Basket Trading 16


Salve a tutti,

In this post I’ll introduce a trading strategy that uses a basket of currency pairs all together. In particular we’ll create a USD based basket of currencies and trade them based on the strength/weakness of a sort of USD index.

Some of the concepts here are related to the ones described in two previous posts: currency strength/weakness and currencies correlations. This basket trading strategy is a particular application of them.

Our basket is made of 7 pairs, the 7 major currencies against the USD:

1. AUDUSD (AUD vs USD)
2. USDCAD (CAD vs USD)
3. USDCHF (CHF vs USD)
4. EURUSD (EUR vs USD)
5. GBPUSD (GBP vs USD)
6. USDJPY (JPY vs USD)
7. NZDUSD (NZD vs USD)
(8. GOLD – optional and it can be too risky to add it to the basket)

The reason why I choose the USD as the “base currency” of my basket is because it tends to be negatively correlated with most of the currencies that are part of the basket. And also because the bid-ask spreads of USD based pairs are smaller. We have to take that into account as each time we open a “basket position” we enter 7 trades at the same time, therefore 7 spreads (and possibly commissions) must be paid.

To start we have to evaluate the strength/weakness of each of the 7 pairs. To do that we can use an oscillator in order to have a “normalized” value for each of the pairs. Let’s say we use the RSI, we calculate its value for each of the pairs. For the USDxxx pairs we’ll have to use the “inverse” value (100-RSI). For example: if we have an RSI value of 70 for USDCHF, our score will be 30 (100-70). That is because we want to calculate the weakness/strength of CHF vs USD (and not USD vs CHF).

Once we have all our 7 scores we calculate their average and we’ll use it to calculate the USD score by doing the inverse of it (100-average of total RSIs).

The difficult part is done. Now it’s easy: if we have a USD score above 50 (medium score in case of oscillators ranging from 0 to 100) it means that we have a bullish USD. Vice versa, a USD score below 50 means a bearish USD.

Based on it, we trade our basket.

In case of a bullish USD (USD score above 50) we go:

SHORT: AUDUSD, EURUSD, GBPUSD and NZDUSD
LONG: USDCAD, USDCHF and USDJPY

In case of a bearish USD (USD score below 50) we do the opposite, so we go:

LONG: AUDUSD, EURUSD, GBPUSD and NZDUSD
SHORT: USDCAD, USDCHF and USDJPY

It’s that easy.

Pay attention to the lot size you’ll use for each trade as in reality you have to look at the total of lot sizes of all the 7 trades.

As usual :) I created an indicator calculating everything you need to trade it manually, giving you alerts when the USDs score crosses the “middle” line.

The indicator shows you mainly the “USD score” and a line for each of the 7 pairs’ scores.

The PaniereFX Indicators set is available here: http://pimpmyea.com/panierefx


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16 thoughts on “Basket Trading

    • Andrea Post author

      Thanks :)
      In the last months I developed 4 trading systems (with related indicators and EAs) based on currencies power and correlation and I’m very very happy about them. That’s why I decided to make them available. Because I know that they really work. All of them.
      Two of the strategies are based on basket trading. One is almost the same described here (with some money management ti improve performances).
      Just have patience and EVERYTHING will be available in the website 😉

  • Nicolas

    I played once with such currency strength indicator. There is one available called xMeter and there is a basket trading EA (with same name) around. The logic used in this EA is different. It will either trade in the currency trend or on reversal. So if USD strength is building against EUR it will sell EURUSD. In case the strength difference between EUR and USD is too high, you can trade a strength reversal. It’s a basket trader because once in a trade it will add new positions in case of drowdown based based on strength signal.
    The EA can trade several pairs at the same time.
    The code is very intresting to look at, but that’s a martingale EA so you are likely to blow your account sooner or later.

    • Andrea Post author

      Basket trading means that you trade more “instruments” at the same time, like if it was one. So when you have an entry signal you open positions in 7 pairs at the same time (like in the system described here). The same applies to closing or reversing positions. This is what I mean with “basket trading”.

      About the currency strength/weakness indicator you can trade in different ways. One way is to trade the “crosses” between the power lines of each currency. But that can lead to false signals. That is why some decided to trade waiting for the “reversal” when the spread between the two currencies is wide. This is also a valid approach but “only” at certain extreme conditions and you definitely risk that the trend is not done completely (that’s why it adds positions).

      To solve those problems I coded 3 indicators: one is the powerline showing you the strength/weakness of each currency, the second shows you the correlation between them that is my main filter for entering a trade based on the entry signal coming from the powerline indicator. The third is an indicator that tells you how much you should trade and how to adjust your trades besed on the spread between the two powelines. So you scale in (add positions) when the spread widens so you add positions to winning ones (pyramiding) and start reducing positions taking profits (scale out) when the spread lowers.

