Topic: Hedging EA - Always in profit
a) Usually, a few of the forex instruments (symbols), so called pairs in a plain language move in line with the other pair. For example GBPUSD (GU) and EURUSD (EU), often move in the same direction. However, some of them move in the opposite direction such as EURUSD with USDCHF. A couple of pairs that move in the identical direction is said to have a positive correlation, while couples move in opposite direction are negatively correlated. If we simultaneously enter the market by buying GU and selling EU at the same time, we were in position of hedging or so called locking
b) Although GU and the EU usually move in the same direction, its movement distance in pip between GU and EU is differ. Generally, based on the past records, movement of GU is bigger than EU. In order to balance the movement of these pairs in monetary value, let say in the USD currency, we use the ratio of Average Daily Range (ADR) between these pairs to determine the number of lots to be used during trading. The average ratio of ADR of the EU over GU in the period of the last 365 days is approximately 0.8. This means, if GU moves in a day by 200 pips, the EU is expected to move a total of 160 (= 0.8x200) pips. To get a proper balance of hedging in the USD, we use a smaller lot in GU. If we trade EU with 1.0 lot, then the traded lot for GU should be 0.8 lot, which is a result of ADR ratio (0.8) multiply with traded lot in EU (1.0 lot).
2. ENTRY AND EXIT
Although most of the time GU and EU usually move in tandem, there are certain situations cause the trend of GU is opposite with the trend of EU. When the pairs are moving contrary, the number of pips of movement to the contrary is called the gap. We can enter the market when the gap for the movement in the opposite direction between the GU and the EU is significantly bigger (minimum recommended gap is 100 pips). Let say at the time the 100 pip gap is occurred, trend of GU is up and trend of EU is down, then we are advised to enter the market by selling GU and buying EU simultaneously (if movement of GU is downtrend and oppositely the movement of EU is uptrend, we will buy GU and sell EU).
When GU and EU are beginning to move back in similar direction (or is said to close the gap), our open posts are believed to be in the profit territory, and we should be out of the market. To close the gap from previous situation which is GU is upward and EU is downward, GU must go down, and the EU have to go up, or GU has to move down substantially, or another possibility is the EU has to move up substantially.
Numbers of individual lots recommended to be used for Pair 1 (let say GU, for GU-EU couple) in the market are based on the ADR ratio between the two pairs. So if we are using 1 lot for EU, then we suppose to use 0.8 lot for GU.
If the market against your opened positions, you can enter new posts of GU and EU for the second time (We name it as second layer of your posts) and so on for every increment of floating loss at certain distance (measured in pips). For GU with EU combination, the recommended distance for each layer is 100 pips. If your pairs at the last layer accumulate a net profit (recommended between 100-50pip), you should close these profitable posts and float the others.
For equity 1k USD, each layer should use a size of lot of 0.05 units to 0.1 units. (A traded lot of 0.1 units usually called as 10 cents, which a movement of 1 pip is equivalent of 10 cent in the value of money). If a lot of 10 cents in size is used in the trading, your account should be able to sustain in the market to the floating loss at least at 10 layers or 1000 pip loss.
To facilitate a manual trading, a robot called Overlay Positive Hedging has been developed. Since the robot is still under testing and development phase, I open this thread mainly for sharing its setting, ideas, errors-debugging, or what ever thing that can improve its function as well as its performance. Any suggestions to modify or upgrade the robot are very much welcomed. Discussion in this thread should be focused on developing the robot.
The developed robot that can be used in a forward test for verifying the technique is a profitable method or to monitor its drawdown. Back test for the robot can not be carry out as it involves two different pairs
If you want to trade a two way (overlay hedging) on a couple of GBPUSD-EURUSD, the robot should be installed on both charts, which are GU chart and EU chart. The robot should be placed in the chart of Pair 1 (GBPUSD), and a same robot in the chart of Pair 2 (EURUSD). If you are trading is only one way only, put the robot in one chart only, either in chart of Pair 1 (GBPUSD ) or Chart of Pair 2 (EURUSD)
Two-way trading (overlay hedging)
For a two-way trading or called overlay hedging (traditional hedging). Two Robot’s parameters must be set as follows:
1. In the chart of Pair 1 (let say GBPUSD):
a. TradeCouple1 = true
b. TradeCouple2 = false
One-way trading (overlay)
Put the robot in one of the chart (either chart of Pair 1 or chart of Pair 2). If you want to buy Pair 1 and sell Pair 2, set the robot’s parameters as follows
a. TradeCouple1 = true
b. TradeCouple2 = false
Robot Parameter Setting
1. Lots = 0.1
Number of lots for the second Pair (Pair 2). Suppose the setting is Pair 1 and Pair 2 is GU and EU, respectively. Lot used by the first Pair (Pair 1) depends on the ratio of Average Daily Range (ADR) between the two pair. Suppose the parameter settings for” Lots” is 0.1, thus Lot used for Pair 1, which is GU is “Lots” multiply with ADR ratio = 0.1 x 0.8 = 0.08 units. Lot for Pair 2, which is EU = “Lots” = 0.1 units
4. TakeProfit = 80
To define total profit in pips of the Pair 1 plus Pair 2 at the last layer. Once the couple of pairs acquired the defined profit in pips, the robot will close the posts at the last layer.
6. TakeProfitInUSD = 100
To define total net profit in USD from Pair 1 plus Pair 2 at the last layer. Once the couple of pairs acquired the defined profit in USD, the robot will close the posts at the last layer
15. UseManual_ADR_Ratio = true
If you want no of lot of Pair 1 is calculated based on parameters set by the ADR_Ratio, set this parameter to TRUE. Otherwise, the robot will determine ADR ratio by its own.
17. MagicNo = 90000
Couple identification number for each couple of pairs. For instance, if you want to trade a couple of GU-EU, this number suppose to be set similar in the GU and EU chart. If a different couple is to be used in trading, for example a couple of AUDUSD-NZDUSD, you have to change the parameter into other numbers, such as 90001. Use the same number for the parameter in both charts AUDUSD and NZDUSD.