Overlay Positive Hedging EA

Hi. I found this EA on another medium. Below is a description given by the author. I am just starting to experiment with this and will post my results. INTRODUCTION

This technique was introduced by the fellow’s traders Meet Joe Black, Maidin and several others (sorry if their names are not mentioned here) in the other forum. To acknowledge their contributions I would like to thank and congratulate to all those involved in the development of this trading technique.
The technique can be briefly explained as follows:

1. CONCEPTS

a) Usually, a few of the forex instruments (symbols), so called pairs in a plain language move in line with the other pair. For example GBPUSD (GU) and EURUSD (EU), often move in the same direction. However, some of them move in the opposite direction such as EURUSD with USDCHF. A couple of pairs that move in the identical direction is said to have a positive correlation, while couples move in opposite direction are negatively correlated. If we simultaneously enter the market by buying GU and selling EU at the same time, we were in position of hedging or so called locking

b) Although GU and the EU usually move in the same direction, its movement distance in pip between GU and EU is differ. Generally, based on the past records, movement of GU is bigger than EU. In order to balance the movement of these pairs in monetary value, let say in the USD currency, we use the ratio of Average Daily Range (ADR) between these pairs to determine the number of lots to be used during trading. The average ratio of ADR of the EU over GU in the period of the last 365 days is approximately 0.8. This means, if GU moves in a day by 200 pips, the EU is expected to move a total of 160 (= 0.8x200) pips. To get a proper balance of hedging in the USD, we use a smaller lot in GU. If we trade EU with 1.0 lot, then the traded lot for GU should be 0.8 lot, which is a result of ADR ratio (0.8) multiply with traded lot in EU (1.0 lot).

2. ENTRY AND EXIT

Although most of the time GU and EU usually move in tandem, there are certain situations cause the trend of GU is opposite with the trend of EU. When the pairs are moving contrary, the number of pips of movement to the contrary is called the gap. We can enter the market when the gap for the movement in the opposite direction between the GU and the EU is significantly bigger (minimum recommended gap is 100 pips). Let say at the time the 100 pip gap is occurred, trend of GU is up and trend of EU is down, then we are advised to enter the market by selling GU and buying EU simultaneously (if movement of GU is downtrend and oppositely the movement of EU is uptrend, we will buy GU and sell EU).

When GU and EU are beginning to move back in similar direction (or is said to close the gap), our open posts are believed to be in the profit territory, and we should be out of the market. To close the gap from previous situation which is GU is upward and EU is downward, GU must go down, and the EU have to go up, or GU has to move down substantially, or another possibility is the EU has to move up substantially.

Numbers of individual lots recommended to be used for Pair 1 (let say GU, for GU-EU couple) in the market are based on the ADR ratio between the two pairs. So if we are using 1 lot for EU, then we suppose to use 0.8 lot for GU.

3. TAKE PROFIT (TP) AND STOP LOSS (SL)

All the open posts in this technique use the Open TP and open SL. You have to float the posts until the floating pips or the profit in USD value from these two pairs become positive.

4. WHAT TO DO IF FLOATING DISTANCE (GAP) IS GROWING?

If the market against your opened positions, you can enter new posts of GU and EU for the second time (We name it as second layer of your posts) and so on for every increment of floating loss at certain distance (measured in pips). For GU with EU combination, the recommended distance for each layer is 100 pips. If your pairs at the last layer accumulate a net profit (recommended between 100-50pip), you should close these profitable posts and float the others.

5. EQUITY MANAGEMENT OR MONEY MANAGEMENT (MM)

For equity 1k USD, each layer should use a size of lot of 0.05 units to 0.1 units. (A traded lot of 0.1 units usually called as 10 cents, which a movement of 1 pip is equivalent of 10 cent in the value of money). If a lot of 10 cents in size is used in the trading, your account should be able to sustain in the market to the floating loss at least at 10 layers or 1000 pip loss.


