HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

Pair Trading: Effective Strategies


Pair Trading: Effective Strategies for Earnings in Financial Markets


Pair trading is used by experienced traders as a reliable tool for risk diversification. For the successful implementation of a long-term trading plan on the stock market, it is enough to competently make an investment portfolio by investing in promising ETFs. As an alternative, it is permissible to consider the distribution of capital between shares of companies with high capitalization and government bonds in the ratio of 70/30. This is the kind of tactics that is used by such an investment guru as Warren Buffett, allowing him to minimize trading risks.

The use of such a strategy is possible on the over-the-counter foreign exchange market. The only difficulty is the right choice of financial instruments. The article discusses examples of pair trading on Forex and provides practical recommendations for beginner traders. The author also describes his personal trading strategy with a guaranteed profit of 7 to 12% per month.

Correlation and features of its practical application in trading


Correlation is a statistical interdependence of at least two random values. In the terminology of online trading, correlation should be understood as an interrelation in the pricing of currency pairs.

The correlation coefficient can vary in the range from -1 to one, where the minimum value indicates the opposite trend of asset pricing, and the maximum – the identical one. If the coefficient is zero, then this indicates the absence of interdependence between financial instruments. For example, the correlation between the Australian dollar and the value of gold is close to one. This metal is practically the main export commodity of the state, so its market value affects the pricing of the national currency in the medium and long term:

The screenshot shows the AUD / USD and XAG / USD charts. The identical pricing principle is obvious. It is important to pay attention to the intense price impulses that are peculiar to the XAG / USD pair. Smoother movements are characteristic of AUD / USD. This can be successfully used in your own trading. The average daily volatility of the XAG / USD pair is about 170 points. If an impulse from 50% of this range is formed on the chart, then you should open a trade for AUD / USD with a target level of 20-30 points (the volatility of this instrument within the day is very insignificant). Stop loss is recommended to be set at the opposite local level. The number of successful transactions is more than 85%.

Important! The correlation coefficient is a floating value, which depends on the level of liquidity. This indicator is also able to influence macroeconomic factors. This allows traders to make profit by changing the correlation coefficient in the medium term in the foreign exchange and long-term in the stock or commodity markets.

Practical application of correlation in forex trading


The most common way to earn profit with interdependence of Forex currency pairs is trading in assets with a negative correlation coefficient.

The interdependency ratio of the EUR / USD and USD / CHF pairs is -0.95. In practice, this figure ranges from -0.78 to -1. The essence of earnings consists in opening 2 identical trading orders for assets at the moment when the correlation coefficient between them will be minimal. To identify such situations, you will need to use the currency pair relationship indicator. There are a lot of similar analytical tools, but it is recommended to pay attention to the iCorrelationTable. This indicator is not available in the MT4 and MT5 platforms, however it is possible to download it from specialized sites independently and install it in the terminal in accordance with standard instructions. When transferring to a grid, it is not required to make adjustments to the input parameters of the tool.

The indicator is built in the additional window below the price chart and displays changes in the correlation coefficient of currency pairs. To place orders on EUR / USD and USD / CHF, it is desirable to wait until the value of their interdependence is about -0.95. Transactions must be opened at market value in one direction and with identical trading volume. Orders will need to be closed after changing the correlation coefficient with fixing the minimum profit:

Two orders are opened with a volume of 0.1 lot. After 3 days, the profit was about 3 USD. To issue these trade orders with a leverage of 1: 100, a deposit of 200 USD will be quite enough. Thus, the minimum potential profitability of the strategy will be 12% per month. However, it is important to pay attention to the obvious disadvantages of this vehicle:

The correlation coefficient does not change often.


Not to many brokers have a positive swap on the mentioned pairs in the contract conditions.

The main advantages of the strategy are stable income, availability of analysis and practically passive participation of the trader in trading.

Attention! For trading, it is possible to consider currency pairs not only with a negative, but also with a positive correlation coefficient. In the latter case, orders should be opened in opposite directions.

There is another way to earn with correlations when trading Forex. The principle of trade is almost completely similar to that described earlier. The trader will need to find 2 pairs with a negative value of the correlation coefficient and a positive swap. At the same time, the conditions specified in the broker’s user agreement should not limit the user in choosing a trading strategy. To exclude non-trade risks when choosing an intermediary company, banking organizations should be given preference, for example:

Attention should be paid to the negative correlation coefficient of USD / SEK in relation to EUR / USD and AUD / USD. The companies mentioned earlier offer a positive commission for transferring the transaction to the next day only for USD / SEK and AUD / USD. This combination should be considered for practical use.

The screenshots show the specification of the contracts of the broker Dukascopy Bank SA. As can be seen, when opening a Buy order, the USD / SEK swap pair is 6.18 USD per day. For AUD / USD, this value is negative and amounts to -3.71 USD. Thus, when opening 2 identical orders, the net profit of a trader for transferring transactions will be 2.47 USD per day. When calculating, you should not forget that on the night from Thursday to Friday the swap is credited in triple size. Thus, the net profit per month will be 74.1 USD or 7.4% per month (88.8% per annum) from 1000 USD. This is a pretty impressive profit, given the almost complete absence of trading risks.

