Developing a System #2 (Entry system for hedging correlated pairs)
Submitted by Edward Revy on May 29, 2008 - 05:13.
Submitted by Grant
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We need a decent entry system for hedging two positively correlated currencies.
These would be EURCHF and USDJPY. The pip cost is almost the same everyday, very close. And the volatility of USDJPY is 26% higher daily range than EURCHF.
So we would sell 1.26 lots of EURCHF, and buy 1 lot of USDJPY.
When the hedge makes for example
(lot1 +lot2)*50 = $113, we close the trade.
I have written a metatrader expert to trade like this, but my entry rules are not getting me in at the best correlation times, and the result many times is the trade widens in loss for a long time. But if somebody out there can figure out how to time the entries better, we will have 3 or 4 profit trades per day. Any ideas?, they are easy for me to code in and send back your expert for all to test.
Grant
grantsmail2001@yahoo.com
In pairs trading one often using normalized deviation. Below is quota from "The handbook of pairs trading" by Douglas S.Erhman. BTW this is good book about subject You interested in.
Regards
Andrew
"
NORMALIZING DIVERGENCE
This technique is used in any mean reversion strategy and allows the
trader to compare divergence to a normalized distribution. This provides
cleaner data with which to analyze any given trade. The technique is commonly used to compare a stock’s price with its moving average, the assumption being that the stock price will tend to oscillate around its moving
average. [...]
This process is referred to as a Z transformation and is obtained by taking
the difference between the price of Microsoft and its 10-day moving average,
subtracting the average of the difference, and dividing by the
standard deviation of this difference. As can be seen from the chart, this
normalized deviation oscillates around zero fairly symmetrically. This
relationship could be exploited by trading on the assumption that at a
given level of divergence, there is a high probability that the deviation
will revert to zero."
Let me see your codes. May be I can fix or do some improvement.
Best Regards,
syanwar
Admin of Viking234.Com
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