Correlated Currency Divergence Strategy

[shandybagusj]

I have been "studying" trading for several years, and I'm still trying to find a strategy that suits me in order to become a more serious trader.

Recently I come up with an idea of an hypothetical strategy that I want to share with you, to have an opinion from more experienced traders, and eventually in case of some of you will help me to crack the information that I'm missing in order to make it real.

Basically Correlated Pairs (Gold/Silver) (EURUSD/GBPUSD) (AUDUSD/NZDUSD) (S&P/Nas100) (DAX30/CAC40) (USDCAD/OIL) (BITCOIN/ETHEREUM) move like DNA strands: they will cross each other, and then they will move away one from another like an elastic, to move together again later, and this sequence is repeated over time.

How can we take advantage of this sequence?

When they are far away from each other, at the maximum extension of the elastic, we can Sell the one above and Buy the one below.
No matter what, they will later cross each other again, and we will close both the positions at the crossing.
At the closing we will have 3 scenario:

1. If the cross occurs between the Buy and the Sell, both trades are in profit.
2. If price closes above the Sell, the Buy will be in profit and Sell in loss, with the profit of the Buy bigger than the loss of the Sell.
3. If price closes below the Sell, the Sell will be in profit and the Buy in loss, with the profit of the Sell bigger than the loss of the Buy.

So, no matter where the price closes, we will have a NET position of the 2 positions in profit.

Basically it is like an arbitrage on the divergence of correlated pairs.

A drawdown may occur after we place the trades, if the elastic enlarges even more, so we will have for some time a drawdown. In this case we may also think to add a position, (still minding the money management), as no matter what, soon or later, the 2 pairs will cross each other again.

It can be used on any time frame. I expect more trades on smaller time frame with small profit (smaller pips) each, and I expect fewer trades on bigger time frame, but with bigger profit (bigger pips) each.


What will we need?

1)
We will need an Overlay Indicator which puts the 2 pairs on the same chart. This Overlay Indicator for MT4 I found it for free on the web. But Overlay indicator come with the problem of the scale. There is also the "compare" option in TradingView.


2)
This point 2 is the most difficult part for me to solve. We will need an indicator which indicates something like the strength of the divergence/elastic, which will help us to filter and to place the 2 trades at their optimal/maximum extension, in order not to get too much drawdown.

For example, if this indicator has a scale of 0-100, we may consider placing the trades everytime the indicator goes above 80. You are more experienced, so my question is:

DO YOU HAVE ANY IDEA HOW THIS DIVERGENCE STRENGHT INDICATOR CAN BE ACHIEVED? WHICH FORMULA?

THIS POINT 2) IS THE MOST DIFFICULT CHALLENGE OF THIS STRATEGY WHICH NEEDS TO BE HACKED TO MAKE THE STRATEGY REAL.

If this point is solved we will need just an EA to make the dirty job and catch trade opportunities at day and night.


3)
We will also need a calculator which give us the equivalent position sizing of the trades to be placed for the 2 pairs. I make an example to try to explain me better:

Let’s say there is an Arbitrage Divergence on Gold / Silver and I want to Sell Gold and Buy Silver.

If I sell 1 Lot of Gold, how many lots of Silver should I buy? Which is the formula to sell/buy the same amount on 2 different pairs?



If you kept the time to read my post I would love to hear your thoughts. But most importantly, do you believe it can be done?

Please, I don't have your same years of experience so please avoid to criticize if this strategy eventually will be an unuseful strategy. I'm just doing my best. All contructive critics are accepted, expecially I will need to figure out that Point 2 of the Strategy.


Thanks in advance for answering,

 

[Fxzombie]

I once tried trading the correlation pair EURUSD with EURJPY, these two pairs tend to have a positive correlation, if the EU is uptrend then EJ is in an uptrend, but there are different moving averages so with hedging it is possible to get positive change anomalies, this method is indeed low risk but has potential the gain is also low.