What is pairs trading?
Take any highly correlated pair, for example AUDUSD/NZDUSD, when they decouple, short the higher one, buy the lower one, in anticipation that they will revert to the mean, at which time positions are closed.
Virtually all threads/forums that discuss FX pairs trading start and end in confusion. Traders seem to like the idea of pairs trading FX but I’ve not seen a strategy conceptualised very well, let alone traded well.
This thread will attempt to reverse this trend.
Pairs Trading Strategy:
I’ve come across an interesting MT4 indicator that nicely conceptualises FX pairs trading, giving me a good starting point. The picture attached shows a bollinger band looking indicator, however the difference here is that the oscillator represents the price difference between 2 pairs. When the oscillator moves to either extreme the 2 pairs are indicating a decoupling; buy the lower pair/ short the higher pair, TP at reversion to the mean.
However, just like bollinger band trading, price contacting the standard deviation band does not always represent a buy or sell. These signals need to be intelligently filtered.
Note: Because the indicator I refer to is a commercial one, and I don’t want this thread moved to the commercial section, I wont mention names nor provide a link here. My hope is that either there is already a good free version of this indicator floating around or someone tech savvy can whip one up for us.
The purpose of this thread:
[1] thrash out the pros and cons of pairs trading
[2] if we can get through that, build a strategy
Let the games begin.![](https://resources.faireconomy.media/images/emojis/64/1f60a.png?v=15.1)
.
Take any highly correlated pair, for example AUDUSD/NZDUSD, when they decouple, short the higher one, buy the lower one, in anticipation that they will revert to the mean, at which time positions are closed.
Virtually all threads/forums that discuss FX pairs trading start and end in confusion. Traders seem to like the idea of pairs trading FX but I’ve not seen a strategy conceptualised very well, let alone traded well.
This thread will attempt to reverse this trend.
Pairs Trading Strategy:
I’ve come across an interesting MT4 indicator that nicely conceptualises FX pairs trading, giving me a good starting point. The picture attached shows a bollinger band looking indicator, however the difference here is that the oscillator represents the price difference between 2 pairs. When the oscillator moves to either extreme the 2 pairs are indicating a decoupling; buy the lower pair/ short the higher pair, TP at reversion to the mean.
However, just like bollinger band trading, price contacting the standard deviation band does not always represent a buy or sell. These signals need to be intelligently filtered.
Note: Because the indicator I refer to is a commercial one, and I don’t want this thread moved to the commercial section, I wont mention names nor provide a link here. My hope is that either there is already a good free version of this indicator floating around or someone tech savvy can whip one up for us.
The purpose of this thread:
[1] thrash out the pros and cons of pairs trading
[2] if we can get through that, build a strategy
Let the games begin.
![](https://resources.faireconomy.media/images/emojis/64/1f60a.png?v=15.1)
.