is the very wrong word for T101.
Correlation is derived from sample of past data. See Correlation and Dependence. I can imagine how frustrated to tell someone that T101 system is not about correlation.
The use of correlation coefficient for trading is not about predicting the price action. Correlation is relationship between two set of data. If two pairs have strong correlation to be each, chances to see them move in same direction is higher.
For example, from Correlation Heatmap. At this point of time, EURUSD has highest correlation coefficient with GBPUSD based on data of 1 week. Next, open EURUSD and GBPUSD chart.
You may see they are moving together in same direction at different rate. How does this help you in trading? Which pairs will you buy? The lagging pair you will say and you will close when you see reversal from leading pair.
It is useless.
If two pairs are highly correlated, the lagging pair will immediately reverses when the leading pair reverse. That's the definition of correlation. If the leading pair is blind, so will the lagging pair. Blind leads blind.
The prediction of overall market direction is more important. That's what T101 system is doing.
Showing posts with label Basic. Show all posts
Showing posts with label Basic. Show all posts
A021: Basket System
As mentioned in tandem trades, T101 is used to identify potential pairs to trade. Ideally we want to trade (only) the strongest pairs. Being the few of the strongest pairs, they have relatively moved quite a number of pips. They are also the higher risk pairs to trade due to chances of failed reversal.
trader101 suggested to trade all 14 pairs at one direction.
This is a well-known fact in risk management world. See Modern Portfolio Theory. In general MPT tells us, the portfolio risk (standard deviation) is lower if we have more risk components within the portfolio.
The suggestion to trade 14 pairs gave birth to T101 Basket Trading System.
trader101 suggested to trade all 14 pairs at one direction.
This is a well-known fact in risk management world. See Modern Portfolio Theory. In general MPT tells us, the portfolio risk (standard deviation) is lower if we have more risk components within the portfolio.
The suggestion to trade 14 pairs gave birth to T101 Basket Trading System.
A020: Anchor
Anchor is the furthest point of a block.
Sell AUDUSD 500 << Anchor
Sell NZDJPY 450
Sell GBPCHF 400
Sell EURUSD 350
Sell EURCHF 300
Sell CHFJPY 250
Sell USDJPY 200
Buy USDCHF -200
Buy EURGBP -250
Buy NZDUSD -300
Buy GBPUSD -350
Buy EURJPY -400
Buy AUDJPY -450
Buy GBPJPY -500 << Anchor
Anchor can be any pair. It depends on market condition.
At this point of time when I am writing this, EURUSD (positive) and EURJPY (negative) is my setup anchor.
Some uses anchor is an indication of market direction as well. When an anchor pair dislocated even by the pair in the same group, this shows sign of reversal. At different market condition, the indicative of reversal can be different which adds to the difficulty for interpreting the T101 system.
Sell AUDUSD 500 << Anchor
Sell NZDJPY 450
Sell GBPCHF 400
Sell EURUSD 350
Sell EURCHF 300
Sell CHFJPY 250
Sell USDJPY 200
Buy USDCHF -200
Buy EURGBP -250
Buy NZDUSD -300
Buy GBPUSD -350
Buy EURJPY -400
Buy AUDJPY -450
Buy GBPJPY -500 << Anchor
Anchor can be any pair. It depends on market condition.
At this point of time when I am writing this, EURUSD (positive) and EURJPY (negative) is my setup anchor.
Some uses anchor is an indication of market direction as well. When an anchor pair dislocated even by the pair in the same group, this shows sign of reversal. At different market condition, the indicative of reversal can be different which adds to the difficulty for interpreting the T101 system.
A019: Measurement of Market's Direction
The first pair that moved away from the group/block of either buy pairs or sell pairs, is known as tandem pair or attacking pair. trader101 suggested the market direction is confirmed once this pair reaches and dislocate the anchor (furthest location/pair of each block).
This is half truth.
It takes a lot of strength for the attacking pair to reach and dislocate anchor. The market may have exhausted by then. Also, we will see less meat too. I have experienced failed reversal at the very moment the anchor has dislocated. Since the market has moved towards a direction for some time, when a failed reversal happens, it will be quick and strong.
Most likely the rebound will hits our cut loss limits of 560pips.
That's market. For that, T101 basket system works with 14 pairs to reduce portfolio risk.
This is half truth.
It takes a lot of strength for the attacking pair to reach and dislocate anchor. The market may have exhausted by then. Also, we will see less meat too. I have experienced failed reversal at the very moment the anchor has dislocated. Since the market has moved towards a direction for some time, when a failed reversal happens, it will be quick and strong.
