it’s my first post on this great forum - I am relatively new to trading - mostly I deal with forex, but now I would like to trade on DAX and CAC (and perhaps some other indexes…)
but there are some differences to fx trading so there comes first questions:
the specification of the instruments are as follow:
DAX - 1 lot = �25 * DAX30
CAC - 1 lot = �10 * CAC40
Now I would like to start a pair trading on this 2 instruments - to balance as good as possible the 2 values I need to open a the same value in opposite directions…
so if presently DAX = 5515 and CAC = 3650 - to calculate the lot sizes, should I go like that:
1 lot of dax = 551525 = 137.875�
1 lot of cac = 365010 = 36.500�
and therefore
for 1 lot long on dax I need (137.875/36.500) c.a. 3,77 short lot of cac ?
or should I calculate it by 1 tick per 1 lot size:
which is �5 for CAC and �12,50 for DAX - so in this case for each tick I need 2,5 times more CAC then DAX ?
to my understanding, what you want to do is place trades in both of them in order to maximize potential profits and reduce risk. If this is indeed what you’re wanting to do then I will share what little i know about doing this in forex…basically, there are ratios between certain currencies…currency correlation i believe is what they are sometimes called. (something like this Forex Correlation - Trading Tools - Mataf. however, there are two things that make this difficult to do…
the first one being that these ratios are constantly changing, not just per day or hour, but per tick. so, what may be a strong correlation one day or one minute even, may drop the next day/minute–or rise ;D. so, variations in the ratios can be a problem.
the second problem is the ratio itself. as you said, you would need about 2,5x more cac than dax. the problem that comes up here is that sometimes these ratios are not convenient in terms of placing trades with the lot sizes you have available. the first whole ratio that i can think of between cac and dax that is 2,5 would be 2 lots of cac and 5 lots of dax–which can sometimes be a problem depending on how much money you’re working with per lot size, etc.
so, it seems to me ur correct in the 2,5 scheme of things; however, trading like that isn’t always as flawless as it initially looks. hoped this helped a little bit =. my apologies if it isn’t what you were looking for. good luck!
There are two things you need to trade the DAX, experience and a big wallet. I would recommend sim trading this for a good amount of time before putting cash on the line.
pip value imo. because your profits are determined by how many pips one or the other changes; if they change at roughly the same, or opposite rate, you want your trades to be based off of the variable for that rate–the pip!
Pair trading is based on an idea that spread (distance) between 2 cointegrated (or at least corelated) instruments are most of the time but NOT constantly the same (unless correlation =1). No matter if the price on them jumps 100 pips up, or down, because there is a correlation between them, the spread should stay more or less the same.
Than, if the spread is greater than usually, we go long on the one below average and short on the one which went too much up.
When they return to equilibrium, we theoretically should close the positions.
On one of them we usually lose a little bit, but the profit made on the second one should be great enough to make some money on it.
If you trade just one instrument, and the price jumps 100 pips up - either you make money or you hit the SL and lose…
Of course in currencies we have cross-pairs, but if you want to trade indexes, oil or metals - that’s the way to do it …
