Currency Strength Meter Strategy

Step by Step currency strength and forex basket trading.
Currency Pair Selection
The currency pairs selected in this example are the EURUSD, EURJPY and USDJPY. Entry direction will be based on currency strength. Exits will follow the Dynamic Money Manager (DMM) rules which will be created later.

Open FxOdds with the Currency Strength and DMM modules visible. Click the Strength column in the Pair Strength window to sort with the strongest upward (green) pairs on top and the strongest downward (red) pairs on the bottom. The EURUSD shows upward strength (green) and the USDJPY is in just in the red (downward strength). Knowing a bit about currency correlations we know that this confirms the normality of the negative correlation between the two pairs – whenn the EURUSD goes up, the USDJPY goes down and vice versa.

Currency Strength Indicator  

Since the USDJPY (-1.06) is more negative than the EURUSD (0.32) is positive it suggests that a short position be taken for the USDJPY. This starts our basket table with the USDJPY short. This also fills in the EURUSD as a short position. Why? Knowing that the two pairs mostly move in opposite directions this provides a close to virtual hedge for the combination. If we were to take a long position with one currency pair and a short with the other, we could be correct on both or wrong on both. A safer approach is to balance the currency basket as much as possible – this is basket trading. With the EURUSD short and the USDJPY short the only option for the EURJPY is to take a long position in order to result in a balanced basket.

Currency Basket Balancing
The table represents a balanced basket. A “+” sign equates to a long component while a “- “sign is for a short one.  

 

Trade sizes also important since pip values are not the same for every pair. Remember this when selecting your position size if you wish to be as precise as possible. This is especially important when position sizes become larger as it is not enough to just trade the same size per pair. OANDA offers precise allocation  with single unit precision.

Create a Strategy
Right click in the DMM window and select the DMM Strategy option.

Dynamic Money Manager Module for Forex

Apply functions to create your strategy.  Enable the strategy and set the risk parameters for maximum Used Margin, P/L and Pip Value.

 

On the left, negative P/L side of the grid, when a position moves:

  • Down -10 pips the position is reduced by 50% using the 1/2 function.
  • Down -15 pips the position is reversed in direction, either from long to short or short to long using the reverse function.
  • Down -20 pips the positon is closed using the close position function.

On the right, positive P/L side of the grid, when a position moves:

  • Up 10 pips it is doubled using the 2x (double) function.
  • Up 15 pips it is doubled again.
  • Up 20 pips the position is closed for a 20 pip profit.

The strategy remains conservative and in check with the Max Used Margin % of 75, Max Floating P/L% of 5 and the Max PIP Value of $10. Click OK to set the strategy. From this point on any new trades made from the DMM window will have these parameters automatically applied. 

Placing Trades
Place trades according to our basket created in Step 1 by right clicking in any of the DMM squares and selecting New Order. In the New Order window check the “pips” option and set the pip value to $0.25. The trade size will automatically be adjusted to produce a pip value of exactly $0.25. Click the Buy or Sell button to place the Market Order.

New Forex Trade

The left and bottom gauge panels populate with useful information. Of most importance in this, and most strategies will be the Risk and Reward gauges in the lower left panel. This strategy remains quite conservative with a Risk of 0.17% and a Reward of 0.30%, a 1:1.8 ratio.