Most likely the rebound will hits our cut loss limits of 560pips.
That's market. For that, T101 basket system works with 14 pairs to reduce portfolio risk.
A018: State of Imbalance
The equilibrium is also an ideal state.
The market will not stop moving due to different participants with different background and information. This is the truth and the attractiveness of forex market.
Market will only stays in a range when we are near to equilibrium. And most of the time, this period will not lasted long. When there is perceived fundamental change (in general), the market turns to the state of imbalance. Perceived is an expectation of the market and it is not the real fundamental change.
Relative movement of different pairs in T101 system allows us to find the leading pair and the market's direction. Few of the leading pairs that relatively moved the most is called tandem pairs in this system. Some trades tandem pairs as they are the strongest pairs. Some uses them as yardstick to measure the strength of market's direction.
A017: Flow with the Market
This is an ideal and never seemed to be the case. Ideally we want to flow with the market but we can't see the real market's direction. In fact, if you are trading a single pairs, you never will.
Stay with your indicators, stay with your system, and you may succeed but most likely you will fail.
Good system will predicts single pair movement based on technical analysis tool. The truth why there is hype about T101 system is due to the potential of forecast/predicts market's direction.
Market will moves from imbalance state to equilibrium state. Yes, it is also about the theory of supply and demand. When market moves, you want to know which direction it will goes.
Stay with your indicators, stay with your system, and you may succeed but most likely you will fail.
Good system will predicts single pair movement based on technical analysis tool. The truth why there is hype about T101 system is due to the potential of forecast/predicts market's direction.
Market will moves from imbalance state to equilibrium state. Yes, it is also about the theory of supply and demand. When market moves, you want to know which direction it will goes.
A016: Supply and Demand
If carry trade pairs give swap gain, the market will sells them when the market force reaches state of equilibrium.
In the forex world, theory of supply and demand still prevails. Traders sell carry trade pairs when the price gain reaches the projected swap gain over time.
So, there will be reversal. And, there will be failed reversal.
This is the interesting fact about forex market. You will never predict the market. You will flow with the market.
In the forex world, theory of supply and demand still prevails. Traders sell carry trade pairs when the price gain reaches the projected swap gain over time.
So, there will be reversal. And, there will be failed reversal.
This is the interesting fact about forex market. You will never predict the market. You will flow with the market.
A015: Theory of Equilibrium
If everyone is selling, who is buying?
Unlike equity market, when you sell a currency in forex world, you are buying another currency in the same time. There are, of course, exceptional cases such as central bank intervention.
The market will try to move towards state of equilibrium.
Remember carry trade pairs?
And, why is the market sells carry trade pairs that provide swap gain?
Unlike equity market, when you sell a currency in forex world, you are buying another currency in the same time. There are, of course, exceptional cases such as central bank intervention.
The market will try to move towards state of equilibrium.
Remember carry trade pairs?
And, why is the market sells carry trade pairs that provide swap gain?
A014: Cross-jump
a.k.a. crossover.
Here is what trader101 says:
Assuming positive movement pairs are on top of the 14 pairs, if the buy pairs are positive and moving down (cross-jump) to bottom (in the same time one of the sell pairs will switch place with a buy pair), the market direction is trending to anti carry trades (Short). This is describing scenario (3) & (4) above.
If everyone is selling, who is buying?
Here is what trader101 says:
1) BUYS that jumps up === BUY (if buy jump to profit you buy)Cross-jump happens when market starts to sell gaining pairs.
2) SELLS that jumps down=== BUY (if sell jump to loss you buy)
3) BUYS that jumps down === SELL (if buy jump to loss you sell)
4) SELLS that jumps up === SELL (if sell jump to profit you sell)
Assuming positive movement pairs are on top of the 14 pairs, if the buy pairs are positive and moving down (cross-jump) to bottom (in the same time one of the sell pairs will switch place with a buy pair), the market direction is trending to anti carry trades (Short). This is describing scenario (3) & (4) above.
If everyone is selling, who is buying?
A013: Tandem Trades II
Identify the leading pairs and check with your own trading system.
After cross-check with your trading system, you will find whether it has potential for large movement. Set your own target price and cut loss limit accordingly.
You can also cross-check with different comparison basis such as D1 (compare with the beginning of today's price). Tandem trades are effective only if you have good trading plan.
After cross-check with your trading system, you will find whether it has potential for large movement. Set your own target price and cut loss limit accordingly.
You can also cross-check with different comparison basis such as D1 (compare with the beginning of today's price). Tandem trades are effective only if you have good trading plan.
