Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20
Silver's Massive Undervaluation Relative to Gold Makes It Irresistible - 14th May 20
Bitcoin Halving Passes with no Fanfare, but Smart Money is Accumulating - 14th May 20
Will Job Market from Hell Support Gold? - 14th May 20
The Tragedy Of Missed Covid-19 Opportunities - 14th May 20
Worst Jobs Report In US Economic History - And The Stock Market Continues To Rally - 14th May 20
NASDAQ Sets Up A Massive Head and Shoulders Pattern - 14th May 20
Perceiving Coronavirus as a Disruptive Technology - 13th May 20
Why Financial Trouble Brews on the "Home" Front - 13th May 20
Stock Market ‘Sentiment Event’ Rally Grinds On - 13th May 20
The Fed Now Owns All Markets - 13th May 20
Fruit Trees Gardening to Beat Coronavirus Blues - , Apple, Cherry, Kiwi, Pears, Plums, Grapes, Bananas May 2020 - 13th May 20
Gold Investors Shouldn’t Be Losing Focus - 12th May 20
S&P 500 Bulls Again At Resistance – Now What - 12th May 20
US Fourth Turning Accelerating Towards Debt Climax - 12th May 20
Gold in the year of the Coronavirus Pandemic - 12th May 20
Hi Ho Silver : Away! - 11th May 20
The Great Stock Market Disconnect - 11th May 20
The Big Move In Silver May Be Right Now - 11th May 20
Finding Winners in the Wreckage of the Coronavirus Economic Downturn - 11th May 20
Brave New Corona World – A heated Debate between Steven Pinker and Aldous Huxley - 11th May 20
Coronavirus Catastrophe Stock Market Implications - 10th May 20
US Stock Prices are Ignoring the Economic Meltdown, Wait for it… - 10th May 20
Forecasting Crude Oil: This Method Has Been the Undefeated Champion Since 1998 - 10th May 20
Coronapocalypse and Gold - How High Is Too High for the Yellow Metal? - 10th May 20
The Illusion of Owning Gold - 10th May 20 - Nick_Barisheff
The Financial Crisis Will Continue To Lurk Even If the Lockdown Gets Eased - 10th May 20

Market Oracle FREE Newsletter


Reduce Your Risk in Currency Trading By Using Twin Pairs

Currencies / Forex Trading Jan 16, 2010 - 03:06 PM GMT

By: Bryan_Rich


Best Financial Markets Analysis ArticlePair trading is a popular stock-trading strategy. It gives you the opportunity to capture a dislocation between two stocks by taking a long position in one stock and simultaneously taking a short position in another — in equal dollar amounts.

In identifying a good pair trade, you’d look for two stocks that share the same industry, the same sector or simply have a strong historical statistical correlation. Yet for the time being, the share price of one may have gone up (the one you go short), while the other company’s stock (the one you go long) went down.

Your trade is successful when prices come back to the historical norms of the trading relationship.

Now … I generally talk about currencies in this column. So what does pair trading have to do with currencies?

A lot, as you’ll see in a moment …

First, here’s a bit more background: If you’re trading two like-companies (long one, short another) with similar economic exposures and similar historical price characteristics, you’re hedged to an extent regardless of where the market goes. And your trade should make money if you are right about the divergence in value among the two securities.

That’s one of the key benefits of pair trading strategies. It’s the ability to strip out the influence of the general market or sector performance on your trade. After all, those influences should have a similar impact on both the long and short component of the pair trade. That’s why pair trading is sometimes called “market neutral.”

And minimizing external risks in a currency trade can be just as easy …

Pair trading can help minimize losses.
Pair trading can help minimize losses.

You see, currency investing is a pair trade too, since currency values aren’t determined in isolation. Evaluating the value of a currency is only meaningful when it’s compared to the value of another currency. It’s a constant exercise in relativity.

As we know, currencies can be highly sensitive to the broad economic climate. And that’s never been more apparent than today given the looming time bombs that threaten to derail the paths of financial markets, such as:

  • Unfolding sovereign debt problems,
  • Rising protectionism,
  • Unprecedented global policy actions and the unintended consequences,
  • And new burgeoning asset bubbles.

But if you don’t want to take the macro view on how the global economy will play out this year, you can minimize such general market risk by looking to intraregional currency crosses.

I’m talking about a long/short pair trade between two regional currencies. For these trades, the correlations tend to be very tight during shock events — which can minimize potential losses. Meanwhile you can still be positioned for a nice winner.

Let’s take a look at a couple examples of intraregional-currency plays that offer nice profit opportunities, while reducing the risks of a shock to the global economy.

Intraregional-Currency Play #1: Intra-Europe

The paths of the euro and the British pound have diverged in recent months due to the underperformance of the UK economy relative to that of the Eurozone. But despite the troubled economic position of the UK, the euro could be vulnerable to a sharper decline.

The culprit: Sovereign debt problems …

Greece has been downgraded by all three ratings agencies on concerns about their ability to service government debt. Now Portugal, Spain, Italy and Ireland are all under the microscope for similar reasons.

Euro vs. USD

Source: Bloomberg

You can see in the chart above the recent divergence in the currencies of the two key European Union member economies.

I think we’ll see both move lower. But the euro will likely fall faster as the issues with Greece and other weak spots in the Eurozone continue to unfold. Therefore, I’m looking for the euro to weaken against the pound, bringing the spread, circled above in the chart, back together.

Next, let’s look at Asia …

Intraregional-Currency Play #2: Intra-Asia

Even through the depths of the global financial crisis, the Japanese yen was strengthening. In fact, the Japanese yen has been the best performing currency in the past 2½ years. Meanwhile other Asian currencies were crushed during the height of uncertainty.

Why did the yen outperform so dramatically?

When the financial crisis hit, a divergence developed between the yen and other Asian currencies …

This was driven by the forced unwinding of the yen carry trade. In other words, the huge interest rate gap between Japan and the rest of the world that drove investors to borrow massive amounts of yen for virtually free, exchanging it for higher yielding currencies around the world … went bust! Consequently, hordes of investors were forced back into yen.

Yen and Won vs. USD

Source: Bloomberg

More recently, the Asian currencies, including the yen, have been moving in the same direction. But the sour economic conditions in Japan and attempts to fight record deflation with more stimulus is beginning to weigh on the yen.

Meanwhile, South Korea’s economy has fared far better on a relative basis. This makes a convergence between the yen and the won likely, and offers the potential for a profitable pair trade.

In sum: Even in times when the broad economic environment is playing such a dominant role in determining the path of the general currency markets, there are still opportunities to capture gains without taking undue risk.



Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules