Currency Strength Meter StrategyStep by Step currency strength and forex basket trading.
Currency Pair Selection
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.
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
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
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.
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.