Arbitrage and the Forex Market

The only difference is in the model for FX quotes while in optimization of portfolios stock models are used - this model I am also looking for and cannot you advise anything at the moment. Sign up to join this community. The best answers are voted up and rise to the top. Stack Overflow for Teams — Collaborate and share knowledge with a private group. Create a free Team What is Teams?

Forex Arbitrage Explained

Learn more. Is statistical arbitrage on FX possible? Ask Question. Asked 10 years ago. Active 8 months ago. Viewed 13k times. Improve this question.

How Maximize Returns with a good Statistical Arbitrage Strategy

Rodrigo de Azevedo 1 1 silver badge 11 11 bronze badges. Alexey Kalmykov Alexey Kalmykov 3, 1 1 gold badge 17 17 silver badges 24 24 bronze badges. The former neutralizes risk in a large portfolio against factors, sector membership, geographic regions, etc. The latter simply pairs two related possibly cointegrated assets so that exactly one side is long and the other is short. The word "pair" is just a bit overloaded in the context of currencies, so I used term "statistical arbitrage" to clear things a bit.

This does not directly relate to pairs trading but it is based on statistical anomalies with several fx baskets traded at any given point in time. I have not relied on papers for this approach but I know there is definitely work done in this space I myself focus almost entirely on currencies at the moment.

How to you detect the statistical anomalies? Add a comment. Active Oldest Votes. He writes: Academics and industry practitioners generally concentrate on time series aspects of currency markets. Our pairs-matching algorithm and trading strategy is described below: He finds: Excess returns, Sharpe ratios and directional accuracy statistics generally indicate promising results. The Sharpe Ratios he refers to are about 0. Improve this answer. Tal Fishman Tal Fishman Btw, good find. HTH someone with practical knowledge will have to chime in with how to implement :.

Richard Herron Richard Herron 4, 1 1 gold badge 18 18 silver badges 34 34 bronze badges. Random walks are for discrete time so they have only jumps.

Is it only a pairs trade if I'm long and short two currencies not used in my home country? Show 3 more comments. Ilya Ilya 2, 16 16 silver badges 30 30 bronze badges. Sign up or log in Sign up using Google. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name. Email Required, but never shown. Featured on Meta. Stack Overflow for Teams is now free for up to 50 users, forever.

Related 2. Hot Network Questions. Question feed. Accept all cookies Customize settings. At this point, we lock in profits equal to the divergence size. This strategy will be profitable if there is a constant interrelation between the tools. However, this dependence is not constant.

Therefore, the pair can diverge for a very long distance and fail to converge back. However, dependence collapses from time to time and that is when the trends are formed. We shall use the TradingView service to conduct calculations of the spread between these tools.

Arbitrage trading: a complete guide

There are different ways of calculating the spread, which brings slightly different results. You may choose the best one down to your preference. The simplest way is to calculate the spread by the difference. After that, you need to decide at which moment you shall open the position.


The thing is to enter the market when the spread is expanding fast, that is when the tools are temporarily losing the correlation between them. Strong spread expansion stands for the expansion exceeding the average one. Therefore, the difference between the spread chart and the moving average can be a good indicator for the entry.

What is Arbitrage in Forex Trading in Exness? Risks of Arbitrage Strategies

Thus, we will get the spread oscillator. It is very simple to trade this spread. When the line goes into the overbought zone the spread has gone too far from the average values , we should sell the spread. When it enters the oversold zone, we should turn over the position. And if we want to sell the spread, we should sell the euro and buy pounds.

That is, we should deduct the moving average with a period of 50 from the current closing price. Another method is to trade spread from the borders of the Bollinger Channel. All you need to do so is to add the Bollinger Bands indicator to the spread chart. In this case, the crossing of the channel borders will also indicate a significant deviation of the spread from the average one. Another important thing is the correct calculation of the size of the order for the position of the pair.

It is quite logical to assume that two orders should be of equal volume so it shall be enough to open two positions of the same number of the lots. However, it is not that simple. If we calculate the divergence between the tools in points, then we may assume that the points are equal for both of the tools. We should take into account different cost of the point of two tools relative to the dollar to balance the positions. You can find the cost of a currency pair point by using point cost calculator. So if we need to equalize the sizes of the positions, we should take a 1.

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The most important part of the pairs trading strategy is to pick the trading tools properly. You should understand that the strategy itself is not a Holy Grail but it may bring you a stable low-risk profit if the correlating assets are chosen correctly. If you want to study statistical arbitrage, you should start with pairs trading.