Personally, I think this can be as flexible as it needs to be. Exit early so that you can get another trade, if that is what you are comfortable with, or, see it throough to the end no matter how long it takes. I think this is why this strategy could work so well, everyone can choose their own risk level…
You could enter at 10 pips, aim for 5 pips profit and do it 5 times a day. You could wait for 100 pips and aim to get it all, but do it once a month. There are several ways to trade it and it will depend on each person as to how they tackle it, how much risk they are happy with, etc. As Medisoft showed, different pairs have different divergences and different risks so there are lots of ways to tackle it…
wow this thread got long all of a sudden. A few quick comments. I’m trading this with a small $100 account. With Oanda I can trade single units of base currency. EU is worth around 1.33 and GU is 1.59 my trade size is 240 EU and 200 GU that gives me an exposure of 319.60 US dollars on EU and 319.65 US dollars on GU so I’m dollar neutral.
random thought. If pairs like these are say 90 correlated and you trade 1 EU against 1 GU then you are only 90% market neutral?
Another random thought. If you look at price action at London open coming out of Asia quiet period you will sometimes see one currency held mostly flat while the other makes a big move. That’s a clear unambiguous break of correlation. You don’t need an overlay chart to see it.
If you place all your available capital into first trade you dont have anything left to buy more…
like every 20 pips move
I think I am going to buy in on the first 20 pips divergence and then buy more on every 50 pips divergence after that until they converge…see what happens, I too am using a small account right now until I figure this out.
now looks like a pretty good time to short EU long GU to me
I’m trading both, GU and EU. But I’m doing it with a balancing technique. I start using the ATR of both to size the trade based on the stats I collected yesterday. I set the max divergence on 300 pips, and a max risk of 10 % of the account, that means, when the pairs diverged 300 pips, that must be the 10 % of the account, if they exceed that divergence, I close all the trades of that pairs.
Then I adjust the size of the pairs every 20 pips. When the divergence pass from 20 to 40, I place another trade for each one, but the size is now based on the move the pairs. If a pair moved more than the other, then I size it smaller, and the other pair gets more size.
What I want to do is to maintain a position the most neutral and balanced possible all the time.
You are right. Today, with the news of Spain, EU moved a lot, but GU moved more! and a big divergence was generated on my trades.
It is smaller than the maximum I measured in the past, but it is big, about 130 pips. And on AJ/CJ the max measured was also broken, to have more than 114 pips. I’m calculating my risk with a total divergence of 300 pips, so 130 or 114 pips are a small fraction of the max risk, but that teach me that it is better go safe and set a risk with a big enough divergence limit to support this type of extreme moves.
I suggest you to read the baby pips school, specially the part of lot sizing and money management.
If you risk your account (smaller or not) on that two trades, and the market continue diverging for a lot, your account will not support that unrealized loss and you will get the “feared” margin call.
it is better to size your positions to allow a bigger market move than average, to support the moves that can happen with “black swan” events.
one question: it also should be working with highly negative correlated pairs, shouldn’t it? if you look at e.g. eurusd and usdchf, they are strongly negative correlated. i prefer to look at eurusd vs chfusd then, so you can see the same deviations as with postive correlated pairs. if eurusd moved much higher than chfusd, then it means chfusd is relatively undervalued, so you sell usdchf and also sell eurusd. does that make sense? i’m pretty sure it does, but just want to make sure that i’m not making a dumb mistake.
p.s.: look closely so you don’t confuse it. sometimes it’s usdchf and sometimes it’s chfusd.
cheers
I’m new to this forum but not to trading. I don’t want to come off wrong but…I am just wondering how is it that people are losing trades. I have been trading this way for a week now and have not lost a single trade. I’ll admit I came very close ( a total profit of 2 pips) but every other trade has done well. Even today after the Fed mins. came out at 2 pm and the dollar took off. I was in EU and GU for a neutral position on the dollar and I still walked away with a decent profit. I use an overlay just like Kelton, only I trade the 5min charts. Not the Holy Grail but it works
After the Fed minutes, if you were dollar neutral, and the dollar moved, then that that shouldn’t make any difference to your position so how is it that you made a profit? Also, as I look at the charts, after the minutes, the GU and EU diverged, and they have not yet come back together. So there hasn’t really been any opportunities on the EU/GU/EG since way before the Fed minutes.
Are you sure you are trading this the right way round, and shorting the stronger currency and buying the weaker currency? At the moment that would mean shorting the GU and buying the EU (or long EG).
Could you please point to a link at yahoo finance. I am unable to locate Forex charting that allows such a feature for two pairs of currencies like EUR/USD and GBP/USD at yahoo finance
holy moly, i need 5 posts to post a link so this is number 4 then. and so that it is not completely useless: now should be an exellent chance to open some trades. there are many great opportunities after yesterday.
That is not true, if you look at the 1d chart, you can see it is actually a 30m chart (since midnight).
If you select the 5d version you can clearly see the pair have been diverged for about 3 days, then briefly came together yesterday at what looks to be around 18:00 GMT, before diverging again.
as i said before, i use it on a “longer” term basis than the original thread creator. i keep my trades open on average for a few hours to a few days. therefore im looking at the 5d chart!
but if you like you can sure use the 1d chart as well to get some intraday divergences.
so this is number 4 then. and so that it is not completely useless: now should be an exellent chance to open some trades. there are many great opportunities after yesterday.