6. PURPOSE OF THE THREAD

To facilitate a manual trading, a robot called Overlay Positive Hedging has been developed. Since the robot is still under testing and development phase, I open this thread mainly for sharing its setting, ideas, errors-debugging, or what ever thing that can improve its function as well as its performance. Any suggestions to modify or upgrade the robot are very much welcomed. Discussion in this thread should be focused on developing the robot.
The developed robot that can be used in a forward test for verifying the technique is a profitable method or to monitor its drawdown. Back test for the robot can not be carry out as it involves two different pairs

This robot is based on overlay hedging technique. It may be used for couples of pairs which have a positive correlation pair (example the GU with EU)

7. SETTING

Settings for parameters used by this robot are as follows:

Chart
If you want to trade a two way (overlay hedging) on a couple of GBPUSD-EURUSD, the robot should be installed on both charts, which are GU chart and EU chart. The robot should be placed in the chart of Pair 1 (GBPUSD), and a same robot in the chart of Pair 2 (EURUSD). If you are trading is only one way only, put the robot in one chart only, either in chart of Pair 1 (GBPUSD ) or Chart of Pair 2 (EURUSD)

Time Frame
The robot can be placed on any time frame. However D1 timeframe of the charts belong to the traded pair has to updated. This is necessary for proper ADR ratio calculation by the robot.

Two-way trading (overlay hedging)
For a two-way trading or called overlay hedging (traditional hedging). Two Robot’s parameters must be set as follows:
1. In the chart of Pair 1 (let say GBPUSD):
a. TradeCouple1 = true
b. TradeCouple2 = false

2. In chart of Pair 2 (let say EURUSD):
a. TradeCouple1 = false
b. TradeCouple2 = true

One-way trading (overlay)
Put the robot in one of the chart (either chart of Pair 1 or chart of Pair 2). If you want to buy Pair 1 and sell Pair 2, set the robot’s parameters as follows
a. TradeCouple1 = true
b. TradeCouple2 = false

OR, if you want to sell Pair 1 and buy Pair 2, set the robot’s parameters as follows
a. TradeCouple1 = false
b. TradeCouple2 = true

Robot Parameter Setting
1. Lots = 0.1
Number of lots for the second Pair (Pair 2). Suppose the setting is Pair 1 and Pair 2 is GU and EU, respectively. Lot used by the first Pair (Pair 1) depends on the ratio of Average Daily Range (ADR) between the two pair. Suppose the parameter settings for” Lots” is 0.1, thus Lot used for Pair 1, which is GU is “Lots” multiply with ADR ratio = 0.1 x 0.8 = 0.08 units. Lot for Pair 2, which is EU = “Lots” = 0.1 units

2. LayerDistance = 100
Distance in pip between each layer or level to open the next a couple of posts at the new Layer.

3. UseTakeProfitByPip = true
If you want to close your posts by pip acquired, set this parameter to TRUE. Otherwise FALSE if not used.

4. TakeProfit = 80
To define total profit in pips of the Pair 1 plus Pair 2 at the last layer. Once the couple of pairs acquired the defined profit in pips, the robot will close the posts at the last layer.

5. UseTakeProfitByUSD = false
If you want to close your posts defined by value of money in USD, set this parameter to TRUE. Otherwise FALSE if not used.

6. TakeProfitInUSD = 100
To define total net profit in USD from Pair 1 plus Pair 2 at the last layer. Once the couple of pairs acquired the defined profit in USD, the robot will close the posts at the last layer

7. MaximumLayer = 5
Maximum layer or level to be opened by the robot. There is no specific number for the maximum layer.

8. Pair1 = GBPUSD
A full name of symbol or pair for Pair 1. Pair 1 must have a larger ADR than Pair 2.

9. Pair2 = EURUSD
A full name of symbol or pair for Pair 2. Pair 2 must have a smaller ADR than Pair 1

10. Note1 = "Couple 1: Buy Pair1 Sell Pair2"
A reminder note that “Couple 1” is to enter a Buy for Pair 1and Sell for Pair 2.

11. Note2 = "Couple 2: Sell Pair1 Buy Pair2"
A reminder note that “Couple 2” is to enter a sell for Pair 1 and a buy for Pair 2.

