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Hedge and Correlation Strategy

  • #3,381
  • Nov 12, 2011 9:03am Nov 12, 2011 9:03am
Regarding the normalization of positions and not a lot of movement... this really comes into play and is infinitely more important when you're arbing pairs with significantly different ranges and tick values. For example (completely hypothetical) if you were to arb the EURGBP and the EURSEK.

Quoting hedgeitall
Hi Profxtrader,
I can answer this from my point of view. I have done tests with different lot sizes. I could see no real benefit. One issue I had is that the better the hedge the less movement, which made 2 other problems. 1- I had to use larger lot sizes and 2- It become less profitable because the trades stayed open longer.

I like your ea. Can you give it too me please?
just kidding..

I am working on a similar automated project. I am quite happy with the results I am getting. I have come up with some novel ways to make it both safer...
Every time you use 'hopium' in a post, God kills a kitten.
  • #3,382
  • Nov 12, 2011 6:31pm Nov 12, 2011 6:31pm
Quote
one way to cut the hold times down is forget about pips and count actual profits. Up the trade size (within reason) while lowering the profit target for your arbs and you'll get a lot more banked profits a lot quicker and it'll lower your hold time and reduce the# of positions you have open and your floating DD> Look at the equity graph on mine and you can see that in the past week and a half I've done just that and they track together a lot more closely than they did initially.

I am looking at dollars not pips. Also I have been doing some tests on when to close. I based my closing on the number of lots I have open. So the more risk I take(more drawdown) the more i expect to profit. With my testing I found closing too soon made me less money. I still havent got a magic formula for when to close. In fact I feel I am being too conservative in closing.
I could probably squeeze alot more profit out each trade. By manually stopping the ea I have been able to almost double my account in one trade. (4 days)
  • #3,383
  • Nov 12, 2011 6:41pm Nov 12, 2011 6:41pm
Quoting hedgeitall
I am looking at dollars not pips. Also I have been doing some tests on when to close. I based my closing on the number of lots I have open. So the more risk I take(more drawdown) the more i expect to profit. With my testing I found closing too soon made me less money. I still havent got a magic formula for when to close. In fact I feel I am being too conservative in closing.
I could probably squeeze alot more profit out each trade. By manually stopping the ea I have been able to almost double my account in one trade. (4 days)
Interesting. I'm more concerned with banking profits. Slow and consistent is fine by me. 80-100% a year is an astronomical return in any market, but easy to do in spot FX if you just keep consistently turning small profits.

And doubling an account in 4 days? You're obviously talking about way more risk that I'd be comfortable with. Typically our strategies don't use over 10:1 leverage. I'm getting anxious when I'm just nearing that threshold.
Every time you use 'hopium' in a post, God kills a kitten.
  • #3,384
  • Edited Nov 13, 2011 3:49am Nov 12, 2011 6:53pm | Edited Nov 13, 2011 3:49am
Some interesting reading should anyone have the time. Jim Simons who runs a $20B hedge fund had to testify before congress in 08... fully states that he employs market neutral strategies.

http://oversight-archive.waxman.hous...1113120509.pdf

If a $20B hedge fund can do it (in the 10 or so years it's been running it's made well over 2000%), why reinvent the wheel?
Every time you use 'hopium' in a post, God kills a kitten.
  • #3,385
  • Nov 13, 2011 7:27pm Nov 13, 2011 7:27pm
Quoting profxtrader
Interesting. I'm more concerned with banking profits. Slow and consistent is fine by me. 80-100% a year is an astronomical return in any market, but easy to do in spot FX if you just keep consistently turning small profits.

And doubling an account in 4 days? You're obviously talking about way more risk that I'd be comfortable with. Typically our strategies don't use over 10:1 leverage. I'm getting anxious when I'm just nearing that threshold.

Sorry I probably didnt explain it very well.

The idea is to simply let the profits run as long as possible. But the downside is you have to except short term you are not going to bank as many small profits.

You would only let the profits run when you are in profit and have a breakeven close. So there is no added risk.

Ideally you could open a completely new hedge as soon as you are safely in profit. That way you keep up your trading frequency.

I just changed the code on the system I posted above to test it out. Hopefully it will work if there are no bugs.
My takeprofit is now 5 times my previous, but with a couple of conditions, 1 being that it must have sufficient drawdown to activate.

