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Developing A Multilevel Strategy

Pair Trading

Here’s an automated trading strategy that can be used to trade currency pairs.

Multianalysis based on the simultaneous movement of various currency pairs is popular among traders. There are many methods you can use when it comes to this form of analysis. They can be classified based on the number of different trading instruments and the principles of their underlying. For example, if you only use two trading instruments, then two options are possible:

1. The instruments are either moving in one direction (for example, EUR/USD and GBP/USD), in which case the opening and closing of a position occurs when signals occur on the two currencies at the same time such as a simultaneous increase or decrease.
2. The other option is that they are moving in different directions (for example, EUR/USD and USD/JPY), in which case you would be opening and closing positions when they are moving in opposite directions.

Another common strategy involves three instruments, such as the two major currencies and a cross (say, EUR/USD, GBP/USD, and EUR/GBP). As a rule when using multi-instrument strategies, you should open positions for all instruments involved in the analysis simultaneously. This forms a multicurrency hedge. But you can open a position just on one instrument, and use signals with other tools to solely confirm the signal.

FIGURE 1: PLOTTING THE INDICATOR. Here you see the indicator plotted for multiJPY on a one-minute time frame.

Analyzing correlations
I will write a simple group of multi-indicators in NinjaTrader script that will help analyze the correlations between currency pairs. Once you do this, you will be able to create multicurrency strategies.

To do so in NinjaTrader 7, use the wizard to create an empty indicator. Call it multiJPY (since you are looking at a multidirectional movement of EUR/USD and USD/JPY). (For the address of the code referenced here, see the end of this article.) Next, open the editor and paste in the following lines of code:

Add(new Line(System.Drawing.Color.DarkViolet, -0.01, "Lower"));
Add(new Line(System.Drawing.Color.YellowGreen, 0.01, "Upper"));

…Continued in the September issue of Technical Analysis ofStocks & Commodities

Excerpted from an article originally published in the September 2012 issue of Technical Analysis ofStocks & Commodities magazine. All rights reserved. © Copyright 2012, Technical Analysis, Inc.