Price Channel Oscillator. A tool to make pairs trading easier
The task of any trader and investor is to minimize risks as much as possible, but at the same time receive acceptable profitability.
Large hedge funds achieve this goal through smart risk hedging, compiling portfolios of shares and other assets that are as market-neutral as possible, as well as by searching for a direct relationship between assets, their correlation and, most importantly, spread or swap.
However, in pairs trading, everything is far from being as simple as it seems at first glance, because knowing the direct connection between assets, it is necessary to catch the very moment of making a profit due to the spread that occurs at the moment of a strong divergence of charts.
To simplify pairs trading, as well as search for expansion zones for different assets, traders in the vast majority of cases use special assistants; we will get acquainted with one of these assistants in this article.
The Price Channel Oscillator indicator is an auxiliary technical analysis tool, the main task of which is to build a price oscillator based on two currency pairs.
Price Channel Oscillator is used by traders to identify price discrepancies, therefore, it can be used on any trading assets and time frames where it is necessary to monitor such a pattern.
Installing the Price Channel Oscillator indicator
The Price Channel Oscillator indicator is something of a novelty in pairs trading, since the tool was developed at the end of 2017.
Therefore, in order to use it, you will need to download the indicator file at the end of the article, and then install it directly into your MT4 trading terminal.
Installing the Price Channel Oscillator is no different from a practical point of view from installing any other custom indicator.
The installation process itself follows a standard scheme, namely, you will need to dump the indicator file previously downloaded at the end of the article into the appropriate folder in the terminal data directory.
You can find more detailed instructions for installing indicators by clicking on the link http://time-forex.com/praktika/ustanovka-indikatora-ili-sovetnika.
After restarting the platform, Price Channel Oscillator will appear in the list of custom indicators, and in order to start using it, just drag the name onto the screen.
However, it is worth understanding that for the Price Channel Oscillator to work correctly, it must have access to historical data on the currency pairs that participate in the oscillator.
Therefore, before plotting it on the chart, in parallel, open the necessary for the calculation currency pairs in separate windows.
The basis of pairs trading. How to use the Price Channel Oscillator
Pairs trading is based on making a profit from the spread account. It is very important to understand that the spread in pairs trading has nothing to do with the commission, which is also called by the broker.
In fact, a spread in pairs trading is a profit that is formed by opening counter orders on two currency pairs in order to make a profit on a future narrowing.
In pairs trading, trading is carried out between two currency pairs with a high correlation, which should be 75 percent or higher. Simply put, assets should move almost identically most of the time.
The spread, namely profit, is formed due to the fact that at a certain moment prices begin to move in the opposite direction (move apart relative to each other).
At such moments, the trader opens opposite orders for two instruments in order for the assets to come into balance and continue to move in their usual direction.
If we talk about practical application, then Price Channel Oscillator greatly facilitates the process of searching for such situations and clearly visualizes them.
So, if the selected currency pairs have a direct correlation (they move identically in the same direction) but their values diverge greatly (the lines move away from each other), you need to open a sell order for the currency pair that is trending up, and a buy order for the pair that is trending down .
Profit is recorded at the moment when the profit from one position covers the loss from another.
In conclusion, it is worth noting that the Price Channel Oscillator is an excellent assistant for pairs trading, which allows you to trade the divergence of correlated instruments and make money on the spread.
However, it is worth understanding that the instrument only visually highlights the behavior of assets, but the trader must select the instruments themselves with high correlation independently. You can view the correlation coefficients of currency pairs here - http://time-forex.com/terminy/korrelysyy-forex
Download the Price Channel Oscillator.