A012: Tandem Trades
T101 system initially was designed for tandem trade identification.
The tandem pairs suggested by trader101 are perfectly 'correlated'. I try not to use the word 'correlate' but I can't find another English word. You can imagine they are chained in market movement.
Like the original correlation theory, correlation coefficient changes through time and economic fundamental change.
I never like this. Yes, tandem pairs work but for a certain period of time only.
However, T101 can be used to identify potential tandem trades. As suggested by trader101 too, we shall trade the very few pairs that cross-jump (crossover). These are the few leader pairs. These pairs can change according to market condition too. For instance, I observed leading pairs changed from GBPJPY to USDCHF as time changes.
It does not matter anyway.
The tandem pairs suggested by trader101 are perfectly 'correlated'. I try not to use the word 'correlate' but I can't find another English word. You can imagine they are chained in market movement.
Like the original correlation theory, correlation coefficient changes through time and economic fundamental change.
I never like this. Yes, tandem pairs work but for a certain period of time only.
However, T101 can be used to identify potential tandem trades. As suggested by trader101 too, we shall trade the very few pairs that cross-jump (crossover). These are the few leader pairs. These pairs can change according to market condition too. For instance, I observed leading pairs changed from GBPJPY to USDCHF as time changes.
It does not matter anyway.
A011: Failed Reversal
trader101 suggested to use 40pips for each pair as cut loss limit. I am not sure too. It depends on market condition but cut loss limit is a must have to protect your account.
Unfortunately, since we are not knowing the true perfect state, failed reversal happens (not all the time). Remember, it is only ideally for full reversal towards opposite side to happen.
Failed reversal also happens when you don't have a clear target price. Usually I uses combined trailing stop for protecting my gains.
Since you are master of your trades, you have to set your own target price. Fail to correlating with market condition is a weakness of T101 system.
Unfortunately, since we are not knowing the true perfect state, failed reversal happens (not all the time). Remember, it is only ideally for full reversal towards opposite side to happen.
Failed reversal also happens when you don't have a clear target price. Usually I uses combined trailing stop for protecting my gains.
Since you are master of your trades, you have to set your own target price. Fail to correlating with market condition is a weakness of T101 system.
A010: The Reversal
Trust me, when pairs start to cross jump from top to bottom and vice versa, it is indication of reversal.
However, for you to successfully master T101 system it is not easy.
Remember the true perfect state? The basis of comparison is different for different market condition and therefore you can't really obtain the true perfect state. To be honest, I am not sure too. However, I know this can be built up by experience.
For now, you can take the original T101 system basis of comparison, which is the beginning of the week.
By using the suggested method, plot of hourly relative pair movement in MS Excel (I am using my own MT4 IA for this purposes), you can know better when is the reversal.
As mentioned, ideally reversal should moves in opposite direction towards the opposite perfect state. (From 14 pairs declining pips to 14 pairs gaining pips). Unfortunately, this is not always happen.
However, for you to successfully master T101 system it is not easy.
Remember the true perfect state? The basis of comparison is different for different market condition and therefore you can't really obtain the true perfect state. To be honest, I am not sure too. However, I know this can be built up by experience.
For now, you can take the original T101 system basis of comparison, which is the beginning of the week.
By using the suggested method, plot of hourly relative pair movement in MS Excel (I am using my own MT4 IA for this purposes), you can know better when is the reversal.
As mentioned, ideally reversal should moves in opposite direction towards the opposite perfect state. (From 14 pairs declining pips to 14 pairs gaining pips). Unfortunately, this is not always happen.
A009: Carry Trade Pairs
Most of the pairs from common brokers are in carry trade direction (market force direction). Try to buy 14 pairs by using a demo account and notice your swap after few weeks.
The swap is gaining due to carry trades.
This is an essential understanding for T101 system.
The swap is gaining due to carry trades.
This is an essential understanding for T101 system.
A008: Mechanism of Perfect State
The perfect state is not as perfect as we think. trader101 uses the term of perfect setup but I prefer to use perfect state. They are the same.
Example by trader101:
Sell GBPUSD 500
Sell EURGBP 450
Sell GBPCHF 400
Sell CHFJPY 350
Sell AUDJPY 300
Sell EURJPY 250
Sell USDCHF 200
Buy CADJPY -200
Buy AUDUSD -250
Buy USDJPY -300
Buy EURUSD -350
Buy EURCHF -400
Buy GBPJPY -450
Buy USDCAD -500
The is happening at this state? I will use Universal pairs to illustrate.
