Netsrac Correlation Trader - Main Concepts

Netsrac Correlation Trader - Main Concepts

24 May 2019, 08:55
Carsten Pflug
1
512

There are three concepts behind this EA.

  • Correlation
  • Hedging
  • Position sizing

For optimal use you need to understand these concepts. So let's take a look at the first and most important thing.

Correlation

If you look at the following pictures, you see the charts of two instruments. CADJPY and EURJPY. The price of both charts go similar. If one asset is going up, the other will going up too (they are in -balance-). They are going similar, most of the time – they are positive correlated.


Now take a look at the following picture. It shows EURNZD and NZDCHF at one hour timeframe. What do you see? If the one is going up, the other is going down (they are in -balance-). They are going in opposite direction – they are negative correlated.

EA1

These correlations, positive and negative, are based on strong fundamental reasons. Most of the time these similar/opposite movements are present. But, sometimes there are different movements – different than usual. One asset is growing while the positive correlated pair is falling. Or one asset is falling and the negative correlated pair is falling too. These are potentially good situations to take a trade. These are -imbalances-. We expect, that the two assets will come back to the usual behavior. But there is one question: which one will revert the move to come back to correlation? One answer could be that we do technical analysis. Look at possible support/resistance, pivot points, trendlines, volumes, ... whatever and make a decision. But you can do something else,

Hedging

Lets say, we have an unusual situation in a positive correlation. One asset is going up while the other is going down. We got a signal from the EA, that they are in a high -imbalance- now. We expect a return to the usual behaviour. We don't know, which one revert – so we make an easy decision. Buy the one, that was fallen. Sell the one, that was growen. We make a hedged trade. If the two assets move similar, we win and lose nothing with a hedged trade. The one will win, what the other lose. But in a -imbalance-, we expect, that one will win more than the other will lose. (There is another approach to trading correlations. This applies to so-called triples, i.e. correlation pairs with three currencies. A note: divide the price of AUDUSD by the price of NZDUSD. What price do you get? Maybe we may discuss this approach later in another EA.)

We have another question. If we want to hedge a trade with another – we must calculate the correct lot size for both trades. This is the third concept of the Correlation Trader-EA,

Position sizing

The EA is taken the following variables into account for position sizing:

  • Pipvalue
  • Average Daily Range (of 20 days)
  • Assets minimum lot size
  • Risk factor 
You have to adjust the risk factor in EA-options. The lot size is calculated by the EA. The formula for this looks something like this:

EVR1 = ADR1 * Pipvalue1(@MinimumLot1*riskfactor)
EVR2 = ADR2 * Pipvalue2(@MinimumLot2*riskfactor)

LotMultiplier = Max(EVR1,EVR2)/Min(EVR1,EVR2)

Lot1 = MinimumLot1*riskfactor
Lot2 = (MinimumLot1*riskfactor*LotMultiplier)

This looks a bit confusing. But that is not a problem. For you only the risk factor is important.


If you set this to 1, one of the two assets is calculated with the minimum lot size. The other one may be increased a little, depending on the ratio of the Pipvalue and the ADR. Try the settings a bit and ALWAYS check the calculated lot size before opening a trade. You can also change the calculated lot size in the EA if you click on it and enter a different value.

Alternatively, you can of course also use the simple calculation. In this case, use the option "No calculation of Lotsize" (see picture). Then the minimum lot size of the asset is multiplied by the risk factor.


Please ask me if you have any questions. I hope you will have some good trades with this tool! Find the Netsrac Correlation Trader here: https://www.mql5.com/en/market/product/38813

For more informations, watch the videos on youtube:

Watch Video#1 (first start)
Watch Video#2 (how to operate the dashboard)
Watch Video#3 (trade handling)
Watch Video#4 (how the signal is generated)


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