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

5 ways to get your strategy copied

Copy trading is one of the popular ways that allow professional traders to earn additional income on their trading by offering investors to...

A Comprehensive Guide to Oil Trading: Strategies, Factors, and Techniques

Oil, a vital and highly valued commodity, plays a pivotal role in numerous industries worldwide. This non-renewable energy resource exists in various forms, with crude oil being the most prominent...

The Relationship between Gold and the USD

If you have been reading our research articles, you must have seen that our analysts very often talk about the negative correlation between gold and the US dollar...

What Factors Influence Electroneum Price?

With the cryptocurrency market being on the rise for the past three years, more and more investors are considering going for digital assets instead of traditional ones...

What is Non-Deliverable Forward (NDF)?

A non-deliverable forward (NDF) is a forward or futures contract that is settled in cash, and often short-term in nature. In an NDF contract, two parties agree to take opposite...

Current trends in the precious metals market

Gold and other precious metals are widely recognized as an investment asset class, that is why we would like to tell our readers about current trends...

Mastering the Art of Forex Profit Calculation

Forex trading, a venture both intricate and potentially rewarding, hinges on the precise understanding of profits and losses (P&L). As each trade unfolds, the fluctuating forex market presents a myriad of risks...

Benefits of Becoming a Signal Provider for Copy Trading

As a trader, you may be asking yourself if becoming a signal provider is right for you. Many new traders turn to copy trading as a way to learn from more...

Where will the COVID-19 pandemic lead the United States?

Last week, US government debt set a new historical maximum. The milestone of $25 trillion was taken. The situation deteriorated sharply in April 2020 due...

Forex Education: Does It Make Sense?

Work of any nature requires considerable effort, both moral and physical. Indeed, in addition to having to spend a considerable amount of time on theory...

Understanding Forex Hedging: A Comprehensive Guide

Forex hedging is a risk management strategy that aims to reduce or eliminate the potential risks associated with financial transactions. It has evolved into a profitable trading strategy for some traders...

Trading Like A CFO - Planning

We already went over the similarities between trading and financial management. Now we are going to get a little deeper into each...

How to Trade Copper: A Comprehensive Guide

Copper is a widely used hard commodity that finds applications in various sectors, including technology, construction, plumbing, and wiring. While it may be less expensive...

NEO Price Prediction: Invest or Skip?

NEO isn't the most popular cryptocurrency, especially when compared to Bitcoin, Ethereum, Tether and Ripple. Currently, it's ranked only 26th by CoinMarketCap in terms of market capitalisation...

Choosing a Trading Instrument: How to Trade Indices

By now, you must be familiar with the names of the world's major stock indices: Dow Jones, S&P 500, NASDAQ, DAX30... But did you know that they can...

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)...

Deep-Dive With Us: What Is Tron?

What comes to mind when you think of the word "Tron?" For some, it's a cheesy 80's movie. For others, it's a promising blockchain platform. In today's article, we'll take a look...

Margin and leverage. What exactly is margin trading?

Margin trading refers to trading with leverage, therefore opening up the possibility of a higher ROI. Leverage is a key forex trading term and is explained in the next section...

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...

APR vs. APY in Crypto: A Comprehensive Guide

Cryptocurrency investments have become increasingly popular in recent years, attracting investors from all walks of life. As the crypto market continues to grow and evolve...

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.