Correlation Strategy

sparxfx

Newbie
2 0
Hello Everyone!!

I have been trading for several years but have never posted in a forum until a couple months ago when I posted some information on a correlation strategy I trade. The post originally started out as a search for help in developing an EA for position management (not automated entries). I received numerous requests for information on the strategy itself so I decided to share some of the information. It was very well received, so I thought I would continue sharing it in my free time.

My correlation strategy is simply trading more than one pair at a time and viewing all the pairs being traded as one collective unit or trade. Each pair in the correlation trade plays an integral part as the trade utilizes correlations in a manner that allows you to profit no matter what direction the market moves. It is a way to profit from the random nature of Forex by capitalizing on the random swings and algorithms between correlating currencies. The draw down is often extremely limited and little margin is required. The strategy focuses on quantum, not pip collecting.

The strategy is nothing new or exciting. Like most strategies out there this is just another person's version of something that has always been around. The strategy is common among commercial traders, financial institutes and some speculators. What I have done, is taken some of the basic theories and concepts of correlation trading and developed a strategy for Forex that has been adapted for intraday and/or short term profit. There are many variations of the strategy so it is great as a stand alone method and can also complement existing strategies due to its unique versatility.

Please Note: This is just a very general overview of one of my main correlation strategies. It is not completely thorough nor does it speak to the subjective components such as set ups, entries, and points of caution. However, there should be enough information to satisfy traders seeking strategy information.

This particular version of my correlation strategy acts as a pseudo-hedge because the currencies are traded in a manner where the USD is usually hedged. There are several reasons for this but the primary reason they are traded in this manner is because the trades have the opportunity to be profitable regardless of the direction the market moves. When I refer to trades I am referring to the collective balance of all open positions as one correlation trade involves multiple currency pairs (usually 2 pairs).

The currencies I trade for this strategy are chosen from correlation triangles I create. There are multiple correlation triangles but the most common and frequent correlation triangle I use contains the EURUSD, GBPUSD, and USDCHF. I group these three together based on their correlation coefficients which is a statistical measure of how two securities move in relation to each other. The other reasons include, but are not limited to liquidity of the pairs; and the fact that there are multiple correlation trade combinations that can act as a pseudo-hedge within the three pairs.

Once a correlation triangle is created it is important to recognize that although there are various trade combinations within the triangle, there are only a limited number of combinations that can be traded to satisfy the criteria of this correlation strategy.

It is my intention to start posting information in this forum from the forum currently hosting the info but I trade full time and that is my priority. This forum will be a side project for me when I have free time. For those who want more details before I can get them posted here, you can find them at their current location located here: http://www.goldenmoneytree.com/forum/viewtopic.php?t=974 . I have no connection to this forum it just happens to be the location where I first started to share my strategy.

If anyone has any questions please post, send me an IM, or email me at [email protected].

Cheers!!!
 

NVP

Legendary member
37,707 2,065
more info / attachments

Hi SparxFx,

(I have also contacted you privately)

Could you load some attachments, recent trades to illustrate your strategies ?

I have not got user access yet to Goldentree so cannot see attachments there

Best Regards
Neil
 

sparxfx

Newbie
2 0
Thank you for your response and interest NVP.

I have emailed you two statements and will soon send you some screen shots of the actual trades as well. One statement will show you a return on investment of approximately 150% in about a month and the other is approximately 160% in 17 or 18 trading days. These are just two of many examples but should assist you. The majority of the trades in both those statements are one standard lot per position as it makes it easier to show the profitability of the overall strategy. If the lot sizes were increased as the account equity grew the results would logically be substantially higher.

The example of being long EURUSD and long USDCHF from GammaJammer is but one example of the collective strategy. However, I respectfully disagree with GammaJammer’s summation that trading the two is the same as trading the EURCHF. It is a popular misconception and there is no shortage of opinions and documentation to support the opposing views on this topic but it has little or no relevance to my strategy.

It does not matter if you believe trading 2 currency pairs with a common base and/or counter currency is the same as trading one cross pair. It does not matter if it is true. It does not matter if it is false. And it does not matter if you believe 2 currency pairs form a synthetic version of a third currency pair. The comparison or debate would be extremely multifaceted and the subsequent resolve would serve no benefit to the correlation strategy discussed here.

The purpose of trading the two currency pairs simultaneously includes (but is not limited to) the benefit of the pseudo-hedge. This is something that cannot be accomplished by trading one currency pair. The fundamentals, logic, and concepts behind the strategy can be as simple or as complicated as you choose to make them.

