Time-Collection GBPUSD divided by AUDUSD offers RATIO2(obtain indicator under)
Time-Collection RATIO1 divided by RATIO2 offers RATIO(obtain indicator under)
COMPARE EURUSD/USDCHF RATIO1 TO GBPUSD/AUDUSD RATIO2. PERFORMING CORRELATION ANALYSIS ON RATIO1 VS. RATIO2 GIVES NEGATIVE OR POSITIVE CORRELATION. +/- CORRELATION IS ONE OF THE REQUIREMENTS FOR HEDGING!
THE REASON FOR THIS STRATEGY: AFTER DOING PAIRS-TRADING FOR A WHILE I NOTICED THAT SOMETIMES YOU ENTER AND THE PROFIT IS NEGATIVE BETWEEN TWO INDIVIDUAL INSTRUMENTS, AND TO CANCEL OUT THAT RISK IS TO HEDGE THE HEDGE, SO THAT ONE RATIO IS NEGATIVE WHILE THE OTHER RATIO IS POSITIVE.
EXAMPLE, NORMALLY YOU WOULD HEDGE EURUSD WITH GBPUSD, BUY EURUSD AND SELL GBPUSD! OR VICE VERSA, DEPENDING ON RATIO.
NOW SUPPOSE THE HEDGE GOES AGAINST YOU, AND YOU ARE NEGATIVE ON YOUR PROFIT……… HERE IS WHERE THE OTHER HEDGE WILL BE POSITIVE.
SO TO HEDGE THE HEDGE, I NOTICED THAT RATIO1 VS. RATIO2 HAS NEGATIVE/POSITIVE CORRELATION, WHICH MEANS WHEN THE RATIO OF RATIO1/RATIO2 IS 2 STANDARD DEVIATIONS AWAY FROM MEAN, YOU WOULD:
[SELL RATIO1 AND SELL RATIO2] (unfavorable correlation, ratio touching higher bollinger band, overbought)
[BUY RATIO1 AND BUY RATIO2] (unfavorable correlation,ratio is touching lowest bollinger band, oversold)
[BUY RATIO1 AND SELL RATIO2] (constructive correlation, ratio is touching lowest bollinger band, oversold)
[SELL RATIO1 AND BUY RATIO2] (constructive correlation, ratio is touching higher bolling band, overbought)
SO FOR EXAMPLE IF RATIO OF RATIO1/RATIO2 IS OVERBOUGHT ON NEGATIVE CORRELATION, YOU WOULD SELL RATIO1 AND SELL RATIO2 WHICH EQUALS, SELL EURUSD, SELL USDCHF, SELL GBPUSD, BUY AUDUSD. NO STOPLOSS IS SET, SINCE TWO INSTRUMENTS WILL BE POSITIVE AND TWO WILL BE NEGATIVE. ALSO, BEFORE ENTRY, ANALYZE CORRELATION BETWEEN:
EURUSD VS. USDCHF
EURUSD VS. AUDUSD
GBPUSD VS. AUDUSD
USDCHF VS. GBPUSD
AUDUSD VS. USDCHF
EURUSD VS. GBPUSD
NOTE: CORRELATION ANALYSIS FOR EACH ABOVE SHOULD BE DONE ON 15M,30M,1H,4H,1D FOR 30,90,180 PERIODS
EXIT WHEN RATIO RETURNS BACK TO THE MEAN
i HAVE BEEN TESTING THIS AND WHEN YOU HEDGE IN GENERAL, THE RETURNS ARE DECREASED, AND WITH THIS HEDGE THE HEDGE CONCEPT THE RETURNS ARE EVEN SMALLER, BUT YOU ARE PROTECTED AGAINST NEGATIVE PROFIT ON THE SIMPLE HEDGE WHERE YOU ONLY SELL EURUSD AND BUY GBPUSD. BECAUSE WITH THIS: WHENRATIO1 IS NEGATIVE, THE OTHER RATIO2 IS POSITIVE……………………………….BECAUSE OF NEGATIVE CORRELATION BETWEEN RATIO1 AND RATIO2… OF-COURSE, IF ALL CORRELATIONS START BREAKING DOWN, AND ALL OF THE PAIRS START SWINGING LIKE CRAZY, THEN YEAH THAT IS THE RISK, BUT I’M ASSUMING THAT CORRELATION IS HIGH ON DIFFERENT TIME FRAMES…..
Be aware: whenever you enter with these 4 pairs, eurusd, usdchf, gbpusd, audusd, discover that there’s correlation between all pairs. I.E. eurusd could be hedged with usdchf, eurusd could be hedged with gbpusd, eurusd could be hedged with audusd, gbpusd could be hedged with usdchf, and audusd could be hedged with usdchf. So total, relying on correlation between ratio1 and ratio2, you may setup to be hedged throughout 4 pairs.
Beneath are the symptoms for this technique:
1. correlation indicator for ratio1 vs ratio2
2. ratio1 indicator for eurusd/usdchf
3. ratio2 indicator for gbpusd/audusd
4. ratio indicator for ratio1/ratio2. ([eurusd/usdchf] / [gbpusd/audusd])
5. template for the indicator setup,
Correlation indicators has a bug: setup three totally different indicators for correlation, one for 30 intervals, 90 intervals, 180 intervals, in order that totally different correlation time frames present up!
1.whenever you load the correlation indicator for ratio1 vs. ratio 2, the correlation values won’t present up straight away, it’s important to swap to a different chart, and await a tick to replace the information arrays, solely then the correlation will probably be displayed for ratio1 vs. ratio2. Principally swap to a different chart, after which come again after the information updates, and the correlation info will present up.
Kind pair1, kind pair2 2. This does not have a bug, however to use bollinger bands to this ratio, it’s important to discover the bollinger band indicator on the left window of METATRADER, then drag the BB indicator over the ratio window, and when the choices comes up, choose your applicable values for interval and for BB bands to point out up it’s important to “apply to: first indicator information“. Solely this fashion the bands will present up.
Kind pair1, kind pair2
3. it’s important to apply the identical BB band course of as in earlier course of.
Hedge the Hedge Indicator
Kind in pair1, pair2, pair3, pair4 4. To use bollinger bands on this indicators, apply the steps from above, discover BB indicator, drag it over the ratio, choose: first indicator information in apply to window.
PLEASE POST FEEDBACK ON WHAT YOU THINK AND WHAT IS THE BEST RULES FOR USING THIS SYSTEM.