BTS or Basket Trading System is a trading system consists of multiples pairs formed from "Australian Dollar, Aussie - AUD", "Canadian Dollar, Cnadian / Loonie - CAD", "Switzerland Franc, Swiss - CHF", "Euro - EUR", "British Pound, Cable / Sterling - GBP", "New Zealand Dollar, Kiwi - NZD", "Japanese Yen, Yen - JPY","American Dollar, Dollar / Greenback - USD".

With these major pairs and crosses pairs, we may form up to 28 pair’s combination. For BTS, we only looked for 14 pairs that can be perfectly hedged and high correlation between pairs.

What is correlation and hedging?

Correlation is a determined relationship between two or more pairs which could either be negative or positive. Negative correlation is the relationship between two pairs wherein one goes the opposite direction of the other pair. Example of these is the EURUSD and USDCHF. The measured difference of negative moves between the two is the percentage of negative correlation. Positive correlation is the opposite. Example of these is the GBPUSD and EURUSD. This is a relationship between two pairs that both will be moving in the same direction. The difference of the rate of moves is called the percentage of positive correlation.

Hedging a trading strategy where you buy one pair and sell another pair if they are positively correlated or buying one pair and also buying another pair that are negatively correlated. Opps sounds complicated. For instance, since we now established that EURUSD and USDCHF are negatively correlated, and then buying EURUSD and buying USDCHF will have a semblance of hedging. Or the selling of GBPUSD and the buying of EURUSD will also have a semblance of hedging.

However if you want a perfect hedge, then you sell EURUSD and buy EURUSD, this will never get you anywhere except losing for the spread and swap fee. This practice however is now disallowed by NFA. It falls under the category of no hedging. Well here is another hedging that will not fall under the disallowed strategy: Buy EURUSD, Buy USDJPY and Sell EURJPY or Sell EURUSD, Sell USDJPY and Buy EURJPY. If you calculate properly the traded lot then you will have a perfect hedge that will not get you anywhere as well.

What is hedging in BTS?

The 14 pairs that we are trading in the basket and the direction they are being traded are in hedge strategically. We could calculate the proper trading lot for each pair if we need it to fall under the category of perfect hedge. But what is the point? The lot size was intentionally left as 1 unit in order to create an imbalance. With this imbalance we allowed the pairs to swing either in the positive or negative portion thus creating a synthetic trend that will guide us in our trading.

Hope this introduction of BTS could helped those are interested and knowing the very basic principle of the system.