Here's my questions concering hedge trading correlating pairs:
- Does it still involve discretionary trading to know when to get in and when to get out? Doesn't it involve two particular currencies to go up as a pair to be profitable? ie. EUR/CHF
The answer is yes and no, since we are depending on the eur/chf price movement, and eur/chf is a carry trade pair, it will trend up as it should, so entering without discretion will also do, I'll explain why later. Now, if you want to gain the maximum potential, you need to get it at a right entry, to lessen the period of drawdown, in that way, there won't be any mis-used of margin.
- Now it was mentionned earlier that world ecomnomies change and so will interest rates. Wouldn't that nullify the usefulness of said calculators or can they be modifed to adapt to other currencies in the future because if a strategy is only going to work for 4-5 years why use it?
With regards to global economy. Euro is getting stronger right now, stronger than the USD. This will cause inflation and ECB must increase their interest rate, which will cause the euro stronger,. In fact there's a rumour that it will reach 1.4 this year and that's not a far fetch. On the other hand, the swiss depend much on export just like Japan, so they should keep there interest rate low. People will borrow swiss franc to buy higher earning interest currency like euro, thus carry trade will continue. The eur/chf will still trend upward. This answers the 1st question above.
I'm using True North calc, that is one of the reasons I started this thread. They update their calculator if there are some significant changes in interest rate and correlation ratio. And will send the updated file for their users for free, as per their agreement. I received 3 updated calculator since I purchase it, and they just recently added another strategy calculator in it.
Some of my friends is still subscribing freedomrock, and since they are web based software, I think they don't have any problem updating it. I haven't used the other that you've mentioned, so I can't give comment.
The only time this strategy stop to work is when euro interest rates is equal to swiss interest rates, which is hard to imagine but possible.
- How often does one trade using correlating pairs? This has been a question I have often wondered because I know people who almost day trade with it while other position trade. To anyone who trades forex assistant or true concepts or freedomrocks, how often do you make a trade and how long do you tend to hold on to the trade?
Just as I've said. I'm using True North and they taught me how to scalp the market using the hedge startegy. In my experience, sometimes I get 2 to 3 good signals to enter the hedge, and sometimes if my prediction is wrong, that 2 to 3 pairs trade just last for about 1 or 2 days before they get to the profit zone. And by the way, they also have the 4 pairs hedge calculator for longer term trade... holding for weeks or a month, this is for people who don't have time to stay in front of the platform very often.
These are just some of my burning questions about correlation pair trading of which I still wonder if it's worth getting into.
Same answer that I gave to members asking me in PM, YES it is worth it, I already gained enough, I'm about to buy myself a home theater set next week end. Hope that help answers some of your questions.
That's very simple, but you require to have basic knowledge in trading and some the 3 very useful indicators they recommend. It is the Stoch, CCI and the less useful but there to give confirmation, the ADX. Those 3 indicators combine with the use of trendline and fibos.
Like the chart that I posted. Price touched the upper channel line and formed a pin bar (morning star), and break out the bollinger band, it means overbought, If you look at the Stoch, it crossed down the 80 level.(the BB I add it myself, not part of their recommendation). It is a strong signal of sell.
Now, I use the hedge calculator to compute the amount of lots to buy, but instead of buy, I open 2 sell positions but use the recommended lot of the hedge calc. Did you get my point? But just as I've said on my previous post, the swap will not be in our favor, never mind the deduct swap, it is to little to affect the profit you might gonna get from price discrepancy gain.
While on the exit, wait for the stoch to cross up from below. Just like the one on my posted chart with the red arrow pointing up. Notice that theres also the confluence of 62 fibo and the lower channel. Best time to exit, grab all the move.
I'm sure you'll learn more and understand my explanation more clearly if you purchase the calculator from them. My english is not that good for explanation.
