Saturday, October 22, 2011

Another EURUSD-USDCHF Correlation Strategy


“The market trading environment is unemotional and unforgiving for the novice trader. Professional traders indulge themselves every time a market turning point occurs. They know when a novice trader is making a mistake, because they’re on the wrong side at every turning point. The result for novice traders is a washed account, because they’re constantly losing money at these critical trading areas.” – Brandon Tristan


This article features another useful EURUSD-USDCHF correlation technique, following the one I revealed some time ago. Its logic is based on some dynamic characteristics of the price action. Sometimes the price may encounter some resistance. Here attention should be paid to how long the market which remains at a certain price goes up or down to the next level. In general, the longer it takes for the market to exceed the current price level, the greater the current resistance. Volatility is an expression of uncertainty. In other word, lack of volatility is lack of uncertainty. Therefore a non-volatile trend is more predictable and as such more certain.

Since trading is a zero sum game, there must be a seller for every buyer or vice versa.

Either the EURUSD or the USDCHF may just make a huge move at some point because of a fundamental event. This move causes the indicators on the chart to react. However, the technique shown here isn’t being used for either of the pair just for their sake, but for the fact that either of the pair may show a nice move over the time. At times, some news items would deliberately be released to get rid of some large positions without significantly worsening the market situations. Private traders would wonder why the pair in question has fallen despite positive news and they’re now sitting on losses.

For example, a speculator who sees a downtrend may decide to go short, having been convinced that the market sentiment is bearish. Suddenly another institution might decide to buy hard into the market, and therefore cranking a big chunk out of the trend. When this kind of order has run its course, the original trend will resume. Those traders, who’ve already positioned themselves long, would smooth their positions sooner or later by being forced into selling as well, all of which is driving the market further downwards.

You of course can’t be sure what’s going to happen. What you do is put a stop in your order where it’s necessary and in a place that gives the price room to jump around within its normal volatility.

This strategy comes with no timeframe (non-timeframe specific), yet a big timeframe could be watched just to see what’s happening to the trend. You should never spend more than 60 minutes per week on these trades; just place your trades and go away. You may check the outcome at the end of the New York session on Monday. If one trade is still on, you can manage it as suggested below. The open position mayn’t go on for more than 60 hours. Sometimes, both the EURUSD and the USDCHF may be caught in bearish moves and both trades would be winners; thus maximizing profits.

Strategy Snapshot

Strategy name: A Non-directional Trader

Suitability: Strictly for part-time trader

Signals frequency: Once per week

Timeframe: Non-timeframe specific

Instruments: The EURUSD and the USDCHF

Entry time: Just prior to the close of the currency markets on Friday

Position sizing: 0.02 lots for each $1000 (making it 0.2 lots for each $10000). Add 0.02 lots for each $1000 you gain

Entry rule: During the entry time, go short on both the EURUSD and the USDCHF

Stop loss: 60 pips

Take profit: 180 pips

Breakeven: Move the stop on the winning trade to breakeven after you’ve gained up to 60 pips

Trailing stop: Apply a 60- pip custom-set trailing stop after you’ve gained up to 120 pips

Exit rule: Exit is triggered when the stop or the breakeven or the trailing stop or the take profit, is hit

Winning probability: 50%

Total returns: Total returns are better evaluated on an annual basis

Trade examples

Spreads weren’t considered in the examples below.

Trade A

Instrument: USDCHF

Order: Sell

Entry date: October 7, 2011

Entry price: 0.9235

Stop loss: 0.9295

Trailing stop: 0.9175

Take profit: 0.9055

Exit date: October 10, 2011

Exit price: 0.9055

Status: Closed

Profit/loss: 180 pips

Trade B

Instrument: EURUSD

Order: Sell

Entry date: October 7, 2011

Entry price: 1.3420

Stop loss: 1.3480

Trailing stop: N/A

Take profit: 1.3240

Exit date: October 10, 2011

Exit price: 1.3480

Status: Closed

Profit/loss: -60 pips

In the examples above, we can see that the USDCHF moved positive while the EURUSD moved negative. We can also see that the profit from the USDCHF trade was bigger than the profit from the EURUSD trade. At times, a trade on the EURUSD will be a winner while a trade on the USDCHF will be a loser. The logic is to make more money than you lose.

Note: This strategy mayn’t be used in sideways markets. As a seasoned trader, you should know when the market has entered a sideways phase. When the market enters another strong trending mode, then you continue using this strategy. There are many tools which can help you recognize trending markets and sideways markets. This strategy is for part-time traders only. I implore full-time traders to bear with me. There are other effective strategies that are perfect for full-time traders. These strategies would be revealed by me soon.

Conclusion: I am not advocating trading with a Machiavellian mindset, for the market rarely rewards iconoclasts. What you really need are simple trading methods that work. If a strategy sounds complicated, it likely does not work. This strategy could make you gain some long-term profit no matter the direction of the market. The ultimate formula is to gain more than you lose; since you can never go broke if your income is higher than your expenses. Finally, it is very much important that enough patience is exercised as regards the entry and exit criteria explained in this article.

I conclude this article with some quotes from Brandon Tristan:

“A majority of novice traders don’t begin with a trading plan. To have and follow a trading plan takes discipline because of all the external events and internal thoughts that occur, thus the focus must remain on the trade plan. This takes discipline. Before a novice trader engages the market, a plan must be tested and approved. The time and effort it takes to test and follow a plan pays off. Of course, the payoff is having the ability to find novice traders in the market.”

NB: Please watch out for my coming articles with these titles: ‘The Most Important Trading Skill,’ ‘Recent Market Conditions (The Most Difficult Aspect of Trading),’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 1 - 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘A Hedge Funds Strategy,’ ‘My Hedge Funds Strategy Update,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Resist the Lure of High Risk – Part 3’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses - Part 4 (Losses Aren’t Abnormal),’ ‘The True Holy Grail – The Long Sought for,’ ‘Suicide Trading Techniques,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 5,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Overview of My Signals Strategies,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘The Cost of Discipline,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Monthly Market Review,’ ‘Monthly Trading Report (November 2011),’ etc.

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC


Yahoo! Messenger ID: saazalmu

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