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Semiconductor stocks have been run into the ground so far this week. The pain started on Monday when anti-AI sentiment reared its ugly head to obliterate all the usual suspects listed in New York, before carrying over to the Far East on Tuesday and then maintaining enough momentum throughout the day to sweep through Western markets a second time. Yesterday may as well have been judgement day as far as semiconductors were concerned, with every company even remotely associated with the sector getting systematically destroyed. Japanese giants Tokyo Electron and Advantest both incurred double-digit losses on Tuesday morning, South Korean chipmaking rivals Samsung and SK Hynix fell 13% and 15% respectively, while Taiwan Semiconductor Manufacturing Company (TSMC) shed 3%. The selloff spread to Europe, where ASML fell for the second day running on the Amsterdam stock exchange after losing 8.5% on Monday, before reaching US shores and causing mayhem on Wall Street for the second day running. A number of companies have incurred truly shocking losses so far this week. SanDisk (SNDK) has been hammered no less than 24% since Monday; AMD is down 13%; Seagate (STX) is down 12%; Western Digital (WDC) and Micron (MU) are both 11% in the red. While harrowing, the damage was strictly confined to the semiconductor sector, with the wider US indices largely shrugging off the panic that has pervaded the chipmaking scene. Even the Nasdaq 100 itself (NDX) only faltered 1% when all was said and done, while the S&P 500 (SPX) and Dow Jones (DJI) managed to close yesterday’s session in the green. The same cannot be said for the Korean Kospi index, which is afflicted by rather idiosyncratic quirks. The Kospi suffers from extreme concentration, whereby Samsung and SK Hynix together account for half of the index’s market cap, despite including over 800 companies in total. The benchmark is also beset by leveraged ETFs, which comprise a significant percentage of the stock exchange’s trading volume. Combined, these features are having disastrous consequences for the South Korean index, which plummeted 11% yesterday and has collapsed a staggering 35% over the last six weeks. The lull in military activity between the US and Iran continued to drag crude oil prices lower on Tuesday, with the Brent Crude benchmark falling to $84 per barrel and WTI contracts closing only marginally lower. As always, reliable information has not been forthcoming and the situation remains murky. With or without a peace deal, global demand for oil remains low, while markets are aware that OPEC still has plenty of capacity to increase production. Oil producing nations are also stepping up efforts to improve supply chain resilience, particularly around the middle east, with countries investing in new pipelines and exploring alternative sea routes. Peace talks between Russia and Ukraine may also be on the cards after a meeting between Zelensky and Trump raised the possibility of reopening a line of dialogue with Vladimir Putin. A conclusion to hostilities on that end introduces the possibility of sanctions being lifted against Russian oil exports, further alleviating supply concerns. The latest interest rate decision from the Federal Reserve is mere hours away, and markets are still not sure what that decision will be. As it stands, traders are eyeing it up as a toss-up between a hold and a hike, with FedWatch leaning 70-30 in favour of the former, which is an uncommonly noncommittal split this close to the line. Suffice to say a surprise rate hike would introduce even more volatility into already chaotic markets. Traders are on edge and have every right to be so. The US dollar is looking strong even without moving interest rates; an adjustment to the upside may send the DXY into territory not explored in many moons. Aside from that, the earnings calendar steps into overdrive later today, with Microsoft (MSFT) and Meta Platforms (META) reporting after the US session closes and Apple (AAPL) and Amazon (AMZN) reporting tomorrow. On top of the above, any surprise announcement regarding Iran, Russia, or even crypto for that matter could send markets flying with very little warning. #SOXX #OIL #FOMC About the Author Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment.

