The Usual Suspects - Effective Baskets | Forex Factory

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The Usual Suspects - Effective Baskets

  • #1
  • First Post: Edited 12:59pm Oct 25, 2015 12:30pm | Edited 12:59pm
I have skimmed through a good amount of posts on currency baskets and currency basket systems here that makes very little sense to me. Apart from currency basket systems, I think it would be of interest to talk about baskets of 2-5 pairs that reflect the way the market is trading of late. This may be useful to those looking to capture a currency moving, but don't want to concentrate all in the primary pairs like EURUSD. One can still overweight the primary pair(s), but allocate some to pairs, 3., 4., 5, etc. that they view will still move.


For example:

EUR
1. EURUSD
2. EURGBP
3. ?
4. ?
5. ?

What? No EURJPY. Why? Of late, EUR and JPY have traded with a 'risk on' 'risk off' bias to the market. If EUR is getting hammered because global equities are rallying, EURJPY may hold ground because JPY pairs are rallying.


Another Example:

JPY:
1. USDJPY
2. EURJPY
3. GBPJPY
4. AUDJPY
5. NZDJPY
6. CHFJPY

Why is JPY moving? Is it a pure Japan play/ event or is it 'risk on' 'risk off'? Depending, this list most effectively could include as few as 2-3 pairs because sometimes a basket of 2-3 pairs may make the most sense.


I think it is possible to create a list for each primary currency with a few versions depending on what's driving the market. The counter argument to much of this is 'Why ruin your edge with a hedge?'.
  • #2
  • Edited Oct 26, 2015 2:05pm Oct 25, 2015 3:10pm | Edited Oct 26, 2015 2:05pm
Judging by some of the basket threads on trading forums, people either enjoy unnecessary complication, or they don't understand the mathematical relationship that exists in 'hedges' and 'rings'. Apart from one proviso, algebraic cancellation applies, e.g. (long) AAA/BBB x (long) BBB/CCC / (short) AAA/DDD simplifies algebraically to DDD/CCC. In other words, being long AAABBB and BBBCCC and short AAADDD simultaneously is exactly the same as simply being net long DDDCCC (or short CCCDDD). The proviso being the lot sizes, i.e. unless the ring is perfectly balanced, the trader ends up effectively net long or short in pair(s) that may not have intended. But the point is that all of these 'hedges' and 'rings' can always be broken down to simpler equivalent net positions, to achieve exactly the same end result. Hence the basket is little more than a complication that, in itself, fails to provide any kind of 'edge'.

So what does that leave us with?

When it comes to TRENDS, I believe in trading currencies, not pairs. Pairing the strongest against the weakest currencies (both technically -- I use strength meters -- and fundamentally) improves the trader's probability of catching a strong move. When it comes to ORDERFLOW, only then do I get down to a pair level, and look at pullbacks to probable areas of support and resistance (or 'supply' and 'demand', if you prefer). In other words, I look at CURRENCIES to determine direction and strength, and then PAIRS to time my entries and (possibly) exits.

There's no need to make it more complicated than that.
  • #3
  • Oct 25, 2015 3:15pm Oct 25, 2015 3:15pm
Quoting hanover
Judging by some...

^This, but I am typically too concentrated in my positions so looking for down and dirty effective ways to split a position into a 2nd or 3rd pair that still works.
  • #4
  • Edited 4:08pm Oct 25, 2015 3:56pm | Edited 4:08pm
Quoting hanover
Judging by some of the basket threads, people either enjoy unnecessary complication, or don't understand the mathematical relationship that exists in 'hedges' and 'rings'. With one proviso, algebraic cancellation applies, e.g. (long) AAA/BBB x (long) BBB/CCC / (short) AAA/DDD simplifies algebraically to DDD/CCC. In other words, being long AAABBB and BBBCCC and short AAADDD simultaneously is exactly the same as simply being net long DDD/CCC (or short CCC/DDD). The proviso being in the lot sizes, i.e. unless the ring is perfectly balanced, the trader...
Your posts are pure Gold. This same line of thinking informed my evolution from trading baskets to distilling down to the CORE pairs.
  • #5
  • Edited Oct 26, 2015 2:09pm Oct 25, 2015 4:27pm | Edited Oct 26, 2015 2:09pm
Quoting LITEchild
Your posts are pure Gold. This same line of thinking informed my evolution from trading baskets to distilling down to the CORE pairs.
Thanks.

