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Hedge and Correlation Strategy

  • #3,141
  • Apr 20, 2011 4:22am Apr 20, 2011 4:22am
Hi,

I've been looking at the trades opened and I'm wondering if the initial DD can be minimized. For example, as we know that pair1 should shorted and pair2 should be bought perhaps we could wait for a top in pair1 and a bottom in pair2 using traditional directional trading.

Or perhaps, looking at the stochastic wait until it retraces.

Does this seem a good idea? Any other toughts?
  • #3,142
  • Apr 21, 2011 3:15am Apr 21, 2011 3:15am
Quoting crossy
I'm happy to hear about your successes on H1 TF.

I will be very thankful to you if you can send the final results and the wide report of your trades for the kast 30 days.

I think that it can be very intersting.

Regards,

Y.
Hi ES Trades.

Maybe you did not saw the quated post - above.

Can you, please.

Y.
  • #3,143
  • Apr 23, 2011 5:13pm Apr 23, 2011 5:13pm
Hello traders!
Here goes my very first post in FF. I have been following this thread for some time now but not regularly of late because drawdown is too much for me. I am a great fan of Bollinger for his bands. Is there anyway Bollinger bands can be employed in this strategy? Let's say when two pairs are well correlated and they go out of sync on any timeframe one touches or nears the upper band and the other touches the lower band, then we should wait for some sort of signal, like some cross of ema's, to short the pair touching upper band and long the pair touching lower band. I know these trades will be very few but on lower time frames we might find some. If we get an indicator like stoch difference pairs which compares the BBands difference on two or more pairs it would become too easy to spot a trade. for entry point i suggest 5*5 MA as used in NannigBob's new trend trading system. I have never tried this thing anywhere Just a thought.
This thread is one great example of a nice collaboration of some talented traders around the globe. I think dreamliner should attend his thread a bit more like it's early days. His idea is a nice one but somehow we are not able to find exact entry points on this correlation strategy. Tell you what it still looks profitable!
Pardon me if you find some mistakes in my English. I am not good at English its not my native language, mine is Urdu I m from Pakistan.
Cheers

Awan.
  • #3,144
  • Edited Apr 24, 2011 7:31am Apr 23, 2011 9:52pm | Edited Apr 24, 2011 7:31am
Quoting sharemaster2
Hi Olu,

Thanks for the responce to my mail, anyway any chance of posting more of this sort of set up chart on here so some of us newbies can follow and learn this strategy properly. As I said before, this, seems to be one of the best systerms so far as you can have a few pairs of trade at the same time.

Thanks
Good-day sharemaster2,
Kindly find below charts of highly negative and highly negative correlated pairs:
NAGATIVE CORRELATED PAIRS:
Attached Image (click to enlarge)
Click to Enlarge Name: NEGATIVE CORRELATED PAIRS 1.png Size: 20 KB


EURUSD USDCAD

Attached Image (click to enlarge)
Click to Enlarge Name: NEGATIVE CORRELATED PAIRS 2.png Size: 28 KB


EURAUD AUDCHF

POSITIVE CORRELATED PAIRS
Attached Image


EURUSD GBPUSD, you can set up for EURUSD, EURCHF

Note that the second setup below the chart is a negative correlated pair EURUSD,USDCHF.

You can read my post on the following tread for further clarification:

http://www.forexfactory.com/showthre...60912&page=206
http://www.forexfactory.com/showthre...60912&page=207
http://www.forexfactory.com/showthre...60912&page=208 - This one is very important.
This is very impotant if you want to trade the three pair hedge strategy.
http://www.forexfactory.com/showthread.php?t=279648
http://www.forexfactory.com/showthre...279648&page=26
http://www.forexfactory.com/showthre...279648&page=27

Please feel free to ask me any question.

Successful Trading
  • #3,145
  • Apr 24, 2011 12:55pm Apr 24, 2011 12:55pm
Quoting roundrock
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...

Hey buddy,
how are you doing ? are these rules working fine ?

thank you & regards
  • #3,146
  • Apr 28, 2011 3:09pm Apr 28, 2011 3:09pm
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.
Hi, I red this thread from the 1st post and after that I totaly agree with you DL.



Good Pips... DL
  • #3,147
  • Edited 7:52am Apr 29, 2011 7:28am | Edited 7:52am
I'd like to give some report on my testing (2 weeks so far).

This week has been good. Average on 2 weeks has been 325pip/week earned (totalling 650 pips now).

There has been some DD of 100 pips closed at B/E or with profit.

It seems that DD can be avoided by simple rules: open trade when stoch diff starts to retrace.

However, when the basket is well balanced DD is limited and I have yet to see it exceeding 150 pips.

