Statistical Arb/Pairs trading strategy!

[OOPs]

I got to sort my scale out, I got in a bit earlier to that trade, I counted 20 pips, but I got a feeling it's less.
Hay ho. it's chugging along nicely now!

[Jedster]

I got to sort my scale out, I got in a bit earlier to that trade, I counted 20 pips, but I got a feeling it's less.
Hay ho. it's chugging along nicely now!

I can't comment on your chart (obviously, because I can't see it), all I can say is, I am still in my long EG and my TP is 12 pips away...

[pipcompounder]

Now spread has widened to about 27 pips, but my other pattern trading strategy shows EU pair will climb up some more, than really sell off...maybe GU will buy closer???....we'll see!

[Jedster]

Trade hit my TP in the small hours this morning. This is one of the reasons I like to directly trade the EURGBP instead of the synthetic as you can set hard targets.



(direct link http://i.imgur.com/orDGS.png)

The EG gapped down slightly on Sunday night and hit the -2SD, so that's when the trade was opened. Yesterday afternoon, SL was moved to b/e when price had moved up to -1SD and trade was closed for +31.4 pips. The account is a UK spreadbetting account, so basically like microlots. The trade size was calculated at approximately 2% of my account, with an initial SL set at -4SD (the lower brown line on the chart).

[TalonD]

Trade hit my TP in the small hours this morning. This is one of the reasons I like to directly trade the EURGBP instead of the synthetic as you can set hard targets.



The EG gapped down slightly on Sunday night and hit the -2SD, so that's when the trade was opened. Yesterday afternoon, SL was moved to b/e when price had moved up to -1SD and trade was closed for +31.4 pips. The account is a UK spreadbetting account, so basically like microlots. The trade size was calculated at approximately 2% of my account, with an initial SL set at -4SD (the lower brown line on the chart).

Why did you go long on eurgbp?
Here Eur is the blue line Gbp the green line. So sell Eur and buy Gbp at the first arrow yesterday. Wake up this morning to see at the second arrow... oh my! That would have been short on eurgbp. Thats a big problem with this trading method. You can see long or short depending on time frame or zoom level or even from shifting the chart left to right a little it can change from buy to sell and that happens whether you use an overlay indi or the vitrite thing.
Oh yeah, who was it said they aren't likely to cross over? LOL

[Jedster]

Why did you go long on eurgbp?

Perhaps you haven't read all the messages (understandable given how quickly this thread has grown). Have a read of this post: Statistical Arb/Pairs trading strategy!

If the gap between the EU/GU widens, people buy the weaker and sell the stronger instrument. In this case they would have bought the EURGBP and sold the GBPUSD. This net postion is a synthetic EURGBP trade. I prefer not to trade the synthetic EG, I prefer to trade it directly as I believe it has a number of advantages over the synthetic.

EDIT
Ok, so I responded before you had finished your post...
This is the problem with trying to align charts, or overlay them. It is also the main reason I stopped trading this strategy with those methods. Instead I use the ratio between the two instruments. As described in the above referenced post, the ratio between the EU and GU is the EG. And as you can see from the screen shot a couple of posts earlier, it worked pretty well....

[pipcompounder]

Same bigger gap here, talond, I wish I was awake when that widened, I would have opened another basket of trades, it has come back closer now.

[Jedster]

I guess I advocate using the ratio because of exactly this reason. Here are two charts for the last few days showing the EU, with the GU overlaid on top. Which do you consider to be correct?

A)

(direct link http://i.imgur.com/UgdBK.png)

or B)

(direct link http://i.imgur.com/W9yHB.png)

A shows the GU stronger and the EU weaker
B shows the EU stronger and the GU weaker

A shows the pair converging and closing the gap
B shows the pair diverging and the gap widening

So, from looking at the top chart you would think it correct to take a long EG position and from the bottom chart you would take a short EURGBP position.

Which is correct?

The answer is of course, both of them. They are identical except the position of the overlaid chart is affecting how you see the relationship between the two.

It would appear that B) is closer to what you guys have.

Now look at the ratio/indicator at the bottom of both charts. Irespective of how you overlay the charts on top of each other, this ratio will be completely independent. In these examples, we can see the black line (the actual ratio/value) is below the mean (the blue line). We are expecting it to revert back to the mean so we want a long EG position.

We can then see today, the ratio went above the blue line and almost touched the first orange line (1 standard deviation from the mean). That is the point to take a short EG position. And, actually, that's exactly what I did. After my long closed early this morning, I went short EG at 08:28 GMT

[pipcompounder]

My chart is exactly between your A and B, GU was higher, now is lower.

Update, GU went high enough, I closed that trade at beak even, then later reopened 1 min chart, has GU 20 pips above EU

[timehopper]

Well according to my charts; for going on two weeks now the GBP has been the overall out performer holding a lofty position. I know this because my position is still open from weeks ago. Check my post..... Despite macro economic data and entering a technical recession it has refused to drop until yesterday. Seems it was waiting for some good usa data to begin to really make it get back in line. So I'll choose to short the gbp/usd again today and take a long eur/usd today... Again. Not really worried though. I made a decent 2 day profit of 70+ pips in one move. paid my bills for the moment.


As some have notice depending on the time frame you use and you may see that the smart move according to this system it to take the opposite. By shorting the eur/usd and buying the gbp/usd. THIS IS ABSOLUTELY POSSIBLE and oddly enough ( not for me though) the trade will still turn out fine. Let's try this... open charts of the eur/usd and the gbp/usd on the 30 min time frame. If you got in yesterday ( the girl sitting across from me) you would have been short eur/usd . And you would have closed it this morning for a profit. Meanwhile my originally opened position that I posted IS STILL OPEN.... (short gbp/usd long eur/usd on the hourly)..... See the point.. two different directions and both are right.

Just line up the charts on what ever time frame you like AND TRADE WHAT YOU SEE. the math and situation is DIFFERENT for every time frame. But it will still work. Like i've posted before if it moves against you add more to the position and wait. I've had times where the charts showed me one thing then a little while later it said to take the opposite direction. Myself never wanting a losing trade, I have had to wait it out based on the trade profit or loss ( waiting until it turned out to be a big profit). I've had to because I was already in, then a major move happened in one of the currencies that was not neutral. It happens sometimes. making it look different if I were to close the charts and reopen them like normal. That's why this trade is still open. But one can still open trades using the same pair and continue to make money will waiting for the backwards trade to correct itself, using different time frames within the same pair. A word of caution though : The usa has funny laws about first in first out and hedging. so make sure to vary the position size on your secondary trades (make sure they are still equal to each other though) and make sure they are going in the same direction as your
original positions or just use two different brokers. It's all just a waiting game. but I'd much rather wait in the comfort of home than to be waiting tables or digging ditches for my money.. not that there is anything wrong with that.

Hope this helps.

Any questions just ask....