Several members of FF have sent me private messages to discuss, in more detail, specifics of the trading approach described in post 12-7-15. The correspondence below exemplifies many of the questions asked...
First of all why EURCAD-EURAUD? Based on my weekly Directional Similarity indicator, the two pairs have a DS value >68% from 2010 onward (and currently the 52-week DS >75%) and that degree of similarity is more than sufficient to run the trading approach (I have a thread describing my Directional Similarity indicator-please look it up for more details on how I construct it- the concept is very simple to understand). Also, the swap that Oanda charges for buying EURCAD (negative) and selling EURAUD (positive) is negligible.
Second what if you open two long (EURCAD) and hedge by three shorts (EURAUD) then the market goes up so you open third long (EURCAD) then markets go down? The scenario that you described would never happen because a third EURCAD position would never be open until all of the EURAUD hedge positions had been closed as well as closing EURCAD position 0 and position 1 (and EURCAD position 1 would have been closed +100 pips). However, if there are two open P/L negative EURCAD positions hedged by three open EURAUD shorts AND THEN the market goes up, I will closely monitor the second and third EURAUD positions and close them when their net P/L = $0 (this is described in post 12-7-15). The important point is that I am constantly monitoring the net P/L of the two most recently opened hedge positions and will never allow these positions to turn net P/L negative. For instance, let's say the third EURAUD position is up by +20 pips (which means that the first EURAUD hedge position is up +220 pips, the second EURAUD hedge position is up +120 pips, and the two EURCAD positions could be down a combined 400-500 pips or so). At this point I am more focused on monitoring the EURAUD hedge. As the EURAUD moves back up, I will closely watch the net P/L of the second and third EURAUD positions. Once their net P/L approaches $0, those positions are closed. At this point my focus now shifts to the net P/L of EURCAD position 0 and the remaining EURAUD hedge position.
What happens then? Two scenarios are described below: 1) If the market (EURAUD + EURCAD) continues its climb, then I'm closely watching the net P/L of EURCAD position 0 + the first EURAUD hedge position. Once the net P/L of these two positions equals $0 and the DD of EURCAD position 1 is less than 50-60 pips, I will close EURCAD position 0 and the EURAUD hedge. This leaves me with one open position (EURCAD position 1). I will immediately place a pending EURCAD buy order at -100 pips below the open of EURCAD position 1 and the process starts over again.
2) If the market reverses and begins to fall, I will reopen EURAUD hedge positions at 100 pip intervals below the initial EURAUD position. I will then WAIT and close the two EURCAD positions and EURAUD hedge positions once the net P/L of these positions = $0. Moreover, EURAUD position(s) that are opened beyond what was necessary to balance the P/L negative EURCAD positions, are assigned a 100 pip TP- marking the transition of the EURCAD buy grid to the EURAUD sell grid. The process of zeroing out of the P/L negative EURCAD positions with the P/L positive EURAUD hedge positions could take days or it could take weeks; you must be able to psychologically handle the extended DD. But, as I said earlier, the important point is that I am constantly monitoring the net P/L of the two most recently opened EURAUD hedge positions and will never allow these positions to turn net P/L negative. I don't mind having to constantly open/close/re-open hedge positions.
I use 100 pip intervals because it's easy for me to monitor (price alerts are sent to my phone), but you can set your pip intervals at any level. The EURCAD and EURAUD are quite volatile (compared to the EURUSD) and it's not uncommon for 100 pip swings to happen within a day (100 pip intervals are ~1/4th to 1/3rd of the 13-week ATR for each pair).
