Hedge Calculator - page 2
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Those system are just simply carry trading the EUR/CHF pair, the reason I see/think why they have to split it in 2 is so that you can still buy low and sell high on their respective pairs from time to time, which hardly can be done if you were just buying the eur/chf pair.
Well, if you bought and sold EUR/USD and USD/CHF independantly, sure, you could attempt to buy low and sell high. But do you really know what low and high are? No "hedging" system I've *ever* seen has you buy the two at different times (because then, you're just spread trading, which is more risky).
The website I'm using to check the correlation ratio is http://www.mataf.net/en/analysis-correlation_MarketVsMarket.htm
It has correlation rates computed down to hourly ratio.The corrlations listed aren't close to what FR claims, and we're most interested in long term corrlations.
Like I've said, parity of 2 currency pairs lot is easy, I do have my formula for that. I tested the formula along side with the True North and Freedomrocks, the lot allocation is slight similar with few fraction lot difference. But the trade results give more profit and accuracy using the True North and FR computation. This is the reason why I think that correlation ratio need to be conjunct with the lot parity formula.
I think this can be attributed to rounding or something simular. The reason I don't think they factor anything like that in is because the posted "correlations" on the site never change. You'd think they'd change if the system adapted to them. There could be a possibility that you could combine a spread trade and carry trade by buying the two when correlation is further apart (I'm guessing that on average, the far spread will narrow.. I haven't tested this). I highly doubt they do this, but I'm more than willing to stand corrected.
Not that I doubt you. But can you share us the same exact formula Freedomrocks is using? maybe we can brainstorm it a little further so we can come up with a better system here. What do you think?
The forumla I have is the same you probably do. It's the ratios between the pairs. When I tested it, it was near identical in every condition I tested. Again, if you can show me something otherwise, I'd love to see it.
On the topic of FR, I wanted to share something else that I realized about their system. They add/subtract lots based on price movements, so that if a price goes up to a certain point and then back down, you'll profit (the inverse is true for negative price movements). You know what this actually is? It's doubling down a gain/loss. It's the exact same as randomly buying a pair (or selling) and hoping it goes to a pre-set level. As a real life example, if you had done this on a top before a big up-trend, you'd be down some serious cash. Why do they do this? Because it works 99% of the time, so people get more money 99% of the time, and lose a ton that 1%. Due to the bid/ask spread, it's actually EV-. Plus, if their "hedge" is so great, why add/subtract to it? You're breaking the hedge!
I'm also looking forward to the release of your system. Good luck!
It's more of a technique, but thanks. It's in beta now (I've been using it for a while, but am just now getting it on paper and making it user friendly). It will be posted here when I'm ready.
I had never really looked at the idea of hedging but am intereested in learning about it. Are you saying that there is no way for a hedging system to work?
Not at all. What I'm clarifying is that this popular cross-pair system is simply a low-volitility carry trade. You aren't hedging. There are methods to hedge currencies, such as buying and selling the exact same currencies on two brokers that pay different interest. I prefer to call this technique we're talking about a "correlation carry trade".
If it were that easy... no one will pay a monthly subscription fee for Freedomrocks, forexforsmarties, forex-assistant. Hope someone can point me to the right web site to get the right computation. Atonix, If its not too much to ask. Can you post the formula here? Spliting ratios between pairs is easy, but what I like to know is how they add the correlation coefficient ratio to their computation and what (time) period do they use.
Alright, here I go.
Yes, it is that easy, and people pay for it. I'm going to break something to you: they don't factor in any correlation. There's no reason. Let's back up to see what they are attempting to do, what the correlation is for, then how it could be done easier (and save the subscription). How do I know so much about this? I'm a math junkie, and spent a while evaluating these systems (figuring out exactly what they did). Needless to say, after my trial expired, I never began to look back.
FreedomRocks (and simular ones) are performing carry trades to take advantage of positive swap. Easy enough. They do this by trading low-volitility pairs. Unfortunately for anyone who doesn't pay attention, they aren't hedging anything. Let's take the USD/CHF and EUR/USD (a popular cross). They are buying and selling the exact same amount of dollars. They even tell you this. Making this super simple, they are buying $1 (and selling the equal amount in CHF), and then selling $1 (and buying the equal amount in EUR). This equals (exactly):
($1 in EUR)/($1 in CHF)
Which is (supprise!) EUR/CHF, a pair that your broker should have. Wait, wait, wait.. why would they buy and sell two different pairs instead of just buying EUR/CHF? I'm not exactly sure, I think it's to maintain the illusion that you are hedged. Well then, what are you doing?
You're trading a very stable pair. Check out a EUR/CHF graph. This is what the correlation refers to: how stable the cross-pair is. The EUR and CHF have a high correlation, so are pretty stable. Others aren't so stable (especially the Yen), but pay more.
So you're simply trading two pairs that are simular (due to very simular economic conditions). The higher the correlation, the higher the volitility, and higher the risk (but generally higher the reward). You generally trade multiple pairs to put your eggs in several baskets, because even these "stable" pairs can change.
Want to know another secret? The correlations they list are optimal. Check out http://fxtrade.oanda.com/currencyCorrelations/heatmap.html. First notice that the CHF is fairly well correlated to the EUR, but if you look closely, the 1 year correlation (this system is long term, right?) is -0.71. 6 month is -0.76. 1 month is -0.85. This isn't even close to what they claim. What's the value in any correlation then?
Stability. High absolute correlations means the pairs react very simularly, so are good for lower risk carry trades.
Ok, this should give you enough info to start looking into this and verifying everything I've said yourself. These guys run a pretty good chop-shop of a system. Need your magic amounts of each currency? Just buy the resultant cross-pair in the amount you want. I'd suggest that you buy several different, low volitility pairs.
