Stat Arb Newsletter to Clients

Dear Stat Arb Customers,

I thought I’d tell you about some product development which may be of interest to you.

The current Stat Arb V2 engine is a passive system in that the hard work is selecting which currency pairs to arb. Several of you have suggested a system where an EA auto selects an arbitrage candidate pool which can then be fed into an EA so that it can trade in a fully automated fashion. Obviously there will be a comprehensive set of controls and filters which the trader would pre-define.

The good news is I’ve developed the real time correlation calculation engine and also the filtering system. Some screen shots are below – the next steps are to develop a new EA which can take the candidate pool and auto trade it – this is the hard part!

Some other ideas for improvements have been:-

· Aggregated profit controls – where the EA aims to make a defined profit from multiple arbs in a day – once the profit is achieved all current positions would be closed and the system would sleep until the next day or overnight session.

· Scaling options to allow multiple trades to be pyramided if the spread continued to diverge from the mean by x STDs. Effectively an averaging down process but not without risk…. LTCM!

· Ability to trade negatively correlated pairs

· Email alerts and position updates based at a defined frequency

· Stationary spread analysis tools – the current version has an option called ‘Mean Delta Filter’ – when this was developed the idea was to try and identify stationary spreads – ie spreads which are pretty flat (not going up or down) – you tend to get these when there isn’t a lot of liquidity in the market ie during the Asian session. I am not particularly happy with the current mean delta filter option and I know most of you don’t use it as it’s too selective. This is an area I am particularly interested in developing.

I would be interested in any additional ideas or suggestions for improvement – let me know your thoughts.

I’m also considering setting up an arbitrage trading community on the website where arb traders can exchange ideas. Is this something you would be interested in?

I’ve also put together a few short cuts and frequently asked questions about the current version which may help you get more out of the product. This is by no means an exhaustive list – just the most front of mind things…..

1. Set up arb charts quickly – the Setup.exe program automatically installs a template called “STARB” – if you click ‘Charts’/’Templates’ and then select STARB you will get the EA, the STD indicator and the Price Trace indicators loaded automatically. The defaults settings are EURUSD and AUDUSD so you’ll need to change these.

2. The GVAR table – when the EA opens arb positions it loads a global variable onto the global variable table. The variable will be called ‘Pair1/Pair2 Filled’ and will have a value of 1. So if you traded EURUSD and AUDUSD the global variable will be called EURUSD/AUDUSD. If you manually close arb trades during testing or when you’re live you must DELETE the global variable otherwise the system will not make any additional trades – it will think the arb position is still filled. To access the GVAR table press F3 and then select the appropriate GVAR and delete it.

3. Mean Delta Filter – leave it set to false – it needs more work.

4. www.mataf.net - this website has a pretty good correlation analysis area under the tools section – I have created a similar tool which runs as an indicator in MT4 and supplies real time correlation data based on trader defined pairs. I will release this shortly for traders who like everything in the MT4 environment.

5. Avoid false trades when you launch the system – Try turning your EAs off (the sad face in the top right hand corner!) when you set up arb charts – this will allow the system to settle down and pull the chart data from the brokers server if you don’t have it locally. Once you’ve got a decent looking STD indicator spread trace and you’re happy with the STD multiple then activate the EA (smiley face in top right corner!) Also keep an eye on the experts tab in the terminal window – if you see a zero divide error it means you haven’t got enough chart data on your terminal.

6. Set realistic defined profit targets – if you are trying to make cash from trading on 5 minute charts (not easy!) you need a stationary spread and very realistic profit targets ie 2-5 pips – you also need to be able to manually kill trades which don’t work out. Short term arbing is normally easier during the overnight Asian session due to low liquidity but if you stay in the market too long the spread can become mobile as the western markets start coming on line. This is where a short term arb can leave you high and dry if you stay in the trade.

7. Longer term arb trades are a lot safer but you also need to consider the fundamentals depending on your trading timeframes. I think the EURUSD/GBPUSD breakdown presented some pretty good opportunities on the recouple. I didn’t trade it though!

Screen Shot of real time correlation indicator

Screenshot of the automated correlation filter tool – the next step on…. Note the total spread cost in the far right column – very important!

Hope this is of some interest and use to you.