Forex pairs trading: key strategies and Top brokers
Trading FX pairs by taking long and short positions in correlated currencies or other assets is a strategic way to profit from market inefficiencies. By identifying divergences between two related instruments—whether currency pairs, commodities, or indices—traders can capitalize on temporary mispricings while managing risk. In this guide, we’ll break down the key strategies for pairs trading, how to execute these trades effectively, and which brokers offer the best platforms for this approach.
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What is FX pairs trading?
Pairs trading is based on the principle that some assets have strong historical correlations due to economic ties, shared macroeconomic influences, or overlapping investor sentiment.
- Positively correlated pairs: Move in the same direction (e.g., EUR/USD & GBP/USD).
- Negatively correlated pairs: Move in opposite directions (e.g., USD/CHF & EUR/USD).
How traders profit from pairs trading
- Identify two highly correlated forex pairs (e.g., EUR/USD and GBP/USD).
- Wait for a divergence—when one pair moves significantly more than the other.
- Go long on the underperforming pair and short on the overperforming pair (expecting reversion to the mean).
- Close the trade when the correlation normalizes, locking in the profit.
Pairs trading is often used in low-volatility markets since it doesn’t rely on directional movement. It is risk-hedged, as profits from one position may offset losses from the other.
Key technical indicators for FX pairs trading
Pairs trading relies on technical analysis to identify divergences and potential trade opportunities.
1. Correlation coefficient (0 to ±1 scale)
- Measures the strength of the relationship between two forex pairs.
- A coefficient near +1 means a strong positive correlation (they move together).
- A coefficient near -1 means a strong negative correlation (they move oppositely).
- If correlation drops below its historical average, a divergence trade may be forming.
✅ Example:
- GBP/USD and EUR/USD typically have a correlation of +0.85.
- If it drops to 0.4, it may indicate a mispricing opportunity.
2. Bollinger Bands (BB) – detecting divergences
- Measures volatility and potential overbought/oversold conditions.
- If one pair hits the upper Bollinger Band while the other hits the lower band, a trading opportunity arises.
✅ Example:
- EUR/USD reaches the upper Bollinger Band while GBP/USD is near the lower band → Short EUR/USD, Long GBP/USD.
3. Relative Strength Index (RSI) – confirming divergences
- Identifies overbought (above 70) and oversold (below 30) conditions.
- If one pair is overbought while the other is oversold, traders anticipate mean reversion.
✅ Example:
- USD/JPY RSI = 80 (overbought), EUR/JPY RSI = 25 (oversold) → Short USD/JPY, Long EUR/JPY.
4. MACD (Moving Average Convergence Divergence) – trend confirmation
- Measures momentum and trend strength.
- A bullish crossover in one pair and a bearish crossover in another indicates a divergence trade setup.
✅ Example:
- If EUR/USD has a bullish MACD crossover but GBP/USD shows a bearish crossover, a trader could go long GBP/USD and short EUR/USD.
5. Moving Averages (MA, EMA) – tracking trend strength
- Identifies trend direction and reversion points.
- If one pair is trading above its 50-day EMA and the other is below, a trade opportunity may arise.
✅ Example:
- EUR/USD is trading above its 50-day EMA, while GBP/USD is below → Go Long GBP/USD, Short EUR/USD.
Real case study: EUR/USD and GBP/USD pairs trading strategy
Market context
- EUR/USD and GBP/USD usually have a strong positive correlation (~0.85).
- Due to an unexpected US employment report, EUR/USD drops significantly, while GBP/USD remains stable.
- The correlation weakens to 0.4, signaling a trading opportunity.
Trade setup
✅ Entry:
- Long EUR/USD (expecting recovery).
- Short GBP/USD (expecting it to follow EUR/USD lower).
✅ Technical indicators used:
- Bollinger Bands: EUR/USD is at the lower band, GBP/USD is in the middle band.
- RSI: EUR/USD RSI = 25 (oversold), GBP/USD RSI = 50 (neutral).
- MACD: EUR/USD shows a bullish crossover, signaling a potential rebound.
✅ Exit strategy:
- Once EUR/USD rebounds and the correlation returns to normal (~0.8), both positions are closed.
Trade outcome
- EUR/USD rebounds 50 pips, GBP/USD falls 30 pips.
- Total profit: 80 pips.
The best brokers for Forex pairs trading
The right broker for pairs trading should offer:
✅ Tight spreads & fast execution to avoid slippage.
✅ Advanced charting tools for correlation tracking.
✅ Hedging features to allow long and short positions simultaneously.
HF Markets FX pairs trading
- HF Markets: Tight spreads, fast execution, and support for automated trading.
XTB FX pairs trading
- XTB: Provides advanced charting tools and deep liquidity for efficient execution.
eToro FX pairs trading
- eToro: Social trading, real-time correlation tracking, and multiple asset classes.
Risk disclaimer: eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
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