Over the month of September 2016, I have been forward trading a new product called Correlation Hedge Trader, or CHT for short. As the name suggests, the idea behind CHT is to combine correlation analysis with hedged risk management to produce high-probability trade opportunities with smaller risk. And it seems to work, with 86 trades to date generating an average 20% return each week.
This week, 3rd October 2016, I began forward trading with IC Markets, starting with a $5,000 account balance. So far this too is looking good.
I am the first to admit that one month with Pepperstone, and one week to date with IC Markets, hardly constitutes robust testing over a sustained period of time. However, what these results do not show are the progressively improving outcomes over multiple accounts during strategy development, that have culminated in the results I am now achieving. In other words, these results show only the pointy end of what I've been up to for the past year.
If CHT continues to perform as well as it has to date, I will make copies available for $50 each to anyone willing to support this project. This will include CHT 1.0 expert advisor, CORR_TABLE, CORR_OVERLAY_CHART, and a modified EXPOSURE indicator, plus the CHT chart template. Your package will be an exact duplicate to the one I am using.
Because we are hedging two separate currency pairs, CHT 1.0 cannot be backtested on the Metatrader platform. So I invite you to forward test it yourself for free over the next 14-days. Just email or message me with your first name and country location, and I will send you everything you need. And by the way, CHT 1.0 meets NFA requirements regarding hedging because we are hedging two different currency pairs rather than simultaneously buying and selling a single currency pair.
This strategy was inspired by the article, Hedging - Forex Trading Strategy at FX Market Leaders. You can view the article here.
Components
CORR_TABLE Indicator calculates real-time positive correlation coefficients for the major currency pairs and related crosses using a 50 week period, and tables the results on the chart screen so that accessing the latest coefficients is quick and convenient. All the user has to do is select correlated pairs and set-up relevant charts. Only one chart needs to be opened for each correlated pair. For example, if AUDUSD and NZDUSD are selected, you need only open the AUDUSD chart and attach the CHT expert advisor to it. The HedgeSymbol (NZDUSD) is entered as an input to CHT, and CHT does the rest. Default values are set to coefficients above 75% and below 85%, being the values used to date, however, you can experiment with your own settings.
The CORR_TABLE input box allows you to switch pop-up alerts on/off, set the CorrelationPeriods, TimeFrame, and coefficient range PositiveAbove/PositiveBelow so that only those coefficients that fall between the above/below extremes are presented on screen. Font size is adjustable if, like me, age is affecting your eyesight.
CHT 1.0 Expert Advisor tracks the status of each currency pair that makes up the correlation combination. Inside CHT is an overbought/oversold analysis module that monitors each pair in the correlation, waiting for one pair to enter the overbought zone as the other pair enters the oversold zone. When both pairs are at opposite extremes, CHT buys the oversold pair, and sells the overbought pair, thus creating a hedged trade. Positions remain open until either the profit target is met, or the overbought/oversold extremes return to normal.
In the chart above I have highlighted overbought and oversold extremes between the chart pair (AUDJPY in green) and hedge pair (GBPNZD in blue). GBPNZD is presented using the CORR_OVERLAY_CHART. As you can clearly see, when one pair is overbought, and the other is oversold (long double ended arrows), which indicates that the correlation is currently out of sync, there is a consistent tendency for each pair to eventually move back into sync (two short arrows pointing towards each other). Selling the overbought pair and buying the oversold pair under these conditions is a high-probability, low-risk opportunity.
The logic is quite simple. Positively correlated pairs move together in the same direction, but sometimes get out of sync. Sometimes one pair moves independently of the other, but it is never long before the other pair catches-up. We can take advantage of this if we know which pair is likely to rise, and which is likely to fall, under the protection of a hedged position. If we buy AUDJPY and sell GBPNZD, we are looking for (1) a price rise in the AUDJPY and a price fall in GBPNZD, or (2) a price rise in the AUDJPY whilst the GBPNZD remains static, or (3) a price fall in the GBPNZD whilst the AUDJPY remains static. These all result in profit.
If prices for both pairs move up or down together, whilst remaining out of sync, then risk is controlled. If we buy AUDJPY and sell GBPNZD, and if prices move up, losses on the GBPNZD are absorbed by gains on the AUDJPY, and if prices move down losses on AUDJPY are absorbed by gains on GBPNZD. This is the advantage of hedging. Risk can be contained.
What if prices continue to move out of sync? If we buy AUDJPY and sell GBPNZD, but AUDJPY moves down whilst GBPNZD moves up or remains static, we are going to be showing an unrealised loss, and a negative impact on drawdown. This is where a little bit of faith in the strategy is required, along with sensible money management.
