1

- INTRODUCTION
- TIME & PRICE
- CORRELATION
- FOREX RANKING
- FOREX BASKET ARBITRAGE
- FX-QUANT

Which Trend line is correct ?

3

What is the value of a 45 degree trendline when you have

charts with different distances between the bars ?
What is the distance between bars anyway ?
This means the 45 degree line is not correct in most charts !
4

The correct way to draw the 45 degree line.

1 step in Price and 1 step in Time
Same # steps Up/Down and to the right
Time & Price meet at that crossing point
5

Width = (H-L) * Delta (for all bars)

Fixed proportion on each bar
Keep a constant Ratio for all bars. (Delta)
6

Time & Price Triangle

Close outside the Triangle is a possible change in direction
7

From where to start a new 45Line ?

From a new reversal once crossed by the 45Line
8

SMA-3 in steps, 1e Up/Down is called 1e step Up/Down

45Line replaced when crossed partly, but not by the close
9

EUR/USD daily data, normal bars

10

EUR/USD daily bars with 45Line.

11

The 45Line on normal daily bars, a difficult calculation

12

A different (Renko) way to chart Time & price with 45Line

13

The 45Line on Fixed Range Bars

14

- Correlation
- Different way to trade Cross Rates

15

Correlation between CME Forex contracts

>0.8 is high correlation
Example CAD against AUD is 0.927
16

High correlation between Australian Dollar and

Canadian Dollar, the so called Commodity Currencies.
17

Above matrix is the 5-day correlation between Forex Pairs

Example :
EUR-USD against EUR-CAD = +88
USD-JPY against AUD-USD = -93

18

- Correlation to high, less profit

- Correlation to low, more risk
- Best correlation for spreads between 65 and 85 %

19

Cross-Rate:
EUR / USD = 1.3570
USD / CHF = 1.2060
Take out the two x USD and
get the Cross Rate EUR/CHF
1.3570 x 1.2060 = EUR/CHF 1.6365
So 3 legs working together !
1 EUR/USD
2. USD/CHF
3- EUR/CHF

20

Ratio between EUR/USD and GBP/USD

21

Difference between EUR/USD and GBP/USD

(both 10.000)
22

Bottom chart: Spread value, now with Candle or bars

23

Bars are the OHLC of a spread between the two contracts

Weekly bars (box) around daily spread bars. Trend in the spread is
up when the 1e daily close is above the last weekly high (box) v.v.
24

Two time frames, Boxes (weekly) and Bars (daily)

Working together !!
Boxes are the trigger
25

Spread CME uro/USD (top chart) against Swiss/USD (middle)

26
At \/ sold /$ and bought SFR/$, both $ 12,50 per point.

Long spread signal, start Neutral with:

AUD 0.7883 - NZD 0.7004 (0.7883/0.7004)
You need NZD 112.550 short for AUD 100k. long

27

Spread: 2 x E-NQ against 1 x E-S&P ! Use same strategy

28

One more step you can add:

On each new signal take a new full position, but take out each time
the 75% of the position when the average bar length is reached 29

FOREX RANKING
System for ranking
Major Forex Rates

How can we rank the major FX rates ?

- Filter each FX rate with the same type of filter
- This way we can compare FX Rates
- For easy ranking create a ranking table
and a scatter type chart

What are we using ?

-

RSI 10
EMA10 on RSI
EMA30 on RSI
Ratio EMA10 EMA30 (> 100, <100)
Momentum on Ratio (> 100, <100)

10

Symbol

Last

RSI

RSI_Ratio

Momentum

EUR/USD
GBP/USD
AUD/USD
NZD/USD

1.3651
1.9979
0.8302
0.7420

79
27
35
40

110
108
98
104

102
94
85
92

USD/CHF
USD/JPY
USD/CAD
USD/NOK
USD/SEK
USD/DKK

1.2052
119.34
1.1164
5.9572
6.6941
5.4580

35
59
15
54
31
19

87
101
58
92
58
77

84
91
80
98
68
87

EUR/GBP
EUR/CHF
EUR/JPY
EUR/NOK
EUR/SEK
EUR/DKK

0.6833
1.6456
162.82
8.1313
9.1370
7.4655

76
61
61
62
25
45

100
104
109
103
64
91

106
85
90
104
72
80

GBP/JPY
USD/SGD
USD/HKD

238.81
1.5158
7.8216

65
47
75

110
102
103

100
103
102
11

Symbol
GBP/JPY
EUR/USD
EUR/JPY
GBP/USD
NZD/USD
EUR/CHF
EUR/NOK
USD/HKD
USD/SGD
USD/JPY
EUR/GBP
AUD/USD
USD/NOK
EUR/DKK
USD/CHF
USD/DKK
EUR/SEK
USD/SEK
USD/CAD

Last

RSI

RSI_Ratio

Momentum

238.81
1.3651
162.82
1.9979
0.7420
1.6456
8.1313
7.8216
1.5158
119.34
0.6833
0.8302
5.9572
7.4655
1.2052
5.4580
9.1370
6.6941
1.1164

65
79
61
27
40
61
65
75
47
59
76
35
54
45
35
19
26
30
15

110
110
109
108
108
105
104
103
102
101
100
98
92
91
90
72
64
58
58

100
102
90
94
96
85
105
102
103
91
106
85
98
80
89
80
73
68
80

12

Symbol
GBP/JPY
EUR/USD
EUR/JPY
GBP/USD
NZD/USD
EUR/CHF
EUR/NOK
USD/HKD
USD/SGD
USD/JPY
EUR/GBP
AUD/USD
USD/NOK
EUR/DKK
USD/CHF
USD/DKK
EUR/SEK
USD/SEK
USD/CAD

