Ezios replies to: Playing with the currencies : Gabin System


Nice to see that somebody is playing with currency strength numbers and devising formulas to pinpoint triggers.
My “first love” in forex was basket trading. Since a couple of years, my trading is almost exclusively based on currency strength / weakness.
Here’s my take on what you propose…

First and foremost, it is important to understand that this system is countertrend basket trading, using reversion to the mean as main trigger.
I am not too sure if this is a good idea (combo of basket and countertrend).

Baskets – with the exception of USD – are comprised of 1 major and 6 crosses.
i.e. EUR basket: EURUSD (major), EURAUD, EURCAD, EURCHF, EURGBP, EURJPY, EURNZD (6 crosses).
What is the common denominator in crosses ?
Depending on what the USD is doing, once a couple of crosses start “motoring”, they can get to hefty ATRs.
i.e. look at the daily range of EURAUD, EURCAD, EURJPY, EURNZD as opposed to the major (EURUSD).

Graphically, here’s what the “interconnection” looks like.

Click to EnlargeName: Screenshot1.pngSize: 429 KB

Back to this “motoring” thing.
You go countertrend on a EUR basket, but what if the bottom falls out and EUR tanks across the board ?
The crosses will very possibly start tanking big style (read: going against you). Not 1 cross, but mostly 3 to 4.

Now for your formula part.
Delta up, Delta down, Average Other Currencies, etc.
The currency strength meter you are using (FWIW I am using the same): 8 currencies, arithmetic mean = 4.5, the sum of the 8 currency values is always 36.
Knowing this and plugging a simple formula into Excel, it’s a piece of cake to calculate your initial trigger.

Click to EnlargeName: Screenshot2.pngSize: 35 KB

You will buy a first basket when the “weaker currency” value is 0.8. At that value, your delta down = 4.2.

In terms of money management, let’s assume that you have a $10K. A conservative (total) lot size for a basket would be 0.10-0.14.
Chopped up in 7 pairs that would be 0.02 lots per pair.

So, I will replay your trading scenario in slow motion.
Please bear in mind that this is not a “black swan” scenario. This scenario will play out at least once per month, but usually 3-4 times.

Friday 9 Feb.
The time you see in the screenshot of my EAs log file is your (and my) local time. GMT +1.
London opens, apparently shortly there is some high impact news on the GBP.
Nice, this is maybe going to move things a bit. Let’s see what direction the market takes.

Click to EnlargeName: Screenshot3.pngSize: 244 KB

Took a while, but your patience is rewarded.
Three hours into the London session, at 12h14 to be precise a GBP long basket is triggered.
At that moment, GBP CS (currency strength) dips below the 0.8 value.

Click to EnlargeName: Screenshot4.pngSize: 197 KB

About 40 minutes later, time to open the second GBP long basket. GBP currency strength value prints 0.40

Click to EnlargeName: Screenshot5.pngSize: 4 KB

Still no pullback, but patience. Reversion to the mean will come, right ?

Well, about 1.5 hours after NY open, we get the six sigma event.
GBP currency strength goes below 0.1 and a third GBP long basket should be opened.

I am not going to run the drawdown numbers, but seeing that there was an additional drop 100 pips (GNPAUD, GBPCAD, GBPJPY) things look rather nasty.

Just my thought of course, but a basket of currencies in combination with countertrend trading is something that can very easily spiral out of control.
Happy (basket) trading !


Facebook Comments