Important! There is a high spread for the mentioned currency pairs, so it is important to understand that to compensate for losses, it will be necessary to keep orders open for at least 1 week. Therefore, to maximize profits, it is strongly recommended to consider the application of this strategy exclusively for long-term investment.

Compared with classical trading strategies, the correlation earnings method has several advantages:

The only drawback is the relatively low profitability compared with the profit potential of short-term trading methods.

Conclusion


The considered strategies of earning on the correlation of Forex currency pairs is the possibility of obtaining a stable profit from passive investment in the foreign exchange market. Income potential significantly exceeds similar indicators when investing in a bank deposit, real estate, in foreign ETFs or in Russian mutual funds. The level of risk is quite comparable.

Attention! Beginner traders are recommended to accumulate practical skills on a demo account within 1-2 months before investing their own funds.

Author: Kate Solano, Forex-Ratings.com

RELATED

The Benefits Of Cryptocurrency Explained: Should I Trade Cryptocurrencies?

Gold has been in use for ages, and the stock market dates back hundreds of years. Cryptocurrencies have been around for more than a decade now...

What are cryptocurrencies and how do they work?

Nowadays, cryptocurrencies have become a worldwide phenomenon that most people have heard about. Although somehow they are still unusual and are not understood...

How Options Expiration Can Change How You Trade

Forex trading can be a very profitable venture, but it can also be quite dangerous. One of the risks you take when trading forex is the risk of options expirations...

A Guide to Ethereum Trading

Ethereum is one of the most promising technology in today's fast-paced world. Since its creation in 2015, its growth seems not to slow down anytime soon...

How to make money trading Bitcoin

The question "how to make money with bitcoin" has awakened an acute interest of forex traders. Usually the answer is associated with the purchase

Is money really its worth

While using money as a form of exchange in our everyday life, very few people really understand how money receives its value. Money is used practically under...

Soulbound Tokens (SBTs): Pioneering Digital Identity in the Blockchain Era

Soulbound tokens (SBTs) represent a groundbreaking concept in blockchain technology, championed by Ethereum co-founder Vitalik Buterin and inspired by mechanics from the popular fantasy game...

Mastering Bond Trading in 2024: A Comprehensive Guide

Bonds, often referred to as fixed income securities, continue to play a pivotal role in the financial landscape, serving as a fundamental instrument for governments and corporations to raise capital for various ventures...

Dogecoin: Has the Hype Faded?

Dogecoin (DOGE) has been enjoying the newfound attention this year. So far, it has accumulated a market capitalization of more than $40 billion and ranks #6 largest digital currency...

A Complete Guide to Online Indices Trading

An increasing number of traders is interested in indices markets and CFD trading. Indices measure how a group of stocks performs. The idea is to focus on how strong...

Silver Trading Guide: How to Trade Silver and Why

Silver, often referred to as "the other precious metal," offers traders and investors a unique opportunity to engage in commodity trading. In this comprehensive guide, we will explore the world of silver trading...

Trading Guide to TSLA: NASDAQ - All You Need to Know About Tesla

Tesla is regarded as one of the most visionary and innovative tech companies of our time. Here’s everything you need to know about TSLA, including company history...

Leveraged ETFs: Worth It or Not?

Leveraged Exchange-Traded Funds or leveraged ETFs aren't new to individuals or institutional investors. In fact, they're becoming one of the most popular types...

Crypto CFDs: A Comprehensive Look at the Modern Alternative to Direct Cryptocurrency Trading

Cryptocurrencies have marked their presence in the investment world with their decentralized, transparent, and private characteristics. While direct ownership of cryptocurrencies remains a common choice...

How to Create and Sell an NFT

In 2021, NFT triggered an immense interest across the internet. No wonder: people are ready to pay vast sums of money for NFTs, the cost of which can go up to millions of dollars...

What Is Fibonacci Retracement? Definition & How To Use It

Setting the support and resistance levels is usually a problem for traders. It is especially inconvenient when trying to figure out from the beginning where to place them on the chart...

Mastering Oil Trading: Comprehensive Strategies and Crucial Aspects

The world of oil trading offers a plethora of opportunities for savvy traders, but it also presents unique challenges. Understanding the nuances of trading in Brent Crude and West Texas Intermediate (WTI)...

STP Broker: Definition, Characteristics, and Advantages

A Straight Through Processing (STP) broker is a forex brokerage firm that provides wholesale forex services orders to institutional traders. The STP broker was built from the exchange...

Why VPS is important to forex traders?

Forex traders operate in one of the world’s largest and most volatile financial markets. A daily trading volume of US$6.6 trillion makes the forex market the most traded market globally...

Bitcoin Cash: Will It Reach Great Heights Again?

All financial markets have ups and downs, and Bitcoin Cash fits this rule just like any other cryptocurrency. But due to the novelty, these cycles of increase or decrease...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.