12. TradeCouple1 = true
If you want a trading by buying Pair 1 and Selling Pair 2, set this parameter TRUE.

13. TradeCouple2 = false.
If you want a trading by selling Pair 1 and Buying Pair 2, set this parameter TRUE.

14. ADR_Day = 365
To define a number of days to calculate the Average Daily Range. Subsequently, the robot used the calculated ADR for obtaining a ratio of ADR between Pair 2 with Pair 1

15. UseManual_ADR_Ratio = true
If you want no of lot of Pair 1 is calculated based on parameters set by the ADR_Ratio, set this parameter to TRUE. Otherwise, the robot will determine ADR ratio by its own.

16. ADR_Ratio = 0.8
This is ADR ratio between Pair 2 and Pair 1. If UseManual_ADR_Ratio = true, this ratio is used to calculate a traded lot for Pair 1.

17. MagicNo = 90000
Couple identification number for each couple of pairs. For instance, if you want to trade a couple of GU-EU, this number suppose to be set similar in the GU and EU chart. If a different couple is to be used in trading, for example a couple of AUDUSD-NZDUSD, you have to change the parameter into other numbers, such as 90001. Use the same number for the parameter in both charts AUDUSD and NZDUSD.

See Overlay indicator to visualize overlays. http://www.forexfactory.com/showthread.php?t=158161

Not sure what kind of Overlay the EA is using.

EDIT: 5/11/12 Thanks to the efforts of KingHigh, we have a readable translation of the original .ex4 decompile.

Edit 5/14/2012: Bug removed from KingHigh's translation. Damn, does that sound Biblical or what?

Edit 5/16/2012 Version 3: Bug in SendSell(...) regarding return(Ticket) fixed, KingHigh.

Edit 5/17/2012: Set files for my local PC version settings attached. Recommended initially by Paulss

DISCLAIMER: THIS THREAD HAS GROWN QUICKLY. THE EARLY RESULTS SEEM POSITIVE, BUT USE THIS LIVE AT YOUR OWN RISK. THE THREAD AUTHOR NOR ANY OF ITS PARTICIPANTS SHALL BE HELD LIABLE FOR ANY LOSSES INCURRED THROUGH THE USE OF THIS EA ON LIVE MONEY.

interesting concepts...will play the ea

The whole key in this system is to recognize when correlations starts to change and act as needed. Use the attached to see the correlation difference compared to the charted pair.

Most of the overlay indicators for MT really suck. Pro-realtime has great overlays, but its overpriced. Anyway, if nothing else this EA is a starting point, let's see what happens.

i tried backtest ea default settings - posted error

Hi. The author mentioned it can't be backtested because it has to trade in 2 pairs at the same time.

I got awful results overnight on 5 min TF with more or less default settings. Trying it now on 15min.

This thing certainly takes a lot of trades, it's too bad an indicator wasn't provided with the EA, so the logic can be better understood. There is no IP protection on this, so anyone out there feel free to decompile the ex4 and post. I will do the same.

Edit: by default the hedge ratio is set 1 EU to .8 GU. It's obvious this needs to be adjusted so i set the manual hedge setting to false so i think it should use the adr to calculate it now. Still testing on Finfx, set the TP to 10 for now. Will experiment with other settings later. Obviously, this will not work with pwned (by cftc) US based brokers

I am testing now, in M5, positive now result seems good, will post report few days later. It's a good EA.

the whold human history is a wonderful cycle that keeps repeating itself.

this EA will fail to 99% who read this thread.

Care to explain?

this is just sell eurgbp (using the author's example that gu rise like crazy, and eu rise like crazy) in 0.2 lot when eurgbp in a seemingly overbought condition, isn't this?

FF is full of these kind of systems.

the reason that i don't favor it:

1. it often works, but not becoz it is magic, it is becoz the market is often ranging, and if you sell eurgbp when it looks overbought, you are often correct. this is the fundamental of this system.

2. newbies might not know the point 1 above. when eurgbp stays overbought for 2 weeks (a trend comes), newbies' account will explode instantly. and they still don't understand why, or believe the "gap" will be filled.

3. even this "gap" thing is an advantage (an inefficiency of the market), it is hardly possible for a retailer trader like me to use, since Wall St guys apparently have faster computer and broker feed.......

move on to something else, unless you are very resourceful in programing, statistics, and hardware.

Right well thanks for bringing up the points. I posted the EA here before really testing it because there are many creative and technical minds here that can give suggestions on improvement. I have seen the concern about it being eurgp trade. Potentially we can come up with some unique ways to monitor EG and make the EU/GU a more favorable trade.

