Hedge trading using Nasdaq 100 and S&P 500

Discussion in 'Trading' started by parisd, Aug 2, 2006.

  1. parisd

    parisd

    The original idea comes from a simple forex trading strategy being long 1 GBP/JPY and short about 1.8 CHF/JPY, that hedge is not good but allow the trader to make money if he catches a positive swing and in addition collect the differential of interest each day. Off course it is better to open position at right time to avoid a drawdown but not mandatory

    The first variation of this strategy was to adjust the ratio between GBP/JPY and CHF/JPY to have a better hedge (around 2.2 or above) then to decrease this ratio when the GBP/CHF drops in order to be ready for next immediat rise or to maintain the current ratio if the GBP/CHF rise. Unrealised losses are maintained under control during GBP/CHF drops and gains are attractive if GBP/CHF rises. We close the trade during a positive swing and try to reopen it during a negative swing.

    As we are never sure that GBP/CHF will start to rise, the next variation of that strategy is to replace GBP/JPY and CHF/JPY hedge (which are not well correlated) by US stocks indexes Nasdaq100 and S&P500 indexes which are better correlated.

    The hedge strategy would then be:
    Long Nasdaq100 (N100) and short S&P500 (S500) for same amount of $. If N100/S500 rises I keep the ratio constant and close the trade with a profit, but if N100/S500 dropes I reduce the size of the short position to maintain same amount of $ long and short and continue to adjust until N100/S500 starts to increase, such a way after a controled drawdown I am probably able to close the trade with a profit.

    Nasdaq100 (N100) and short S&P500 (S500) can off course be replaced by 2 indexes better corralated for more safety.

    May be all this does not make sense, I am waiting for your opinion, but it is a strategy used sucessfully in forex.
     
  2. sccz97

    sccz97


    do a search for pairs trading
     
  3. parisd

    parisd

    Does pair trading adjust the ratio between the pair during trading?