i know that entering two highly correlated trades at the same time is doubling up on risk, but what if you enter the second one after your stop in the first reaches BE? is that also considered a correlation violation (ie. doubling up on risk and shouldn't be done)? i always thought after stops are put at Break Even it doesn't matter if you start other correlated setups. hoping to get answer from people are are profitable
- #3
- Jan 26, 2017 9:15am Jan 26, 2017 9:15am
- Joined Jul 2015 | Status: Trader | 2,299 Posts
Take ideas from everyone but do not listen to anyone. Explore and create and develop yourself into a trader. Very few succeed because they follow the rules of others. They tell you not to place round pegs into square holes, go ahead anyway. Push and break boundaries until you find something that works. Sure you can trade two highly correlated (same direction) or uncorrelated pairs (in opposite directions) without taking on additional risk, cut your risk in half for each pair.
- #5
- Jan 26, 2017 12:19pm Jan 26, 2017 12:19pm
- Joined Sep 2006 | Status: ... | 8,112 Posts
i know that entering two highly correlated trades at the same time is doubling up on risk, but what if you enter the second one after your stop in the first reaches BE? is that also considered a correlation violation (ie. doubling up on risk and shouldn't be done)? i always thought after stops are put at Break Even it doesn't matter if you start other correlated setups. hoping to get answer from people are are profitable
Concepts like RR, or P/L based trade management (e.g. moving to BE, locking in profit, etc) are based on personal criteria that the market takes no cognizance of. Secondly, what has happened up until now is past, and gone; the issue of whether to exit or not should always be about what will happen next, i.e. will my P/L improve or worsen henceforth? Hence I believe that an edge comes from correct market analysis, i.e. exit should be made if either the price action, or the fundamental reasons behind the trade have changed, or suggest that maintaining the position is no longer valid, or now carries new additional risk. As opposed to making decisions based solely around my P/L. (I say 'exit' so that people will understand me, but I prefer to think in terms of net exposure, i.e. to what extent I want to be long or short in a given pair/instrument; entries and exits are merely ways to adjust this net position).
Re correlation, my primary strategy involves looking for currencies that are strong/weak both economically and momentum-wise, and pairing them against each other. I try to avoid becoming over-committed to one currency, unless I have strong convictions for any overriding fundamental reason that I believe is driving that currency. I also look to diversify, but the extent to which depends on how I perceive strength/weakness and current flows in other currencies, and other markets (e.g. equities vs risk on/off). For example, if I see GBP as strong and only USD as fundamentally weak, then I might risk 1% on a short cable trade. However, if I see very solid fundamental reasons driving GBP (e.g. it had fallen a lot due to negative sentiment about Brexit, giving it plenty of room to strengthen, and now the news reflects that some of the uncertainties about Brexit are being ironed out), and there are two or more weak currencies (for example, USD and JPY), then I might take 1% risk on each of GU and GJ (for total exposure of 2%). But if there were less compelling reasons for GBP strength, then I might take only 0.5% risk on each trade, for total exposure of 1%. A lot of this is judgment and experience, and of course I don't always get it right.
Also, consider simplification. For example, there's no point in being long both GU and UJ when I can achieve the same thing by being simply being long GJ.
I hope that makes some kind of sense. Of course your trading approach might involve using completely different concepts, which would make what I've described less relevant.