HEDGING (EURUSD-GBPUSD) WITH CORRELATION

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i'M ATTEMPING TO DEVELOP A HEDGING STRATEGY TO MINIMIZE RISK. HOW DO I DETERMINE CORRELATION BETWEEN EURUSD AND GBPUSD USING THE CORRELATION PROGRAM PROVIDED IN THE INDICATOR CODE BASE ?

'Correlation USDCHF/EURUSD'


WHAT IS THE CONCEPT BEHIND CORRELATION, I HAVE ATTEMPED TO UNDERSTAND THE CODE BUT IT SEEMS UNCLEAR ON WHAT EXACTLY IT IS DOING.
 
I don't know why do you want to hedge using correlations, when you could perform statistical arbitrage...
 
TheEconomist:
I don't know why do you want to hedge using correlations, when you could perform statistical arbitrage...
Yes, i have read about it on wikipedia.com

https://en.wikipedia.org/wiki/Statistical_arbitrage

I could not convert that data into MQL4 format, i do not completely understand statistical arbitrage other then offsetting the bets and use probability of large numbers to achieve positive results.

Correlation shows which way to hedge, assuming heding is done with only [EURUSD, GBPUSD] [BUY, SELL,respectively]
 
this code compares USDCHF open and close price. if the difference is >0.0006 and close>open (white candle) it gives "Sell EURUSD" signal. It uses a excpectation that EURUSD and USDCHF have correlation near to -1 or if one goes up, other goes down. it is not always so...

use correlation from here -- http://www.metatrader.org/cgi-bin/yabb2/YaBB.pl?num=1136827546

correlation itself measures how much pairs are reacting to each other movements. it means that
correlation near 1 -- pairs are pretty much moving together to one direction
correlation near -1 -- pairs are moving excact but to other directions
correlation near 0 -- pairs have nothing incommon - if one move, other... does what it wants...

hope it helps...

zolero
 
Zolero is right. One of the strongest correlations is between USDCHF and EURUSD. Other strong correlation is between EURUSD and GBPUSD. Until recently I thought it would be hard to do statistical arbitrage , since I couldn't predict correlation shifts... This was until I've put all three pairs on the same chart and result was in the front of me...Read all about this here: http://www.strategybuilderfx.com/showthread.php?t=17282 Now I'm working at the EA...
 
PERFECT,

i'm glad internet exists, this must the be best indicator out there.....................................RISKLESS INDICATOR

IF THE CORRELATION BETWEEN EURUSD AND GBPUSD IS 1, which directions do the pairs go when dropping from 1 down to 0.9, 0.8, 0.7, etc.. 0.1? Which directions should i open positions with EA, testing shows correlation moving in real time, correlation difference of -98 PIP(MAX) between pairs. If correct position is taken since hedging is used -98 become +98(ONLY IF CORRECT POSITIONS ARE OPENED). Am I right, or wrong?


c0d3
 
if correlation is 1 this means that EURUSD and GBPUSD are going together up (or down). if correlation goes down to 0.1 this means that it doesn't matter what EURUSD does (goes up 55 points) GBPUSD moves up and down of his own. this means - there is no correlation - one goes up, other up, then down, a little up, again down... one has clear trend, other not.

you probably hasn't got the idea of hedging -- it doesn't change correlation, it will bring down risk near to zero. it mens if one position goes to negative territory, other makes profit and is compensating it. if you have correlation -1, for example, you open a trade (buy) and hedge it with another trade (again buy). now if the first trade is wrong (price goes down) then other is right (price goes up). It is a little more flexible than just open sell and buy at the same time (you automatically lose spread)...

zolero
 
zolero:
if correlation is 1 this means that EURUSD and GBPUSD are going together up (or down). if correlation goes down to 0.1 this means that it doesn't matter what EURUSD does (goes up 55 points) GBPUSD moves up and down of his own. this means - there is no correlation - one goes up, other up, then down, a little up, again down.. . one has clear trend, other not.

you probably hasn't got the idea of hedging -- it doesn't change correlation, it will bring down risk near to zero. it mens if one position goes to negative territory, other makes profit and is compensating it. if you have correlation -1, for example, you open a trade (buy) and hedge it with another trade (again buy). now if the first trade is wrong (price goes down) then other is right (price goes up). It is a little more flexible than just open sell and buy at the same time (you automatically lose spread)...

zolero


WHEN EURUSD AND GBPUSD HAVE A CORRELATION OF 1, THEN THE CORRELATION START FALLING APART, I WANT TO DETERMINE WHICH DIRECTIONS THE CORRELATION IS HEADING TO DETERMINE THE HEDGE DIRECTION FOR THE PAIRS, SINCE THE CORRELATION IS 1, IT SHOULD START FALLING APART TO 0.9 AND HAVE RANDOM MOVEMENT LOWER OR AROUND 1, CORRECT?
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