Cheers!!!
 

timm

Active member
101 16
The example of being long EURUSD and long USDCHF from GammaJammer is but one example of the collective strategy. However, I respectfully disagree with GammaJammer’s summation that trading the two is the same as trading the EURCHF. It is a popular misconception...

Yes. Come off it GJ. NExt thing you'll be telling us the world's round and the Pope's a catholic. ;)
 

atomm

Member
67 3
So am I right in saying you would, for example be long eurusd and long usdchf same size?

If so, you have just spent a page describing something I can summarise for you in two words. If you put on the positions I've described above, it's called being Long EURCHF. Simple as that. If there are only two pairs, and you knock out the dollar exposure you're trading a cross. Plain and simple.

Of course if you trade more than the two pairs simultaneously thats a little different, but from the sounds of things you're predominantly just trading crosses. Nothing wrong with that per se, it's just commonly described in somewhat simpler terms ikn the FX market

Good luck

GJ

GJ

Agree with GammerJimmer.
If you cascade currency charts on the same monitor screen, probably with low time-frame ( 4-hr or lower ), and monitor the live price movement, you can see the correlation of a cross to its component currency pairs.

Example ;
EURJPY = EURUSD X USDJPY
GBPJPY = GBPUSD X USDJPY
EURCHF = EURUSD X USDCHF
EURGBP = EURUSD X ( 1 / GBPUSD )
But the formation of each cross has certain degree of deviation or maybe inefficiency in the process of transaction ( which is done in a fraction of a second ).

If you long both EURUSD and USDCHF at the same position size, but shortly later both fall in price, what appears on the EURCHF chart is it is down. In this situation you have losses in the trade. Vice versa for a short position.

In another scenario, shortly later both move in opposite direction, what appears on the EURCHF chart is it stagnates, ie. almost no change in price.
This maybe an opportunity to exploit the inefficiency on the simultaneous EURUSD and USDCHF trade, as the EURCHF price does not move; something like hedging. Of course the spread of the trade must be considered. The occurrence of such movement is another question.

IMO, Saprxfx's correlation strategy merit some further research, particularly if the trade combination involves more than 2 currency pairs at the same time. The inefficiency in price movement involving 3 or more currency pairs ( against the USD ) maybe the trove to exploit. It maybe very complex or nonexistence at all, but looks interesting. I personally has no single idea on it and I may be wrong though.

Saprxfx, welcome to share your strategy.
 

tightstops

Active member
245 19
that sparxfx doesnt realise that long eur/usd and long usd/chf in equal amounts is long eur/chf isnt a good start but maybe he has something. although until he adds a third pair and it sounds like he will i dont think were going too far into the realms of correlation. i looked into it a bit myself and its interesting how often various pairs hit resistance areas at the same time adding a little fuel for the change in direction. i think it can be useful to frank ideas with with other pairs so if youre thinking of buying cable maybe look for strength in euro first, much the way you might keep an eye on the s&p or even nasdaq if youre trading the dow jones. a while ago i remember trading crosses without even looking at their charts but having just studied the two relevant pairs since i figured it was the relationship with the dollar that would be more important in deciding the direction.
theres some kind of harmony in there but im not sure if its tradeable i mean if x goes up and y goes down that means z will do this. why not just buy x and sell y and forget about z. the only time z becomes useful outside of confirmation is if theres a significant delay between the two occurances.
one of the market wizards (cant remember the name marcus something maybe any way he was one of the good ones (not sure how some of them got in there- 40% annual return for 3 or 4 years in a big bull market followed by big drawdowns when the one way street finished - i suppose anythings a dissapointment after reading about the magicians in the first one anyway he described fx as 3 dimesional chess and its easy to see his point of view its one big synchronised mesh but i find it hard to see where there might be an advantage because it does seem so synchronised.
one thought i had the other day when looking for a trade on the charity thread might be worth thinking about: i was confident euro would be heading down so figured id put it on the thread when i got there i saw trendie had said buy cable for about a hundred pip move or something so im thinking without knowing anything but the euro charts that doesnt look to clever hows that going to get there if im right bearing in mind ive got a 20 pip stop- anyway cable flies off and hits his target and euro doesnt budge when cable finally calms down euro drifts down so can a conclusion worth looking into be:
if a correlated pairs making a big move and the other is still. when the big mover stops or falters go the other way with the other pair which has been showing no desire to take what should be the direction of least resistance.
i personally found that trying to keep an eye on everything was counter productive. knowing one pair intimately i think outweighs the advantage of a wider perspective having said that if im thinking about longer term moves ill take a look at the dollar index along with my euro charts.
i look forward to spakxfx's ideas
 

tightstops

Active member
245 19
It's called triangular arbitrage, and you need access to interbank / wholesale type spreads and tools in order to actually make it work.

