Here we go again in our quest for FXE linearity in a non-linear world. This time we’re using standard deviation divergences between FXE and EWG , an ETF proxy for the DAX, which is considered by many traders to have a greater technical alignment than EZU (reviewed yesterday).
And, once again, we’ve engaged the ETF Rewind Pairs Model Analyzer to provide a technical backdrop for our study and to deliver some basline metrics. One nice aspect of EWG is its average daily volume of 1 M shares, about 4 times more than EZU. While the DAX, like the DOW, is comprised of 30 stocks, EWG has more of an ETF component basis with just 10 stocks comprising 64% of total assets. In some ways this profile makes EWG a leaner and meaner index than the DAX and suggests applications such as my old Three Finger Lead studies make be particularly useful here. In the meantime, let’s just review the net results compared to the FXE/EZU: enhanced linearity and increased P&L.
The draw-down factor is slightly greater but we have not applied any stops to this model. Had we used the equity curve break stop developed for the PDQ Dashboard, the performance metrics would have been even greater. Going forward we’ll explore a few more variations of the theme as we seek to deliver a robust trading model for FXE based on the relative performance of a basket of highly correlated currency and country ETFs.
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