I am shortly going to load this to my vps (pm me for name). You can get less than 1 ms ping to FinFX if you have premium account, $2,000 USD. I think this is affordable to most on here.

On another thread we are exploring these kinds of advanced hedging relationship using R and other statistical tools. It is convenient to use MT at face value, but with statistical analysis you can make more informed decision. So we will see where this goes.

Basic_Setting=----------------- Basic Setting -----------------
Lot=0.10000000
LayerDistance=100
UseTakeProfitByPip=1
TakeProfit=80
UseTakeProfitByUSD=0
TakeProfitInUSD=100.00000000
MaximumLayer=5
Pair_Setting=----------------- Pairs Setting -----------------
Pair1=GBPUSD
Pair2=EURUSD
Note1=Couple 1: Buy Pair1 Sell Pair2
Note2=Couple 2: Sell Pair1 Buy Pair2
TradeCouple1=1
TradeCouple2=0
ADR_Setting=------------------ ADR Setting ------------------
ADR_Day=365
UseManual_ADR_Ratio=1
ADR_Ratio=0.80000000
MagicNo=90000




Gross Profit:122.31Gross Loss:12.65Total Net Profit:109.66
Profit Factor:9.67Expected Payoff:4.06
Absolute Drawdown:0.00Maximal Drawdown:4.14 (0.04%)Relative Drawdown:0.04% (4.14)

Total Trades:27Short Positions (won %):14 (78.57%)Long Positions (won %):13 (84.62%)
Profit Trades (% of total):22 (81.48%)Loss trades (% of total):5 (18.52%)
Largestprofit trade:23.46loss trade:-4.14
Averageprofit trade:5.56loss trade:-2.53
Maximumconsecutive wins ($):8 (54.39)consecutive losses ($):1 (-4.14)
Maximalconsecutive profit (count):54.39 (8)consecutive loss (count):-4.14 (1)
Averageconsecutive wins:4consecutive losses:1

Nice work on the settings, this is 5 min tf correct? I will try these out later.

vps or broadband connection?

TF is M1, it is broadband conection.

now, how about today's result?

very interested to see...... thankx

Please forgive me, but gpbusd and eurusd correlation is dictate by the eurgbp action, if eurgbp move down of let's say 100 pips, we'll have a "gap" of 100pips between eurusd and gbpusd, when eurgbp go up again (if) the ea make profit.
Why not simply trade eurgbp?

I found this EA after reading about this system:

http://bit.ly/IAxhLB

It relies on pairs to be 70-80% correlated to be tradable. One possible way to hedge the eurgbp exposure is simple trade the same EA on 2 other pairs with a similar amount of correlation. So for example the setup:

EA on GU / EU as described above.

BUT ALSO, put it on EURGBP / USDCAD to hedge that exposure. You could turn trading OFF on the eurgbp pair, otherwise you will be exposed again. So that leaves you trading those 3 pairs in which all 3 maintain roughly 70-80% correlation give or take, depending on timeframe.

For ideas: http://www.forexticket.us/en/tools/01-01-correlation

Gross Profit:322.77Gross Loss:114.42Total Net Profit:208.35
Profit Factor:2.82Expected Payoff:1.57
Absolute Drawdown:0.00Maximal Drawdown:22.37 (0.22%)Relative Drawdown:0.22% (22.37)

Total Trades:133Short Positions (won %):69 (72.46%)Long Positions (won %):64 (50.00%)
Profit Trades (% of total):82 (61.65%)Loss trades (% of total):51 (38.35%)
Largestprofit trade:29.52loss trade:-20.14
Averageprofit trade:3.94loss trade:-2.24
Maximumconsecutive wins ($):8 (54.39)consecutive losses ($):2 (-22.37)
Maximalconsecutive profit (count):54.39 (8)consecutive loss (count):-22.37 (2)
Averageconsecutive wins:2consecutive losses:1

TF=M1, I will try M5 today
result not bad. will keep going to test.

yes, this guy say the exactly what the EA do.

That's great Paul. Which broker are you on? I just loaded it to PFG Best. Though they are US based, they just started to offer hedging.

Source code has been added to post #1