how can a common trader earn money using arbitrage strategy?

You don’t need to have a million dollars or to have accounts at several forex brokers. You can earn money using statistical arbitrage strategy when you are trading with micro and mini lots and by using only one forex account.

Arbitrage strategy or pairs trading or convergence trading is based on statistics and mean reversion. You need to find two historically correlated forex pairs using a currency correlation calculator. When the correlation between the two forex pairs diverges beyond a certain value or weakens, you need to buy the weakest forex pair and sell the strongest forex pair. When the mean reversion takes place, the number of pips of these two trades will be positive.

Example :

Step 1 : Find the currency correlation calculator at the two historically correlated forex pairs. Today, I will pick NZDJPY and EURJPY. In the last 10 days, the correlation was 94.5 (if the correlation is bigger than 90, then that is excellent).

Step 2 : Activate custom indicator.


Using the custom standard deviation indicator on daily chart, we can compare this two currency pairs. In the image above, we can see that the blue line spreads across; yellow line -1 standard deviation from moving average and white line moving average.

Step 3: Find entry and exit :

You can enter when the blue line crosses the yellow line (buy order). Or you can enter when the blue line crosses the red line (sell order). Exit when the spread reverts to the mean (moving average white line). Stop when the loss is as far as the target price. In this strategy, I used the 1:1 profit/loss ratio and I always use an Expert Advisor to generate sell and buy orders.

Set 4 : Results from October 2012 :

BUY EURJPY : +126 pips

SELL NZDJPY: -64 pips

Profit : 62 pips

In this strategy, if we try to use 15 min. charts or 5 min. charts forex broker spreads can affect our profit. On the other hand, forex pairs correlation can change very fast in 15 min. time frame. This is the best results I get when I use daily chart for statistical arbitrage trading.

Advice :

If one currency is being devalued and the other is increasing in value then the investors can make extraordinary benefits by making investments in the foreign exchange. Nowadays, foreign exchange has become a profitable business but it needs expertise and knowledge of foreign exchange trading tricks and soft rules. The rules are known as soft rules because they are not hard and fast. They might change from one period of time to the other. It is also possible that you may get a positive experience by using one trick and the next time it may fail. Use statistics in forex trading and try to develop a strategy in order to adapt to any market condition.

If you decide to trade using statistical arbitrage please use the daily charts to avoid loss. Always use indicators and monitor the currency correlation.

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