The EG chart is set with 200 BB with 5 Standard Deviations (SDs). The primary deviation being the 2nd SD. There is no 1st deviation on this chart. Minimum SD is kept to 2nd deviation for reducing number of lines and easy viewing of the price action.
If you carefully observe the price action between the two vertical RED lines. First red line, being the 19 Feb 2012 and the second red line being the 2 March 2012. The price has always (most of the times) has touched the 2nd SD (note there is no 1st SD as mentioned earlier). Once it touches the 2nd SD. the price moves up and up, doesnāt return either to median (Moving Average) or to the lower 2nd SD. Except at two places, clearly marked with up and down arrows.
This scares me a little and I am not able to mark it as a safe strategy to play with. Why? The answer lies between the red lines as mentioned above.
If one has entered a Short position touching 2nd deviation, at the point where red and blue line intersected on 19 Feb 2012. That position would have been in loss till 2nd March 2012. On 2nd March 2012 it would have been Break Even point and still no profit. Agree that you wouldnāt keep that position open that long. One will accept loss at some point between the two red vertical lines. Taking loss will be very subjective, agreed.
However, if you notice carefully, between the two vertical red lines wherever you have entered when price touched 2nd deviation. You would have been in loss for sure. Of course, except two places marked with up and down arrows.
Question here is simple. How would you manage such period between the RED lines of complete loss. The period of about 10 days with no profit at all?
Your kind thoughts / Feedback / Assessments would be very much appreciated.
I think the EG is valuable for reference only, but the original ākelton strategyā still seems the bestā¦
Update, EU and GU pairs were neck and neck still this morning until 1 hour ago, now, itās a profit frenzy! Will have to update later, still trading!
UPDATE: ok, little break now!
I was wondering when these pairs would break up, now, in the last hour they have come about 15 pips apart and back again twice, and currently may be coming apart again, I went ahead and set orders when they were about 13 pips apart, and again after they had met and came back out, profiting both times-1.3% profitā¦finally!..these are some steep moves, too!
Iām using USDJPY / CADJPY with good results in the double pair strategy.
GBP and USD, not GU. I calculated the correlation of both currencies, using GBP/[JPY,CHF] and USD/[JPY,CHF] and compared also with EUR/[JPY/CHF] and other currencies to find the best correlated individual currency, and I found that the pound and the dollar are better correlated, so G/U can be traded in the way you are suggesting, at least is what I think.
Yeah, when I was making the baby pips school, I found that EURCHF is good for swing traders because EUR and CHF are very correlated economies that generates good swings.
So my own view of this might be different from others here (obviously). However for me, firstly, the length of time the trade is open should relate to the chart you are looking at. I use a 1H chart, so I am happy to let the trade run for a few days. If I were trading off the 15M chart, then I would be looking to get in and out relatively quickly. On the 1H, I am taking fewer trades, but each one is targetting more pips. For the 15M chart, I would be taking more trades with a smaller target for each one.
Secondly, I am looking for 2SD or 3SD as a target. I am not necessarily waiting for it to revert to the mean (or cross it). Exact entry and exit will depend on the circumstances, but 2 or 3 SD is my rough guide.
I have marked up your screenshot with possible entries and exits. Blue circles are entries, and red circles are exits. Now of course, this is done with the benefit of hindsight, and the chart is a little small to make out the details, but it should be sufficient for the purposes of this post.
In the first part of the chart there is an obvious up tren and the first 4 trades appear perfect. In an up trend, I am expecting price to reach potentially 3SD from the mean, and then to revert back by 2 or perhaps 3SD. If it were to come back more and touch or cross the mean then it means lower lows would be formed, and that isnāt really going to happen when the instrument is trending nicely.
In these examples, price gets to about the 3SD mark, and a good exit would have been 2SD below at about the 1SD level. You donāt have the 1SD BB on the chart, but those marked up exit points approximate to where the 1SD would roughly be. I donāt know how many pips were there because I canāt see the scale.
Then there are 2 trades that are taken as price hits what looks like 3SD and 4SD. It is possible these would have stopped out, but I canāt see clearly. If I am entering at 3SD, I would attempt to work out where the 5 or 6SD point is, and set my SL there. It might get hit, but fairly unlikely.
Then, in the middle of the chart, there are 2 trades. First a long which enters at about -3SD and closes at the mean for about 3SD of profit. Price actually crosses over the mean and hits +2SD, but the mean has already started to turn down. So I would be thinking that might be a good entry point. We enter a short which gets at least 4SD and perhaps even 6SD of profit if you had held on.
By now we are in a fairly strong down trend. There is another trade which looks like it would have closed for b/e (maybe), but canāt really tell on this image. Given the price action, Iām not sure I would have entered here anyway. Too much vol, the bands are so close together it is hard to see one level from the next, so I may have waited until price settled down.
