DuettoFX Strategy Details And Tips 34


Ciao a Tutti,

first of all thanks for the terrific response to the DuettoFX Indicator which was released yesterday. It seems that most of you have already applied DuettoFX to your charts and are already hunting new “duetto”  trades 😀

However, a word of caution: as for any system/strategy please use DuettoFX on a demo first, until you exactly understand how it works.

I’ll share some tips today so that you can use DuettoFX in the best way and you fully understand how to replicate the strategy described in the “1000 Pips per Month with a Single Indicator” post. I’d like to stress that this strategy can be improved a lot with a more reliable exit strategy, however it can be a good starting point for newcomers.

Look carefully at the picture below (you can click on it for a larger view):

This is how DuettoFX looks on my Alpari MT4 platform rigth now (17th Feb 2012, 08:40 GMT). Notice how the red cloud is now very small because the two white curves delimiting it (one for EURUSD and one for USDCHF) are very near. For this reason the three labels in this indicator’s subwindow are overlapping and you can’t read them at all.

First tip: you can always know the exact value of any indicator on the MT4 platform just looking at the “Data Window”. DuettoFX generates 8 output values (by the way, this is the maximum allowed by MT4) and the ones you should look at are:

  • value5: the value related to the first instrument (EURUSD in this example)
  • value6: the value related to the second instrument (USDCHF in this example)
  • value7: the value of the spread (translated by 50)
  • value8: the value of a moving average over the spread (translated by 50)

So if you cannot read the exact values displayed by the three labels on chart you should always refer to the Data Window.

In the picture above we read: value5 = 49.8856 and value6 = 49.9334, hence spread = 49.8856 – 49.9334 = -0.0478. Therefore we have value7 = 50 + (-0.0478) = 49.9522.

The fact of summing 50 to the actual spread is just a “trick” needed by DuettoFX in order to display the spread (the solid yellow line) centered around the cloud’s median line (which is 50).

In the “1000 Pips per Month with a Single Indicator” post I explained that spread must be above a fixed threshold in order to have a valid entry signal. When a candle closes with spread>=2 then we can enter Long at the beginning of the next candle. When a candle closes with spread<=-2 then we can enter Short at the beginning of the next candle. That means before entering a trade you should use the Crosshair tool of your MT4 platform, place it on the last closed candle, and then look carefully at “value7″ in the Data Window. If value7>=52 then you can place a Long trade, if value7 <=48 then you can place a Short Trade.

As an example, look at the solid yellow vertical line that I draw on chart above. At the opening of that candle (2012.02.14 18:00, which corresponds to 16:00 GMT) I entered short EURUSD @ 1.31481. As a matter of fact the previous candle (see the dashed yellow vertical line)  was the first candle after the previous green cloud to have a spread lower than -2 (value7 = 47.5770). That trade resulted in a MAE (maximum adverse excursion) equal to 44 pips and a MFE (maximum favorable excursion) equal to 170 pips. So you can understand that with a good exit strategy you can pocket a lot of pips, because the vast majority of trades have MFE much bigger than MAE (in some cases MAE=0 because the trade goes straight in our favor as soon as it is entered and it never retraces to the entry price).

The last thing I must stress regards the dotted vertical lines (green and red) displayed by DuettoFX. These lines are drawn in realtime so it can happen that a new dotted line is drawn if a new cross happens within a candle, but that cross is not confirmed when the candle closes. A perfect example is in the picture above, where spread < 0 (or value7 < 50) and nonetheless a vertical dotted line has appeared. That line appeared because during a short-lived bullish momentum we had spread>0, therefore DuettoFX detected a new positive cross. However that cross may not be confirmed when the current hourly candle closes (as a matter of fact – as I said – spread is negative right now, so the cross is not there anymore).

So you should not be fooled by the dotted vertical lines: always refer to the actual spread value “after” the candle is closed. The next version of DuettoFX will have a new option that allows to draw these lines only when a candle is closed. Anyway, remember that the most reliable trading signals do not happen after a valid new cross, but when a fixed threshold has been exceeded. It usually takes some hours after a new fresh cross in order to see spread>= 2 or spread <=-2, so there is no rush to enter trades.

