The Statistical Arbitrage module is designed for traders who have experience with statistical arbitrage concepts in theory and/or practice. It is NOT suitable for inexperienced traders or people searching for 'fire and forget' black box trading systems.
The generic arbitrage engine is a configurable toolset designed to track two highly correlated or co-integrated assets. The system automatically executes trades when trader defined arbitrage conditions are met and closes the trades when mean reversion is complete, a defined profit target has been achieved or the trades breach the maximum risk levels (based on % of account equity)
PLEASE READ THIS.....
The system IS NOT a black box 'fire and forget' trading system
From our experience long term profitable black box systems are a fantasy and tend to be curve fitted systems developed by failed traders. Due to this, they normally "go pop" over the long term and in turn destroy your equity and initial investment - save your money, learn to trade and only buy tools which give you an edge!
Statistical Arbitrage is not a guaranteed method to make money in FX or commodity trading. Discretion is a vital component - your pair selection, trading timeframe, trading time, account equity, sensitivity to drawdown and ability to exit when pairs decouple will all influence the performance of this trading approach.
Traders who can identify stationary spreads and pairs which display a high medium term correlation based on technical and fundamental analysis will get the most out of this system. Running the system on a basket of currency pairs is the best way to create dynamic hedging and reduce the risk of drawdown from arbs run in isolation.
The V2 arb system can trade any correlated currency pair or asset accessed through the Metatrader MT4 platform on any chart timeframe. This enables traders to set the system up for either high frequency statistical arbitrage plays or longer term arbs based on higher timeframes.
Examples of highly correlated assets are:
The system includes automated modules for high speed trade execution, requote and slippage scenarios.
The system is designed to place opposing trades ie simultaneous Long and Short positions therefore creating a theoretically neutral market position.
Note: The current stat arb EA for MT4 does not set stops for the pairs within the Metatrader MT4 client trading environment. Arb trades will automatically be closed when one of the following conditions occurs:-
How fast can you run?.......
There are a lot of people looking for fire and forget trading systems which they can drop on a chart, sit back and watch their $50 initial equity grow into $10 Million in the first year. Yes.... people really do believe tools like this exist and unfortunately there's no shortage of vendors happy to position their 'products' as fulfilling these fantasies! FX AlgoTrader are not one of these vendors.
The Stat Arb EA tools on this site are 'tools' NOT ROBOTS. They provide a rich arbitrage toolset which allows traders to automate their arb trading strategy on whatever timeframe they prefer. If you've never made a penny trading FX or other assets the chances of making money using arb tools, unfortunately, isn't high. They won't turn a losing trader into a winning trader but they will automate an arb strategy and provide solid risk control. How much you make will depend on how good you are as a trader.
Some people can run faster than others - if you've got good equipment it makes the job easier!
No. Unfortunately it's not possible to backtest EAs in MetaTrader 4 which trade multiple pairs.
With small accounts trading micro or mini lots it's not critical to make the legs balance. As the postion size increases this becomes more significant. For example any pairs which have USD as the quote currency eg majors such as EURUSD GBPUSD will have the same pip value. So a standard lot for EURUSD and GBPUSD will both have the same pip value of $10/pip. If the arb pairs are made up of a cross such as EURJPY the pip value (based on todays rates) would be $12.88/pip. So in order to make the legs balance we would need to reduce the position size of the EURJPY leg by 1/1.288=0.78.
So to create a balanced EURUSD/EURJPY arb you would need to use 1 lot for the EURUSD leg and 0.78 lots for the EURJPY leg.
If we reduce the position size to 0.1 lots ($10,000- a mini lot) the position sizes would need to be adjusted to 0.1 and 0.078. So unless you had a micro account you would have to run two mini lots for both legs.
Once you reduce the position size to micro lots the effect of balancing the arb becomes increasingly less significant.
*The easiest way to calculate the pip value is to use an online pip calculator
NO. Don't do this! The arb products will only allow one unique instance of a particular arb to run. If you load the same arb setup on another chart it will confuse the internal variables used for trade management. The system will not behave logically as the two arbs will constantly overwrite the internal variables which could create erroneous trade behaviour. You can run any number of unique arbs on the MT4 platform using the tool - but they must all be unique.. eg one instance of EURUSD/GBPUSD or AUDUSD/NZDUSD etc etc
For advanced arb traders it is possible to create the same arb on a different timeframe by reversing the pair sequencing thus creating an 'inverse' arb. Eg EURUSD/GBPUSD on H1 and GBPUSD/EURUSD on M15. However, the trader would have to control the trade direction of both arb setups by using the trend locking options. This approach can be used to hedge and also reduce drawdown on longer term arbs but this strategy is complex due to the skill required in closing the inverse arb component when long term mean revsersion takes place.
V2 and V3 can be used on any period for short term or long term arbitrage. V3 is an enhanced version of V2 as it uses logs for the spread analysis which has many advantages such as dynamic profit targetting and a wide range of trader defined external input parameters. V3 is the logical progression from V2 and contains many trader requested enhancements.
