in Forex Why if EUR/USD price goes up the price of the USD/CHF tends to go down?
then What is your Hedge strategy, How much you buy and sell
Extra tags:
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Tagged with: CHF • EUR • Forex Questions • hedge • price • USD • usd price
Filed under: Forex Systems
The reason that the two mentioned currency pairs tend to move opposite of each other is do to a relationship called corellation. These two happen to have a high negative corellation. If two pairs have a positive corellation they would tend to move in the same direction.
I like the chart that Kathy Lien produces at http://fxtsp.com/forex_report4.htm
What is interesting with the two pairs that you mentioned is that you do not buy and sell…you only buy positions in both. If you structure your hedge properly you will also receive a very nice interest payment every day, 7 days a week regardless of what the currency pairs price does.
The number of lots you need to buy to set up a balanced haedge is dependent on a number of variables such as volatility, market conditions, current trends, interest rates, corellations etc.
This can be greatly simplified by using one of the proprietary Allocation Models available from a couple of sources.
Good luck.
Paul
You shouldn’t be trading FX if you don’t know the basics. I’m not trying to be nasty or "smart", but you’re in a market that’s 20 times more "dangerous" than trading stocks!
I never hedge. I buy/sell around 1% of my trading capital at a time. Remember "Money Management" is more important than getting the "direction" of the trade correct. But you’d know that if you had read several books.
I’d wish you Good Luck…. but what you need most is more knowledge… and I mean knowledge from experts, not strangers that you don’t know their qualifications or motives.
Three steps:Since they are negatively correlated. This can be done by running regression analysis using Excel Add-in function of the change in price in the last 60 intervals.
Then you can create a covariance terms to determine portfolio standard deviation.
Finally, run the optimization to determine at what hedged amount will give you either:
minimized risk…or ..optimized return.
Good luck
The computation may be expressed as:
sum_sq_x = 0
sum_sq_y = 0
sum_coproduct = 0
mean_x = x[1]
mean_y = y[1]
for i in 2 to N:
sweep = (i – 1.0) / i
delta_x = x[i] – mean_x
delta_y = y[i] – mean_y
sum_sq_x += delta_x * delta_x * sweep
sum_sq_y += delta_y * delta_y * sweep
sum_coproduct += delta_x * delta_y * sweep
mean_x += delta_x / i
mean_y += delta_y / i
pop_sd_x = sqrt( sum_sq_x / N )
pop_sd_y = sqrt( sum_sq_y / N )
cov_x_y = sum_coproduct / N
correlation = cov_x_y / (pop_sd_x * pop_sd_y)
EUR/USD is known as direct counters and USD/CHF as indirect counters. So they tend to move in opposite directions. But CHF being a low yielding currency, second only to JPY, investors may tend to sell it to buy higher yielding currencies, hence the carry trades. During unwinding of these carry trades, when investors losses their appetite for risks, both these crosses will move in the same direction.
At present I am short EUR/USD and nothing on USD/CHF. As for the amount, it really depends how much you are willing to lose.
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If you don’t understand the technical responses given above, you probably shouldn’t be using hedge strategies.