Inevitably, there is a very high probability that an out of sync situation will eventually return to normal, but account funds must be able to sustain this type of scenario. The default risk setting is 0.01 lots per $100 account balance, which I consider to be a moderate-aggressive risk level. You can lower your risk by increasing the balance amount required to trade 0.01 lots, or increase your risk by lowering the balance amount required. Doubling the balance amount from $100 to $200 effectively cuts your risk in half, whereas reducing the balance amount to $50 effectively doubles your risk. You have to decide what works best for you.
HedgeSymbol – enter a symbol against which the chart symbol is hedged (use CAPITALS only). If you have selected the AUDUSD/NZDUSD combination from the correlation table, the chart symbol will be the AUDUSD, and the HedgeSymbol will be the NZDUSD.
TimeFrame – set at one-hour (H1) by default as per forward testing results. The user is able to experiment with different timeframes, however, it is highly recommended that all new settings are forward tested on a demo account before applying to live trading.
SyncTriggerTarget – set at 90% by default as per forward testing results. CHT 1.0 is set to trigger trades when overbought/oversold synchronization extremes occur. That is, when one of two correlated symbols enters the overbought zone, and the other enters the oversold zone, and the difference between these extremes is equal to or greater than the SyncTriggerTarget, CHT 1.0 will open a hedge position. Raising the trigger point will generally reduce the number of trades being triggered with the potential to improve accuracy, whilst lowering the trigger point will do the opposite by increasing the number of trades triggered and potentially reducing accuracy. Test new settings on a demo account before applying to live trading.
ProfitTargetLot – set at $1.50 by default as per forward testing results. ProfitTargetLot, or profit target per lot traded, is multiplied by the lot size traded, i.e. 0.15 lots X $1.50 = $22.50 profit target. Increasing the ProfitTargetLot amount increases overall profit potential but reduces the probability of achieving the profit target. Reducing the ProfitTargetLot amount reduces overall profit potential but increases the probability of achieving the profit target. Test new settings on a demo account before applying to live trading.
BalanceAmount – set at $100 by default as per forward testing results, the BalanceAmount is used to automatically calculate incremental lot size per trade according to the current account balance. At the $100 setting, CHT 1.0 calculates the lot size as 0.01 lots per $100 in the account balance, so a balance of $1,000 will calculate 0.10 lots, and a $5,000 balance will calculate 0.50 lots, and so on, with the calculated lot size increasing or reducing according to the current account balance. Raising the BalanceAmount reduces the lot size calculated and the associated risk factor, i.e. less traded lots equals less risk. For example, increasing the BalanceAmount to $200 halves the lot size and associated risk factor. Reducing the BalanceAmount can be dangerous. Reducing the BalanceAmount to $50 for example, doubles the lot size and associated risk factor. Test new settings on a demo account before applying to live trading.
CHT CHART TEMPLATE
The CHT chart template conveniently combines all elements of the CHT package on screen, as shown in the example below. Provided the CHT expert advisor and supporting indicators have been installed to your copy of the MT4 terminal, the template can be used for fast chart set-up. You will only be required to enter the hedge symbol to the CHT expert advisor (as already described) and CHT overlay chart (just right click the blue overlay chart line and open the CORR_OVERLAY_CHART properties box).
(Click on chart to view full-size)
You will notice several elements displayed on the chart including the correlation table that we have already discussed, CHT 1.0 trade status details presented above the correlation table, the CHT overlay chart (blue chart line), and the CHT exposure indicator at the bottom of the screen. Collectively, these elements combine to provide you with both visual and statistical information in real-time.
CHT overlay chart is for visual purposes only, and plays no actual role in analysing or trading the market. Its sole purpose is to present you with visual information about what is going on behind the scenes.
CHT exposure displays open position information at the bottom of the screen, including lot size, entry price, and profit status. Like the overlay chart, CHT exposure plays no role other than to present meaningful real-time information.
Account status shows account balance, equity, used margin, and the open profit of all open positions. Hedging status confirms which pairs are to be hedged, the timeframe, total profit target, profit target per lot, and number of lots to trade based on the current balance. Just below this is the overlay chart confirmation, which displays the current currency pair setting in the overlay chart, which should be the same as the hedge symbol (AUDUSD in the above example).
