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  1. #1

    Static arbitrage

    I will post here some idea which cross my mind, and after searching the net I have found that I am not the first with this and it's called static arbitrage but I did not find enough materials for mt4. So if anybody have something please share. The main idea is to watch highly correlated pairs likemore then +90% or highly negative correlated like -90% and exploit the situation when there is not correlation to open position. So if 2 pairs are more then 90% of time in the same move and then in one moment they start to move in opposite direction we can exploit that and enter a position and wait to get correlation again back to 90% high and take our profit. I think in this way we can reduce trading risk.
    I have found some indicators to help us actually see when pairs start to separate from each other :
    Example EURUSD chart with overlay chart of AUDUSD and correlation indicator at the bottom.
    [Only registered and activated users can see links. ]


  2. #2
    This is more correclty described as "Correlation Hedging". There is a wealth of information on this topic, even on Wikipedia. It does work and is usually a reasonably safe, relaxed trading method .... except for the risk of sudden "News" type events. So it is always wise to have a StopLoss in place and a small / modest TakeProfit.

  3. #3
    Well there is some material explaining this method but i did not find some concrete trading system based on this for mt4

  4. #4
    Quote Originally Posted by Xmind View Post
    I will post here some idea which cross my mind, and after searching the net I have found that I am not the first with this and it's called static arbitrage but I did not find enough materials for mt4. So if anybody have something please share. The main idea is to watch highly correlated pairs likemore then +90% or highly negative correlated like -90% and exploit the situation when there is not correlation to open position. So if 2 pairs are more then 90% of time in the same move and then in one moment they start to move in opposite direction we can exploit that and enter a position and wait to get correlation again back to 90% high and take our profit. I think in this way we can reduce trading risk.
    I have found some indicators to help us actually see when pairs start to separate from each other :
    Example EURUSD chart with overlay chart of AUDUSD and correlation indicator at the bottom.
    [Only registered and activated users can see links. ]
    Sell EURUSD and buy AUDUSD. Let's look at what this means:

    Sell EUR. Buy USD.
    Buy AUD. Sell USD.

    USD cancels each other out, leaving: Sell EUR, Buy AUD.

    In other words, this is exactly the same as going short on EURAUD.

    These types of trading strategies are no safer than trading a single currency pair, the risk exposure is the same.

  5. #5
    Yes in sense of risk there will be always some risk involved when we take a buy or sell button but in this particular case, if we analyze a little more, we can see that something is going on with 2 pairs, which are 90% of time in correlation and now correlation is lower. So that is our signal to monitor and take advantage of situation. If you only watch EURAUD you don't see nothing you don't know if is going up or down

  6. #6
    You can use correlated pairs to trigger the entry (effectively using them as a technical indicator), but trading EURUSD and AUDUSD is pointless when you can achieve exactly the same result by trading EURAUD instead.

    There's also another problem: let's say the correlation drops from 90% to below 50% (e.g. EURUSD goes sideways and AUDUSD goes into a downtrend). The correlation can be restored to 90% if EURUSD falls while AUDUSD goes sideways (so that EURUSD can "catch up" with it). The other way to restore correlation is that AUDUSD goes back up to where it was previously when EURUSD started going sideways. So while you may know there's a very good chance the correlation will return to 90%, you don't know which direction to trade EURAUD to take advantage of this knowledge. Which means you have to use technical indicators to determine the direction, exactly the same as trading any currency pair whether correlated or not. So I don't see any advantage to this method.

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