Sell AUDUSD 500
Sell NZDJPY 450
Sell GBPCHF 400
Sell EURUSD 350
Sell EURCHF 300
Sell CHFJPY 250
Sell USDJPY 200
Buy USDCHF -200
Buy EURGBP -250
Buy NZDUSD -300
Buy GBPUSD -350
Buy EURJPY -400
Buy AUDJPY -450
Buy GBPJPY -500
For the perfect state above, Sell pairs are gaining and Buy pairs are losing. This is relative to the beginning of the week (since we opened the trades since the beginning of the week).
On natural hedge state, the account only suffers losses of spread.
However, if you notice carefully, the prices of 14 pairs are declining.
The so-called perfect state, in fact, is not perfect. The market is actually moving towards anti carry trade direction (anti market force direction). Such phenomenon may continues for several hours, days or weeks. At this state, it is not helpful for predicting price action (using T101 system).
Example by trader101:
Sell GBPUSD 500
Sell EURGBP 450
Sell GBPCHF 400
Sell CHFJPY 350
Sell AUDJPY 300
Sell EURJPY 250
Sell USDCHF 200
Buy CADJPY -200
Buy AUDUSD -250
Buy USDJPY -300
Buy EURUSD -350
Buy EURCHF -400
Buy GBPJPY -450
Buy USDCAD -500
The is happening at this state? I will use Universal pairs to illustrate.
Sell AUDUSD 500
Sell NZDJPY 450
Sell GBPCHF 400
Sell EURUSD 350
Sell EURCHF 300
Sell CHFJPY 250
Sell USDJPY 200
Buy USDCHF -200
Buy EURGBP -250
Buy NZDUSD -300
Buy GBPUSD -350
Buy EURJPY -400
Buy AUDJPY -450
Buy GBPJPY -500
For the perfect state above, Sell pairs are gaining and Buy pairs are losing. This is relative to the beginning of the week (since we opened the trades since the beginning of the week).
On natural hedge state, the account only suffers losses of spread.
However, if you notice carefully, the prices of 14 pairs are declining.
The so-called perfect state, in fact, is not perfect. The market is actually moving towards anti carry trade direction (anti market force direction). Such phenomenon may continues for several hours, days or weeks. At this state, it is not helpful for predicting price action (using T101 system).
A007: Prediction of Price Action
As suggested by T101 system, upon formation of perfect state, the market force will react by itself.
The next movement is un-perfect itself.
When this un-perfect movement starts, T101 system will predicts the price action. Ideally the price action will forms another perfect state which is opposite of the current perfect state.
This allows us to forecast which movement of pairs.
Many of T101 followers were confused by this market movement and claiming that it is all about correlation. trader101 tries to explain the false understanding of the system's follower but he was rebutted.
If you think T101 is about correlation coefficient then you have confused.
The next movement is un-perfect itself.
When this un-perfect movement starts, T101 system will predicts the price action. Ideally the price action will forms another perfect state which is opposite of the current perfect state.
This allows us to forecast which movement of pairs.
Many of T101 followers were confused by this market movement and claiming that it is all about correlation. trader101 tries to explain the false understanding of the system's follower but he was rebutted.
If you think T101 is about correlation coefficient then you have confused.
A006: Perfect State
or whichever you want it to be called, is the point of time when long pairs and short pairs gathered at either top or bottom.
The reason for perfect state formation was unknown at that point when trader101 posted in the forum. I am not sure whether he wasn't understand the logic or he was keeping it for himself. I do agree that we should feed too much in the forum though.
It is pretty hard for me to explain the logic behind the formation of perfect state (based on my understanding). It is an equilibrium of market movement (relative to certain point of time) where carry trades being neutralized by anti carry trades. Since the time comparison is different based on existing market condition, no one knows when is the real 'perfect state'.
This has, then, become an art of T101 system. I strongly believe the knowledge of finding the true perfect state will helps T101 system. trader101 suggested the time comparison from beginning of the week. I have used different manner of comparison though.
The reason for perfect state formation was unknown at that point when trader101 posted in the forum. I am not sure whether he wasn't understand the logic or he was keeping it for himself. I do agree that we should feed too much in the forum though.
It is pretty hard for me to explain the logic behind the formation of perfect state (based on my understanding). It is an equilibrium of market movement (relative to certain point of time) where carry trades being neutralized by anti carry trades. Since the time comparison is different based on existing market condition, no one knows when is the real 'perfect state'.
