Statistical Arb/Pairs trading strategy!

[Richard87]

Hi, I think so. But you would not be dollar neutral, and that could be a problem i think…

[TalonD]

The price of eur/gbp is derived from eur/usd and gbp/usd. It is the multiplication of EU and UG where UG is the reciprocal of GU.

The reason this stat arb is so appealing to so many is because it has the appearance of hedging and safety but that is an illusion. If these pairs are only 80 correlated then you are only 80 percent hedged. The illusion of safety makes it psychologically easier to pull the trigger.

If you use the divergence of GU and EU as an indicator for entry into EG then you are using eur/gbp as an indicator of itself.

GU bid 1.5828 reciprocal is 1/1.5828 = 0.631792
EU bid 1.30369

1.30369 times 0.631792 = 0.825625
Current EUR/GBP is 0.8256 ask

use the reciprocal of GU ask to get EG bid

[timehopper]

Thanks i’ll try the 5min chart
how many pips do you wait for the pairs to separate by?
and how long do your trades normally take?

Depends on the market conditions. I was taught 2.5 to 3 standard deviations, going into the most volatile trading sessions (london). Most of the time I can get in two trades in an trading session. The main reason I like the way Kelton does it i because it does away with the need of being handy with a calculator, and make it almost all visual. Just look for a bigger gap than usual. Say 30 pips. Hope that helps if not please let me know.

[FXEZ]

@medisoft

Do you think that for this strategy one should size their positions based on the beta?

If the beta of EU vs GU is 1.4, should I size the GU positions 1.4 times the EU ones, to get a beta neutral position?

In my humble opinion, the goal in correctly sizing the positions via the term Beta should be to maximize the stability of the spread created and the profit opportunities. This means a spread that is generally range bound with wider swings. The spread for equal sized betas is EURUSD * 1.0 - GBPUSD * 1.0. Using a 1.4 beta for GBPUSD the formula becomes EURUSD * 1.0 - GBPUSD * 1.4.

I created two pictures and you could do the same with a bit of coding in MT4, to show the difference between the different betas described above. EURUSD is the candlestick chart (red/green), GBPUSD is colored Sea Green, and the spread (EURUSD 1.0 - GBPUSDbeta) is colored magenta. Note how there are more undulations that could allow more opportunities to profit/escape from a position with the 1.4 beta vs. the 1.0 beta. As a post script I’ll simply add that there are more beta combination possibilities than the two posted here, some of which will be better suited to maximize profit opportunities.

[medisoft]

This is what I was saying in the past, but my ignorance made me say “ATR” instead of “BETA”.

I knew that some factor must be used to make a more stable moves on two pairs, but I didn’t knew the right term for it.

So, the task now is to calculate BETA for GU and EU. Right now I didn’t found the complete information about how that is calculated. I found A LOT of “beta version” lol, but almost nothing about the formula or explanation of how to calculate BETA.

I read that it uses a covariance, and also the variance, so I’m going to code that to get the beta value for the pairs I’m trading.

@FXEZ

In my humble opinion, the goal in correctly sizing the positions via the term Beta should be to maximize the stability of the spread created and the profit opportunities. This means a spread that is generally range bound with wider swings. The spread for equal sized betas is EURUSD * 1.0 - GBPUSD * 1.0. Using a 1.4 beta for GBPUSD the formula becomes EURUSD * 1.0 - GBPUSD * 1.4.

I created two pictures and you could do the same with a bit of coding in MT4, to show the difference between the different betas described above. EURUSD is the candlestick chart (red/green), GBPUSD is colored Sea Green, and the spread (EURUSD 1.0 - GBPUSDbeta) is colored magenta. Note how there are more undulations that could allow more opportunities to profit/escape from a position with the 1.4 beta vs. the 1.0 beta. As a post script I’ll simply add that there are more beta combination possibilities than the two posted here, some of which will be better suited to maximize profit opportunities.

[TalonD]

FXEZ how did you get that purple beta line? Do you have a metatrader indicator that does that?

[FXEZ]

@TalonD

FXEZ how did you get that purple beta line? Do you have a metatrader indicator that does that?

TalonD, I put this simple MT4 indicator together to show the spread difference between two pairs with input beta for each symbol. This should reproduce what was shown in the prior charts. Please let me know if you have any problems with this indicator.

See the documentation and updates for the Pairs Trading MT4 Indicator Pairs with Beta and to download the source and ex4.

.

[PIP_CHASER]

I just put together a spreadsheet of the daily close for the GBPUSD & EURUSD since 01/2005 through today.

