I ‘d like to continue my talks about one of my favourite arguments: currencies correlations.
Just as a reminder… the correlation tells you how much two pairs (or two single currencies) are related: if they tend to move in the same direction (direct correlation), in opposite directions (inverse correlation) or if they don’t have any relation between them (no correlation).
Spread trading is a “non directional” way to trade with stocks or CFDs, etc. but it can be used in Forex as well.
In general, you take two pairs that are directly correlated and trade long the one that is relatively stronger than the other, while you trade short the weaker. In practice you buy the stronger one and sell the weaker one.
That way you try to reduce trading risks, still doing some profits.
How does it work? Since the two pairs (or currencies) tend to move in the same direction, if the one that you traded long is in gain, probably the one that you’re trading short is in loss.
But you “bet” on the fact that the one that you traded long will gain more than the loss you’re taking with the one you’re trading short as it is actually “stronger” than the other.
This is a “non directional” trading as you don’t care anymore about the trend as your gain comes from the relative gain/loss between the two pairs.