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Dragon Riders GBP/JPY

  • #12,241
  • Oct 25, 2015 7:24pm Oct 25, 2015 7:24pm
Quoting TheQuant
Hi. New to forexfactory. Been trading the GBP/JPY-GBP/USD spread. At the current volatility levels I'm looking to short the spread (short GBP/JPY long GBP/USD). We're seeing reasonable levels of co-integration on the the daily. Anyone else doing stat arb on this?
Hi TheQuant, welcome to FF! I don't trade the GBP/JPY-GBP/USD spread but were you aware that assuming the special case of equal betas and numerator/denominator cancellations G/J-G/U = 0 equates to a more volatile version of USD/JPY? See: http://forums.babypips.com/free-fore...tml#post403410 for discussion on E/U - G/U and its relation to E/G. I believe the same principle applies here.

Also, since you mentioned cointegration, you might find the following an interesting simplification regarding creating a two pair cointegrated spread using an approach like Engle Granger: http://forums.babypips.com/free-fore...tml#post405656

Hopefully this will give you one or two new takes and some food for thought regarding the implications of G/J - G/U.
  • #12,242
  • Edited Oct 26, 2015 2:20am Oct 25, 2015 9:03pm | Edited Oct 26, 2015 2:20am
Managed to catch the falling knife today. I usually don't trade the Sydney session but I saw a nice scalping opportunity in GBPJPY for +10 pips on the retrace.

Good luck to all of you this week and fill your wheelbarrow up with pips
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  • #12,243
  • Oct 26, 2015 12:00am Oct 26, 2015 12:00am
gartley activated... who else sold on the 186??
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  • #12,244
  • Oct 26, 2015 1:54am Oct 26, 2015 1:54am
Quoting keadr
gartley activated... who else sold on the 186?? {image}
186.02 Last Friday.
Be humble or be humbled.
  • #12,245
  • Oct 26, 2015 2:10am Oct 26, 2015 2:10am
Quoting FXEZ
{quote} Hi TheQuant, welcome to FF! I don't trade the GBP/JPY-GBP/USD spread but were you aware that assuming the special case of equal betas and numerator/denominator cancellations G/J-G/U = 0 equates to a more volatile version of USD/JPY? See: http://forums.babypips.com/free-fore...tml#post403410 for discussion on E/U - G/U and its relation to E/G. I believe the same principle applies here. Also, since you mentioned cointegration, you might find the following an...
Yes, of course it has this kind of correlation because when global equities rally and USD/JPY is catapulted up it is not dollar strength but yen selling that moves it. Parallel to this GBP/USD is bid on risk appetite. So if USD that is hardly strong climbs over yen weakness then cable that is being bought smashes it.
Be humble or be humbled.
  • #12,246
  • Oct 26, 2015 2:27am Oct 26, 2015 2:27am
Quoting Temujin
{quote} 186.02 Last Friday.
werent you tempted to pt at 50 pips? its going down town
  • #12,247
  • Oct 26, 2015 3:14am Oct 26, 2015 3:14am
Quoting FX-Ray
{quote} Good point, Id like to sell 186.90/80 though, hope we get there next week.
Hey Ray, tried approximating DPs for this week, is this in any way correct?

Blue lines are decision points and green lines are 1/2s.

Cheers
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  • #12,248
  • Oct 26, 2015 3:53am Oct 26, 2015 3:53am
Quoting alexpi
{quote} Hey Ray, tried approximating DPs for this week, is this in any way correct? Blue lines are decision points and green lines are 1/2s. Cheers {image}
Nice work, it looks good to me.
  • #12,249
  • Oct 26, 2015 3:55am Oct 26, 2015 3:55am
Long targets:

189.20/10
187.70/60
186.90/80

Short targets:

184.80/70
184.20/10
183.20/10

Add: currently 185.30/20 important
  • #12,250
  • Edited 4:16am Oct 26, 2015 3:59am | Edited 4:16am
Quoting Hickson
{quote} so it also depends on the broker, if NY closes are used? Otherwise data for a histogram ist useless?
it depends what you are looking for. I watch daily profiles because its easier for me to set them in context afterwards.
For instance, some look at swings to find a good spot for an end of a retracement and so on. I prefer daily profiles.
  • #12,251
  • Edited 4:36am Oct 26, 2015 4:18am | Edited 4:36am
Quoting FX-Ray
Long targets: 189.20/10 187.70/60 186.90/80 Short targets: 184.80/70 184.20/10 183.20/10 Add: currently 185.30/20 important
long @ current daily low

Inserted Video
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  • #12,252
  • Oct 26, 2015 4:43am Oct 26, 2015 4:43am
Quoting FX-Ray
{quote} it depends what you are looking for. I watch daily profiles because its easier for me to set them in context afterwards. For instance, some look at swings to find a good spot for an end of a retracement and so on. I prefer daily profiles.
This is where I started research, ignoring volume though. I thought it could be working with H1 and then go back in time, it did not work out yet however. Daily profile would mean to only choose from D1 data?
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Fix up, trade sharp ...
  • #12,253
  • Oct 26, 2015 4:44am Oct 26, 2015 4:44am
Quoting Hickson
{quote} This is where I started research, ignoring volume though. I thought it could be working with H1 and then go back in time, it did not work out yet however. Daily profile would mean to only choose from D1 data? {image}
pick 1440 x M1 for one day.
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  • #12,254
  • Oct 26, 2015 4:49am Oct 26, 2015 4:49am
Quoting FX-Ray
{quote} long @ current daily low https://www.youtube.com/watch?v=cXR1rHR14KA {image}
watching 186.00/85.90 as next intermediate-target