Out of sync data is displayed at the bottom of the account status area. It shows the out of sync target that must be reached before a hedge position is opened, the relative status of each currency pair in the hedge, and the current out of sync status. Again, this information provides insight as to what is going on behind the scenes, so that you have a complete understanding of why a trade has been opened, or why there is currently no activity.
I invite you to forward test CHT yourself for free over the next 14-days. Just email or message me with your first name and country location, and I will send you everything you need.
This week, 3rd October 2016, I began forward trading with IC Markets, starting with a $5,000 account balance. So far this too is looking good.
I am the first to admit that one month with Pepperstone, and one week to date with IC Markets, hardly constitutes robust testing over a sustained period of time. However, what these results do not show are the progressively improving outcomes over multiple accounts during strategy development, that have culminated in the results I am now achieving. In other words, these results show only the pointy end of what I've been up to for the past year.
If CHT continues to perform as well as it has to date, I will make copies available for $50 each to anyone willing to support this project. This will include CHT 1.0 expert advisor, CORR_TABLE, CORR_OVERLAY_CHART, and a modified EXPOSURE indicator, plus the CHT chart template. Your package will be an exact duplicate to the one I am using.
Because we are hedging two separate currency pairs, CHT 1.0 cannot be backtested on the Metatrader platform. So I invite you to forward test it yourself for free over the next 14-days. Just email or message me with your first name and country location, and I will send you everything you need. And by the way, CHT 1.0 meets NFA requirements regarding hedging because we are hedging two different currency pairs rather than simultaneously buying and selling a single currency pair.
This strategy was inspired by the article, Hedging - Forex Trading Strategy at FX Market Leaders. You can view the article here.
Components
CORR_TABLE Indicator calculates real-time positive correlation coefficients for the major currency pairs and related crosses using a 50 week period, and tables the results on the chart screen so that accessing the latest coefficients is quick and convenient. All the user has to do is select correlated pairs and set-up relevant charts. Only one chart needs to be opened for each correlated pair. For example, if AUDUSD and NZDUSD are selected, you need only open the AUDUSD chart and attach the CHT expert advisor to it. The HedgeSymbol (NZDUSD) is entered as an input to CHT, and CHT does the rest. Default values are set to coefficients above 75% and below 85%, being the values used to date, however, you can experiment with your own settings.
CHT 1.0 Expert Advisor tracks the status of each currency pair that makes up the correlation combination. Inside CHT is an overbought/oversold analysis module that monitors each pair in the correlation, waiting for one pair to enter the overbought zone as the other pair enters the oversold zone. When both pairs are at opposite extremes, CHT buys the oversold pair, and sells the overbought pair, thus creating a hedged trade. Positions remain open until either the profit target is met, or the overbought/oversold extremes return to normal.
In the chart above I have highlighted overbought and oversold extremes between the chart pair (AUDJPY in green) and hedge pair (GBPNZD in blue). GBPNZD is presented using the CORR_OVERLAY_CHART. As you can clearly see, when one pair is overbought, and the other is oversold (long double ended arrows), which indicates that the correlation is currently out of sync, there is a consistent tendency for each pair to eventually move back into sync (two short arrows pointing towards each other). Selling the overbought pair and buying the oversold pair under these conditions is a high-probability, low-risk opportunity.
The logic is quite simple. Positively correlated pairs move together in the same direction, but sometimes get out of sync. Sometimes one pair moves independently of the other, but it is never long before the other pair catches-up. We can take advantage of this if we know which pair is likely to rise, and which is likely to fall, under the protection of a hedged position. If we buy AUDJPY and sell GBPNZD, we are looking for (1) a price rise in the AUDJPY and a price fall in GBPNZD, or (2) a price rise in the AUDJPY whilst the GBPNZD remains static, or (3) a price fall in the GBPNZD whilst the AUDJPY remains static. These all result in profit.
If prices for both pairs move up or down together, whilst remaining out of sync, then risk is controlled. If we buy AUDJPY and sell GBPNZD, and if prices move up, losses on the GBPNZD are absorbed by gains on the AUDJPY, and if prices move down losses on AUDJPY are absorbed by gains on GBPNZD. This is the advantage of hedging. Risk can be contained.
What if prices continue to move out of sync? If we buy AUDJPY and sell GBPNZD, but AUDJPY moves down whilst GBPNZD moves up or remains static, we are going to be showing an unrealised loss, and a negative impact on drawdown. This is where a little bit of faith in the strategy is required, along with sensible money management.