      But more on that in the next very few days 😉

      • Todd

        Is this how you are working torwards the EA?
        Scale in and out?
        Also when using the basket stratigy do you find that your sussess rate improves?
        I have experimented using a similar approch as you described trading manuel and found I liked it alot, when you are on the winning side you could realy make nice gains. The problem I had is I didn’t have the right tools that I needed to properly evaluate all the pairs so i did not continue. When looking at the indicator I see also that it is floating around 50,in and out before it makes up its mind, Does the other indicators lag more so you stay out till more a reliable signal? And do you find a trailing stop useful for this basket trading to help lock in profits in case the market turn’s or how do you determin stop loss and take profit. Sorry about all the questions but this is starting to look like what I have been searching for and I am getting dancey.
        Pip On
        Todd

        • Andrea Post author

          The scale in scale out lets you filter false crosses around the 0 line in two ways: first by not entering until the value is strong enough, second by entering gradually so at first you’ll enter with small lot sizes. There may be losses but they’ll be small, and they’ll be much more than covered but bigger moves where you’ll be also pyramiding you positions. The DLS strategy is not good for all the strategies but one of the best money management strategies and flexible enough to improve almost any strategy performance. I’ll write more about it in the next weeks.
          Personally I don’t use much trailing. Actually I prefer to scale out banking some profits as I see a lowering of the values of the indicators.

  • Joseph

    wow! I read about basket trading in forexfactory sometime back and I liked the logic behind it but I never got to apply it.
    Am excited to try out your indicator as it certainly simplify the entry criteria.

  • Todd

    Are you going to bundle the 4 trading systems into one package along with there EA’s, I guess
    I am just currious if I am going to be able to afford all that is coming?
    Can you give your ideas on this?
    Pip On
    Todd

    • Andrea Post author

      What you’ll see in the coming weeks are a set of indicators for manual trading. Each set is a sort of trading system itself.

      I coded the EAs (in reality they are for Multicharts and only started porting to MT4) just to backtest strategies and see if they really work as I expect. I’m not sure if and when I’ll release the EAs but it won’t be soon.

      Actually I think that using the indicators along with some “semi-automatic” script to manage trades is the best solution as for every strategy it requires a brain working to be really profitable.

      I’m not interested in selling EAs, but in giving ou something that helps you read the market and make money out of it. It is not easy as installing an EA. It’s a process that requires patience and knowledge. What I can do is give you the best tools I developed and use explaining as in depth as possible how to use them. Making a strategy automatic or semi-automatic comes only AFTER you deeply understand it.

      I won’t package them together as any strategy is stand alone. And I also hope that you’ll be able to find new ways to use my indicators to suit your trading at best.

      Thanks for you interest Todd. What I’m saying is not for you personally but for all the people interested in my indicators and strategies.

  • Todd

    Andrea
    Thanks for all that you are doing. I might add that some script would be nice to help manage a basket. That is one issue I had in the past when tring to have multi trades of multiable pairs open at the same time. You had to watch them like a hawk and it took along time to manage.
    Yet the profits were there if you had enofe time to anilize all. But what I understand your indicators will help alot with that. I also liked how you placed those trades that you showed us on one minute chart. Way cool. Can hardley wait till I can play. You make it look like childs play.
    Pip On
    Todd

    • Andrea Post author

      Thanks to you Todd.

      In reality it all depends on the timeframe you decide to use for your trading. For the basket trading I suggest you not to go below the 1hour timeframe. Better if you go even on higher timeframes like the 4H or Daily. That way the entry signals won’t be that frequent and working on a daily timeframe you can even just dedicate 5 minutes a day to manage them.

      Same thing in reality applies to all the strategies. They can work on every timeframe, but depending on the time you have for trading and on your trading “attitude” you should choose the one that fits your needs best. Lately I suggest to use higher timeframes but to speed the “learning” process you can even try to trade the 1M timeframe (or low timeframe in general).

      Sometimes it’s a child play (not that often in reality). Most of the times is not. What’s important if you decide to trade the lower timframes is that you trade them when the market is more “liquid”. So usually around London open and NY open time. You don’t have that kind of problem with medium/high timeframes 😉 The general rule is that the higher the timeframe the easiest is to trade (for many reasons too long to explain here). But also everything needs to be scaled as pip profits and draw downs are larger, so to keep the same “risk” you have to use lower lot sizes. I think I’ll dedicate a whole post to that as it’s an important “choice”.

      The wait is almost over 😀

  • Wayne

    Hi Andrea
    This looks interesting.Do you do the inverse value calculation (100- rsi) only on the usd/cad – usd/chf and the usd/jpy or on all the other 4 pairs? ie:aud/usd-gbp/usd-eur/usd-nzd/usd
    EG: usd/cad rsi is showing say 33, (I assume it is 100-33=67) / and the aud/usd is showing rsi 60, is it 100-60=40 or is it 60?
    Kind Regards
    Wayne

    • Andrea Post author

      The calc is made for all 7 the pairs. The USD score is made out of their average.
      I have to calculate the USD strength so for xxxUSD pairs you have 100-RSI, for USDxxx pairs you take the RSI. The average of those 7 values gives you the USD score. Quite easy :)