This has, then, become an art of T101 system. I strongly believe the knowledge of finding the true perfect state will helps T101 system. trader101 suggested the time comparison from beginning of the week. I have used different manner of comparison though.
A005: Relative Movement II
Next point to take note is the alignment of relative 'growth' (movement) of all pairs.
One strong evidence observed by trader101 is the forming of perfect state. This is when for some point of time relative to beginning of the week, we shall see the first 7th pairs and the next 7th pairs separated into two different groups (top and bottom).
It like putting to rest the dirty bottled water and it will start to settle down after a certain period and all the dirt to the bottom and the clearer water at the top.
One strong evidence observed by trader101 is the forming of perfect state. This is when for some point of time relative to beginning of the week, we shall see the first 7th pairs and the next 7th pairs separated into two different groups (top and bottom).
A004: Relative Movement
trader101 uses beginning of the week as a basis of comparison. He measures how does each pair changes with reference to the beginning price of the week.
Each pair will performs positively or negatively but so long if 7 long pairs and 7 short pairs are in perfect natural hedge, we shall see losses in term of spread.
The most important element of T101 Basket Trading System is the relative gain and loss of each pairs. The absolute gain/loss gives the idea of whether the market is trading in range or trending strongly. Not long after the thread started, trader101 suggested to use 100pips for the anchor pairs for this purposes.
Each pair will performs positively or negatively but so long if 7 long pairs and 7 short pairs are in perfect natural hedge, we shall see losses in term of spread.
The most important element of T101 Basket Trading System is the relative gain and loss of each pairs. The absolute gain/loss gives the idea of whether the market is trading in range or trending strongly. Not long after the thread started, trader101 suggested to use 100pips for the anchor pairs for this purposes.
A003: Natural Hedge
Original T101 pairs are:
1. GBPUSD
2. EURGBP
3. GBPCHF
4. CHFJPY
5. AUDJPY
6. EURJPY
7. USDCHF
1. CADJPY
2. AUDUSD
3. USDJPY
4. EURUSD
5. EURCHF
6. GBPJPY
7. USDCAD
Universal pairs:
1. AUDUSD
2. NZDJPY
3. GBPCHF
4. EURUSD
5. EURCHF
6. CHFJPY
7. USDJPY
1. USDCHF
2. EURGBP
3. NZDUSD
4. GBPUSD
5. EURJPY
6. AUDJPY
7. GBPJPY
Let's look at universal pairs.
First 7th pairs,
Sell: 1 AUD, 1 NZD, 1 GBP, 2 EUR, 1 CHF, 1 USD
Buy: 2 USD, 3 JPY, 2 CHF
Hence,
Sell: 1 AUD, 1 NZD, 1 GBP, 2 EUR
Buy: 1 USD, 3 JPY, 1 CHF
Next 7th pairs,
Buy: 1 USD, 2 EUR, 1 NZD, 2 GBP, 1 AUD
Sell: 1 CHF, 1 GBP, 2 USD, 3 JPY
Hence,
Buy: 2 EUR, 1 NZD, 1 GBP, 1 AUD
Sell: 1 CHF, 1 USD, 3 JPY
All 14 pairs will creates natural hedge (excluding spreads).
1. GBPUSD
2. EURGBP
3. GBPCHF
4. CHFJPY
5. AUDJPY
6. EURJPY
7. USDCHF
1. CADJPY
2. AUDUSD
3. USDJPY
4. EURUSD
5. EURCHF
6. GBPJPY
7. USDCAD
Universal pairs:
1. AUDUSD
2. NZDJPY
3. GBPCHF
4. EURUSD
5. EURCHF
6. CHFJPY
7. USDJPY
1. USDCHF
2. EURGBP
3. NZDUSD
4. GBPUSD
5. EURJPY
6. AUDJPY
7. GBPJPY
Let's look at universal pairs.
First 7th pairs,
Sell: 1 AUD, 1 NZD, 1 GBP, 2 EUR, 1 CHF, 1 USD
Buy: 2 USD, 3 JPY, 2 CHF
Hence,
Sell: 1 AUD, 1 NZD, 1 GBP, 2 EUR
Buy: 1 USD, 3 JPY, 1 CHF
Next 7th pairs,
Buy: 1 USD, 2 EUR, 1 NZD, 2 GBP, 1 AUD
Sell: 1 CHF, 1 GBP, 2 USD, 3 JPY
Hence,
Buy: 2 EUR, 1 NZD, 1 GBP, 1 AUD
Sell: 1 CHF, 1 USD, 3 JPY
All 14 pairs will creates natural hedge (excluding spreads).
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