Miniebook

I had thoughts on this a for while,but it is definitely a work in progress. I would like to release a new mini ebook available for download of how i trade correlation successfully for the past year and this year.I will designed this for newbie trader (not so newbie) which they can hopefully follow. It will be a rough/raw first edition since it will my first ebook. I will include some screenshots but only a few so not to take too much space on fileservers and for a fast download.

Hedging with EURUSD

As i continued trading towards H1 Tf , i encountered several runaway trades. I found a solution , to hedge the trade with eurusd in a step towards diversification. My exposure on eurgbp alone is not a very wise action especially in the long run. Nowadays i do not only check the correlation between eurusd and gbpusd, but i also looked for eurgbp and gbpusd. In usual days i usually has eurusd and eurgbp trades running at the same time, but also when both in a different direction,ex buy eurusd sell eurgbp.
I not only reduce a lot of DD,usually i ended up in profit as eurusd profits is larger than eurgbp loss. In a better situation, i even have a profit in both eurusd and eurgbp making for a terrific week.

Experiments Result

I found it the hard way...at least on demo..yes you can big stop loss, but the actual grid must be 30 pip spacing between levels and 60pips above for tp since as soon as trend came you want to hold out on winners longer .Those stops above which is 200p will be hit but you have to make sure you have more profits than losers.

Losers vs Winners

Theres no escaping losers with this new technique,as always we had to make sure our winners are more or bigger than losers,as for trend traders bigger winners is usually the case.But a hard to do for us average traders...whats the better ? Having streaks off losing trades and a big gain vs steady stream of booked profits with occasional booked losses. I chose the latter...

Further experiments 2

It seems the newest strategy works in ranging and trending markets for now, this past few days i have been working on euro dollar booking in profits ,while maintaining hedges in the minus, as the pair range i continue booking profits and cutting the losers gradually when the profits is bigger than losers.Eventually the balance and even the equity rises, bigger suprise when the balance and equity rises even faster in trending markets today, as euro trends down.
This happens simultaneously with closing of some big losers but the profits is bigger than -ve positions. At some point there was 12 -14 positions buy and sell combine which i gradually close all but 4 today after i decided to call it a day. All of this without using a single tp or stop losses.
Another version i will test is using 200p fixed SL for all positions long or short . I wanted to know if i can cut dd faster and maximizing profits at the same time, yet in one condition.. the profits must be bigger than the booked SL's that was hit...seems a new kind of challenge.Time will tell between the two.

Further experiments

This past months have been great for pairs trading ,even with the chaos happening on the markets on the euro situation .Despite falling and rising,we kept booking more pips on eurgbp, albeit a much slower pace since we trade H4,one thing i noticed is that trades are getting fewer and more infrequent..this happens to narrowing range and crazy market movements. We did switch to H1 and even 15min to execute trades. But 15min tf is a unsafe but for quiet markets .I wont recommend even myself to trade those tf.

Due to this, i made experiments for EURUSD , i scoured the forums for information regarding hedging. One thing they did was booking the profits while at the same time ,reloading orders using limits orders,and closing the danglers which is losing positions gradually. I found that this shows promise , either a trending markets or ranging markets.It is a combo a both systems together, although i used a little MA to give me basic direction. This also in line with what a trader said. " Trading is not trading itself, but managing positions". A bit vague,but the philosophy behind is somewhat true. Will keep you posted.

Trend trading

One of the most famous trading strategy that was ever used was the trend following strategy. This was evident to current economic climate, if an instrument was in established trend ,it will more or less continue in its current direction regardless up or down.Amplified by trend followers ,the movement probably will sustain ,towards weeks or even years.
Then there was a statement released publicly towards trading , 95% of most traders often lose, similar to 95% of business startups.But we will focus on trading for now.
Stops, or stops loss almost always accompany any trend following strategy. In my opinion one of the ways that most traders lose money. But without a SL preset,the account will in much potential to lose especially with overleveraging. The results, with or without stops both will lose money, one slowly or the other quite fast. The reason was the way the strategy is executed. The strategy is geared towards professionals or experts with years of trading experience. If you teach this to newbies ,or even apply this to robots it will lose money some way or another. Traders often got 'killed' in ranging period which can occur anytime anywhere without any warning. You can imagine how many times they will stop out. Once the trend is back in place will the trader hold on into their position to recover some of the losses?
Using hedging or using a bidirectional grids or using williams MM which is adding trades to winners, the trader can not only make money but withstand drawdowns during the ranging period.Most strategy are not much equipped to endure prolonged range period which is their biggest weakness.Standing the dd is a must to eliminate losses and getting the needed profit.
Most cash in during losses which is not the way business work.WHo would cash in during losses? We will only close 'trades'/cash in during profits.Such is the way that most teachers tought their students. Plus there is a psychological advantage,since we would look at dd as temporary. On the other side DD is looked as permanent which is booked loss. Loss and wins are never permanent unless booked. They would book during losses, which could be psychologically damaging. Some traders even said trading is a lot more mentally challenging. But they always tell to damage their own mental state.eg book in a loss.

