T101 basket trading system - math analysis - page 3
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i'm sorry for those questions, i must be drunk somewhere forgot whereabout i've read the post...
most my questions are answered in post #1
sorry to disrupt your convenience,
Hi,
Ok, once you figured out some answers already, mine will be short.
1. Why 14 ? why not 28 or 10 pairs ?
Actually, I think that the original goal was to include as much as possible.
However, dont overdo it - adding more would result in exotic currencies and/or some currencies not available at all brokers. So, this choice seems very reasonable - supported by brokers, and spanning quite a lot of market.
2. What the purpose behind of the order pairs of the basket ? from pair no. 1 to pair no 14, why he create Sell basket and buy basket ? why not sell only or buy only so if the trend is negative profit we just vice versa the DI
He wanted balanced, with half buy and half sell. The most important was to watch them compete for slots. Only buy or only sells would not be possible to trade so easily.
3. What the calculation of SL 560 USD julius suggested for setting the exit ? (sorry if i ask little naive questions)
40 pips * 14 trades * 1 USD per 0.1 minilot = 560 USD
4. Why not we created other Entry rule addition for validating like if the profit / loss basket reach amount dollar in IA / DI then we enter the market ?
That was not in the original system, but was later added by participants. However, the IA was not constructed having overall profit in mind - it was constructed to have (more or less) balanced trades and see how they go out of balance (i.e. going far from 'zero line'). Then, upon confirmation that balance is starting to be ruling again, we trade trend reversals.
original IA
I have been following your thread, and am glad to see it doing so well. Since your thinking is evolving so quickly, I thought it would be helpful to put in some thoughts with you now. I take a very wide angle veiw with most things, and I myself tend to not drill down into details. This is my nature, so you may find my observations a little obvious and redundant.
I just want to give you food for thought.
Your Thread feels like you are on the right track to me.
FIRST, EXAMINE THE IA PAIRS:
1. I tend to think that some of the IA pairs MAY be unneccesary and at the very least, not needed in the actual trade basket.
2. Why are they in the order, and the set that they are in?
THE IA HEDGE PAIRS: (IBFX)
SELLS BUYS
AU AJ
CJ UC
EU EG
EC EJ
GC GJ
NJ NU
UJ GU
NOW-- LETS SAY WE DECIDE TO SELL THE ENTIRE BASKET: (the buys are now sells)
WHAT CURRENCIES ARE STRONG, WHICH ARE WEAK?
CURNCY STRONG WEAK
AU USD AUD
CJ JPY CHF
EU USD EUR
EC CHF EUR
GC CHF GBP
NJ JPY NZD
UJ JPY USD
----------------------
AJ JPY AUD
UC CHF USD
EG GBP EUR
EJ JPY EUR
GJ JPY GBP
NU USD NZD
GU USD GBP
Now collate them according to the number of times that each currency appears as strong or weak
STRONG WEAK
NZD 0 2
AUD 0 2
EUR 0 4
GBP 1 3
CHF 3 1
USD 4 2
JPY 6 0
TOTAL 14 14
SO: It is obvious that since the Yen outnumbers everything, that when we SELL the entire basket, we are trading on the JPY being STRONGER against the EUR, GBP and the two minors, AUD,NZD.
We are also trading to a lesser extent, a stronger CHF and USD, though these are cushioned by the USD/CHF pair and somtimes the USD/JPY.
NOW-- It makes me wonder why these two pairs are even there. It's kind of like you are trading against yourself. I am sure you have noticed that the UJ and UC, and EG, are often like flies in the ointment during an actual trade.
I believe Julius said to trade the UC the opposite way, and in fact, it think it is in scripts. Julius also insisted that there had to be at least 12 pairs in the IA, but I am not so sure. WHY? Why not 8, or 10.
ALSO-- WHY IS THE EG THERE?
NOW...WHY DOES THE IA WORK?
I believe that the IA works of the strength of the yen. That is to say that the Yen pairs tend to trend together. This is because, (and fundementals is not my forte) the Japanese tend to us the value of the yen to regulate their economy more than other governments. Therefore, the BOJ and large Japanese players buy and sell the Yen heavily in order to move the value of the Yen where they want it. You can read an excellent article on Japanese manipulation of the Yen in Scooby Doo's, and Hopwoods japanese basket trade thread on FF.