Both arb products have two components – an Expert Advisor and an indicator. The indicator provides the statistical analysis component. V2 Arb products calculate the spread of the pairs by dividing one by the other, they then calculate the moving average (of the spread) then plot trader defined standard deviations either side of this moving average. The trade entry and exit thresholds are determined by the STD Multiple in the indicator (this can be adjusted by the trader)
The trade entry thresholds (STDs) are set by eyeballing the typical departure from the mean before the spread recouples. Obviously timeframe and system parameters are critically important. 5 minute charts can show what looks like a stationary spread but this can change very quickly and become highly directional. On the other hand a weekly chart provides much more insight into the medium/long term spread dynamics. Short term arbing is very difficult and it's easy to get caught when the pairs decouple. This is often seen towards the end of the Asian session and near the Frankfurt open. As liquidity flows into the market spread can become directional over short timeframes.
In terms of suitable arb pair selection you can use the FX AlgoTrader real time correlation indicator to select highly correlated arbitrage pairs on any timeframe.
The V3 system uses a log spread algorithm which allows the trader to see the reversion potential in dollar terms. This allows traders to see the power of the longer term arb compared to short term arb trading.
You would need to know about mean reversion, correlation, coupling/decoupling/divergence etc. You would need to understand that there are is no guarantee mean reversion will take place when you expect it to.
The template will always use the default settings so if you wanted to change them and keep your modifications just create a new template called “New Arb Settings ” or whetever you like. Then whenever you open the new template your modified settings will be used instead of the default settings.
You could run arbs on a $500 micro account providing you keep the position sizing to a minimum. It would not be wise to run arbs on a mini acocunt with only $500 dollars in equity. Both V2 and V3 arb products can be run on micro, mini and standard MT4 accounts.
It depends on you and what you want to achieve – if you like short term overnight arbs based on the Asian thin liquidity market then 5 minutes might be good for you. Alternatively – if you like to make decent money without having to give the broker lots in spread costs - Daily charts would provide fewer trades with much larger profits for arbs which reverted to the mean. Generally the longer the timeframe the higher the profit.
A customer made 1200 USD off a 5000 USD account in a week. The guy is an x-commercial trader so bear that in mind! The tool is only as good as the trader in terms of picking the right pairs to trade and setting the right parameters.
So, in summary, arb traders will need to experiment to find the best system settings which match their trading style, risk and general expectations.
In terms of ROI it’s hard to say as it depends on which timeframe you trade. The potential profit is displayed by the EA under the "Reversion Potential" data label on the main chart. This figure is calculated on the difference between the current spread and it's moving average. If the reversion target is set to the opposite band the potential profit will be substantially increased but the trader would need a full swing from one band to the other ie +1 to -1 STD or whetever trigger parameters the trader has defined.
In terms of timeframe you can make a lot more money on longer term charts in comparison to short term high frequency arb trades. We dont produce ROI or equity curve data any more as the results will vary hugely from trader to trader. The tools only reflect the ability of the trader to select the optimum assets, timeframes and parameters to trade. It all goes back to how fast can you run :)
There are a number of reasons this could happen which are:-
This could happen due to the following reasons:-
The 'Disable Gen Starb' global variable has been set by the system. Press F3 to view the GVAR table - there are a few reasons this can happen which are:-
1)'Close_All_Trades' parameter is set to true.
2) The aggregated daily profit target has been achieved and auto reset is disabled
3) The account equity is below the minimum limit
To resolve this problem go to the Global Variable Table in MT4 - press F3 - look for a global variable called "Disable Gen Starb" with a value of '1'. If you delete the variable the system will reactivate.
At the moment there is no dynamic rebalancing. I have considered applying a scaling in system to allow the arb position to be increased if a spread continued to decouple – this is similar to an averaging down approach but the leverage obviously increases with the position size thus increasing the risk of stop out if the net position P/L reaches the maximum risk parameters set in the system. There are different schools of thought with regard to scaling in/averaging down. An alternative approach is to trade the opposite side of the arb on a lower timeframe which would create a dynamic hedge (to a degree)
Additional Comment: Some V3 customers have been experimenting with a alternative approach to dynamic rebalancing in cases where an open arb trade is decoupling from it's MA and creating a drawdown.Rather than rebalancing the lot sizing of the existing arb a new arb is set up which is the exact opposite of the current arb. For example if you had a 5 lot per leg EURUSD/GBPUSD arb which was triggered off an houly chart you would set up a GBPUSD/EURUSD arb running on a 15 minute chart and use the 'Lock_Long' or 'Lock_Short' parameters to force any new trades off the 15 minute chart to the exact opposite of the arb on the longer timeframe. This creates a perfect hedge and also allows reduces the drawdown as the shorter term arb will gradually eat into the drawdown created by the longer term decoupled arb. The principle is simply based on trading short term spread volatility seen on the shorter timeframe. This approach is not a guaranteed "Get of jail free card" but it can substantially de-risk positions where significant decoupling has taken place and in tandem reduce the magnitude of a potential loss.
The V2 or V3 arbitrage engine will do this if you set them up accordingly. The correlation indicator was designed to be used for arb traders to aid in their pair selection.
So if you’re criteria is daily correlation >75 and 5 min correlation <-75 you could set up the arb product on your 5 minute chart (probably easier to use an hourly actually) and then set you’re STD multiple in the STD indicator so that your trade entry triggers were where you want them. You could do this visually and look to only trade the largest divergences each day.
Fully automated trading on pre-configured charts.
Integrated risk control based on account equity
Can be run on all chart timeframes
Can trade any forex pairs
Advanced order control for requotes on entry and exit
FX AlgoTrader Real Time Correlation Indicator
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