Correlation And Hedge Strategy - Forex Forum

Greetings,

Several are posting hedging strategies on other forums, so I thought I would post one I have been trading for about a week. It has all been positive because I do not use stop losses. I am posting this here because people are usually able to pick holes in the strategy and show where it would fail, and I want to know this before I keep trading it. Here it is:

1. Go do dailyfx.com and click on "charts" and "live charts" and open up a EUR/USD.
2. Click on "instruments" and overlay a GBP/USD chart.
3. Choose any timeframe (I use 30 minutes).
4. Notice how the currencies flip flop, up and down on each other. At one time GBP/USD will be on top, then a couple hours later or a day later EUR/USD will be on top.
5. Buy the currency that is on the bottom and simultaneously sell the currency that is on the top.
6. When they converge and cross exit for the win.

So we are entering the position when there is a gap between these currency pairs, and we are exiting when the currency pairs cross (the one that was on the bottom is now on top, the one that was on the top is now on the bottom).

Obviously the bigger the gap between the two currencies upon entry the better.

I trade with 1000 units per $100.00 account balance or 10,000 units (mini lot) per $1,000.00 account balance.

This system has produced a return of approximately 15% on my account balance in the previous week.

This can also be done with GBP/JPY and EUR/JPY.

Please comment on this strategy as able.

Basic questions on how to open charts, overlay charts, etc. will not be answered as I do not have time to discuss anything but the strategy itself.

I think this strategy cannot be done with the hedge of EUR/USD and USD/CHF since they are negatively correlated. Anyway, we should buy the currency pair that is on top and simultaneously sell the one below, shouldn't we?

This sounds very interesting and there may be few other pairs that will show strong correlation from time to time (90+) where the same strategy can work well.

How has it been for you now (after few months)? Still successful? Have you discovered any potential traps?

Anxious to hear back.