Hedging strategy with rollover difference profit

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Forum transfer: Submitted by Rich on September 5, 2008 - 13:40.

Idea: find two pairs, which move either inversely or in the same direction (such pairs are called highly correlated) and calculate lot sizing in such way that rollover becomes a positive value.

Theory:
There are pairs with high correlation coefficient. Such pairs tend to move in the same direction (positive correlation) most of the time, or in the opposite, mirror-like direction (negative correlation).

(Currency correlation table always change to some point, buy the base often stays the same).
Use those correlated pairs.

Strategy example:

Go Long (1 lot = 10 000) on GBP/JPY pair and at the same time Short (1,8 lots = 18 000) on CHF/JPY.

Ideally GBP/JPY pair should be trending up, which will allow collecting additional profits from the trade itself.

Positive interest paid by the end of the day for carrying GBP/JPY pair is higher than the charge for carrying CHF/JPY. The difference - is your profit.

Additionally, you'll see that during some periods of time the difference between a losing trade on one pair and a winning trade on the other pair grows into a positive sum, in such cases both trades can be closed and profit taken. The setup is then reset again.

Good luck!
Rich