I conducted in an experiment several months ago using EURUSD using bidirectional grid, i added to winners.Eventually the account suffer a total DD of -900 pips which i closed with regret. The trend eventually appears,which on paper,if i would continues using the strategy would nett me profit,eliminating -900p with a plus. That was a lesson learned. We must be able to withstand initial dd,before getting the profit.But this would be easier to execute rather than the usual trend strategy MM.In the basic trend strategy ,if you missed the winners, thats a death blow to your account ,plus suffering losing streak.Even sleep is not permissible, you must catch all trades.
Using stop entry orders(hedging), no trades will be missed, you could have a nice night sleep.To me the advantage outweights the disadvantages, even by having bigger DD.
Each to their own. If your not comfortable trading, dont, trade only when your comfortable.Does that make psychologically sound?

More questions to ponder

Have you ever looked at how the three pairs move in conjunction or relation to each other?Each of the pairs has its own side of story.Sometimes the other will lead ,somedays the next pair does.One also leads one almost always follows. This could be a hidden gem, since the three "always" go everywhere together during my observation. Yes they do split sometimes but in the end they always band back together. With higher TF's we could see the main direction of where it should go,no matter how far it went even towards 1000 - 2000 far apart in due time it will go back to its direction, like the sun.
In retrospect this could be absolutely powerful tool,even more than very long term trend.The trend as you can see ,even the most powerful/longer ones will change in due time,its past cannot foresee the future,the train will run but you wont know for sure how much fuel is left, you will be playing a guessing game which its why so many has failed in forex.The notable difference is that with this 'tool'/correlation we could see the destination, yes the destination matters, its what matters most. Twist and turn it be, but reaching the predetermined place it will.Think about it, i did not see anyone teaches this anywhere,even if they do its incomplete or vague at best. Combine it hedging / locking then you will minimize those DD's.

Nowadays i also have traded additional pairs ,EURUSD as well as EURGBP.The signals on EURGBP has become a bit rare ,even waiting for weeks now. I had placed a trade on EURUSD naked based on correlation out of boredom , and reached +60 quickly. I had thoughts that maybe i could ditch all of those technical analysis and just place the trade at random, knowing the main direction provided. The risk had to be determined before hand,but we know since we could calculate the maximum deviation by the charts a max of -200p DD should work since i'm looking at statistics here. Backtest is good to calculate max drawdown.Using sl's we could be stopped out anyhow.But without currency exposure,how could we profit? Stops/hedge, lock whatever must be large enough to account for currency fluctuations ,by fluctuation i could mean 50 -150p up/down. Throw the risk/reward out of the window here ,thats only good to lose your account eventually.Statistics are what matter here. A boxer couldnt win any match after suffering 2 - 3 punches and gave up.He wont be champ forever. He must absorb it and keep duking it out. A 50 pip sl and 100 p tp? no way, i had not make it work ever.

More rules

As you can see in the previous example and images i didnt point out another secret that i always use. Usually people will jump in the trade when they see enough gap, trendline break ,etc.There is actually another requirement to trade. The picture below has 3 lines, one the eurusd ,the blue gbpusd and red eurgbp. The rules says blue above eurusd to buy and vice versa.In addition the red must be below eurusd,this is very important. See here the alignment :
Buy eurgbp (pair trade buy eurusd sell gbpusd) = red line the lowest,eurusd in the middle , blue line the highest.
Sell eurgbp (pair trade sell eurusd buy gbpusd) = red line the highest, eurusd also in the middle , blue line the lowest.

Safe trading.

Live mistake

Closed the trade finally in +1 pip profit,shows us that even when making mistake ,the market eventually gives us the way out.I thought the trade would eventually goes to -100 to add up,but didnt.Should have waited for the trendline break ,but eventually happened today.Waiting for the next trade @EURGBP

Live example

Now at long EURGBP 0.8726. Risking less 1% account. A common mistake that new traders is to overtrade or overleverage. They risk too much that 1000p dd meant a bust account. In our case 1000p dd wont dent the account.
Pulled the trigger after hitting the lower extreme band H4,also hit the bottom/extreme channel with an up candle.Lets see.Targeting only few pips since its in dd. Much to learn by experiencing drawdown.
The next step for me is diversify..trading only one pair wouldnt be enough.There will time that we will be experiencing dd so we must add few more pairs to our portfolio. Make profits while stuck in dd period will make sure we make money faster. A trader said he was making lots of money even trading pennies/nickels,those few thousand pips do add up even when the lots size is small so to sustain dd. Profits will ensure we can kill the dd trades faster,also eliminating the sheer boredom of waiting.
The trick is what other pairs we can trade.Low volatility will be our obvious target. I chose AUDNZD ,EURUSD (correl USDJPY/EURJPY) , USDJPY (GBPUSD/GBPJPY) and a couple more pairs to supplement our trades. Those pairs are made from the majors, not the exotics. Hope for the best.

Range trading vs Trending strategies

Basically when you enter into the forays of the financial *games* you are almost always presented these two types strategies.These two are the main roots of many many strategies ever employed under the sun . In some forums, i have commented about range trading / trend trading in general.I am currently biased towards range trading , mainly because my primary trades are all mean reverting suited to ranges.But as time passed on, i had often drawn comparison towards the two,and what i find ,is that i cannot discount trending strategies.
Trending strategies almost always employs SL. Years ago i had unsuccessfully traded many trend strategy that tend to hit the SL too many too often.I had tweak the sl ,the indicators,the tf ,brokers, scalping strategies and so on for 3 -4 years straight.Never had a lasting success.Soon i developed a phobia to SL.A lot of those strategies had small stops, low reward,5min - 15min trades and low strike rate.The most it can get is reduce the loss...but the end is the account suffer a slow bleed and slow death. Thats what websites dont tell you about. The strike rates stinks which makes efforts wasted during the prolonged SL streaks not the mention the time wasted and frustrations suffered.All of that trouble just to make up the loss? The idea stinks..well the results wil stinks.You cant turn dung into gold anyhow you wanted too.Dont expect different results doing the same things.
But the research continues on, i eventually looked into the bigger TF, larger room for the trades to breathe,less frequency, slow trades and switching into price action trading.The results are not stellar,but at least promising. The losing trades began to dissappear since the winners overcame the losses.The winners are bigger than most of the losers.I also employed pyramiding which i add up into winning trades in the higher Tf. Finally i get to see the fruits from my labour. The similarity between my other strategy is that i didnt use stops.I just let the trade fly,let it mature.Eventually it has to move somewhere, i just had to weather the initial storm. Thats the mistake i did years back, because i didnt have preparation for the storm.

I also realised my range strategy still has flaws and hole in the system. Drawdowns can get huge when market shakeups do happen, but i do have few options.First i can refer on the previous post which i talked about reducing drawdown. The other option :> I had ride out some market trends about 100 - 600 in the minus.What if also employ trend trading? Instead of suffering thousands of red -pips i could be actually winning based on the big movement should i employed trend strategy by reversing the trade. I can also take this further..a combo of the two will be awesome.I can initially play the mean reversion for about -200 pip dd or so.When the trade goes against us some more , i let trend trading takes over (pyramiding). When the market is not ranging then its trending, i just had to switch sides.But i will always try to begin with range trading. But with the EURGBP it is so rare, i ended up in profit before serious dd occured.Trend strategies are best tended to the medium to big movers of currencies.
In any case when the storm hits EURGBP at least i had some options before i proceed.Thats always another plus to slow high TF trading,it gives you the time ,how should to proceed.

Ps I do closed + 7 pips profit entered on last friday out of sheer boredom.The markets are slow last week as the didnt know how to react to the news.You also get Jay leno on his show joking about how bad the US economy is ..and so does the rest of the world.Stocks are plunging down everywhere post riots,debt,bail out,more debts and crisis left and right.
Times like this is when i entered the short term trades based on 1hour TF.I give you some details ,entered long on 0.8771, it plunges -30, so i add another one at 0.8741..monday closed both on 0.8760. The -30p increment is based on volatility and the current range so watch out.Small lots for small TF.No unnecessary risk here.No stops.Works on slow slow market only.
In the future i will write about combining small Tf trades(my impatience and boredom of waiting) and my main trades.