The exception to this would be the UJ, which doesn't neccesariy follow the rest of the Yen pair. Sometimes it does, sometimes not. Probably because the Japanese economy is so heavily invested in the US economy in banking and trade.
THE IA IS TO BE OPENED AROUND SUNDAY OPEN, AND ALLOWED TO SETTLE FOR COUPLE DAYS.
WHY IS THIS?
It would be assumed that it gives the market time to set it's weekly trend.
Another reason might have something to do with the weekend gap. The aggregate gap of 14 pairs could probably throw the IA a long way from the mean. (look at last week when we had gaps of up to 100-200 pip because of the Greece solution).
THE SPREAD: Merely a representation of which set of the IA is winning. I saw one guy on your thread said it oscilates, and will eventually, given time, come back around. I think he is right, logically.
I have wondered if the spread could be plotted or correlated with the profit/loss of two open trades: one buy basket, and one sell basket. Note the spread on the IA in relation to the profit and loss of the buy and sell basket and plot it. I bet you would find a pattern, or perhaps a bell curve.
Might be an Idea, that instead of trading when the spread starts to move up or down might wait until it is over bought or sold. It would be nice to know when the spread reaches such & such a level, that the IA is over bought, or sold by say 2 standard deviations. You then enter a trade, and trade the basket back to the IA basket spread is at parity, or back to the mean.
(This is my latest thought.) At least there would be a profit target, and since you are trading from a direction outside fat side of the bell curve, should be safer to use smaller stops, since you have a better idea when it time to give up.
I am a believer that there are some constants, like gravity, or pi, or the speed of light. It would seem to me that, with so many pips and pairs that are supposed to all work together, there has to be a common denominator that should predict 70% or above success. This is especially true if the IA is truly well balanced.
I think that is the extent of my knowledge of Julius' original IA.
Hope you found a nugget to think about, and that you didn't mind the lengthy read.
Larry
Nopik,
Read with interest your thoughts about the role of the CJ. As you may know, from the pm's exhcanged, I am a strong proponent of the GJ being the key currency and the leader of the pack, closely followed by the EJ. The Orest developement thread over on FF tends to favor the EJ.
I see your point. In looking at the charts, the CJ seem to be a VERY good fit with the basket. I guess I never really looked at it much, since it is on the buy side.
Perhaps looking at all three of these charts might give a good indication of basket movement.
IF ALL THREE OF THESE ARE MOVING IN UNISON, THAT WOULD MEAN THAT THE FUNDEMENTALS OF THE JPY ARE MOVING THE BASKET, RATHER THAN THE BASKET MOVING THE YEN.
does that make sense? I'm not sure.
As a side bar, in my personal trading, I got in the CJ in a long this morning, and already have about 50 pips, with some profit locked in. When I made this trade, I happened to glance at the IA (which I opened last night) and found it and all the Yen including CJ pairs behaving as expected.
Yen was nice and strong last night, (that is starting about 0300-0400 GMT. Did any of you guys pick up some pips on a Sell basket?
Good Trading, Larry
Hi Larry,
So, finally you did it
I think I already anwered you in private, but let me do it again in public.
1. I tend to think that some of the IA pairs MAY be unneccesary and at the very least, not needed in the actual trade basket.
In the basket, indeed, I was considering puchase straight eur/jpy. Otherwise, if you do not go for perfect hedge, open all 14 trades.
NOW...WHY DOES THE IA WORK?
I believe that the IA works of the strength of the yen. That is to say that the Yen pairs tend to trend together. This is because, (and fundementals is not my forte) the Japanese tend to us the value of the yen to regulate their economy more than other governments. Therefore, the BOJ and large Japanese players buy and sell the Yen heavily in order to move the value of the Yen where they want it. You can read an excellent article on Japanese manipulation of the Yen in Scooby Doo's, and Hopwoods japanese basket trade thread on FF.
The IA is just sophisticated way of opening imperfect CHF/JPY trade. Just as opening basket is a way of opening imperfect eur/jpy.
THE IA IS TO BE OPENED AROUND SUNDAY OPEN, AND ALLOWED TO SETTLE FOR COUPLE DAYS.
WHY IS THIS?
It would be assumed that it gives the market time to set it's weekly trend.
My understanding is that the IA stops to be cyclic after time passes. So, reopening it is necessary. A week beginning is just a moment as good as others.