There is room for opinion as to which way markets might move, and the application of different types of analysis techniques. But there is absolutely zero room for opinion in the areas where math and logic are overruling.

For example, ultimately the only way to succeed is to be net long while price is rising, and/or net short while it is falling, frequently/heavily enough to overcome costs. Everything else -- hedges, baskets, scaling in/out, P/L-based decision making, position sizing methods and variations -- is mere smoke and mirrors, and offers nothing in the way of a long term edge. The sooner (aspiring) traders realize this, the sooner they start to make real progress on their trading journey.

In general, no analysis = no possibility of an edge.
  • #6
  • Oct 25, 2015 4:51pm Oct 25, 2015 4:51pm
Quoting hanover
{quote} Thanks. There is room for opinion as to which way markets might move, and the application of different types of analysis techniques. But there is absolutely zero room for opinion in the areas where math and logic are overruling. For example, ultimately the only way to succeed is to be net long while price is rising, and/or net short while it is falling, frequently/heavily enough to overcome costs. Everything else -- hedges, baskets, scaling in/out, P/L-based decision making,...
I hear ya! Loud and clear!
  • #7
  • Oct 25, 2015 5:01pm Oct 25, 2015 5:01pm
Example:

ECB Press Conference last Thursday, 10-22-15, which was a very short EUR market catalyst - would you rather be short EURUSD or short EURUSD, EURGBP, and perhaps another EUR pair - Same overall notional value in the position? Why?
  • #8
  • Edited Oct 26, 2015 2:01pm Oct 25, 2015 6:29pm | Edited Oct 26, 2015 2:01pm
Quoting R19
Example: ECB Press Conference last Thursday, 10-22-15, which was a very short EUR market catalyst - would you rather be short EURUSD or short EURUSD, EURGBP, and perhaps another EUR pair - Same overall notional value in the position? Why?
Good questions. My opinions only FWIW:

Agree that EUR is currently fundamentally weakest currency, and has immediate potential to move lower, especially as Draghi has indicated that if inflation fails to pick up, the current QE programme will be reviewed, and probably expanded, in December.

I see USD as fundamentally strong, provided the market continues to anticipate an interest rate hike in the next few months. This is dependent on inflation, which is currently relatively subdued, meeting the Fed's targets. Also dependent on positive employment data. Also, EUR and USD somewhat negatively correlated simply because EURUSD is the most traded pair.

GBP also long term bullish given expectation of rate hike mid 2016. Current sentiment down due to poor inflation data however.

JPY bearish medium to long term due to QQE, with inflation forecasts revised downward, and the possibility that QQE stimulus may be increased. JPY always vulnerable to safe haven flows (scenarios involving risk off sentiment can see quick moves of sometimes > 500 pips on USDJPY).

CHF fundamentally bearish due to SNB's negative interest rate. Vulnerable to safe haven flows and behind-the-scenes SNB intervention to weaken the currency.

AUD currently on hold, but with a bias toward easing, despite recent good numbers and upbeat comments from Gov Stevens. AUD is vulnerable to data from China, metal prices (particularly copper an iron ore), and correlation with other commodity currencies (CAD, NZD).

NZD bearish due to 3 recent rate cuts, and possibly one in the imminent pipeline. I also see it as overbought at present with room to move downward. Dependent on dairy prices (major export), and correlation with other commodity currencies (CAD, AUD).

CAD neutral, arguably mildly bearish following recent downward revisions to 2016/17 growth forecasts. Heavily dependent on oil prices, and some correlation with other commodity currencies (NZD, AUD).

Current sentiment (TA perspective --- see screenshot):
Strong: USD
Strong, but weakening: NZD, AUD
Neutral: GBP, CAD
Weak: EUR, CHF, JPY

I've been short EURUSD since Friday. After two big red D1 candles, there may be some profit taking today, but I expect it to fall toward next support areas at ~1.09 over the coming days. I don't see any other pairs as being exceptionally strong, hence I'm staying with EU only at the moment, but I continue to monitor any changes to current sentiment and am ready to revise my views and positions accordingly.
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  • #9
  • Oct 25, 2015 7:12pm Oct 25, 2015 7:12pm
Quoting R19
Example: ECB Press Conference last Thursday, 10-22-15, which was a very short EUR market catalyst - would you rather be short EURUSD or short EURUSD, EURGBP, and perhaps another EUR pair - Same overall notional value in the position? Why?

