Statistical Arb/Pairs trading strategy!

Thats right put it on the one 1min chart zoomed out to the max. if you know how to use vitrite, keep one mt4 normal and
the other push ctrl-shift-5. here is one of two jpy currencie chart. they are very correlated in nature and the chart proves it.

this one might be easier to see. pink one is Aud/Jpy and blue one is Nzd/Jpy. if you were to make every trade
in the 22 hours this chart shows thats over 20 pips appart and opening a new position every 20. its about 220 pips.

for exaple: the charts reach 20 pips appart. I would open a buy and sell order. then if an hour later they were 40 pips
appart I would open another buy and sell. if they then touched i would close all positions and profit 60 pips. - spread

if you look at the chart below I would be in an open order with a sell for the AUD/JPY and a buy for the NZD/JPY.
My position would still be open untill these two charts touch again.

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hi kelton
In another demo account of mine on FXCM micro account i have found out that it is possible to directly overlay charts with their ‘price overlay function’. I cant get them to both display in candlesticks but as a single line for each pair. or candlestick for 1 pair & a line for the other pair.
hope this is of use
dave

I only like mt4 and all the indicators I’ve used end up messing me up but ill definitely check it out. Thank u

thanks for the vitrite, the overlay indicator is annoying.

Are you using any kind of a stop loss with this?

When I’ve traded this in the past I usually watched it on a 15M chart with an overlay indicator. This vitrite gives a much better view!

Hey talonD. I am not using a stop loss. And believe me I know proper money
and risk management. But I have been not using one just because I am in a market neutral position
And since I do not use support or resistance or fib to place trades it would be difficult to make a stop loss

Can you please explain how you set this up to be used on MT4? Thanks PC

how to set up the vitrite you mean? install the vitrite program and it will allow you to adjust the transparency of the active window. So I open two metatraters. On one I pull up a GU chart and pull up a EU chart on the other. make sure the time frame is the same and make sure the zoom level is the same and then just make one of them partly transparent.
I like to make the charts priceline instead of candles.

Make sure that the zoom level is all the way out. its the best way. Any other zoom level makes it very difficult

Hi Kelton!

May I ask you what is your screen resolution?

And about the 20 pip difference between the two lines, you use the front MT4 to measure the 20 pips? Because I think they are “relative to 1 pair 20 pips”, or “visual 20 pips”. This because the pairs could be more than 20 pips distance in their real value. Let say, one pair is trading at 0.9900 and other is trading at 1.2100, but in the chart they appear to have a distance of 20 pips, but in price the distance is a lot higher.

Thanks :slight_smile:

I dont know my screen resolution lol the pictures suck because the overlay makes everything a little darker.t
And its visual pips. not acutal, becaues they could be litterally thousands of pips away but that is impossible to trade
remember you are trading correlation not actual numbers. The good thing about eur/usd and gbp/usd is that they
have the same pip size to make everything easy and simple

You can also use NZDUSD and AUDUSD, I think they have the same correlation. At least on the charts the correlation seems to be almost the same, but the spreads are lower because they are “majors”

Thanks :slight_smile:

On MT4, with full zoom out, each bar is 1 pixel width. And what you say about the difference of thousands of pips is right. I thing the best way to see that is as a “percent” the zero (lower of the chart) and 100 (upper of the chart) are the range. The two pairs move between that 0 and 100, and if EURUSD is at 80 and GBPUSD is at 70, then one can measure graphically the distance between the 80 and 70 percent levels on EURUSD, if that is 20 pips then that is an entry sell for EU and buy for GU. When the percent on the chart is equal, let say, 75, on both EU and GU, that is a take profit level.

For stop loss, I think it could be based on max loss on the equity, for example, I’m willing to risk only 3 percent of my account. Then, when the sum of all the open trades on EU and GU exceeds that 3 percent loss, that will signal my stop loss and I need to close all the trades.

Do you think this make sense?

I undertand the stop loss theory by total profit and loss but I dont like it because I am in a market neutral position.
oh and UPDATE!!! USE THE SAME MT4 SOFTWARE WHEN OVERLAYING THE CHARTS. DOWNLOAD TWO DEMO ACCOUNTS
AND OPEN UP TWO MT4’S BUT FROM THE SAME BROKER. BECAUSE SOMETIME EACH BROKER FOR SOME REASON USES A DIFFERENT SCALE SO EVEN THE SAME CURRENCY PAIR OVERLAID ON ITSELF WILL LOOK LIKE IT GOES OUT OF CORRELATION WHICH IS NOT POSSIBLE.

Medisoft, when I was doing this I was using a 2% equity stop loss. It seems a percent of equity is the most logical way of controlling risk with this system, for those of us who want to use that kind of control.

How do you find correlated pairs? Let say, I found that EURGBP is correlated with EURCAD and EURAUD, and also GBPAUD with EURAUD, I did this checking the pairs from 1m to 4h and looking if they tend to follow one to the other, and also checked the near history of a correlation indicator on the same time frames to see how much time does it is above the 50 percent correlation, how many times does it reach the 80 percent correlation.

Do you think this is correct?

You can find the correlation of pairs by just researching online. Go to forexticket.com and look at the correlations there. Anything above .8 is good to trade. .5 is not very correlated. Don’t use a indicator to find correlation either, the are in reliable.

And for people that want a stop loss… they are not bad and if u figure out a profitable strategy with one then use it. My personal approach is to not use one when pairs trading. Typically they are not used when pairs trading stocks either

Thanks. But which time frame do you look for to chose a correlated pair? I see that GU and EU is correlated on the long term and on the short term time frames.