Volatility and average daily range

Flexibility is one of the demands during trading that needs to met,especially if your trading revert to the mean strategies like this one.For now the average daily range for eurgbp is around 100pips more or less.This is way much different than 2 -3 previous years.The range could exceeded 300 -600 pips. Back then during trading the drawdown could be so deep around 1000 pips or more.Just imagine if we add up every 100 pips ,that could mean 900 + 800 + 700 +600 +500 +400 +300 +200 +100 = -4500 Drawdown!!!! That is absolutely outrageous for us small traders.But if we add based on average daily range indicator (which varies and changes based on market) we could cut down some of our drawdown.What if we add every 500 pips or so for the above example,the drawdown is only 1500pips..still large but its based on that current market which is in chaos then.
Other ways to cut DD is use regression indicators or trendline.In our case,i prefer to use trendline since the accuracy is high,take your pick,would you suffer a dangerous DD -4500 or risk only 100 - 200 pips DD before getting to the TP goal? The answer is obvious. There's a reason why small accounts can thrive... We don't have the funds like national banks do , but we could manage the risk better. Just remember to add up based on the daily range .If the pairs retraces to 50% then that is our break even point.
But that is all the defensive part, what about the profit part which is everybody's goal? Pairs trading indeed have positive expectancy.Once the gap between pairs gets larger,the spread has consistently close the gap and more.That is why in my opinion this strategy has its merits. Even if it goes way into DD ,we will see the DD eliminated and finally see profit.If your are only targeting 50% or be you shouldnt be bother trading just to keep up with the losses.What is the point taking the pain without the gain?
I had seen a few mean reversion strategies trades,at best they only get break even.What a waste of time.The trade must move in our favor to gain + pips.

Trade initiation

Our menu for today as usual ,the EU/GU or EURGBP. The news certainly have made some moves this past tuesday and monday and we begin to see upwards movement on EURUSD and downwards movement for GBPUSD. The correlation have been steadily increasing over few weeks now. This also goes well with our short bias for Euro since im waiting for a short trade.I will await for the hedge range to spell 'ok' as the above is "trading : None". We will give it some time to complete the upwards movement, before we pull the trigger.
Plotting a trendline on EURGBP and waiting for the trendline break and confirmation will give us more accuracy for our trade.A bounce from the upper BBAND will help us recognize if we are ready to trade. The length of time to reach the TP will be decreased drastically than opening it now.Not to mention lesser risk.Nevertheless i will proceed to add/average the trade if it goes to -100pips.TP will be set to 20 -45pips or the extreme BB.

Thoughts on EURO

With the the downgrade of the US credit ratings,things might be bleak for US.Perhaps another recession will hit the US not much different than what occur a couple of years back.This also chimes in with the sluggish employment market indicated last friday.
Meanwhile in the news euro stock/shares continues to fall in the aftermath of the plague that infected greece and now italy.Since both are not looking good,are we looking for shorts or long?

In my opinion euro has the short bias..ranging markets will work best for our trading.I will looking for shorts but dont be discourage to enter long,the market can go sideways since things are heading nowhere.This make it even more better to us..i love sideways market.

More about pairs trading to follow.

Pairs Trading : Forex

Pairs Trading .Intro

Since this is a forex related site.. forex does not need much introduction,there are zillions of sites to introduce you into the forex world.I will leave it as such,since there are also thousands of other methods to skin the 'cat'. I chose pairs trading since its the easiest for me to execute and also bears the fruits of years of research.Pairs trading criteria::mean reversion, high TF trading H4 to above,high win rate to loss ratio,slow (swing) trading, non scalping, non stress, and best of all time and battle tested. I used EURUSD and GBPUSD combination ,basically EURGBP.Buy/sell one pair and sell/buy the other.I began this research since mid 2008...started live using this method since july 2010 till now.Hard to lose pips.When to correlation lowers(the gap rises) its time to open the trade.Combine it with trendlines, candlestick.divergence,higher tf to stack odds in our favor.If all three pairs are moving in the same direction the better.I will try to go in depth about this later.


Increasing efficiency

I have learned in the past few months that i cannot neglect the significanse of support and resistance.In our case the most common and useful analysis is the trend lines.It is more effective in H4 and above.I still consider 1hour TF as scalping therefore risky.Once opon a time ago i think trendlines are overrated and overused..well it works more in conjunction with our Pairs trading..as a result our trade becomes more accurate with even less drawdown.It definitely can save us pips especially in extremely trending market.The trend is not our best friend here.


A picture is worth a thousand words.A messy chart though.Note the indicator is used above (neutral overlay mq4)<< .Put it in EURUSD chart make sure GBPUSD is the subsymbol.Note that red lines is overlayed with EURGBP/EURUSD.Ill let you figure out that one.You could follow the hedge range and its threshold..its wonderful to minimize even more drawdown.I wont be trading buy EU / sell GU / buy EG now...since the blue lines(GBPUSD) is close to EURUSD.Its a unnessary trade with obvious DD....Also note the horizontal blue line marked at 29.6.2011..this reeked of selling EURGBP..wait until EURGBP is in the extreme BBands...wait for a trendline break....i assume you knew about trendline break and confirmation...you should know this even before you got here...its the very very basic.I actuallyshorted EURGBP at 4 fourth july..not a very long wait to get 30pips..why 30 pips? dont get greedy..at least for myself...if youll think the shorts actually gonna go some more.stop at the other extreme of the band...i didnt show you the EURGBP chart.. you can also figure it out/backtest/foward test as needed.This especially bode well with the current euro /greece situation.