If none of this makes sense, I apologize. Please feel free to ask questions. Also... this is a work in progress... Best, Dave
Update as of 5:32 pm est, Sunday, October 30, 2016:
Current open trade(s):
EURCAD; buy 236 units @ 1.4747 (opened 10-30-16); TP @ 1.4847 (EURCAD position #1)
Today's closed trades:
None
Pending orders
EURCAD; buy 237 units @ 1.4847; TP @ 1.4947
EURCAD; buy 235 units @ 1.4547; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 235 units of EURAUD)
Balance = $207.42 USD
Unrealized P/L = $0
Net Asset Value = $207.42
%DD =0%
Margin Used = $5.19 (50:1 leverage)
Margin Available = $201.93
%Margin Available = 97.3%
Update as of 7:55 pm est, Monday, October 31, 2016:
Current open trade(s):
EURCAD; buy 236 units @ 1.4747 (opened 10-30-16); TP @ 1.4847 (EURCAD position #1)
Today's closed trades:
None
Pending orders
EURCAD; buy 237 units @ 1.4847; TP @ 1.4947
EURCAD; buy 235 units @ 1.4547; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 235 units of EURAUD)
Balance = $207.42 USD
Unrealized P/L = ($0.46)
Net Asset Value = $206.96
%DD =(0.2%)
Margin Used = $5.18 (50:1 leverage)
Margin Available = $201.77
%Margin Available = 97.3%
Update as of 7:35 pm est, Tuesday, November 1, 2016:
Current open trade(s):
EURCAD; buy 236 units @ 1.4747 (opened 10-30-16); TP @ 1.4847 (EURCAD position #1)
Today's closed trades:
None
Pending orders
EURCAD; buy 237 units @ 1.4847; TP @ 1.4947
EURCAD; buy 235 units @ 1.4547; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 235 units of EURAUD)
Balance = $207.41 USD
Unrealized P/L = $1.03
Net Asset Value = $208.44
%DD =0%
Margin Used = $5.22 (50:1 leverage)
Margin Available = $203.22
%Margin Available = 97.4%
Pending orders
EURCAD; buy 237 units @ 1.4947; TP @ 1.5047
EURCAD; buy 236 units @ 1.4747; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 236 units of EURAUD)
Balance = $209.14 USD
Unrealized P/L = ($0.40)
Net Asset Value = $208.75
%DD = (0.2%)
Margin Used = $5.25 (50:1 leverage)
Margin Available = $203.54
%Margin Available = 97.5%
Pending orders
EURCAD; buy 237 units @ 1.4947; TP @ 1.5047
EURCAD; buy 236 units @ 1.4747; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 236 units of EURAUD)
CADJPY; buy 235 units @ 78.00; TP @ 79.00
CADJPY; buy 233 units @ 76.00; No TP (CADJPY position 0; if this CADJPY position is open, will sell 233 units of AUDJPY)
Balance = $209.39 USD
Unrealized P/L = $0.25
Net Asset Value = $209.14
%DD = 0%
Margin Used = $10.52 (50:1 leverage)
Margin Available = $198.87
%Margin Available = 95.1%
Pending orders
EURCAD; buy 237 units @ 1.4947; TP @ 1.5047
EURCAD; buy 236 units @ 1.4747; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 236 units of EURAUD)
CADJPY; buy 235 units @ 78.00; TP @ 79.00
CADJPY; buy 233 units @ 76.00; No TP (CADJPY position 0; if this CADJPY position is open, will sell 233 units of AUDJPY)
Balance = $209.13 USD
Unrealized P/L = $0.10
Net Asset Value = $209.24
%DD = 0%
Margin Used = $10.50 (50:1 leverage)
Margin Available = $198.74
%Margin Available = 95.1%
Pending orders
EURCAD; buy 239 units @ 1.5047; TP @ 1.5147
EURCAD; buy 237 units @ 1.4847; No TP (EURCAD position 0; if this EURCAD position is opened, will also sell 237 units of EURAUD)
CADJPY; buy 235 units @ 78.00; TP @ 79.00
CADJPY; buy 233 units @ 76.00; No TP (CADJPY position 0; if this CADJPY position is open, will sell 233 units of AUDJPY)
Balance = $210.91 USD
Unrealized P/L = ($0.74)
Net Asset Value = $210.74
%DD = (0.4%)
Margin Used = $10.54 (50:1 leverage)
Margin Available = $199.63
%Margin Available = 94.6%
@hautboyz
When a EURCAD buy position hits -100 pips, it will be hedged by a EURAUD sell position. Likewise, when a CADJPY position hits -100 pips, it will be hedged by a AUDJPY sell position. These hedge positions are stated in my daily update posts.
Best,
Dave
@ NoStopsXXL
This approach could be used with any strongly positive/negative correlated pair...the stronger the correlation (weekly basis), the better. My basket is limited to two pairs because of other time commitments (i.e. work, lol). Anyway, I suspect that the more pairs opened the better because at some point ranging periods will occur that will land a hedge position in FX purgatory until a trend emerges. As an aside, if you want "more action" you can run this method using a pip "threshold" less than 100 pips...
Update as of 8:30 pm est, Sunday, November 6, 2016:
EURCAD/EURAUD Hedge
CADJPY/AUDJPY Hedge
NOTE: I was at a family function when the markets opened at 5:00 pm EST, so I missed the opening 200 pip plunge in the EUR markets... it blew through my pending EURCAD buy order (EURCAD position 0) at 1.4847 and instead opened the trade at 1.4768. I immediately opened a EURAUD hedge position at 1.4444. The EURCAD subsequently shot up to 1.4868... at this point the EURCAD buy position 1 was approximately -75 pips and the NET P/L of the EURCAD position 0 and EURAUD hedge position 1 was >$0, so these two positions (EURAUD hedge and EURCAD buy position 0) were manually closed per my rules. I then immediately placed a pending EURCAD buy order @ 1.4847 (EURCAD position 0) which was eventually triggered 30 minutes after closing the initial hedge trades described above and led to the opening of the EURAUD hedge trade @ 1.4447.