This week I implemented some better trade management (mainly trailing stops) but I'm still lacking more advanced features (like averaging down).

I'm considering whether to go live and use real money.

It would be nice to know if anybody is using this method live and would like to share their broker and/or settings, and off-course their success rate.

pvpn
  • #3,148
  • Apr 30, 2011 11:55pm Apr 30, 2011 11:55pm
Quoting pvpn
I'd like to give some report on my testing (2 weeks so far).

This week has been good. Average on 2 weeks has been 325pip/week earned (totalling 650 pips now).

There has been some DD of 100 pips closed at B/E or with profit.

It seems that DD can be avoided by simple rules: open trade when stoch diff starts to retrace.

However, when the basket is well balanced DD is limited and I have yet to see it exceeding 150 pips.

This week I implemented some better trade management (mainly trailing stops) but I'm still lacking more advanced features...
Hi pvpn,

I will appriciate you if you add your trades report for these 2 weeks.

Regards.
  • #3,149
  • May 2, 2011 8:36am May 2, 2011 8:36am
Quoting crossy
Hi pvpn,

I will appriciate you if you add your trades report for these 2 weeks.

Regards.
here you go.

http://www.mt4i.com/users/pvpn-1044

Sure I'll appreciate any comments.
  • #3,150
  • May 5, 2011 3:30am May 5, 2011 3:30am
It seems this thread has exhausted most of it's steam.

Nevertheless, I'd like to report back some of my findings.

In the last few days I introduced more trade management and more rules for opening the trades. I opened some new demo accounts for forward testing (as I lack tick data for most of the exotic pairs).

The results are not so good so far. Sure, most of the DD has been eliminated but I was hoping that better entries would increase the P/L ratio. Instead, I have many trades that close at B/E or close and I'm missing the home-runs that would occasionally pop.

It seems that when a big gain is possible, it's accompanied by a big DD too. That is: To earn 50 pips I have to face a 50-100 pips DD first: Think about a Wave which is bigger. In this conditions, the trade management will often kick-in and after a run of 15-20 pips will close the trade at B/E.

On the contrary, smaller runs (less DD and less profit) still fit properly and hence are cashed back.

The end results is that the strategy becomes less profitable all-round and gets boring most of the time, with 50%+ trades closing at B/E and the others with small gain.

So, a proper way to trade it seems to be the "kamikaze" no-stops one with martingaling, in the faith that the correlation will hold and pairs will come home (eventually)... until the correlation breaks and you loose your account.

In this case a stop-loss in necessary and wise entries would be a must.
I've been trying to imagine a proper way to handle this. My best idea is to start with a small order. if the trade goes the wrong way I would enter 1 or 2 "averaging down" (limited martingaling) and hope for the best.

In the case the correlation holds, the trade will work out properly and will be closed with profit. In the case correlation breaks (a statistically rare but possible outcome) you'll have the stop-loss at a predefined level.

The problem with such a strategy is that normally you'll have small winners and occasionally the huge DD which will close at B/E or (once more) with a small gain. This is because, psychologically after you've run into hundreds of pips in DD, you'll want to close the trade as soon as it shows profit, or you'll reduce exposure as soon as the trade is at B/E and close it at it's normal TP.

I must add that occasions for hedging pairs are becoming very rare. mostly my systems have hit exotics when they de-correlate from the majors (AUDCAD is an example).

OTOH, majors are pretty closely correlate most of the time and I would not risk the huge exposure needed to pay for the trade costs.

Did i say... no free lunch yet?

your comments are welcome.
  • #3,151
  • May 5, 2011 11:36am May 5, 2011 11:36am
pvpn,

looking at your statement, nearly 500 trades, a large lot. Did I miss or didn't you mention (after the M5 of a few posts ago), in what timeframe you were trading this?

Earlier it was stated, that a larger TF will result in smaller number of trades, but also larger profits (and DD of course).

It seems logical, that the smaller you choose your TF, the smaller you'll get an exec with SMALL decorrelation.

On the statement is no commission included, with about 500 trades this is a lump sum too?

josch
trading is war - life is simple
  • #3,152
  • May 5, 2011 12:43pm May 5, 2011 12:43pm
I think that you are worng.

This strategy is good if you know how to have a good enteries.

As was mentioned many times: High TF - High DD but with higher profits, but you need to you correct matingale.

I think that you did a very good results with a good method...
  • #3,153
  • May 6, 2011 9:52am May 6, 2011 9:52am
Quoting josch
pvpn,
looking at your statement, nearly 500 trades, a large lot. Did I miss or didn't you mention (after the M5 of a few posts ago), in what timeframe you were trading this?
Earlier it was stated, that a larger TF will result in smaller number of trades, but also larger profits (and DD of course).
It seems logical, that the smaller you choose your TF, the smaller you'll get an exec with SMALL decorrelation.
On the statement is no commission included, with about 500 trades this is a lump sum too?
josch
Well, commission is included in the bid/ask spread. There's no other commissions other than the (hefty) spread. I don't enter trades unless total spread for both pairs is less than 6 pips. This in necessary because of the small TF (5M) I use.