It might not work any better, but who knows??
http://www.myfxbook.com/members/arbu...pa6-stp/187017
  • #3,386
  • Nov 15, 2011 9:06pm Nov 15, 2011 9:06pm
Has anyone looking into whether the pairs they're trading are co-integrated and not just correlated?

Correlation is all well and good but when you're doing stat-arb between two pairs trying to have them converge to a mean co-integration is significantly more important..
  • #3,387
  • Nov 16, 2011 12:51am Nov 16, 2011 12:51am
Quoting drgoodvibe
Has anyone looking into whether the pairs they're trading are co-integrated and not just correlated?

Correlation is all well and good but when you're doing stat-arb between two pairs trying to have them converge to a mean co-integration is significantly more important..
drdoogvibe,

The co-integration work on 1Mins TF or need big time frame ?

Regards
Ludo.
  • #3,388
  • Nov 16, 2011 1:11am Nov 16, 2011 1:11am
Quoting hedgeitall
Sorry I probably didnt explain it very well.

The idea is to simply let the profits run as long as possible. But the downside is you have to except short term you are not going to bank as many small profits.

You would only let the profits run when you are in profit and have a breakeven close. So there is no added risk.
That does not really make sense, the concept of this strategy is that you trade two securities that have moved out of correlation. The only logical place to take profit is when they have moved back again ie: the gap has closed. If you allow the trade to run after that even if it is a losing trade then the trade is no longer following a correlation strategy and is now just a random trade.
  • #3,389
  • Nov 16, 2011 1:45am Nov 16, 2011 1:45am
Quoting MaxDoom
That does not really make sense, the concept of this strategy is that you trade two securities that have moved out of correlation. The only logical place to take profit is when they have moved back again ie: the gap has closed. If you allow the trade to run after that even if it is a losing trade then the trade is no longer following a correlation strategy and is now just a random trade.
You are right. I don't disagree.
It is more a case of gambling with the randomness.
What I am suggesting is
Once the "Gap has Closed" and you are in profit.
Set a stoploss, so you cant lose money.
Let the trade continue to either a larger profit, or hit your stoploss and take a small profit.

It is just that I have done this a few times with great success. As I said previously I made 2 months profit in a few days.

I dont know how often it would pay off? But I can only test it and see.

As I said before, once you are in profit and have set a stoploss, just forget about it and let it run. Open a new hedge if you want? You have nothing to lose.
  • #3,390
  • Nov 16, 2011 1:56am Nov 16, 2011 1:56am
Quoting drgoodvibe
Has anyone looking into whether the pairs they're trading are co-integrated and not just correlated?

Correlation is all well and good but when you're doing stat-arb between two pairs trying to have them converge to a mean co-integration is significantly more important..

I agree. Convergence is the key. Not correlation.
  • #3,391
  • Edited 6:37am Nov 16, 2011 4:49am | Edited 6:37am
Quoting hedgeitall
I agree. Convergence is the key. Not correlation.
Absolutely, I call it recoupling but I think we're talking about the same thing. They have to come back together to make a successful arb. I don't understand how this gets made into some monster that appears so difficult. Statistical Arbitrage... the 'statistics' are already there for you in many forms / sites / software and freely available code. You need not develop some crazy new mathematical formula (although you're free to) to determine if pairs are correlated or not. When they uncouple (come out of correlation) you use some sort of analysis to determine when to take the trade. This method (although I've never tried it the way it's written personally) is one. When they come back into statistical alignment (recoupling) you exit, usually at a profit. I've had literally hundreds of arbs in a row without a loss. Never for astronomical profits. I take the little that the arb gives me, bank it, and move on. While we have a lot of software that does this for us but sometimes I do trade myself (I'm a trader by profession... sitting and watching drives me nuts some days ). Yesterday alone I took 12 manual arbs (24 trades). Every single one profitable. Net result was 1%. Now a lot of you would scoff at that percentage, but that's the risk and such you should be looking at. Take an excel spreadsheet, start with your opening balance be it $500 or $50,000 and see what a consistent 0.5% - 1% a day will net you in a year.
Every time you use 'hopium' in a post, God kills a kitten.
  • #3,392
  • Nov 16, 2011 6:28am Nov 16, 2011 6:28am
How about this for an idea? When one gets too far away from the other two you buy the low one and sell the two high ones. In this case lime is GBP, blue is EUR and red is AUD (all USD). How would that work out in practise? It's a 30 min chart by the way.
Attached Image (click to enlarge)
Click to Enlarge Name: eur gbp aud.gif Size: 24 KB
  • #3,393
  • Nov 16, 2011 8:01am Nov 16, 2011 8:01am
I don't want to put too much rubbish on this thread but just to let you know I am demoing this with the above pairs and nzdusd as well on a 30 min tf and only trading the two most extreme pairs, sell the high one, buy the low one. I've applied the swiss army ea to close out with either a net profit of 50 pips (over both trades) or a loss of 50 pips. These levels may need adjusting and it may prove more profitable to just let the trades run until the correlation swings the other way. I'll let you know how I get on and probably put it into a different thread if it works out.
  • #3,394
  • Nov 17, 2011 6:38am Nov 17, 2011 6:38am
Quoting surfeur
drdoogvibe,

