result below the line. May be you have some stat numbers?

josch
trading is war - life is simple
  • #2,992
  • Edited 2:40pm Mar 17, 2011 1:20pm | Edited 2:40pm
Have any body used corelation indicator 1.8 and stoc. indicator 1.7b in demo and live platform? I get different readings between them for stoc difference and corelation number.

Note : I just noticed that the stochastic indi reads the stochastic value of the pair where it is loaded but not able to read the value from other pair.

Example : I loaded this indi in aud/usd chart. The indi reads the value from audusd chart. If the indi is for audusd/audjpy, then it is not able to read from other pair ( audjpy)

So, the indi reads the stocastic value from first pair and not reading from second pair. The indi shows 74; 0.00; 74.

That is why the difference. But i dunno why the indi is not able to read the stoc value from audjpy chart .
Intraday only.
  • #2,993
  • Mar 17, 2011 7:19pm Mar 17, 2011 7:19pm
Quoting navk
Have any body used corelation indicator 1.8 and stoc. indicator 1.7b in demo and live platform? I get different readings between them for stoc difference and corelation number.

Note : I just noticed that the stochastic indi reads the stochastic value of the pair where it is loaded but not able to read the value from other pair.

Example : I loaded this indi in aud/usd chart. The indi reads the value from audusd chart. If the indi is for audusd/audjpy, then it is not able to read from other pair ( audjpy)

So, the indi reads the stocastic value...
The problem solved. I uninstalled MT4 demo and reinstalled again for live a/c. It is ok and indicators and EA s work perfect.

I will again go to demo untill japan volatility is over.
Intraday only.
  • #2,994
  • Mar 17, 2011 8:17pm Mar 17, 2011 8:17pm
Quoting Indrek
From my experience, it is not a good idea. Besides, 70 pip SL is tiny. Trade smaller lots if you cannot survive some 100-200 pip drawdown if needed.
Remember that at the time you have a huge drawdown you possibly take many other trades that give profit. So, overall you have all chances to be above breakeven even when some trades are in deep minus....
I understand your idea, BUT if your TP = 10 pips, and you have an open basket with DD= 150 pips, for example, and even you have more 10 profits basket, then you are still LOOSING!!!. This loosing basket can go on to -200 pips loose, and then..

Look at my shots I attached 2 pages back.
  • #2,995
  • Mar 17, 2011 8:36pm Mar 17, 2011 8:36pm
Quoting crossy
I understand your idea, BUT if your TP = 10 pips, and you have an open basket with DD= 150 pips, for example, and even you have more 10 profits basket, then you are still LOOSING!!!. This loosing basket can go on to -200 pips loose, and then..

Look at my shots I attached 2 pages back.
As round rock said, look at stocastic indicator and trade on currencies which have less volatility. Pair selection and corelation number are most important in addtion to lot size.
Intraday only.
  • #2,996
  • Mar 18, 2011 3:06am Mar 18, 2011 3:06am
Hi Dreamliner,

I discovered this thread some days ago and started reading it with a lot of enthusiasm, such as a gripping book!
Now that the "end" is reached, I'm disappointed by your disappearance, here.
As well as all the historical people who contributed to its success.

I think this strategy and this thread is actually one of the best ever. It still diserve to be kept alive, and the presence of its "founder".

Maybe you think that all have been said, about it? I don't know.
My experience about "hedging" is that it's a great thing.
Its only weak point -like all trading strategies, but differently, here- is the risk management. Ie: we can't use stop loss, like any other technique.
I ask a question to everybody here: how do you face this key point -risk?

Especially these days, I'm sure everybody noted strong "volatility" on some currencies like YEN or others. It's really hard to cope with possible losses....
Of course it's really important a more selective entry, but we must be prepared to face all possible strong negative situations.

Thank you for your attention
  • #2,997
  • Mar 18, 2011 7:19am Mar 18, 2011 7:19am
Quoting crossy
I understand your idea, BUT if your TP = 10 pips, and you have an open basket with DD= 150 pips, for example, and even you have more 10 profits basket, then you are still LOOSING!!!. This loosing basket can go on to -200 pips loose, and then..

Look at my shots I attached 2 pages back.
When trading at serious level (full-time) then it is obvious that you diversify risks.
I never hedge too many positions and I always trade different systems at the same time. And I never open any trades for getting just 10 pips.
Current drawdown of one part of your open trades should not be important or worrying, otherwise you are overtrading, or your money management is just too bad, or your account is far too small.
  • #2,998
  • Mar 18, 2011 8:32am Mar 18, 2011 8:32am
Hello Jack-fx,

I have by no means disappeared, am still here and still trading this system with success. However, the thread has taken a turn which I do not like. People have begun posting all about the EA. I absolutely detest EA's and believe they are the blight of Forex Trading. So I simply don't join in on that discussion.

Have a great day.

Quoting jack-fx
Hi Dreamliner,

I discovered this thread some days ago and started reading it with a lot of enthusiasm, such as a gripping book!
Now that the "end" is reached, I'm disappointed by your disappearance, here.
As well as all the historical people who contributed to its success.

I think this strategy and this thread is actually one of the best ever. It still diserve to be kept alive, and the presence of its "founder".

Maybe you think that all have been said, about it? I don't know.
My experience about "hedging" is that it's a great thing.
Its...
  • #2,999
  • Mar 18, 2011 8:42am Mar 18, 2011 8:42am
Quoting Dreamliner
I absolutely detest EA's and believe they are the blight of Forex Trading.
Well said, I fully agree!
  • #3,000
  • Edited 11:10am Mar 18, 2011 9:34am | Edited 11:10am
Quoting Dreamliner
Hello Jack-fx,

I have by no means disappeared, am still here and still trading this system with success. However, the thread has taken a turn which I do not like. People have begun posting all about the EA. I absolutely detest EA's and believe they are the blight of Forex Trading. So I simply don't join in on that discussion.

Have a great day.
I second that. I have been studying Dreamliners method for some time now. I have been reading and re-reading all of his and other contributors posts (esp smjones) to get the clearest understanding possible. I stopped reading newer posts once the focus turned to EA's. I just keep going over Dreamliners strategy from page 100 onward. (I am not knocking the EA people; although they shud have started their own thread...its just that I have no interest in EA's period).

Dreamliner...if you are reading this post, I have a question. I note that you often warn against trading negative correlations. Could you explain in more detail why this is so? I don't understand why the risks (drawdowns) should be any greater than trading positive correlations. Since all the discussions have been about positive correlations only, I'm not even sure if the same indicator rules (entries and exits) would apply to neg correlations. I read somewhere that negative correlated pairs should both be shorted. Is this true? How would one use smjones indicator for negative correlations?

I am not fishing just to "hear something that I want to hear". If you still insist that its a bad idea to trade negative correlations then I wil just put the idea to rest. I welcome anyone's ideas.

I was disappointed when you were not heard from for so long. I wanted to PM you about your strategy but being a new member I do not have that privlege. Perhaps you can start another thread to continue discussions on your non-EA strategy. Please PM me if you should ever decide start it up again so I can follow along (or you can post any new location here in this thread for all to see...its your thread anyway!).

Thanks
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