Good luck with your trading, DuettoFX can really put the odds in your favor, just learn how to use it at best 😉


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34 thoughts on “DuettoFX Strategy Details And Tips

  • Ross

    On the new version when you draw the lines when the candle is closed can you put a popup alert with email alert facility would be nice for those of us on the other side of the world.
    luv your work

    • Paolo Post author

      Hi Ross, other customers have already expressed the same wish, so we are probably going to implement some alerts into the next version. Thanks for your appreciation :-)

    • Paolo Post author

      No. All sales are definitive. Upon request we issue refunds in some circumstances based on our personal discretion. Ciao, Paolo

  • Francis

    Hi,

    You mentioned, “In the picture above we read: value5 = 49.8856″. What is this value 49.8856? What’s the Unit of Measure? Thank you.

    • Paolo Post author

      Hi Francis, there is no unit of measure, since the value is a ratio of 2 values with homogeneous units of measurement. Many oscillators fall into this category. As an example, can you tell me which is the unit of measure of a common indicator like RSI? Ciao, Paolo

  • Jef

    Hi Andrea and Paolo,

    Thanks for designing such an impressive indicator as you did with DuettaFX ! You guys are getting better and better.
    In the coding of the EA (which i’m sure you have half finished and tested already) may be you can add the MTF indicator as a filter for maximizing profits; what i mean is if the i.e. the EURUSD indicates green/long, the MTF could take you out of the market if it indicates a short, eventhough the DuettaFX is still in the green/long mode.
    Cheers, Jef

    • Paolo Post author

      Hi Edwin, I’ll explain again MFE and MAE using an example. Let’s suppose I buy EURUSD @ 1.3048 and then I close this trade @ 1.3112. The PL of this trade is +64 pips. In order to know MFE and MAE of this trade, we must look at the entire price history from the moment the trade was opened to the time it was closed. Let’s say after the trade was opened price went to 1.3060, then it reversed to 1.3025, then it reversed again to 1.3128, and finally it reversed again until I closed the trade @ 1.3112. In this scenario MFE (maximum favorable excursion) is 1.3128 – 1.3048 = 80 pips, and MAE (maximum adverse excursion) is 1.3048 – 1.3025 = 23 pips. In other words price moved in our favor 80 pips and against us 23 pips. In this case MFE-MAE = 80 – 23 = 57. When an indicator signals trades that consistently show MFE-MAE > 0 then we can consider building a winning strategy upon it.

  • Todd

    Paolo
    Is the light green and red lines the buy and sell sey at -48 or 52, while the yellow just says that a cross happened?
    Could you explain in simple terms what is MFE and MAE is? I am a little lunk headed at times.
    Thanks
    Todd

    • Paolo Post author

      Hi Todd, I explained MFE and MAE in the previous comment. The green and red dotted lines appear in realtime when DuettoFX detects a new cross (even if it is not confirmed yet). Please look at the Data Windows in order to understand when value7 >= 52 (that is spread >= 2) and value7 <= 48 (that is spread <= -2). Ciao, Paolo

  • Todd

    Thanks I have been rely hung up on this. I am finaly starting to get it.
    I should of asked a couple of post ago, I thought I could figure it out. Sorry
    Pip On
    Todd

  • Francis

    Hi,
    Thanks for the response. Since values 5 & 6 in the data window are each a ratio of each other as per your: “the value is a ratio of 2 values” (hope I am not confused), to aid my understanding further, what does it mean if say value 5 is 50? And what does it mean if say value 5 is 47. I appreciate that the further values 5 & 6 move away from each other the better the trading opportunity. Also, when you say “a ratio of 2 values”, what are the values it is using to compare? Is it price action or something else or maybe even a set of different kind of values? Last question for now: How long will the purchaser’s version be updated for free? 1year/2years/no time limit? Thanks.

    • Paolo Post author

      Hi Francis, the most important values computed by DuettoFX are value5 for instrument1 (e.g. EURUSD) and value6 for instrument2 (e.g. USDCHF). They are the white lines delimiting the “cloud”. They can go from 0 to 100. A value equal to 50 means that the corresponding instrument is perfectly neutral. A value > 50 means it is bullish. A value < 50 means it is bearish. Let's say value5=53.2 and value6=45.4 at some point. That means there is buying pressure on the first instrument and selling pressure on the second instrument. In this scenario we prefer to stay long the first currency pair and short the second currency pair. I cannot disclosed the exact formula for computing value5 and value6, I can only say they are based on a oscillator. Future versions of DuettoFX will be provided at no charge to customers (no time limit).

  • Francis

    Thank you very much Paolo. I really appreciate the well written explanation. I understand if value7 >= 52 then one should go long on that pair and go short on the opposing pair using the lot size advised. Question: When the optimum time arrives I may be at work or having the night sleep and the next time I check DuettoFX what value7 is considered too late to enter any trade? Thank you.