I'm releasing a technique soon that takes these principals and uses them only in profitable conditions and diversely to manage risk effectively. And without the $100+/month rip-off. Oh, and if after reading this you don't believe me, I have the formula FreedomRocks uses to calculate lots.
atonix,
Thanks for your post, very interesting...!
Very timely as well, as I'm doing the FFS demo and have been looking for the same hedge calculators as the others here.
Just requesting that when your technique is made available that you would be so kind to inform those of us who are interested, if not on this thread.
EDITED: My mistake, I did not see your above post....
Thanks,
WNW
Atonix,
Thank you. Seems you have a real understanding of this aspect of trading (or investing). So with this type of method, by considering it a low volatility carry trade wouldnt that mean there are some benefits over trading the the single pair you mentioned? Please also count me in once you have your program running, I am really interested in these ideas.
My hedge Calculator work in progress
I want to share this and see if it can be improved.
What I have is a calculator the takes the two pairs with adjusted lot size so each pair should equal the same money gain on a said move in the price.
(EU/USD points = 10.0 compaired to USD/CHF points equal 8.23)
For every 1 pip gain in 1 lot of E/$, the U/Chf lot would need to be adjusted to 1.215 to keep pace. Now I just need to figure how to add in the coorelation, if some one can help with that.
Also this is set to work on a LONG trade for now.
I want to share this and see if it can be improved.
What I have is a calculator the takes the two pairs with adjusted lot size so each pair should equal the same money gain on a said move in the price.
(EU/USD points = 10.0 compaired to USD/CHF points equal 8.23)
For every 1 pip gain in 1 lot of E/$, the U/Chf lot would need to be adjusted to 1.215 to keep pace. Now I just need to figure how to add in the coorelation, if some one can help with that.
Also this is set to work on a LONG trade for now.Yep this is the same thing I wrote (forumula wise), but as explained above, I think is very useless. Thanks for your contribution.
Atonix, Thank you. Seems you have a real understanding of this aspect of trading (or investing). So with this type of method, by considering it a low volatility carry trade wouldnt that mean there are some benefits over trading the the single pair you mentioned? Please also count me in once you have your program running, I am really interested in these ideas.
Basically, EUR/CHF is just as any pair, and is pretty stable. USD/JPY is the same, but is very volitile. It's all about risk tollerance.
My technique that I'll be posting is more than just "do x". It's actually looking at what you're truely wanting (risk tollerance, length, etc), and making a basket of carry trades that distribute risk and are not trending against you.
Well, if you bought and sold EUR/USD and USD/CHF independantly, sure, you could attempt to buy low and sell high. But do you really know what low and high are? No "hedging" system I've *ever* seen has you buy the two at different times (because then, you're just spread trading, which is more risky).
Plotting the hi & lo is easy, there are many ways to do that. You can use fibo levels or pivot levels or daily ATR or simply place limitorders at every previous hi and low swing. I will explain later why it is safe.
Not that I'm siding FR or True North. But we can't ever judge that FR has wrong correlation ratio posted on their site, since we don't know from which time period they are getting from. On the other hand, the True North calculator refresh its correlation ratio every time you open the file, they are getting their feeds from MSN money site.
When you use the phrase "near identical", that means you don't have the exact formula they are using, right? Even if you round it off, it won't give the same exact results, unless you don't use decimal points. I'll PM you my formula, but can you PM yours to me? so that we can exchange notes?
You have a point there, 99% win and 1% lose will close your account. That is if you are too greedy and trade large margin all the time. If you are just using 10% margin, it will take around 800 to 900 pips down move without a retrace of EUR/CHF pair, before you can reach a margin call. That kind of fall didn't happen in the last 5 years. If fact, last February global financial crisis, when carry trades unwind, I was hedging the 2 safe pairs with 8% margin, Eur/Chf felt 366 pips, and I were able to survive.
What freedomrocks lack is they didn't enclose a warning that trading more than 10% of margin is risky, they didn't post it on their site, they just discussed it on their webinar.
While when I bought the True North calculator. They warn me beforehand and given thought me how to utilize it to the fullest potential by getting the right entry, which 2 useful indicators to use and how to use Dollar Cost Averaging technique with the system.
And as for the buy lo, sell hi logic. This is little complicated to explain. Both company didn't claim that it is a perfect hedge, as it never will. There's a few fraction points defference between both pairs, that's were we earn money from. When a pending sell limit order is executed, you are actually selling a part of your initial long position, this balancing will give us lesser time to recover from a floating loss. Same logic with the overnight interest you earned everyday.
Overall, all those company have almost the same profitable strategy, but I choose True North since it is just a 1 time fee, and I can get a free copy everytime they update their calculator. If I'm only using a small amount to trade and if I pick the other companys offer, I will just end up giving back all my profit to them with the monthly subscription fee.
Gee, I'm sounding like as if I'm their sales representative. True North have to give me credit for this.
The true definition of the word hedge is when you are selling and buying 2 different currency pairs that are moving on the same direction or buying both currency pairs that are moving on the opposite directions.
While when you say carry trade. You are trading a single currency pair on a direction where it is trending most of the time, and have the ability to earn swap daily.
I would rather call this topic, "correlation hedging using a carry trade pair as a barometer".
Yeah, all good points. Oh, I know plenty about S/R and the like.
As a last correlation point, correlation goes both ways. It means that price action is simular between two pairs x% of the time, and when it's not, it goes both ways. That's why I don't think there's any advantage to calculating pair positions with it, since it should be evenly distributed around the correlation point.
ATonix,
Any idea when you will be ready for some of us to take a look?