Something came to me yesterday, and wanted to get other traders input on. Say we get a Long Entry on EUR/USD What if we also put on a Short trade on a piar that was as UN-CORRELTED from EUR/USD as possible ? My thinking is ...... if we get a fantastic entry to go say Long on a pair, then wouldn't a Highly Un-corelated pair move in the total opposite direction, thus letting us make profit on 2 trades vs 1 ? Just wanted to see if my thinking on this is correct and if this idea would play out as I'm thinking ...... if one pair makes a huge Move to the upside and you had also put on a short trade on a near 100% un-corelatd Pair, would you in theory be making double the $ on the trade ( 2 separate trades ) ?
I assume you mean an entry in a negatively correlated instrument, not uncorrelated... (an instrument with a perfect -1 correlation would move opposite to your original position). Taking your thinking as a starting point, even IF you were able to find a perfect negative correlation, what would be the advantage over just increasing the size of your original (long) position? Generally, a combination of uncorrelated investments results in lower overall volatility and better risk / reward.
I think you're thinking of negative correlation. Uncorrelated is some thing like long eur and then long or ahort cattle Yes if 2 things are 100% negatively correlated its a double bet in you example
could you give us an example? long eur.usd if it goes up most likely all eur pairs would also go up or all usd would fall against all the other majors, but not always it looks like I will be going into FOMC long eur.usd and long usd.jpy, one should win and the other should lose. or I could just put on long eur,jpy same thing
I look at 3 pairs of 3 currencies, because the percentage change of one will be the equal of the percent change of the other two. Percent change, not price or pip amounts. Ex: % change EURJPY = %change EURUSD + %change USDJPY I don't know why EURJPY is the summation; maybe it has the most volatility. There's also some clever algebra to do to prove this, I did this once but lost the scrap piece of paper I wrote it on. Usually 2 pairs will move and the 3rd one moves a lot less. This helps identify the star of the show. If EURJPY moves little, but EURUSD and USDJPY move a lot, the story is about USD. If EURJPY and EURUSD move a lot, in the same direction, and USDJPY probably not moving much, then it is a EUR story. After identifying, then you can place your opposite trades. But this doesn't work out perfectly. Sometimes the 2 opposite pairs don't move in equal amounts, in this case the 3rd pair moves some, does not stay muted. Also, instead of guessing on just one, it's guessing on two or three with more combos of outcomes, so the probability of guessing right probably goes down. If someone has a proof in support or contradiction, it would be great if you could share it, I'd be happy to learn.
only anecdotal, that's exactly the way I do it. For instance, if you want to get short the dollar, spreading that trade over several pairs can keep you from getting too one sided in any one currency.