Turns out the 62% fib was a nice entry last night. I am in a nice positive position at this time. I am curious what you mean by reverse hedde. I assume you basically treaded within your longer twrm carry trade. This would be similiar to forex for smarties and freedom rocks if I understand correctly. Right now I am working off my own calculations (as seen earlier in the thread.) Basically just taking the pip value difference multiplied by the correlation ratio of the last month. What I have not decided is how I really want to trade this in terms of exiting with small pip profit versus holding for the swap. Itr appears to me that you are exiting once you have a positive position of some sort. For now I will use my longer term support and resistance levels if I get into a position where I think I should exit and wait for re-entry. Watching rhe cross pair gives a very good inmdication of where to get in and out (not unlike tru directional trading).
Looks like we were typing at same time. I assume your "reverse hedge" is simplay a small percentage of your existing trade. In other words, assuming you have 1 lot of eur and 1.2 lots of chf for original position, your revers may be .2 and .3 lots OR are you only enterring the sell on one of thew currencies?
I am starting to believe that the actual calculator is not even necessary. For thpair we are discussing we know that a 1.21 move in chf is take to equal the 10 per pip move in eur. If you simply buy 1.2times the eur as a regular rule I think it will all come out the same in the end due to the constant change in correlation ratios. The key to watch on the correlations is simply to be sure you have a good negative correlation.
I don't just closing out the hedged positions simple because I already earned some few pips. Just like you Scotty, I close at S/R levels, trendlines, channel lines, daily ATR, Stoch, CCI whichever I see a possible reversal.
In the reverse hedge, it is simply going against the true direction of the carry trade. Assuming the hedge calculator ask me to allocate buy 1 lot eur/usd and buy 1.2 lots usd/chf I'll do the opposite, I'll sell 1 lot eur/usd and also sell 1.2 lots usd/chf.
Scotty, can you share with us how you add in the monthly correlation to your computation? If you don't want to share it, its fine. I'm not really desperate of knowing, I'm just curious how True North and the likes get their computations, I'm trying to break the code for a long time, but I still seems get it, the formula I shared earlier in this thread is very near of what I've been researching, I just don't know how to add the correlation value to the formula.
I thought I explained in an earlier post exactly how I do it. Once I determine the ratio it takes to equeal out the currencise, I multiply that number by the monthly correltation of the currencies. I believe this number will come very close to the true north and freedom rocks methods. Please PM if you want to go over actual numbers, this way we dont waste any other peoples time uin this thread if they arent interested.
I don't quite get what you mean by 1.2 move of chf is equal to 10 per pips move of eur. Are you suggesting buy 1 lot euro and buy 1.2 lot swissy?
If that's what you mean. I have already done that. due to the correlation coefficient of both pairs is mostly at 80 to 90 value, which more or less 80% difference. I was placing 1 lot buy eur/usd and 1.2 lots usd/chf. The results are good but sometimes it takes longer period compared to what the hedge calculator allocate. And I can't even use the eur/chf chart to guage the move unlike what I'm doing right now. Try it, you'll see what I mean.
You run a reverse hedge while you are already in a regular hedge? In effect, you have no position and just look to cash one out with profit and wait for other to reverse? For me, when the correlation has gotten out of whack to the "bad" side and I am losing, I look for support levels on the Eurchf. I use these points to increase my position of the hedge with the idea of the rubberband effect you discussed earlier. If support is broken I will exit the additional hedge while continuing int eh original hedge until I see a sign that I should take a full loss. If instead I get the reversal I am expecting, I will exit the second hedge at point where original hedge is back to breakeven. This is not unlike FR, HOWEVER, I take on an actual second hedge instead of just one currency.
Almost....Lets assume 1.2=1, next I look at the correlation. Lets assume with have 90% negative correlation. I multiply the 1.2 *.90, so I purchase 1.08 to 1 of the chf. The closer to perfectly correlated the closer to the actual 1.2 I will get. While this will not be exactly the same, I am guessing its damn close. So close in fact that the difference could just as easily help you as hurt you. For example, if under my formula I end up buying .2 more units of chf then your method, its a total guess which currency will be the one out pacing the other in the hedge. We know these are not perfect hedges so the slight difference makes absolutely no difference. I have run a bunch of demos and its quite interesting that no matter how I allocate the lots somtimes one method is better and other times other methods are better. So true north, fr, forex assistamt, forex for smarties , you or me it doesnt matter. The whole key is entry and exit. Lot differential is only a VERY small part.