Daily Archives: February 1, 2012

Average Daily Range For Spread Trading 4

Salve a tutti,

in my previous post I started talking about how to trade Forex pairs using the spread (or pair) trading system.

In this post we’ll go more in depth and I’ll talk about how to “normalize” lot sizes once we have a entry signal.

We said that we use two directly (or inversely) correlated pairs. And once we know that one is becoming stronger than the other we go long the first (the stronger) and short the other (the weaker).

You should be already familiar about the concept of strength and weakness and so you should already guess how we’ll calculate which one is stronger/weaker.

What we need now is to “balance” the lot size we use.

Why that? Let’s say that we decide to use EURUSD and EURGBP. Those two pairs are generally directly correlated. Let’s say that we have a signal saying that EURGBP is becoming stronger than EURUSD, so we have to go long EURGBP and short EURUSD.

Let’s say that we decide to use a lot size of 0.1 lots (1 minilot).

To make a balanced trade we have to take into account also what’s called the “Average Daily Range”.