Inevitably, there is a very high probability that an out of sync situation will eventually return to normal, but account funds must be able to sustain this type of scenario. The default risk setting is 0.01 lots per $100 account balance, which I consider to be a moderate-aggressive risk level. You can lower your risk by increasing the balance amount required to trade 0.01 lots, or increase your risk by lowering the balance amount required. Doubling the balance amount from $100 to $200 effectively cuts your risk in half, whereas reducing the balance amount to $50 effectively doubles your risk. You have to decide what works best for you.
HedgeSymbol – enter a symbol against which the chart symbol is hedged (use CAPITALS only). If you have selected the AUDUSD/NZDUSD combination from the correlation table, the chart symbol will be the AUDUSD, and the HedgeSymbol will be the NZDUSD.
TimeFrame – set at one-hour (H1) by default as per forward testing results. The user is able to experiment with different timeframes, however, it is highly recommended that all new settings are forward tested on a demo account before applying to live trading.
SyncTriggerTarget – set at 90% by default as per forward testing results. CHT 1.0 is set to trigger trades when overbought/oversold synchronization extremes occur. That is, when one of two correlated symbols enters the overbought zone, and the other enters the oversold zone, and the difference between these extremes is equal to or greater than the SyncTriggerTarget, CHT 1.0 will open a hedge position. Raising the trigger point will generally reduce the number of trades being triggered with the potential to improve accuracy, whilst lowering the trigger point will do the opposite by increasing the number of trades triggered and potentially reducing accuracy. Test new settings on a demo account before applying to live trading.
ProfitTargetLot – set at $1.50 by default as per forward testing results. ProfitTargetLot, or profit target per lot traded, is multiplied by the lot size traded, i.e. 0.15 lots X $1.50 = $22.50 profit target. Increasing the ProfitTargetLot amount increases overall profit potential but reduces the probability of achieving the profit target. Reducing the ProfitTargetLot amount reduces overall profit potential but increases the probability of achieving the profit target. Test new settings on a demo account before applying to live trading.
BalanceAmount – set at $100 by default as per forward testing results, the BalanceAmount is used to automatically calculate incremental lot size per trade according to the current account balance. At the $100 setting, CHT 1.0 calculates the lot size as 0.01 lots per $100 in the account balance, so a balance of $1,000 will calculate 0.10 lots, and a $5,000 balance will calculate 0.50 lots, and so on, with the calculated lot size increasing or reducing according to the current account balance. Raising the BalanceAmount reduces the lot size calculated and the associated risk factor, i.e. less traded lots equals less risk. For example, increasing the BalanceAmount to $200 halves the lot size and associated risk factor. Reducing the BalanceAmount can be dangerous. Reducing the BalanceAmount to $50 for example, doubles the lot size and associated risk factor. Test new settings on a demo account before applying to live trading.
CHT CHART TEMPLATE
The CHT chart template conveniently combines all elements of the CHT package on screen, as shown in the example below. Provided the CHT expert advisor and supporting indicators have been installed to your copy of the MT4 terminal, the template can be used for fast chart set-up. You will only be required to enter the hedge symbol to the CHT expert advisor (as already described) and CHT overlay chart (just right click the blue overlay chart line and open the CORR_OVERLAY_CHART properties box).
(Click on chart to view full-size)
You will notice several elements displayed on the chart including the correlation table that we have already discussed, CHT 1.0 trade status details presented above the correlation table, the CHT overlay chart (blue chart line), and the CHT exposure indicator at the bottom of the screen. Collectively, these elements combine to provide you with both visual and statistical information in real-time.
CHT overlay chart is for visual purposes only, and plays no actual role in analysing or trading the market. Its sole purpose is to present you with visual information about what is going on behind the scenes.
CHT exposure displays open position information at the bottom of the screen, including lot size, entry price, and profit status. Like the overlay chart, CHT exposure plays no role other than to present meaningful real-time information.
Account status shows account balance, equity, used margin, and the open profit of all open positions. Hedging status confirms which pairs are to be hedged, the timeframe, total profit target, profit target per lot, and number of lots to trade based on the current balance. Just below this is the overlay chart confirmation, which displays the current currency pair setting in the overlay chart, which should be the same as the hedge symbol (AUDUSD in the above example).
Out of sync data is displayed at the bottom of the account status area. It shows the out of sync target that must be reached before a hedge position is opened, the relative status of each currency pair in the hedge, and the current out of sync status. Again, this information provides insight as to what is going on behind the scenes, so that you have a complete understanding of why a trade has been opened, or why there is currently no activity.
I invite you to forward test CHT yourself for free over the next 14-days. Just email or message me with your first name and country location, and I will send you everything you need.