SHARE A liquidity void is the low-volume imbalance a one-way price surge leaves behind on the chart, a run of price that almost nobody traded against. A liquidity gap goes by a different name but points at the same thing, which is why traders reach for either word. A pair sits quiet all morning, then a data release hits and it tears 60 pips higher in three or four candles while you watch, caught between chasing it and letting it go. Chase it, and more often than not price snaps straight back through that thin, fast move and takes your stop with it. That empty stretch has a name, the liquidity void, and reading it before you trade it is what this guide is about. This guide starts with what the two terms mean and how they differ from the fair value gap, the smaller three-candle imbalance traders also track. From there it covers how these imbalances form and how to spot them on your own chart. Then the practical part: why price so often returns to fill a void, when to trade one, and when to leave it alone. A liquidity void is a sharp, one-directional price move that leaves almost no traded volume between two levels, usually because there were no opposing orders to slow it down. Price tends to come back and refill some of that empty stretch later. The practical playbook is simple: wait for the retrace into the void rather than chase the move that created it. Ready to study liquidity on a live chart? A liquidity void is the imbalance a strong, one-directional move leaves across several candles: plenty of ground covered, almost no volume traded, no pause to trade back through the range and wicks that scarcely overlap. On the chart, price was at one level, then suddenly at another, and very little business was done in between. Break the term apart and it explains itself. Liquidity is the pool of buyers and sellers ready to trade against you; void is what you have when they are not there. Put the two together and you get a run of price with no one opposing it, which is exactly why it moved through in one go. The phrase comes from ICT (Inner Circle Trader) and Smart Money vocabulary, a school of chart analysis built around how large institutions move price. There, displacement, a fast institutional push out of a range, is said to leave these voids behind. Elsewhere you'll hear the same thing loosely called an imbalance or an inefficiency. Different labels, same patch of chart. One boundary worth drawing early: this is not the same as an opening gap, the true blank space between Friday's close and Monday's open. A void sits inside continuous intraday candles. Price did trade through it, just very thinly and very fast. Read more: Gap Trading Strategy: How Traders Read and Trade Market Gaps In a trading context, a liquidity gap describes a patch of the order book holding very few resting orders. Touch that patch and price skips straight to wherever the next orders sit, printing the same picture a void does, which is why so many traders treat the two words as interchangeable. A quick caveat: in institutional finance, the same phrase describes a mismatch between a bank's assets and liabilities. That meaning has nothing to do with charts, and this article covers the trading sense only. The finer differences between a void, a gap and a fair value gap are laid out in the comparison table further down. Voids are born in consolidation. While price chops sideways, buy and sell orders stack up on both sides of the range. When the breakout finally comes, one side swallows every opposing order in its path, and with nothing left to absorb the flow, price runs without a retrace until it reaches the next area where orders actually rest. A few situations produce them again and again. Major data releases wipe one side of the book in seconds. Session handovers, the quiet stretch after New York closes and before Tokyo builds volume, leave the book thin enough for modest orders to move price a long way. And large institutional entries create the classic displacement leg that ICT traders study. A bullish void is a run of long-bodied green candles climbing from a consolidation low with wicks that barely touch each other. Say EUR/USD has been grinding just above 1.1500 for two sessions, then a dovish central bank surprise lands. Three candles later it's at 1.1583, and the stretch from roughly 1.1508 to 1.1573 printed almost no volume. That thin 65-pip corridor is the void, and the numbers here are purely illustrative. The first few of these I ever traded, I took the tall green candles as a reason to buy. What I missed completely was that the move had already happened. The trade worth having was waiting for price to sink back into that corridor, not chasing it near the top. The bearish version is the mirror image: consecutive long red candles falling with no bounce. Picture GBP/USD sitting on support until a weak UK retail sales number cracks it, and the pair drops from 1.2678 to 1.2604 in a handful of one-way candles. Direction matters more than size here. A void that fires in the same direction as the higher-timeframe trend tends to be respected when price revisits it. A counter-trend void is often just run straight through. Keep that in mind, because the whole trading approach later in this article leans on it. The bearish voids I trust are the ones that form while the