Here’s the results:

Max spread = 6818 pips
Min spread = 321 pips
Avg spread = 3904 pips
Current spread = 2762 pips

If the max spread is reached again it would be 4056 pips from today’s value. The min spread is 2441 pips away.
Looks like a good risk/reward to go long the spread.

[TalonD]

TalonD, I put this simple MT4 indicator together to show the spread difference between two pairs with input beta for each symbol. This should reproduce what was shown in the prior charts. Please let me know if you have any problems with this indicator.

See the documentation and updates for the Pairs Trading MT4 Indicator Pairs with Beta and to download the source and ex4.

.

Thanks that works on my metatrader

[maszito]

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.

thank you Mr. KELTON … I’ve been able to use vitrite, …

[oakman]

Does anyone know how to open 2 of the same mt4 programs from same broker. I can only seem to have one open at the time. I click on it but only lets me have the first one open. Thanks for any help.

[medisoft]

install it twice on different folders

Does anyone know how to open 2 of the same mt4 programs from same broker. I can only seem to have one open at the time. I click on it but only lets me have the first one open. Thanks for any help.

[Sangram_Badhe]

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,

will you please tell me how to see two different pairs in one chart at a same time on mt4
& where to put SL in this strategy
waiting for reply
Thank you

[medisoft]

please re-read the first pages of this thread, there what you are asking is explained.

will you please tell me how to see two different pairs in one chart at a same time on mt4
& where to put SL in this strategy
waiting for reply
Thank you

[Sangram_Badhe]

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.

hi!
1)in which time frame we have to consider +.80 IS GOOD?
2)according to that in which time frame we have to trade?
3)did you mean that between two pairs of charts the upper value pair we have to sale and lower value pair we have to buy?
4)where to keep stop loss, if it goes against our position?
these are my quires, please let me know the answers of it, because I confused about all about above things
waiting for your reply,
thank you

[Sangram_Badhe]

hi!
1)in which time frame we have to consider +.80 IS GOOD?
2)according to that in which time frame we have to trade?
3)did you mean that between two pairs of charts the upper value pair we have…

Read more: 301 Moved Permanently

[christinaa]

@timehopper

Depends on the market conditions. I was taught 2.5 to 3 standard deviations, going into the most volatile trading sessions (london). Most of the time I can get in two trades in an trading session. The main reason I like the way Kelton does it i because it does away with the need of being handy with a calculator, and make it almost all visual. Just look for a bigger gap than usual. Say 30 pips. Hope that helps if not please let me know.

Thank you so much for the reply. Yeah i also do what Kelton does, i over lap the 2 charts. But please tell me how long are you in a trade for? from the time you open the trade to the time you close the trade. If i remember correctly i opened an order on the EURUSD and GBPUSD with around 35 pip separation gab, that was last week Wednesday and its now Tuesday and im now in a loss. Please help me out Timehopper

[patforex7]

Hi Medisoft,

I am unable to find correlation indicator for MT4. Could you point me to one please.

Problem without the indicator I am having is fixing scaling on both the currency pairs. Which is the vital part of the strategy.

When I use the current price of both pairs (i.e. EU and GU); and ‘Add’ and ‘Subtract’ same amount of pips (e.g. 100pips) from both EU and GU stands in the middle of the chart for obvious reasons. So visually it appears they are on top of each other and not diverging which in-fact is a wrong depiction.

I am sure the problem will be fixed when value on both charts are taken when they correlate 80% and above then adding and subtracting equal number of pips.

What about trying this:

Look for a correlation indicator, and place on both charts. When you see that the correlation is more than 80 or 90 % on both, then you take your bid price, let say on EU it is 1.3000 and on GU it is 1.6000. Then add 200 pips on EU to define the max and substract 200 pips to define the min. The same for GU.

Then set that values on the settings of each chart. At the end you will have the price chart of EU at the center of the chart, with a range from 1.2800 to 1.3200 on EU and 1.5800 and 1.6200 on GU, with scale fixed. After that you wait until the prices diverged for 20 pips or so, and trade like Kelton indicates

After you taked your profits, you could re-adjust the center of your chart with the same process.

[Sangram_Badhe]

hi!
everyone
I am not able to understand how the system because the position came into heavy losses
please anybody help me. to use this system properly. and to avoid the mistakes so the a/c will not in the loss.
please reply
thank you

[Sangram_Badhe]

I llose all my amount from demo a/c., by usuing this system. may be I don’t know how to use:41: