Statistical Arb/Pairs trading strategy!

Kelton 2012-03-14 20:40:24 UTC #1

Hello world! My name is Kelton and this is my strategy.
It has been know by names such as statistical arbitrage and pairs trading.

Basically I find two currencies that are highly correlated. When one goes up the other follows
the same amount roughly. What I do is wait untill something upsets the two currency pairs
that makes them fall out of correlation. Then I buy the underperforming currency and short
sell the over performing currency at the same time and the same lot size. Eventually these
currencies will go back to their normal path and touch again. I then close both orders and have
now profited the distance between the two when I opened the orders. It is considered a market
nuetral position because as I am losing on one order I am roughly making the same amount on
the other order. Until they come back to eachother and I profit.
I am up 43% of my account in 13 trades. Every one has been profitable so far.

Examples of correlated currecies are- EUR/USD AND GBP/USD, NZD/CHF AND AUD/CHF…
USE FOREX TICKET TO FIND CORRELATION NUMBERS. ANYTHING ABOVE +.80 IS GOOD.
ANYTHING BELOW YOU SHOULD NOT TRADE. I USE THE 5,15,AND 30 MIN CHARTS.

PLEASE LET ME KNOW HOW YOU DO ON THIS STRATEGY IT IS VERY POWERFUL.

THANKS FOR READING.
KELTON W.

sufiansaid 2012-03-14 20:57:01 UTC #2

Very interesting. Any chance to see any trade/chart examples?

TalonD 2012-03-14 22:08:04 UTC #3

I’ve done similar with eur/usd and gbp/usd with some success. But in that case you’re actually trading the eur/gbp pair

Goodyman 2012-03-24 16:32:29 UTC #4

Can you give more examples of co-related pairs?

LiveForexTrading 2012-03-24 18:47:41 UTC #5

I’ve seen this traded successfully with stocks, however I’m sceptical it will work with forex. Talon D is right, you are basically just trading a combination of the pairs.

Kelton 2012-03-24 23:21:32 UTC #6

I have traded it successfully. I do not use a correlation indicator like
I used to because it rescales itself and throws everything off. But am so far positive 14% in two weeks.
I trade EUR/USED and GBP/USD because of the low spread. But AUD/CHF and NZD/CHF is a good one
Too as well as EUR/JPY and CHF/JPY. But you need a pair of currencies that is
Not too correlated or you will never beat the spread. A lot of jpy currencies
are extremely correlated. Ill upload what my chart looks like in a bit,

LiveForexTrading 2012-03-25 01:31:09 UTC #7

Hi Kelton,

That’s interesting. Do you do it manually, or have you got an automated system?

kidninja 2012-03-25 10:49:43 UTC #8

I use statarb myself too. So far, made 16% roe in just 3 weeks and using 2 pairs. I wonder are you using countegration to determine that the pair is out of sync? And you mention 18 trades you have done, what time frame are you talking about? I ask because i am still optimizing my system

Kelton 2012-03-25 12:35:49 UTC #9

I do it manually I dont trust automated systems personally. And as for kidninja I do not use like a typical standard deviation
to signal a order, i overlay the two currency charts not using an indicator though, I use my own method but when the pairs lets say on EUR/USD AND GBP/USD are roughly 20 pips apart on my chart I open an order and if they hit 40 pips apart I open
another order and the same for 60 pips apart so I would have a total of 3 orders and 6 open positions. I would then close all
positions when the two charts come back together and touch. I use the 1 min time frame which can get about 2-9 orders in a
day and then monitor the charts every once and a while untill they come back in sync. And make sure on the 1 min time frame you are totally zoomed out in mt4. because different time frames will distort the graphs and make it worthless. Its taken me a long time to develop this strategy I hope it helps everyone be profitable. The picture below is what I look at.

Kelton 2012-03-25 12:38:18 UTC #10

I do not use any other time frame besides 1 min zoomed all the way out. The other ones do not work well.

kidninja 2012-03-25 12:42:57 UTC #11

Ok, so i understand that your main asumption is that they will cross or at least touch again. I am using a different method and trade on relative movements. How long is your average holding period? I trade the daily charts and on average have open position between 1 and seven days

Kelton 2012-03-25 12:46:51 UTC #12

This is the same as the picture i put up earlier but with my buy/sell/close orders.
I hope its not to confusing where i entered and exited

Kelton 2012-03-25 12:48:12 UTC #13

Hey kidninja my average holding period is 30 min to a few hours

evad150 2012-03-25 13:37:06 UTC #14

hiya
As a newbie - can u tell me how to put 4 pairs on2 1 chart ie eur/usd and gbp/usd on the same chart
thx

Kelton 2012-03-25 13:44:03 UTC #15

Hey evad150. Ok I had the same problem for a while now. few options you have are to either download a overlay indicator
or a corellation indicator like mt4correlation from greattradingsystems.com. but these indicators autocorrect themselfs
and screw up your charts if your doing what i am doing. the best way
to do what I am doing is to change the opacity of the windows themselves and open two versions of mt4 and make one
window almost see throught and the other normal so it looks like they are the same chart. this way there is no auto correction and you see the real correaltion. download and lookup vitrite

christinaa 2012-03-25 14:01:04 UTC #16

Hi Kelton thanks for sharing your system
so is EURUSD/GBPUSD what you trade the most using this system?
And does it matter what sessions you trade in?

Thanks
Christina

evad150 2012-03-25 14:06:31 UTC #17

hi kelton
thx for your quick reply-
i have a couple of mt4 demo accounts but done a quick search on there rubbish help search but to now avail! So how do u make one of the mt4’s more opaque than the other. Can u do it for just 2 or 3 charts or is it applied to the whole of 1 mt4.

Kelton 2012-03-25 14:10:22 UTC #18

Hi Christinaa, EUR/USD AND GBP/USD because the spread is easy to beat with a small amount of deviation
from when they are perfectly correlated. More trading oppertunities. and it does not matter what session.

thanks for your comments everyone

Kelton 2012-03-25 14:23:54 UTC #19

Hey evad150 you have to get a program like vitrite to make the windows opaque. and it is applied to the whole mt4 so you need to open multiple mt4 windows ( maybe from two different brokers if you have to) I have an mt4 from fbs.com and oanda.com open at the same time and then make sure the settings are the exact same on both so there is nothing making one chart look different than the other and having it throw off the correlation.

evad150 2012-03-25 15:36:10 UTC #20

hi kelton
update: downloaded vitrite ok & set it up ok
I know u have said it a couple of times in past threads but may i stress it again especially 4 us newbies eh :
that both charts must be [U]zoomed out[/U] 2 make sure they overlay correctly.

keep posting and up dating screen shots of actual trades

thx again 4 yr help-happy trading
dave