Zeusjoes Market-Neutral Hedge Strategy
Hello everyone. I've been lurking on FF for a long time, and since I've finally had some level of success in trading, I thought it would be a good thing to share some of my findings with the rest of the community.
The idea for this system was given to me by my sisters' long-time ex, a former hedge fund technician who I happened to meet at a bar about a year ago. He told me that he had been studying the relative movements of currency pairs and that his former employer had made a fortune in the foreign exchange market by developing strategies based on his work. I'm somewhat interested in the idea of creating a strategy that bases its success not on the direction of a currency pair's movement, but on the correlation between the two currency pairs. After doing some research on my own and reading a lot of the math behind correlation trading, I managed to develop a strategy that has delivered some notable results over the past few months. My account is up 34% in the last month and withdrawals have been minimal.
The idea is very simple, trying to mimic the so-called pairs trades that many major StatArb hedge funds do on stocks. I looked at two currency pairs that seemed to have correlated price movements in the past, such as EURJPY and GBPJPY (see Figure 1).
When the spread between two currency pairs deviates from its past behavior, I simply sell the outperforming stock and buy the underperforming stock. In this case, I would sell GBPJPY and buy EURJPY. This way I isolate the success of the position from the spread between these two currency pairs and hedge the risk of the market in general moving either way. As long as the spread between the two currency pairs narrows to normal levels, I will make money regardless of the market direction.
I have found that exotic currency pairs like the Nordic countries SEK/NOK/DKK seem to work very well when using this strategy. But I've also had some great success with GBPJPY and EURJPY, and recently I've been looking at pairs including Oil, Silver, and Gold that look very promising, but I haven't started trading them yet.
This system can be used for both long-term and short-term trading, depending on the degree of correlation between the trading pairs. If you look at the daily chart of GBPJPY versus EURJPY (Figure 2), you'll see that there have been some great opportunities trading these pairs over the past two years over the long term.
I hope some of you will find this strategy useful and I will continue to post more information about it here. If you have any questions, I'd be happy to answer your questions or make suggestions on how to make this strategy more profitable.
Good luck to everyone in trading. /Zeus Jos
The idea for this system was given to me by my sisters' long-time ex, a former hedge fund technician who I happened to meet at a bar about a year ago. He told me that he had been studying the relative movements of currency pairs and that his former employer had made a fortune in the foreign exchange market by developing strategies based on his work. I'm somewhat interested in the idea of creating a strategy that bases its success not on the direction of a currency pair's movement, but on the correlation between the two currency pairs. After doing some research on my own and reading a lot of the math behind correlation trading, I managed to develop a strategy that has delivered some notable results over the past few months. My account is up 34% in the last month and withdrawals have been minimal.
The idea is very simple, trying to mimic the so-called pairs trades that many major StatArb hedge funds do on stocks. I looked at two currency pairs that seemed to have correlated price movements in the past, such as EURJPY and GBPJPY (see Figure 1).
When the spread between two currency pairs deviates from its past behavior, I simply sell the outperforming stock and buy the underperforming stock. In this case, I would sell GBPJPY and buy EURJPY. This way I isolate the success of the position from the spread between these two currency pairs and hedge the risk of the market in general moving either way. As long as the spread between the two currency pairs narrows to normal levels, I will make money regardless of the market direction.
I have found that exotic currency pairs like the Nordic countries SEK/NOK/DKK seem to work very well when using this strategy. But I've also had some great success with GBPJPY and EURJPY, and recently I've been looking at pairs including Oil, Silver, and Gold that look very promising, but I haven't started trading them yet.
This system can be used for both long-term and short-term trading, depending on the degree of correlation between the trading pairs. If you look at the daily chart of GBPJPY versus EURJPY (Figure 2), you'll see that there have been some great opportunities trading these pairs over the past two years over the long term.
I hope some of you will find this strategy useful and I will continue to post more information about it here. If you have any questions, I'd be happy to answer your questions or make suggestions on how to make this strategy more profitable.
Good luck to everyone in trading. /Zeus Jos
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