A simple Forex strategy based on correlation: what were brokers hiding from us?
In online trading terminology, the concept of “correlation” means the relationship in the pricing of financial instruments.
There is a well-known strategy for making money on spread differences, which is based on correlation.
When collaborating with reliable brokers who provide access to interbank liquidity, the difference between the purchase/sale prices of an asset (Bit/Ask) is always floating.
During periods of high liquidity (publication of macroeconomic data), the spread widens, and during periods of moderate liquidity, it stabilizes.
Variable liquidity is caused by the predominance of demand over supply.
A well-known strategy for making money on correlation
There is a concept called "correlation coefficient".
This value varies in the range from 1 to -1, where 1 means a direct relationship of financial instruments (charts move synchronously), and -1 means an opposite relationship (asset prices develop in the opposite direction). If the correlation coefficient is 0, then this indicates that there is no connection between the assets. For example, the pricing of stock indices is practically independent of the cost futures .
The essence of the well-known correlation strategy is to open 2 transactions in an identical direction on assets whose correlation coefficient tends to -1. This is a kind of hedging .
When the spread widens, both orders are closed with a profit equal to the spread range being taken.
This trading tactic seems quite simple, and its description can be found on many information sites. However, the authors of these reviews do not mention that in addition to correlation, it is important to take into account the moderate market spread of these assets, which in total should not exceed 3 points.
In addition, trades should be opened during a period when the spread is minimal. Determining this in advance is only possible with competent work with cluster charts, which are inaccessible to many novice traders.
A More Affordable Alternative
In fact, there is an easier way to make money on correlations, in which there are practically no trading risks.
To understand the principle of trading, you should first pay attention to the correlation table:
As you can see, the correlation coefficient of the USD/SEK and EUR/USD currency pairs is negative and equal to -0.809.
This suggests that the price charts of these assets are always moving in the opposite direction.
Now you should show a little imagination and imagine: what will happen if you simultaneously open 2 transactions in an identical direction on these assets and hold them for a month, despite the fact that the swap on them will be positive.
Unfortunately, every broker knows about this earning opportunity, so it is important to work only with companies that provide clients with direct access to interbank liquidity.
Let's consider the practical application of this strategy using the example of Dukascopy bank:
The broker’s official website provides a section “Contract Specifications”.
Please note that when transferring an open Buy order to the next day, the swap is positive and will be 6.18 points. Unfortunately, when opening a similar position on EUR/USD, the swap is negative and amounts to more than 11 points.
Therefore, an alternative option should be considered. The correlation coefficient of the USD/SEK and AUD/USD currency pairs is also negative and equal to -0.778, which is not much less than the previously discussed value.
According to the trading conditions of the Dukascopy broker, the swap when transferring a Buy order to the next day is -3.71:
It turns out that if you simultaneously open two Buy orders for the USD/SEK and AUD/USD pairs, the profit will be 2.47 points daily.
The minimum deposit to start trading with the Dukascopy broker is 1000 USD.
Leverage level 1:100. This is quite enough to open transactions with a volume of 0.5 lots. Thus, the daily profit will be about 15 USD, that is, 45% per month.
The optimal volume to minimize risks will be 0.2 lots, which will allow you to earn about 15% per month from the starting deposit. Do not forget that on the night from Thursday to Friday, the swap is charged at a triple rate.
Conclusion
Making money on correlations is not only possible, but also accessible to everyone.
The trading example presented in the article is not a panacea. Each broker's
contract specification When choosing a broker, it is important to carefully study the user agreement and make sure it is reliable.
Dukascopy Bank was presented as an example, since its activities are regulated by FINMA and the current legislation of Switzerland, which ensures the safety of user funds and the absence of conflicts of interest.