should be highly correlated for two reasons. Naturally, that distance tends to vary with time. When market volatility was very low a few years ago, it was around -93. A much uglier, math intensive introduction to the subject, albeit one that is also far more thorough, is in the book. The same goes with pair trading. In this case, it is important to adjust the size of the positions in order to avoid a serious loss. Now we ask a simple question: If the eurusd rises, what is the probability of that the usdchf will also rise? If you see two pairs spread unusually far apart and the numbers tell you that they usually come back together, then it makes sense to consider a pair trade. Some currencies tend to move in the same direction, some in opposite. Solve for x: 100,000 / 137,500 x * (90,900/100,000) x 100,000 / 90,00 * 100,000 / 137,500.803.
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Examples of same direction moving currency pairs are: EUR/USD and GBP/USD, eUR/USD and NZD/USD, uSD/CHF and USD/JPY. They have a correlation coefficient of over.90, which means that when EUR/USD goes up, GBP/USD also goes. When two correlated pairs diverge from one another, the idea is to simply buy one pair and sell the other. This is commonly known as the eurchf pair. Notice that the USD cancels itself out. GBP/USD and USD/JPY, gBP/USD and USD/CHF, aUD/USD and USD/CAD. For instance, knowing that EUR/USD and USD/CHF move inversely near-perfectly, there would be no point to go short on both positions as they eventually cancel each other (loss profit). What are correlated currency pairs? A correlation of -1 means they will move in the opposite direction 100 of the time. If we decide that USD is going to weaken, for example, we will go long and place half lightning bitcoin of buy order on AUD/USD currency pair, and half on EUR/USD.