so far we talked about currencies’ strength/weakness (power) and correlations. We also talked about basket trading.
Then we explained in detail two strategies that you can use to trade relying upon these concepts. We also provided you with two sets of indicators in order to help you to trade these strategies or to improve your existing trading systems.
Now it’s time to put everything together to create something new: a third strategy. It is an “in between” approach. Its name is “2PFX” as it a mixed approach between “PotenzaFX” (first P) and “PaniereFX” (second P).
Now let’s consider the two groups that are usually inversely correlated between them: Group 1 (AUD, EUR, NZD) and Group 2 (GBP, USD, JPY). Based on what I wrote yesterday, we’ll put GBP in Group 2 for now. We won’t use Group 3 for now. We’ll work on it and with it later, probably in January as there still much to say before
What we want to do is to build a basket of pairs coming from the crosses between those two groups.
We have the following 9 possible pairs:
You don’t have to use them all. Some of them are quite unusual and probably the spreads on your broker can be very high. Feel free to choose the ones that are best for you, but the more the better.
To trade them we have to calculate the average score of Group 1 currencies and the one of Group 2 currencies. Once we know that, we can trade the basket of 9 pairs, based on the cross between the scores.
So when Group 1 score crosses above Group 2 score you have to go:
Vice versa, when Group 2 score crosses above Group 1 score you have to go:
If you want you can also use a DLS (Dynamic Lot Sizing) approach by scaling in/scaling out based on the spread between the two scores.
The strategy may also be applied to trade Stock indexes ETF/Future/CFD/Options.
We know that Group 1 is usually directly correlated to the stock market, while Group 2 is usually inversely correlated to it.
Therefore the balance between the two currencies groups can give you informations about the general trend of the world stock markets.
We just developed a new indicator to help you with this novel strategy. You can see it in action on PimpMyEA.com home page along with the PotenzaFX Indicators. They are both applied to the daily (1D) timeframe.
You can see 3 histograms: a green one for the Group 1, a red one for Group 2 and a white one for Group 3. You can trade with it by following the above rules.
Do you want to know if it works for real?
Well we got an entry signal at the close of the past week coming from the cross of Group 2 above Group 1. We opened our 9 positions Sunday night at the open of the markets. Here are the results of our trades at the moment I’m writing this post:
- AUDJPY – Opened Short at 79.26 (+213 pips)
- AUDUSD – Opened Short at 1.02069 (+302 pips)
- EURGBP – Opened Short at 0.85453 (+167 pips)
- EURUSD – Opened Short at 1.33797 (+396 pips)
- NZDJPY – Opened Short at 60.14 (+178 pips)
- NZDUSD – Opened Short at 0.77459 (+255 pips)
- GBPAUD – Opened Long at 1.5326 (+313 pips)
- GBPNZD – Opened Long at 2.0198 (+471 pips)
So actually we are in gain of +2.295 pips… yes you read it well… 2.295 pips in less than 4 days. By spending 5 minutes Sunday night. That’s the power of currencies’ correlation/strength analysis with basket trading.
I also want to announce that we are also developing scripts that will automate most of the trades for each of the 3 strategies. We are testing them and as soon as they’ll be ready we’ll make them available.
I’m sure that you appreciate the fact that we decided to expose in great detail all our strategies. We developed indicators/scripts to trade them and we are releasing them week after week to the public. This is something that took us years to find out and develop.
You can trade all of our strategies without our indicators/scripts. They are not black boxes and won’t ever be. Because only when you understand a strategy you’re able to profit with it. Even if it’s 100% automatic. This is really what makes the difference between making money trading or not. There’s no strategy in the World that will make you rich without you dedicate some time and effort in understanding it and managing it. No “black box” will make you money in the long run if you don’t spend some time understanding it and so learn how to “adapt” it.