To clarify, as the press conference was happening, during, and after. Very short term - Sorry.
  • #10
  • Edited Oct 26, 2015 2:32pm Oct 25, 2015 10:32pm | Edited Oct 26, 2015 2:32pm
Quoting R19
ECB Press Conference last Thursday, 10-22-15, which was a very short EUR market catalyst - would you rather be short EURUSD or short EURUSD, EURGBP, and perhaps another EUR pair - Same overall notional value in the position? Why?
........
To clarify, as the press conference was happening, during, and after. Very short term - Sorry.
In that case it makes little or no difference what you pair EUR with** (unless there is another simultaneous news event of comparable magnitude affecting another currency). Only thing you need to consider is your total exposure.

**[EDIT] Although, everything else being equal, you might want to choose the EUR based pair with the highest ADR, to maximize your potential pip harvest. But (depending on risk/money management) this might increase both your risk and return commensurately.
  • #11
  • Oct 25, 2015 11:22pm Oct 25, 2015 11:22pm
Quoting hanover
{quote} In that case it makes little or no difference what you pair EUR with** (unless there is another simultaneous news event of comparable magnitude affecting another currency). Only thing you need to consider is your total exposure. **[EDIT] Although, everything else being equal, you might want to choose the EUR based pair with the highest ADR, to maximize your potential pip harvest. But (depending on risk/money management) this will increase both your risk and return...
Other things to be considered are pip value and margin requirements. My calculations tell me EURNZD is the biggest bang for the buck this week.
If you are good at something, never do it for free--Joker
  • #12
  • Edited Oct 26, 2015 12:05am Oct 25, 2015 11:51pm | Edited Oct 26, 2015 12:05am
Quoting hanover
{quote}ultimately the only way to succeed is to be net long while price is rising, and/or net short while it is falling, frequently/heavily enough to overcome costs.
This is worth it's weight in heavy gold. Heavy gold is worth more than regular gold...
  • #13
  • Oct 26, 2015 3:24am Oct 26, 2015 3:24am
Quoting hanover
....... I believe in trading currencies, not pairs.....
This. Learning to search for/anticipate strength or weakness in individual currencies, rather than pairs of currencies, is one of the keys to this game IMO. Traders need to think less about the singular price being printed on their screens, and more about the nature of the two currencies they are trying to simultaneously trade. If you think a currency will be worth less in the future than it is worth now, sell it against every currency you think will be worth more and vice versa.
si hoc legere scis nimium eruditionis habes
  • #14
  • Oct 26, 2015 9:43am Oct 26, 2015 9:43am
Quoting hanover
Judging by some of the basket threads, people either enjoy unnecessary complication...
The joy of unnecessary complication also applies to the majority of people here discussing just about anything related to technical trading.

People seem to want to medicate their feelings of uncertainty with complication.
  • #15
  • Oct 29, 2015 2:01am Oct 29, 2015 2:01am
Quoting hanover
After two big red D1 candles, there may be some profit taking today, but I expect it to fall toward next support areas at ~1.09 over the coming days.
Support-based target at 1.09 reached earlier today.
  • #16
  • Edited 4:03am Oct 29, 2015 3:31am | Edited 4:03am
Quoting jmn5611
{quote} Other things to be considered are pip value and margin requirements. My calculations tell me EURNZD is the biggest bang for the buck this week.
how, what happens to JPY & CHF & AUD


kos
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John 3:16 - From THIS love no power on earth can me sever.
  • #17
  • Last Post: Oct 29, 2015 7:48am Oct 29, 2015 7:48am
Quoting Kosomolate
{quote} how, what happens to JPY & CHF & AUD kos {image}
Hi kos, you are using the currency strength meter, which only measures one aspect of a currency. Take into account pip value, margin, and volatility also. Do not simply use momentum.
If you are good at something, never do it for free--Joker
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