Add: Check EUR/GBP, the current relationship of G/J; E/J and E/G is +,+,- ; If E/G takes out the low of 0.7170 + continuation, upside targets in G/J becomes high probability as long as relationship established.
  • #12,255
  • Oct 26, 2015 5:11am Oct 26, 2015 5:11am
Quoting FX-Ray
{quote} pick 1440 x M1 for one day. {image}
Ah, I see ... so if I want intraday levels I can take the smallest unit of the day. Let's say I am looking for swing trading now from last week's/weeks' levels ... considering hours then? One week = 168 hours = 10080 minutes. So 10080 * M1 and then ... fumble around with frequency formula in excel again ..
Fix up, trade sharp ...
  • #12,256
  • Oct 26, 2015 5:51am Oct 26, 2015 5:51am
Quoting FX-Ray
{quote} long @ current daily low https://www.youtube.com/watch?v=cXR1rHR14KA {image}
Very nice trade, once again proving wrong that you need large stops. It is all about accuracy, but that is the hardest part ... waiting .. I do not care too much.
Fix up, trade sharp ...
  • #12,257
  • Oct 26, 2015 5:58am Oct 26, 2015 5:58am
Quoting Hickson
{quote} Ah, I see ... so if I want intraday levels I can take the smallest unit of the day. Let's say I am looking for swing trading now from last week's/weeks' levels ... considering hours then? One week = 168 hours = 10080 minutes. So 10080 * M1 and then ... fumble around with frequency formula in excel again ..
That would be one way, like I said, it really depends what you are looking for and what kind of trades you want to trade. Trade horizon, size and monthly/weekly/yearly objectives defines those.

Quoting Hickson
{quote} Very nice trade, once again proving wrong that you need large stops. It is all about accuracy, but that is the hardest part ... waiting .. I do not care too much.
Im a short stop, I can admit im wrong and get over it instantly. Next trade just around the corner, business as usual.
  • #12,258
  • Oct 26, 2015 6:23am Oct 26, 2015 6:23am
Quoting FXEZ
{quote} Hi TheQuant, welcome to FF! I don't trade the GBP/JPY-GBP/USD spread but were you aware that assuming the special case of equal betas and numerator/denominator cancellations G/J-G/U = 0 equates to a more volatile version of USD/JPY? See: http://forums.babypips.com/free-fore...tml#post403410 for discussion on E/U - G/U and its relation to E/G. I believe the same principle applies here. Also, since you mentioned cointegration, you might find the following an...
Hi! Thank you for the response - some great stuff in those two links. Definitely something I need to consider when putting on a spread. The second Engle-Granger like method is interesting - I'll have to play with the numbers a bit. If you trade pairs/correlated baskets/ect, what do you typically test for cointegration?
  • #12,259
  • Oct 26, 2015 7:43am Oct 26, 2015 7:43am
Quoting TheQuant
{quote} Hi! Thank you for the response - some great stuff in those two links. Definitely something I need to consider when putting on a spread. The second Engle-Granger like method is interesting - I'll have to play with the numbers a bit. If you trade pairs/correlated baskets/ect, what do you typically test for cointegration?
I'm not using cointegration in any of my strategies currently. The main difficulty I had was that while Engle-Granger or Johansen can find a stationary spread in history for various currency pairs, in the future the spread tends to drift far from stationarity. If you think about what you're really saying with cointegration in FX, you are making an implicit assumption that the economies and therefore the currencies of sovereign countries are permanently interrelated in terms of co-movement. A single important news release or policy change can shatter that assumption. So how can you get it to work?

Because I believe you must assume that the spread will drift over time, the spread needs to be made adaptive over time by periodically recalculating the coefficients and adjusting position size to keep it stationary. The extra transaction cost of adjusting the spread weights over time made this approach unattractive. Maybe you will be able to come up with an algorithm that periodically readjusts the spread weights while keeping transaction costs low enough to be feasible. I didn't solve that problem. See this video and note how much the hedge ratios change over time just to keep the price close to the regression line to get a feeling of what you're really up against: https://vimeo.com/16342467 Each change in hedge ratio equates to a transaction cost, though you don't necessarily need to recalculate continuously as the video does.

The only fair way that I've found of assessing the performance of a cointegration based approach is by walking it forward on new data and keeping track of how it does as it goes forward including transaction costs. Just projecting historical performance forward, or assuming stationarity on future data will give an overly optimistic view of what is actually achievable. I think ezcurrency got further than I did by refining the pair selection process, but I don't think he solved it either (I think this is the most recent cointegration-based effort on forex factory): http://www.forexfactory.com/showthread.php?p=8192805
  • #12,260
  • Oct 26, 2015 7:46am Oct 26, 2015 7:46am
Quoting keadr
{quote} werent you tempted to pt at 50 pips? its going down town
Scalping is not my thing now. Weekly levels, much more significant.
Be humble or be humbled.
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