A Correlation Pair Trader's Friend

Pair trading can be a low risk, profitable trade if you've managed the conditions are the trade properly. We plan to introduce some tools that can help determine whether pair trading works for the instruments that you have selected involving multiple strategies - Distance, Co-integration and Correlation. We'll be getting in those more in the future but for now, if you are a pair trader and using a correlation strategy, we have the means to help you get started.

To begin the correlation pair trade, you of course need instruments that are highly correlated. Within Excalibur Pro, we have a matrix that allows you to compare correlation values across asset classes. You can select your preferred method of correlation (an average period alone or a rolling average calculation).

We conducted a number of studies looking at correlation pair trades and found some interesting, positive results (we looked at major currencies as well as EM pairs like PLNUSD and CZKUSD). All showed positive results as we back-tested over the past year.

But where the trades all began was through identifying highly correlated pairs. Check out our matrix of major currencies and see how easy it is to find those that meet with the highly correlated standard needed to get started. We opted to look at the one-month average correlation value.