Continuing my exploration of tactical solutions for trading FXE (and other ETF proxies for the FX markets) here’s a robust swing trading approach that yields a nice revenue stream of high probability trades.
In this case we’re using the ETF Rewind Pair Trading analyzer to show the correlation of FXE and EZU, the MSCI European Market Index ETF. Our goal is to evaluate the correlation between the currency and the related country or countries using differentials in standard deviations to trigger mean reversion trades. While the returns aren’t wildly large, they are consistent and the draw-down is very low . . Two metrics that I weigh more heavily than net return.
The differential between the currency price and the related country index may seem surprising until you consider that the ETF risk factors are based on completely different parameters. The net effect of these differentials is a statistically predictable lag or latency and in a few future posts we’ll see how this type of pair trade (currency vs country) can be made even more reliable.
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