    • Paolo Post author

      Hi Francis, you are welcome. You can take both trades (long on instrument1 and short on instrument2 or vice versa) at the exact same time with the lot size suggested by DuettoFX’s textual interface or you may elect to trade only one of the two pairs with the lot size you prefer. When you miss a trade you should look at price action in order to understand if you can still enter that trade at a later time. A lot of times price gives you another opportunity to enter at the original entry price within the next 10-20 hours, other times price moves straight in your favor so you dont’ have another opportunity to enter. When you miss a trade you may enter a sell limit or buy limit order that expires in the next 24 hours. Anyway, the DuettoFX EA will allow to enter trades automatically.

  • Stuart

    Regarding the last question, you mentioned that if you miss the trade and price moved nicely to have otherwise generated some nice profits, at what point can you enter the same trade in the same cloud? if the Value 7 is still over 52 or under 48, how do you definitively make the decision to enter or not?

    • Paolo Post author

      Hi Stuart, unfortunately I have not a rule for this scenario. A lot depends on your personal experience as a trader. When I “miss a trade” with DuettoFX this is what I personally do within the next 10 hours: if I believe the trade still has an opportunity to go in the “right” direction (based on my experience) then I enter a limit order at the “original” entry price expiring in the next 24 hours. If I find price below the original entry price, then I enter a stop order at the “original” entry price expiring in the next 24 hours.

  • John

    Are the values above 50 always supposed to be the mirror opposite of the values below 50? For EURUSD / USDCHF I get a mirror image but all other duettos differ from top to bottom.

    • Paolo Post author

      HI John, the two white lines delimiting the cloud look specular most of the time when the pairs involved in the duetto are highly inversely correlated. However this is not a rule. If you think your clouds have really weird shapes then first of all check that you have enough historical data on your MT4 platform for each pair of each duetto, then attach DuettoFX again to each chart. Ciao, Paolo

    • Paolo Post author

      Hi Jim, the “Data Window” is a standard component of any MT4 platform. Just press CTRL+D on your keyboard or select the “View > Data Window” menu in order to display it.

  • Jim

    Thanks for that Paulo- hadn’t used that MT4 feature before.
    Here is another (to my mind) important question
    Presumably derivation of the switching points depends to a large extent on the currency pairs being correlated and I notice you give a figure for correlation on each chart.
    If the correlation deteriorated, at what percentage should we start to think about ceasing trading?
    Regards
    Jim

    • Paolo Post author

      Hi Jim, I’m not sure which is the “figure for correlation” you cite. Personally I’d stop trading this strategy from the empirical observation that the (MFE-MAE) curve stops being regularly headed upwards.

  • gatowman

    Hi Paolo,
    can you fix the DSL and Swing EA like ReticoloFX EA, that i can see the magicnumbers in the textfile in Chart on left side?

    Regards gatowman

    • Paolo Post author

      Hi gatowman, I’ve just taken note of this suggestion in order to implement this feature in the next update.

  • mark

    Hi Paolo and Andrea

    Thank you for your excellent work. I have currently bought the matrix and Duetto fx indicators
    but I have a few questions if you could please help me with.
    1. Is it important to check that the correlation on the 1h, 4h and daily tables are nearly the same when
    doing pair trading?
    2. Is the cloud a measure of standard deviation whereby the 50 is the mean?
    3. So theoretically, if price is above/below the 50 line, at some point it will want to gravitate
    back to the 50 line?
    4. Is the spread a measure of cointergration?
    5. Can we use the +/- 2 spread strategy for all occasions when pair trading? For example
    if we have 2 correlated pairs and we are waiting for the 2 white lines to cross(buy strong sell weak),
    do we wait for the +/-2spread in this situation?
    6. If I want to enter trades based on the decorrelation of pairs whether they are
    positive or inverse pairs, how can I measure what is a good level of decorrelation for entry?

    Thank you for your time and help.

    • Paolo Post author

      Hi Mark
      1. no it is not, the correlation must be considered a general “mood” of currency pairs, that we can use to pick up good couples of inversely correlated pairs
      2. no it is not, the cloud is just the area between two indicators (each of them is applied to a pair)
      3. empirically we can just observe that red and green clouds tend to happen by turns
      4. the spread is the cloud’s width
      5. that strategy works with couple of pairs which are generally inversely correlated
      6. we are interested in inversely correlated pair and a value below -70 can be considered acceptable
      Ciao, Paolo