Correlation trading - no charts required

[PIP CHASER]

This is a correlation trading system that assumes we don’t know where price is going. It uses two currency pairs (EUR/USD and USD/CHF) that only trades long positions (no shorts). The system doesn’t use Technical Analysis. It's all about money management and collecting swap interest.

Rules:

1) Use small equal position size dependent on your personal risk (currently testing a $5000 trading account using .1 lot for each position taken).

2) Enter a long for both pairs.

3) Enter a 100 pip take profit for both pairs based on rule #2.

4) Enter buy stop for both pairs at the take profit level based on rule #3 with a 100 pip take profit.

5) For the losing pair, position average (based on all open positions) using buy limits every 200 pips with a take profit set to break even for all averaged positions. Reset buy stop at this price level with a 100 pip stop loss.


Let me know if you have any questions. I don’t have any drawdown answers for long term at this time. I will post account transactions later tonight.

[miwa2]

Hello PIP CHASER I have heard about correlation trading but was not sure how it worked. I will give it a try also on a demo account and keep you posted.

[4xStar]

Originally Posted by PIP CHASER

5) For the losing pair, position average (based on all open positions) using buy limits every 200 pips with a take profit set to break even for all averaged positions. Reset buy stop at this price level with a 100 pip stop loss.


Let me know if you have any questions. I don’t have any drawdown answers for long term at this time. I will post account transactions later tonight.

I don't understand #5, will maybe need an example with actual numbers....or more explanation

[PIP CHASER]

5) For the losing pair, position average (based on all open positions) using buy limits every 200 pips with a take profit set to break even for all averaged positions. Reset buy stop at this price level with a 100 pip stop loss.

Ex: 1st entry long @ 1.5500, market moves -200 pips, open new long @ 1.5300, now average the 2 postions (1.5500+1.5300=1.5400), set take profit @ this level to close all positions, if pair continues moving down then average in again @ 1.5200 (1.5400-.0200=1.5200). So now you have a long @ 1.5500, 1.5300, 1.5200 (average is 1.5500+1.5300+1.5200=4.6/3=1.5333), set your take profit on these 3 positions @ 1.5333. You are looking to break even if the pair moves against your 1st position. While this is happening the other pair will normally be hitting their take profit level building you account balance. Hope this didn't confuse you.

[rhodytrader]

Since basically what you're talking about here is being long EUR/CHF (long EUR/USD and long USD/CHF equals long EUR/CHF), it's worth mentioning that the cross fell nearly 1500 pips between October and March.

[4xStar]

Originally Posted by PIP CHASER

Hope this didn't confuse you.

Much clearer now, thanks

[PIP CHASER]

Since basically what you're talking about here is being long EUR/CHF (long EUR/USD and long USD/CHF equals long EUR/CHF), it's worth mentioning that the cross fell nearly 1500 pips between October and March.

So are you saying that one of the pairs wouldn't realize a profit on the way up while the other is moving down all the while collecting interest on both pairs? If up to the challange, please show an example of your above statement compared to trading my method over this time to see how it would fair (don't forget to add the interest).

[rhodytrader]

Originally Posted by PIP CHASER

So are you saying that one of the pairs wouldn't realize a profit on the way up while the other is moving down all the while collecting interest on both pairs? If up to the challange, please show an example of your above statement compared to trading my method over this time to see how it would fair (don't forget to add the interest).

I'm not saying that at all. Since the EUR and the CHF are closely correlated most of the time, generally speaking EUR/USD and USD/CHF will be moving in opposite directions. Usually.

What I'm saying is that when you're long EUR/USD and short an equal value of USD/CHF your net position is long EUR/CHF. Do the math. The short USD from the EUR/USD position is cancelled out by the long USD from the USD/CHF position. Thus, you are long EUR/CHF.

In fact, just beling long EUR/CHF is a more efficient thing for what you propose (not that I'm endorsing your system here). Since you're not giving up two spreads, you save their. Also, you're probably better off on the interest carry as well, since you don't have two bid/offer things going on there either.

My point, however, was that when you have the sorts of positions you are talking about running you're base exposure is long EUR/CHF. As such, if the EUR weakens against the CHF you will suffer drawdowns. EUR/CHF fell big time between October and March, implying a potentially crippling drawdown. You said you had nothing you could say on that subject, so I tossed that in to the discussion.

Have you backtested the system with real figures?

[PIP CHASER]

I guess I am not seeing it the way you explain. I consider both pairs as independant of each other that move in the opposite direction based on the daily time frame most of the time. I haven't backtested my system. I have forward tested on a demo since May 08 and has a net profit at this current time. I currently have 3 long positions open on the EUR/USD (looking to close at b/e) and 1 on the USD/CHF (looking for 100pip t/p). I count on the market gyrations to close the multiple open positions.

[PIP CHASER]

I need to take a look at the max DD and build a MM spreadsheet around this. Will work on it over the weekend and post it here.