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:
Use small equal position size dependent on your personal risk (currently testing a $5000 trading account using .1 lot for each position taken).
Enter a long for both pairs.
Enter a 100 pip take profit for both pairs based on rule #2.
Enter buy stop for both pairs at the take profit level based on rule #3 with a 100 pip take profit.
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.
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.
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.
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.
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).
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.
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.
If you have 3 open EUR/USD positions against 1 USD/CHF then I really don’t see where the correlation thing is happening. You’re basically long 1 unit of EUR/CHF and long two units of EUR/USD. That’s like two seperate directional trades - granted with positive carry.
The problem any systems like these have is that they will do well when the market is trending in your direction or generally moving sideways. They will kill you when the trend is against you because you’ll keep adding to losing positions.
As a word of advice, don’t bother forward testing in demo if you haven’t back tested. The back-testing will tell you much more quickly whether you have something work forward testing.
Good points. The idea of adding to a losing position to reduce one’s basis on a pair (EUR/USD) while hedging with gains made on the inversely correlated pair (USD/CHF) is plausible, except that you’re multiplying your position size as the market trends against you on the first pair, but not offsetting by increasing your position size on the winning pair.
If the market swings back to your net basis on the losing pair, you can exit at BE. But it’s anybody’s guess if a pullback in trend will reach that point. If not, you’ll continue buying every 200 pips. One might argue - erroneously - that this is nothing to worry about - after all, how many pullbacks in the Euro’s advance have been more than 600-800 pips; and haven’t they always been blotted out by later moves to the upside? Perhaps lately; but backtest this from the advent of the Euro, and you’ll see that, even though the Euro has almost doubled in value, there would’ve been plenty of margin calls along the way.
The way to compensate would be to match your position sizing on both pairs - when you average down on EUR/USD, you average up on USD/CHF. But at what point do you tap your margin out with this double-buying approach if the Euro does have a protracted, deep trend against you (which is not out of the realm of possibility)?
Maybe the guys at Freedomrocks know - this is basically what they did, sans the MLM component. But then, they don’t seem to be out in force like they were a couple years ago…
I haven’t worked on it since I am on the fence about the drawdown in a strong trending market. I’m not sure if a retracement would be great enough to close out all the positions at break even if this were to happen. I will keep forward testing for a while and posting results.