If IA would be cyclic forever, one IA account would be good for years.
THE SPREAD: Merely a representation of which set of the IA is winning. I saw one guy on your thread said it oscilates, and will eventually, given time, come back around. I think he is right, logically.
No. Spread represents CHF/JPY profit since IA open. I've described it in my earlier posts.
I have wondered if the spread could be plotted or correlated with the profit/loss of two open trades: one buy basket, and one sell basket. Note
Yes, the correlation of IA spread and basket profit will be above 90%. Because eur/jpy is correlated to chf/jpy and eur/chf does not move much.
the spread on the IA in relation to the profit and loss of the buy and sell basket and plot it. I bet you would find a pattern, or perhaps a bell curve.
No, one will find chf/jpy chart, nothing else
Might be an Idea, that instead of trading when the spread starts to move up or down might wait until it is over bought or sold. It would be nice to know when the spread reaches such & such a level, that the IA is over bought, or sold by say 2 standard deviations. You then enter a trade, and trade the basket back to the IA basket spread is at parity, or back to the mean.
Would be beautiful. But, in order to do so, you need your IA hedged perfectly. If you get even small exposure, especially in volatile currency like JPY or GBP, price will drift you off.
Actually, building perfectly hedged IA is interesting task.. I'll might do it someday, to see how it will look like. Or maybe some volunteer will do it first
However, trading such IA will be slightly harder, and will make indicators like Orest useless (until they are modified to meet new pair list).
I am a believer that there are some constants, like gravity, or pi, or the speed of light. It would seem to me that, with so many pips and pairs that are supposed to all work together, there has to be a common denominator that should predict 70% or above success. This is especially true if the IA is truly well balanced.
They are, but not here. The IA total profit is unbounded, unfortunately, because of the exposure.
Hi Larry,
The IA is just sophisticated way of opening imperfect CHF/JPY trade. Just as opening basket is a way of opening imperfect eur/jpy.
My understanding is that the IA stops to be cyclic after time passes. So, reopening it is necessary. A week beginning is just a moment as good as others.
No. Spread represents CHF/JPY profit since IA open. I've described it in my earlier posts.
Yes, the correlation of IA spread and basket profit will be above 90%. Because eur/jpy is correlated to chf/jpy and eur/chf does not move much.
No, one will find chf/jpy chart only
IThey are, but not here. The IA total profit is unbounded, unfortunately, because of the exposure.. . . I think I get most of it. I am sure your analysis is correct. I will re-read your posts with a refreshed point of veiw.
Great thread, and thank you for your hard work, and time reviewing our observations.
Larry
PS, yes I finally made it. Somehow, TSD couldn't get E-mails into my inbox.
@nopik
i thought we should assembly the posts here into the pdf or ebook, to avoid some repeating answers in the futures from some guys that not follow your thread since first post chapter by chapter.
but i need more evidence about this latest chapter of the thread, the "motion of EJ and CJ in the basket"
need more...
@nopik
i thought we should assembly the posts here into the pdf or ebook, to avoid some repeating answers in the futures from some guys that not follow your thread since first post chapter by chapter.
but i need more evidence about this latest chapter of the thread, the "motion of EJ and CJ in the basket"
need more...Yeah, I get you, but I must say he is probably right.
After I experimented with the T101 method last year, I was convinced that the basket followed the GJ. I never really looked that closely at the CJ.
I experimented last night by making a JPY basket similar to the IA, in order to trade the CJ. Largly ended up being a strength meter/indicator, and a poor one at that.
According to the Nopiks exposure list, the 3 currencies with most exposure are the Jpy, Chf, and GBP. If they are the most exposure, then one would think that when the CJ, GJ, and GC jumped, would be a good buy/sell signal.
We would want to trade when these three currencies are at thier strongest against the other less exposed ones.
In the original IA, CJ and GC are sells with the GJ is a buy.
CJ GC jump up- GJ jump down = buy
CJ GC jump down- GJ jump up = sell.
This way, when the three currencies with the most exposure are leading the basket, (or infuencing the basket the most) then should make for the best profits with strongest most sustained moves.
Not sure if this would be correct . . . Doesn't look right some how.
Larry
oops!
I am unable to edit or delete the previous post. I don't think there is any merit to it.
Larry