Last

RSI

RSI_Ratio

Momentum

238.81
1.3651
162.82
1.9979
0.7420
1.6456
8.1313
7.8216
1.5158
119.34
0.6833
0.8302
5.9572
7.4655
1.2052
5.4580
9.1370
6.6941
1.1164

65
79
61
27
40
61
65
75
47
59
76
35
54
45
35
19
26
30
15

110
110
109
108
108
105
104
103
102
101
100
98
92
91
90
72
64
58
58

100
102
90
94
96
85
105
102
103
91
106
85
98
80
89
80
73
68
80

Yesterday Yesterday
RSI_Ratio Momentum
112
104
112
105
104
98
113
99
112
102
107
88
100
99
98
96
97
101
99
90
95
101
104
91
86
89
87
75
87
84
71
76
65
70
57
64
60
79

13

14

23

15

FOREX
BASKET
ARBITRAGE

16

RSIz shows: - negative power below the zero line

- positive power above the zero line.
17

Compare RSI (Strength/Weakness) of FX Basket

All Currencies quoted in USD
18

In this sample:
- EUR/USD
- GBP/USD
- AUD/USD
- NZD/USD
- USD/CHF = CHF/USD
- USD/JPY = JPY/USD
- USD/CAD = CAD/USD
- EUR/CHF
- All equal quoted in USD
19

How much to use per trade ?

Total RSI value of all Currencies
quoted in USD = -83 is 100% of
all currencies in the Basket
Example:
EUR/USD (Red -14) means you
are short in EUR/USD
JPY/USD (Purple +21) is long
in JPY/USD or short in USD/JPY

20

Total RSI value of all Currencies

quoted in USD = -83 is 100% of
all currencies in the Basket
Your available capital to trade
100k. for all 8 currencies
Example:
EUR/USD (Red -14) means you
are short in EUR/USD
-14/-83 = 0.1686
0.1686 * 100k = short
EUR/USD 16.867
21

Total RSI value of all Currencies

quoted in USD = -83 is 100% of
all currencies in the Basket
Your available capital to trade
100k. for all 8 currencies
Example:
USD/JPY (Red +21) means you
are Long in JPY/USD or Short
USD/JPY (Spot Quotation)
+21/-83 = 0.2530
0.2530 * 100k = short
USD/JPY 25.301
22

Each currency
get equal weight
as indicated by
the RSI per
currency .
Example:
USD 10K. =
EUR 7.400
but corrected by
the RSI above
its now 6.986
23

Adjust each
currency daily
to keep the
portfolio in
Balance.

Reinvest the profits

once per month to
build portfolio
value.

24

FX-QUANT
FX-Quant Trading System

What does Arbitrage mean ?

Arbitrage is a financial operation in which currency pairs
are bought and sold, either simultaneously or in
minimum lapse of time, either in the same market or a
different one, with the goal of obtaining a profit spread,
product of the rates price differentials.

What is an Arbitrage Model ?

Arbitrage models for currency/stock pairs may be
designed in a variety of ways.
The important key is to have knowledge of the
relationships among pairs.
This form of arbitrage relies on a strong correlation
between two related securities.
The pairs trade is market-neutral, meaning the direction
of the overall market does not affect its win or loss.

What Is "Market-Neutral ?
A market neutral strategy is one where a trader takes a
long position and a short position at the same time.
Once two markets determined to be statistically "out of
alignment", a long position is taken in the market
considered to be undervalued while a short position is
simultaneously taken in the market considered to be
overvalued relative to the first market.

The trading strategy is based on quantitative analysis

- a statistical concept.
- 50% statistical arbitrage statistical and - 50%
position size management.
Unlike most trading systems, which attempt to predict
market direction, this trading model reacts to price
action and makes trading decisions.

Unlike most trading systems, which

attempt to predict market direction, this
trading model reacts to price action.
6

Diversification.
The strategy creates a complex portfolio of 10
global currencies and adjusts its components
daily.
Diversification of currencies can lead to better
risk-rewards for the combined portfolio.
Example, in a portfolio comprised of three
currency pairs, one position can be unprofitable
at the moment, but the other two can show
profits to more than compensate for the losses
incurred with the losing one.
7

Leverage.
The leverage is carefully determined in order to avoid
disastrous draw downs.
Standard risk parameters employ an average combined
leverage around 2.5:1 for the entire portfolio.
The system opens positions in opposite directions.
The system is USD neutral (i.e. USD bought = USD
sold), although there is a long/short exposure in other
currencies.
8

All positions are normalized for a $10,000 opening

account
NZDUSD +11988
means the system is LONG 11988 units of the base
currency (NZD).
USDNOK -8496
means the system is SHORT 8496 units of the base
currency (USD).

10

The risk is addressed by diversification and position

size management.
The system rebalances portfolio by gradually
buying/selling fractional currency lots.
When a drawdown occurs, portfolio is rebalanced and
ready to recover from losses and make a new equity
peak.
Potential risk for this system comes from overleveraged trading, i.e. trading too large positions for the
account size.
No need for protective stops.

11

Use G-7 currency pairs:

GBPUSD, EURUSD, USDCHF, AUDUSD, USDCAD,
USDJPY, plus NZDUSD USDDKK, EURSEK and
USDNOK.
Example, long GBPNZD position is equivalent to long
GBPUSD / short NZDUSD etc.
This way, you combine positions and reduce the
bid/ask spread costs.

12

Hypothetical Performance report from

Strategy back testing

13

14

Actual Results with real Money

15

16

17

Thank you
WWW.2HEDGE.COM

18