At 5:43 pm EST, the CADJPY spiked 20 pips to 78.13 but my CADJPY buy position 1 (opened @ 77 with TP @ 78) wasn't close due to the wide spread (30 pips). What WAS executed was the pending CADJPY buy order @ 78, and so I closed the first CADJPY trade @77.73.
Current open trade(s):
EURCAD; buy 238 units @ 1.4947 (opened 11-4-16); TP @ 1.5047 (EURCAD buy position 1)
EURCAD; buy 237 units @ 1.4849 (opened 11-6-16); No TP (EURCAD buy position 0)
EURAUD; sell 237 units @ 1.4447 (opened 11-6-16); No TP (EURAUD hedge position 1)
CADJPY: buy 235 units @ 78.13 (opened 11-6-16); TP @ 79.13 (CADJPY buy position 1)
Today's closed trades:
EURCAD; buy 237 units @ 1.4767 (opened 11-6-16); closed @ 1.4868 = $1.78 (EURCAD buy position 0)
EURAUD; sell 236 units @ 1.4444 (opened 11-6-16); closed @ 1.4481 = $0.68(EURAUD hedge position 1)
CADJPY: buy 234 units @ 77.01 (opened 11-2-16); closed @ 77.73 = $1.62(CADJPY buy position 1)
Pending orders
EURCAD; buy 239 units @ 1.5047; TP @ 1.5147
EURAUD; sell 238 units @ 1.4346; NO TP
CADJPY; buy 236 units @ 79.14; TP @ 80.14
CADJPY; buy 234 units @ 77.14; No TP (CADJPY position 0; if this CADJPY position is open, will sell 234 units of AUDJPY)
Balance = $213.64 USD
Unrealized P/L = $3.02
Net Asset Value = $210.69
%DD = 1.4%
Margin Used = $23.70 (50:1 leverage)
Margin Available = $186.97
%Margin Available = 88.7%
Update as of 7:30 pm est, Monday, November 7, 2016:
EURCAD/EURAUD Hedge
CADJPY/AUDJPY Hedge
Summary
Earlier today, as the EURCAD dived and my EURCAD position 1 dropped to $3.28, my two EURAUD hedge positions gained a net $3.36 allowing me to close out the losing EURCAD position 1 trade with a net P/L = $0.18. Although not formally part of my "rules" described in the first post, this does illustrate that when the opportunity arises, flexibility is key with regards to position management in order to abide by the number one rule: mitigate draw down. Anyway, this left open only EURCAD position 0 (237 units opened @ 1.4849) at a loss of 75 pips. So... EURCAD position 0 was elevated to buy position 1 and a pending EURCAD buy order was placed for 236 units @ 1.4749 (EURCAD position 0). If the EURCAD position order is triggered, I'll immediately open a EURAUD sell trade for 236 units.
Current open trade(s):
EURCAD; buy 237 units @ 1.4849 (opened 11-6-16); No TP (EURCAD buy position 1; this was formally EURCAD position 0 - see summary above)
CADJPY: buy 235 units @ 78.13 (opened 11-6-16); TP @ 79.13 (CADJPY buy position 1)
Today's closed trades:
EURAUD; sell 238 units @ 1.4345 (opened 11-7-16); closed @ 1.43014 = $0.80 (EURAUD hedge position) EURAUD; sell 237 units @ 1.4447 (opened 11-6-16); closed @ 1.43014 = $2.66 (EURAUD hedge position 1) EURCAD; buy 238 units @ 1.4947 (opened 11-4-16); closed @ 1.4763 = $3.28 (EURCAD buy position 1) net P/L = $0.18
Pending orders
EURCAD; buy 239 units @ 1.4947; TP @ 1.5047
EURCAD; buy 236 units @ 1.4746; No TP (EURCAD position 0; if opened, will immediately sell 236 units of EURAUD)
CADJPY; buy 236 units @ 79.14; TP @ 80.14
CADJPY; buy 234 units @ 77.14; No TP (CADJPY position 0; if this CADJPY position is open, will sell 234 units of AUDJPY)
Balance = $213.81 USD
Unrealized P/L = $1.35
Net Asset Value = $212.46
%DD = 0.6%
Margin Used = $10.50 (50:1 leverage)
Margin Available = $201.96
%Margin Available = 95.1%
