From the November 01, 2012 issue of Futures Magazine • Subscribe!

Flying high with forex

The chaos hedge

The Global Euro Chaos Hedge model employs a correlation trigger based on the daily correlation trigger of the euro against the Australian dollar. This hedge is a global optimization mechanism to raise profitability for the euro and Australian dollar Standard Style Models because of the European credit crisis. It is based on a backtested correlation trigger of 63%. 

We have found that when euro/Australian dollar correlation drops below 63%, the euro market produces non-trending volatility while the Australian dollar market is more trending (see “Rolling correlation,” below). Because our Standard Style Models profit off directional volatility trends, when correlation drops below 63%, we want more of our Standard Style Model exposed to the Australian dollar market. The 63% correlation trigger activates our Chaos Hedge, which doubles our Australian dollar trading position at trade entry on the open of the four-hour candlestick; the additional Australian dollar position is held until girth indicates an exit.

The backtesting results of this new model (V3.B) that combines the correlation trigger with the Standard Style Model look promising. Results are shown in “Chaos filter” (below).

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