There are people on spot fx market making desks who do this, and people are now also trying to replicate this with machines (harder than you think) but you need to be lightning fast AND have access to customer flow typically in order to be able to close the deal (i.e. what often happens is that two legs of the trade will be executed electronically while a salesperson will have a client trade to make the third leg).

As you would expect the three most common versions of this arb play are EUR/USD/CHF, EUR/USD/JPY and EUR/USD/GBP. The reasons these are omre prevalent are firstly that liquidity in all these currencies is good and fairly consistent and secondly that all the relevant currency pairs can be traded on Reuters / EBS dealing systems (which historically have been the bigger liquidity pools). More pairs are now traded on the other ECNs, but for ease of use, Reuters and EBS are still ahead imho, and that is a big factor when you have milliseconds to do the trade.

And if you think I'm joking how fast you need to be, trust me - these guys are unreal. They look like they're playing track and field on their keypads.

GJ

i expect they have to fire off 3 trades in a fraction of a second to hit all the showing prices? and thats probably after the maths gymnastics. makes me picture the baldwin brother in the usual suspects shooting 2 guys at once
 

tightstops

Active member
245 19
Most retail traders don't have access to anything more recent than daily charts, but that's probably fine. If you need intraday I suggest getting the formula and building a spreadsheet (although wouldn't bother myself).

GJ[/QUOTE]

good chart packages have dollar index charts these days and platforms that trade dollar normally do
 

jacinto

Senior member
2,374 101
And being long EUR/USD and simultaneously long an exactly equal sized amount of USD/CHF absolutely IS being long EUR/CHF. Not an opinion mate - it's fact.

at the time you put this position on I guarantee you you're long eur/chf. P+L wise it will behave exactly the same

absolutely agree on the P+L effect. a rather simple example should do it

long eurusd is roughly the same as borrowing USD to invest in EUR

long USDCHF is roughly the same as borrowing CHF to invest in USD

if USD in leg 1 is identical to USD in leg 2, then USD exposure is nill and:

ASSET = EUR and LIABILITY = CHF........in other words.....long EURCHF
 

jgerousis

Junior member
29 1
Can you help out with correlation between TRY/JPY and other pairs???

after some research I found that interest rollover is 16% , or 40 USD per day for every lot taken (long).

Any ideas about other pairs to hedge against them?

Regards
Yanni
http://www.myfxreport.com
 

TheBramble

Legendary member
8,395 1,171
Can you help out with correlation between TRY/JPY and other pairs???

after some research I found that interest rollover is 16% , or 40 USD per day for every lot taken (long).
The Carry trade gives the impression of offering a lot more than it actually does. Any relatively large interest rate differential will do the trick, basically ANYTHING/JPY. But unless you've got the direction right (long Long tends will help in this regard...) your main trade and profit is directional, not interest rate differentials - that's just (minor) icing on the cake.

For out and out Carry, you need to (a) get the Long trend right (b) have the clout to weather the drawdown which will and does occur and (c) be in for the long haul to make the figures for the purely Carry side of the trade look worthwhile.

But you only need a glitch against you if one or more of those three factors are not in place to make the point of where your primary focus should be – the price levels, not the interest rate differentials.
 

lurkerlurker

Senior member
2,482 150
And in line with what I have said in my last post, if this wasn't the case, arbitrageurs would (and do) step in and make it so. Misalignments last seconds at most.

GJ

Are there more opportunities after the payrolls and FOMC minutes? Don't worry - I'm just curious to know - I wouldn't even think of trying this as I'm just a retail trader paying fat spreads. I really envy the prop FX / interbank lads though - they have so many opportunities that retail folk just don't get*, and they know the order flow....:(

Oh well - maybe I'll get there one day!

* - legally front running massive orders and then taking high risk punts on the profits sounds pretty nice too. Get £40m from a bit of front running, take a huge position - if you win, you just made another £40m and you are a hero, if you lose you are down £0 on the day
 
 
AdBlock Detected

We get it, advertisements are annoying!

But it's thanks to our sponsors that access to Trade2Win remains free for all. By viewing our ads you help us pay our bills, so please support the site and disable your AdBlocker.

I've Disabled AdBlock