Example of strategy using made up numbers

Euro bid/ask: 1.50/1.51
Cable bid/ask: 2.00/2.01

Market moves, Euro increases more than Cable:

Euro Bid/Ask: 1.60/1.61
Cable Bid/Ask: 2.05/2.06

so if euro was over valued in relation to cable, I would go short euro and long cable creating:

Euro: ($100)
Usd: $160

Gbp: $77.66
Usd: ($160)


Momentum hits cable as USD is being sold off, rates become:

Euro bid/ask: 1.63/1.64
Cable bid/ask: 2.20/2.21

So your position becomes:

Euro: ($100)
Usd: $163.00

Gbp: 77.66
Usd: ($171.63)


you would then cover your position creating:
Euro: $100
Usd: ($164.00)

Cable: ($77.66)
Usd: $170.85

Profit in USD including theoretical spreads being: P=170.85-164.00 =$6.85

Now to calculate margin requirement so that you can calculate RoR %:

Leverage: 10:1
Euro Margin (EM) : $16.50
Cable Margin (CM): $16.50
Profit (P) = 6.85
RoR (%) = [P/(EM+CM)]*100
Thus:
RoR = [6.85/33.00]*100
Ror = 20.76%



Now biggest Item would be how to price one in relation to the other so that it is possible to spot these type of positions...

Time to goto the Library!

Statistical Arbitrage Idea (Attempt #1)

Ok so I want to try and prove that there is a way to profit (including spread) between two correlated FX pairs.

I picked Euro and Cable over 1000 ticks (thanks to Leslie for finding truefx.com).

Basically I gave a mean value for the bid/ask just to prove if the theory could even work, then created a +/- value for each tick from the median. So Each new tick is either + or - the previous. Notice how there are a couple very large movements on cable, while euro does not move much? I think that this proves that there is potential in my idea.

I think the next step is that I need to find a way to give value to each pair in value of the other, this will give a base to see if its profitable with spreads. Then I need to prove if the prices revert so that the position could be closed.



edit: I know its not much data to prove the point, but figured testing small sample first to create the calculations would be better than dealing with many lines.

QME

ok so I have my last test on Trig, Exponential Functions, and Logarithmic functions on Wednesday March 31st, and then my exam on April 7th.


Started trying to plan out my undergrad so that I can be well equiped for MFE, or CQF, and started to build a reading list.


Going to pick up Ross' Introduction to Probability Theory this week, and picked up Thorp's 'Beat the Dealer' because I couldn't find a reasonably priced 'Beat the market' (which I found at the University's library :) ).


anywho...lots of over extended markets tonight, took USDJPY short @ 92.6610...might be adding EURYEN and GBPYEN but depends on how it reacts to the highs its going into.

finally

Spent the last 3 weeks cleaning a virus off of my computer.

Finally have it fixed, and everything back to normal.

Took dllryen short 91.929 before I started fighting the virus, and thankfully forexnews.com allows me to track rates from my blackberry. Currenex is Java based so works from almost anywhere which is helpful for next time.

anywho.

I am still bearish markets, and insanely bullish on inflation right now. Almost to the point that we should be worried.

The economy cannot handle inflation until it sees more jobs.



As for me going to live trading again I have steps setup, I just need things to fall into place.

I need a constant source of income for the summer. If that happens, I go live in September while at school using fractual compounding MM, and logical market analysis. I have been networking my ass off to find something I can get full-time hours, but nobody is hiring yet. I hope to hear back within the next couple weeks or I will intensify even more.

I need to get back to trading, and stop making excuses as to why. If I want something I need to take it, Its not going to jump and land on my lap.

Updates...

So starting to become frustrated with my trading.

While I have been going over my Jan010 trades, I have noticed common problems:

A. I have issues with position sizing for the account. I need to learn how to scale into a position. Started with 1:1 and ended up 14:1 on the account, only to have it go the direction I was feeling after I was stopped out (was short cable). This leads me to show that my logic is correct, it is just my timing and Risk Management that needs to be addressed.

B. Time commitment. I cannot afford to sit in front of the computer trading a demo account. Simply as that. Paper Profits cannot pay bills. Even if it is for the track record.

C. Capital. I Cannot deem trading anything under $100k. It doesn't pay the bills, even on good months. Unless there is salary involved (even if its small). Seeing how my trading methodology is based on sustainability, you cannot be sustainable when you cannot pay your bills.


Starting to come to conclusion that trading is becoming a hobby and not a goal. I take two steps forward, and three back. Work is slow, but not slow enough to give me adequate time to trade. Slow means no money, this is leaving me to look for a second job just to pay rent. Becoming worried that if I even get into Quantitative Economics @ university for September, I will not have enough cash to stay there. Becoming a sink or swim mindset...paying my way into a prop firm will put me another $5k into debt (making $10k) but has the possibility to push my foot in the door for a track record (prop firm pays 50% commission). But if I preform poorly, then I am out 5k and I go home to $10k of debts with a terrible job. I honestly do not know what to do anymore other than get a second job and try to keep afloat.




“Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength.”

FX Options

Been going through a couple of sources to build my options knowledge over past couple months.

Was shown Dan Sheridan's Options videos on CBOE.

WOW.

Amazing series. Really helped make the greeks less fearful. Would be cool to take his program, but $6500 USD is University Tuition.

next step would be testing the water with various strategies.

Currently I want to test out Gamma Scalping with a Straddle. I see this as being perfect for FX as market moves very fast at certain times of the day. Still haven't seen how spreads will affect the idea, but will find out soon enough.

Now things I still need to check up on are:
-How to sell spot market to take profits
-Decide how to calculate volatility on cross traded (ATR?)
-Adjusting

Week Ending Oct 17th 2009

So weekly PnL: 383 pips.

Weekly Running PnL: 503.

Still long 1/5th Cable position @ 1.6061, SL 1.6052 and half Dllryen position @ 90.21 SL 90.05.

Notes from the week:

I took trades based on speculation and not on the system at the beginning of the week instead of waiting for the trades to come to me. This can be seen as over trading and needs to be rectified. Unprofitable situations need to be monitored, but need to set alerts in place so that opportunities are hit when they arise. I basically fought the Euro uptrend all week, losing 45 pips across several trades. That shows that I knew I should not take the trade, but still took them anyways, thus seen as gambling and not trading. Also was long Dllryen early, system showed weak bullish, but was on a retrace, went long. Not sure what to think of the trade but it cost me another 20 pips.
Trades that stuck to the system made 643 pips this week. that means I had 140 pips lost due to not following the system, or getting in too late.

Next Weeks Goals:
-Focus on entry, if you miss entry look for next one.
-Follow the system, take trades based only on the system
-Stick to what I know.
-The technical system I know well. This is my edge. I am still grasping money flow.
-Further work on money flow.