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.