@crossy: I agree that entries is key. I tried to make better entries this week (which is not shown in the statement above as I'm still not sure how to improve entries).

However, the week has seen some big losses, despite e better trade management and entries. It seems that when majors are on the move (i.e. see EU this week) the correlations break for much longer periods resulting in the loss of shorter trades.

I think this is also a parameter of the strategy: It major corrections are occurring (NFP et all) past correlation history does not apply any more. It may be better to wait for the new equilibrium to be reached before trading again.

pvpn
  • #3,154
  • May 6, 2011 6:40pm May 6, 2011 6:40pm
Hello everyone...

This strategy correlation hedge probably is close to the "holly grail" dont know... but looks like....

Dreamliner you are a genious!

Well.. anybody use the currency strengt meter to compare whats the relation with the curves of the correlated pairs?

example in EURUSD GBPUSD which values are having GPB EUR USD in currency meter?

The force of the pairs.. maybe can help give any confirmation.
visit www.OlimpiaFX.com
  • #3,155
  • May 9, 2011 8:58am May 9, 2011 8:58am
Quoting olimpia
Hello everyone...

This strategy correlation hedge probably is close to the "holly grail" dont know... but looks like....

Dreamliner you are a genious!
just don't bet your house on this yet. Here's an example of how hedging can go bad. This is AUDUSD and EURUSD (triplet) and correlation at 0.90 (strong).

In the first picture you see all is good and hedge stays between 1 and 2 SD... on the second one things go crazy.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: Screen shot 2011-05-09 at 3.53.20 PM.png Size: 32 KB
Click to Enlarge Name: Screen shot 2011-05-09 at 3.53.36 PM.png Size: 31 KB
  • #3,156
  • Edited May 10, 2011 7:18am May 9, 2011 9:27am | Edited May 10, 2011 7:18am
Quoting pvpn
just don't bet your house on this yet. Here's an example of how hedging can go bad. This is AUDUSD and EURUSD (triplet) and correlation at 0.90 (strong).

In the first picture you see all is good and hedge stays between 1 and 2 SD... on the second one things go crazy.

You are totally right.. pvpn...

Also an strategy of hedging INSTEAD USING STOCHASTIC indicator.. could works with the currency meter.. and the 2 pairs... 3 currencies


Example IN THE picture.. comments?
Attached Image
visit www.OlimpiaFX.com
  • #3,157
  • May 9, 2011 9:42am May 9, 2011 9:42am
Quoting olimpia
Hello everyone...

This strategy correlation hedge probably is close to the "holly grail" dont know... but looks like....

Dreamliner you are a genious!
olimpia,

I don't know, if a currency strength meter gives other/better output than the correlation parameters.

'holy grail' ... hmmm - with mm, right attitude and the right timeframe this strategy may be profitable. what else do a trader want?

'holy grails' mostly are nearly free (for about USD 99.00) available at the numerous shops of those, who are selling the get-rich-quick-scheme or EA or what else, because the sellers are already retired with their gained billions.

My personal opinion: If there would be a possibility (supported by neural networks, mathematic formulas or any other serious stuff) to extract money on a regular basis, companies like GS and others would be the 1st to implement it. Because they have the resources to pay this!

josch
trading is war - life is simple
  • #3,158
  • May 9, 2011 9:45am May 9, 2011 9:45am
Quoting pvpn
just don't bet your house on this yet. Here's an example of how hedging can go bad. This is AUDUSD and EURUSD (triplet) and correlation at 0.90 (strong).

In the first picture you see all is good and hedge stays between 1 and 2 SD... on the second one things go crazy.
pvpn,

of course 'don't bet your house' - you are absolutely correct. But mm and right attitude should exclude this by nature.

josch
trading is war - life is simple
  • #3,159
  • May 9, 2011 9:46am May 9, 2011 9:46am
Hi Dreamliner,

welcome back - founder

josch
trading is war - life is simple
  • #3,160
  • May 9, 2011 9:56am May 9, 2011 9:56am
Quoting olimpia
... Also an strategy of hedging INSTEAD USING STOCHASTIC indicator.. could works with the currency meter.. and the 3 pairs...
olimpia,

may you give some details about the working of strength meter? It's one point to use decorrelation. Other point, strength meter is based on this too or possibly on volatility, volume or anything else?

josch
trading is war - life is simple
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