Overall, it looks like some nice trades. However, I would say that it appears to me that the period for the bollinger bands is too small. I use a 200 period on the 1H chart because it equates to nearly 2 weeks worth of candles. The 200 period on the 15M chart however, is only 2 days worth of data. So, any big moves will really widen the bollinger bands and show as big movements in vol, as can be seen on this chart. Iām not sure what would be a better value for the 15M chart, maybe have a playā¦
I would also look to be in the trades for a relatively short period of time, getting in and out quickly for small profit each time. I personally didnāt like the lower timeframe, but settled on the 1H as that suits me betterā¦
Evfery one is different, you obviously prefer the original method. For me there were too many ways it could be mis-interpreted by overlays and relative positions of the instruments. I also like the ability to be able to set hard targets and stops which canāt be done with the synthetic.
Direct link http://i.imgur.com/78Vha.png (possibly best to use this to see the full size image in another tab as it will get really compressed in this post).
The EG is clearly trending down as the 200MA is smoothly heading down and we have lower lows appearing as we pogress from left to right.
First entry is highlighted with the first red circle on 16th April. Price hit +1SD, actually went to about +1.5, so I would have entered when it retraced to pass back through the 1SD level. 14 hours later it passes through the mean and then goes onto the touch the -1SD line. So the 1st blue circle would be a good exit point for 2SD of profit. However, I would have likely held onto this, given we are in a down trend and that this was a strong move. If I had hung in there, price bounced up and down between the mean and 1-SD for the whole of the US and Asian session (which itself would possibly have given several good trades on the lower timeframe). Then there was a big move down all the way to -5SD in one candle.
I didnāt take this trade because I was on holiday, however I remeber it happening and it met all my criteria for being almost perfect.
2nd trade is further along on 1st May. Very similar circumstances, still in the down trend. Price jumps up and goes past 1SD, almost to +2SD. Enter short as it retraces back through the 1SD level. Initial target was at the -1SD level, but again, because we are in a down trend, I held on and waited for the 2nd target of -2SD. This was a trade I took and I closed it at this point, but had I held on it actually went on further, almost to -3SD!
No, not every day, however these do appear to be very high probabilty trades, so I might be inclided to risk more when entering on these.
Yes, I guess I wait for it to hit 2 minimum, preferably 3 SD. On the same image from the previous post, if you look on the 2nd may there was an entry, it hit the -3SD perfectly. I closed it at the -2SD level getting a (relatively) quick trade for 1SD of profit.
I am also long EG now, although thinking of closing it around b/e as I donāt like how it is working against meā¦
Iām think Iām doing something wrong hehe, I have 2 days of no closed trades and have a drawdown of 20 % right nowā¦ well, Iām trading 9 pairs, so the real drawdown for EU/GU is about 3 % only.
I am still only trading 1 min TF, and only EU/GU pairsā¦look at 12:45pm CST and 10:15 am CST for two opportunities I traded, I took small profit starting at 2:00pm CST, alsoā¦since these pairs were so tight since opening for the week, I have been looking for smaller gaps, willing to open at 12 pips, which means if gap really widened, I would open additional trades with reduced lot sizes.
Jedster, can you give us advice on how to trade inverse correlated pairs?
I was thinking about how to trade that, and I found no way to do that yet.
If I buy one and sell other is almost equal to double the risk on one of them. If both went to my favor, then I win on both of them, but if not, I lose also in both.
If I enter on the same direction on both, one will win while other will lose, very similar to this threadās strategy.
Okay, Iāve jumped shipā¦ Jedster has converted me!
Feel much more comfortable with the one pair system. For me, better profit targets, ability to use a stop, half the spread (and exposure) and more reliable entries.
Now to recover the -300 pips I still have floating around from the two pair system!
Ok, so on my one pair trade, EG, that I added with my normal trades, went the other way a bit, so I bought some more, and then just set a TP not far above entry, maybe 2pips? Then, when I woke up I was $4 richerā¦my other trades have been going in and out of profit, but I was never there to close them, until nowā¦about 0.5% profit, but could have been more if I was able to set a TP as percentageā¦looking back on EG, though, it really has been coming down, so if I were to really use it, it would be short term, small profits, using keltonās viewing system as an indicatorā¦I keep putting a small trade with EG when I open my pairs trading, as time permitsā¦weāll see, hardest part is comparing pip gain potential.
Jedster I must say that you are a legend. I sincerely appreciate, the time you have taken to explain your opinion. Very much appreciated.
In an uptrend itās scary to take a sell position when it touches the 2SD or 3SD. It may completely move against you over the period of time. Though the probability of happening that is not very often. As it moves gradually and in little waves, which does give opportunity to get out with small profits. Like you outlined in blue and red circles. BTW those positions are about in the range of 10-15PIPs each.
I will continue to test my ability to live with the randomness of the market and see how successful this strategy works. Of course, share the ideas when they are concrete and works with all the buddies here.
I agree that on 15 mins chart 200MA is not good idea. I will see what adjustments can be made so it provides better entry and exit points.
Also, I will play at 1H chart, as it make sense to keep trend in mind and then trade with proper entry points.
