Relevant currency pairs may not be synchronized? “False Relevance” Arbitrage Tips that Traders Must Know

In the foreign exchange market, some currency pairs seem to be born as “good partners” and are in line with each other’s pace regardless of the rise or fall. For example, EUR/USD and
GBP/USD, because they are all based on US dollars and are economically linked, they often show high positive correlation.

But occasionally, they will be like an old friend suddenly having a quarrel, one upward and the other downward—at this time, keen traders will realize that there may be a short-term opportunity hidden in it: false correlation arbitrage.

What is “false correlation”?

Relatedness refers to the degree of synchronization between two price trends. For highly positively correlated currency pairs, the rise and fall directions are often consistent; if highly negatively correlated, the opposite movement is carried out.

The so-called “false correlation” refers to the divergence of varieties that were originally highly positively correlated in a short period of time. The reason for the divergence is not long-term fundamental changes, but caused by short-term liquidity, trading sentiment or temporary technical factors.

Give a lifelike example:

You and your friends go to and from get off work every day. Today you arrive at the company on time, but your friends are ten minutes late – the reason is not to quit or change jobs, but to temporarily traffic jam on the road. This short-term deviation will soon return to the usual rhythm.

So there is occasional short-term out-of-synchronization in the market, and traders can use false correlations to discover potential arbitrage opportunities or adjust trading strategies to gain more flexible trading advantages.

How to capture this opportunity?

In the daily strategy discussion of EagleTrader, some traders will use the following ideas to find “false correlation” arbitrage opportunities:

1. Lock the object of observation

High correlation currency pairs:

EUR/USD and GBP/USD

AUD/USD and NZD/USD/CAD With crude oil prices (indirectly related)

These varieties have a synchronized trend in most cases, and their divergence will be moreMore conspicuous. 2. Find the trigger conditions

In short-period charts (such as 5 minutes, 15 minutes), the two related varieties have obvious directional differences. There is no major data or independent news for a single variety that has just been released. The divergence range reaches the normal fluctuation range
1.5-2 times or more. 3. Entering ideas

Buy the one that is “lagging behind” or sell the one that is “advanced”, and the expected price will return to the synchronous state.

The take-profit point can be set in the range where the price trends of the two are reconverging.

Risk and Filter

False divergence may not be an opportunity: if the divergence comes from independent fundamental factors (such as the Bank of England’s unexpected interest rate hike affects the pound), the trend may not be repaired, but will further diverge.

Avoid major data periods: before and after the announcement of non-agricultural, CPI, central bank resolutions, etc., the correlation may be invalid in the short term.

Short-term: This type of arbitrage is more suitable for fast in and out, and holding for too long may be interrupted by new news.

Find advantages in details

In EagleTrader, many excellent traders not only focus on the big trends, but also pay attention to these short-term small deviations and use details to accumulate profits. After all, trading is not just about who goes far. Sometimes, people who look at it carefully can go more steadily.

If you see a familiar “good partner” of currency suddenly parting ways in your next transaction, you might as well think about it – is this an opportunity for “false correlation”?