The co-integration work on 1Mins TF or need big time frame ?

Regards
Ludo.
Co-integration can work on any time frame.

What I'd love to discover is an indicator that can measure co-integration. Co-integration would be useful for pairs trading. Most individuals who are trying to do pairs trading in forex are doing it wrong. Co-integration is most important not correlation when trying to pair trade forex pairs. The reason for this is that co-integration measures a historical spread between two currency pairs that through linear regression can be measured to show that it has existed over sustained periods. When the spread between the two fx pairs widens you would trade both pairs to mean revert that spread. This is true pair trading in any security not just forex. So it's not that correlation has nothing to do with pair trading, it's just that co-integration is what's important.

Guys this is why when you're trading this strategy for certain pairs your account blows up and everything goes wrong. You may not be pair trading currency pairs that are co-integrated despite the fact that they're highly correlated.
  • #3,395
  • Nov 17, 2011 6:42am Nov 17, 2011 6:42am
Quoting hedgeitall
I agree. Convergence is the key. Not correlation.
I'm glad others see this, I truly believe in pair trading, quite a bit of it is going on in Stock securities trading and Futures-- a sector ETF versus an individual stock is the usual strategy. I would imagine it would be significantly more difficult to find fx pairs that are co-integrated since there are far fewer forex pairs to choose from.

However these days with OANDA and AlpariUK the selection has increased significantly and making exotic pairs such as EURSGD etc more available.

I'm not exactly sure how someone can build an indicator that measures co-integration but this is the key that's missing in this thread.

So much great work on correlation indicators (that I'm using daily btw) but fact is, correlation is not what matters in pairs trading.
  • #3,396
  • Nov 17, 2011 7:00am Nov 17, 2011 7:00am
Could you indicate if the risk/reward ratio of this strategy is >1 or not?
Thank you!
  • #3,397
  • Nov 17, 2011 9:21am Nov 17, 2011 9:21am
Please if somebody can share this indicator showing in post #2643.

http://www.forexfactory.com/showthre...49#post4393649

Thanks.
  • #3,398
  • Edited Nov 22, 2011 9:22pm Nov 21, 2011 11:20pm | Edited Nov 22, 2011 9:22pm
Hi guys! it's soon Christmas!
Here is my little contribution to this thread and community.
this is a indicator to MT4 my programmer made for me a while back,
it shows the correlation between pairs so you wouldn't have to visit
Forexticket every time, I hope you find it useful. enjoy
Attached Image
Attached File(s)
File Type: ex4 TableOfCorrelation.ex4   16 KB | 1,815 downloads
Bulls are stupid Animals!especially when Im short!
  • #3,399
  • Nov 22, 2011 4:21am Nov 22, 2011 4:21am
Quoting roughtrader
Hi guys! it's soon Christmas!
Here is my little contribution to this thread and community.
this is a indicator to MT4 my programmer made for me a while back,
it shows the correlation between pairs so you wouldn't have to visit
Forexticket every time, I hope you find it useful. enjoy
I was just wondering what the chart based on minute, hourly or daily values? Thanks again for the indi!
Direction is more important than speed. Alot of people go nowhere real fast
  • #3,400
  • Nov 22, 2011 4:59am Nov 22, 2011 4:59am
Hi everybody, I'm styding this method but I'm not sure with default settings on indicator "stocastic different pairs 1.7_3".

Can I use the default settings or must I change them?

K 100
D 1
S 1

Thank you!
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