The Grail is a trading system that brings only profit. Despite numerous attempts to develop such a strategy, the Grail was created many years ago and has been successfully used by various hedge funds, insurance companies and large banks. Until recently, this method was kept secret, but with the advent of the Internet became available to the masses. This method is called "pair trading" and consists in the simultaneous trading of pairs of correlated trading instruments, which are usually stocks, indices, futures contracts and options, but can also be used and currency pairs. pair trading is a financial strategy based on the phenomenon of correlation of stocks, indices and currency pairs. In turn, the correlation is the relationship between several trading instruments, combined fundamental factors that directly affect the currency standing in the quote. Correlation of currency pairs can be direct or reverse. For example, if you open two charts of EURUSD and GBPUSD currency pairs in the trading terminal and place them one above the other, you can see how the price of one currency pair literally follows the price of another currency pair. This correlation is called direct or positive. An example of reverse or negative correlation can be the currency pairs EURUSD and USDCHF. If one currency pair forms a peak, then the other can be observed depression. Since all currency pairs are interconnected by fundamental factors, you can find a lot of examples of correlation of currency pairs. However, not all of them are suitable for pair trading strategy. It is necessary to select only currency pairs with a high degree of correlation. This will help you service OANDA, with which you can choose currency pairs with a high degree of correlation. The main advantage of pair trading is the absence of a large load on the Deposit. Since currency pairs are correlated, losses on one currency pair are overlapped by profit on the other. Even if there is a strong news, and the price moves in one direction, the second currency pair price will go in the opposite direction, compensating for possible losses. In another way, pair trading is also called currency arbitrage or hedging strategy, when one trade is opened as opposed to another. As a result, even strong price fluctuations have a negligible impact on the Deposit. While the profit on this strategy is quite noticeable. Another advantage of pair trading is that there is no need for technical or fundamental analysis. You can focus directly on trading without being distracted by predicting chaotic price movements. The main thing is to determine the maximum divergence of correlated currency pairs. This is the only drawback of pair trading – it is impossible to say with 100% certainty how long the divergence of correlated currency pairs will last. There is always a possibility that there will be such a strong divergence of currency pairs that it can lead to the loss of the Deposit. But in this case, you can insure yourself against losses using stop-loss or placing locking pending orders.To start trading on the strategy of pair trading, you need to install a special indicator that will help to impose one chart of the currency pair on another. This is necessary in order to determine the divergence of correlated currency pairs on the chart. On various forums and portals dedicated to Forex, you can find a lot of useful indicators of pair trading, but the easiest and most convenient among them is the indicator OverLayChart. After downloading the indicator and installing it in the MT4 trading terminal, you need to open a chart of the currency pair, for example, EURUSD, and attach the OverLayChart indicator to it. In the settings window, you need to write the name of the correlated currency pair next to the SubSymbol parameter, in our example it will be GBPUSD. Optionally, you can specify the bar colors for the second currency pair. If a currency pair with inverse correlation (for example, USDCHF) is used as the second instrument, then select true opposite to the Mirroring parameter, which means "mirroring". In our example, we leave the value of the parameter Mirroring-false.There is also a correlation script that helps you find interdependent trading instruments, including currency pairs and CFD contracts. In the script settings, you can set the StartTime-the date on which the script will search for correlated trading instruments (it is recommended to take the values for the last year), and the Rank, with which you can select the type of correlation coefficient. If the Rank parameter is set to false, the script will be calculated by Pearson coefficient characterizing the degree of linear relationship. If set to true, the script will calculate the Spearman coefficient based on a nonlinear arbitrary relationship. The closer the correlation coefficient is to zero, the less interdependent trading instruments are. We are more interested in those instruments that have a correlation coefficient close to +1 or -1.
After running the Correlations script, it starts working with all the trading instruments presented in the market Watch. Keep in mind that the process of the script may take some time. The progress of its work can be observed in the upper left corner of the screen. As correlation coefficients are calculated, they will be recorded in the log of the trading terminal. In case of script interruption all calculated data will be saved. In the end, the script generates a text Correlations.txt, in which the results are displayed in descending order. The script can be run on any trading instrument. It is advisable to load the history of quotes for all trading instruments that you want to check for interdependence before running the script.How to trade on the system of pair trading? First you need to decide on the inputs. We will enter into transactions after we make sure that the correlated currency pairs have diverged relative to each other as much as possible. To do this, you need to rewind the chart for six months ago and calculate how many points the currency pairs differed from each other. Then you should determine the average value of the discrepancy, in which you will consider the possible inputs to the transaction. For example, you have an average discrepancy of 80 points. As a result, you will consider only those transactions in which there is a discrepancy between the correlated currency pairs of at least 70-80 points. Why is it necessary to do this? Since you do not know how far the currency pairs will go from each other, you can not be completely sure when they will come together again, and this can have negative consequences for your Deposit, as large losses on open positions can increase.
Having determined the average value of the discrepancy, it is necessary to understand the rules of entry and exit positions. As soon as the divergence has reached its maximum, you need to open two positions at the same time: the more expensive currency pair (the one on top) should be sold, and the cheaper one (which is at the bottom) – to buy. Take profits and stop losses are not used in the strategy. We will exit the open positions when the charts of currency pairs intersect at the zero point. To avoid accumulation of losses in case of further divergence of correlated currency pairs, you can use pending locking orders. For example, you have opened a buy position on EURUSD, and at a distance of 100 points from the open transaction put a pending order to sell. Now, if the price catches a pending order, the amount of losses will remain constant wherever the price moves. The same thing must be done on the second currency pair – GBPUSD. A pending buy order should be placed at a distance of 100 points from the open sell trade. It is important to unlock positions in time when the price goes in your direction.As a sales tools, you can take the following currency pairs: EURUSD, GBPUSD, AUDUSD and NZDUSD, EURAUD and EURNZD, and any other currency pairs and CFDs with a high degree of correlation. The timeframe can be used from M5 to H1. At the same time, the higher the timeframe, the less signals will appear, but there will be more take profit. It is recommended to use M15 or H1 timeframe depending on your workload during the day. Also, do not forget about the rules of money management. The total lot of all open positions should not exceed 10% of your Deposit.
In practice, the strategy of pair trading shows great results, but at first it is quite difficult to get used to the work of indicators, so you first need to practice on a demo account before you run the system on a real account. Remember that this method does not have clear rules, the entries in the transaction are determined by eye and should not contradict common sense. We hope that our tips will help you to develop a profitable strategy. Perhaps you will find or develop yourself more successful indicators that will help you achieve success in Forex