market is already falling. The ones that show up against a strong uptrend have cost me enough over the years that I now treat them as bait rather than a signal, and I wait for the higher timeframe to actually roll over before acting on one. Three names, one family of imbalances, three different sizes. The void is the multi-candle displacement container. The gap is the empty space price jumps across where orders are thin. The fair value gap (FVG) is the smallest unit: a single three-candle imbalance where the wicks of the first and third candle fail to overlap. One void often holds several FVGs stacked inside it. Traders borrow these words from each other constantly, so don't lose sleep over the labels. What matters is being able to point at the part of the chart where the other side went missing, whatever anyone chooses to call it. You can spot a void with a simple checklist: Marking one by hand takes seconds. Draw a box around the whole one-way leg, from its first candle to its last, then split it with a line down the middle. That midpoint is the level most traders keep an eye on for a partial refill. If you'd rather not eyeball it, the tools already exist. TradingView carries liquidity void and FVG indicators that shade these imbalances for you, and the same search turns up free versions for MT4 and MT5. They all do broadly the same job: highlight candles whose wicks fail to overlap and shade the empty stretch between them. Whatever the indicator paints still needs a human check against the list above. An indicator saves you time; judging whether the displacement behind the box actually means anything is always your job. Not right away, not guaranteed, and usually not completely. Those are the honest answers to the three questions everyone asks. Does it fill immediately? Usually not. A void can sit open for hours, days, sometimes weeks, and nothing obliges the market to deal with it on any particular schedule. Is a fill guaranteed? No. A void inside a strong trend can stay open indefinitely. Treating a fill as certain is how traders end up fighting a trend with nothing but hope. Does it fill completely? The common case is a partial refill to around the halfway point of the void before the original direction takes over again. ICT traders call that midpoint the consequent encroachment, which is just a formal name for the halfway point. The behaviour tells you more than any fixed rule ever could. When a void simply refuses to fill, that alone is a sign momentum is strong. A half-fill that gets bought or sold straight back up is one of the most common with-trend entries this concept offers. The trade that drummed this into me was a GBP/USD short I kept open waiting for a void to fill all the way. It refilled about two thirds, turned, and ran on without me. Now I plan for a partial fill from the outset, taking something off near the midpoint rather than holding out for the full round trip. The setup earns your attention when a few conditions line up: Timing the session matters more than most beginners expect. The London and New York overlap generally offers the best trade quality of the day, and quiet hours produce the sloppiest. Read more: Best time to trade forex: When to enter the market during the day Think of the void as a fast lane and the areas either side of it as the destinations. Resting orders cluster at old highs, old lows and consolidation zones. Between those clusters, the book is thin. So price crosses the void quickly, then slows, stalls and reacts once it arrives where liquidity actually sits. The refill has the same logic. Markets tend to return to prices where little business was done and trade through them properly the second time. That's why voids behave like magnets: not because of anything mystical, but because untraded prices are unfinished business for the order flow. Put the two ideas together and your chart gets simpler. Voids tell you how quickly price is likely to travel; the clusters either side tell you where it is likely to pause. Reading the two together makes targets much easier to place. It took me longer than I would like to admit to stop treating the void itself as somewhere to trade. Once I started reading it as the road between two clusters of orders, and only acted when price arrived at the cluster on the far side, my entries got cleaner and my stops got smaller. Read more: What is liquidity in Forex and how is it measured Here is the full process, step by step. It's the same sequence whether you trade the long side or the short side. Check the daily and four-hour charts for the trend and for a clear displacement leg. No clear direction, no trade. Frame the one-way move from start to finish and draw the halfway line. These two levels are your entire map. This is the patience step. If price never comes back, there was no trade, and that's fine. On the fifteen-minute or five-minute chart, wait for structure to turn back in the trend's favour before acting. Entry near the midpoint, stop beyond the opposite edge of the void, target at the next area where liquidity visibly rests. A long example, with every number purely illustrative. GBP/JPY is trending up on the daily and prints a one-hour void from 187.24 to 188.41. You box it, mark 187.83 as the midpoint, and wait. Two sessions later price dips to 187.79, the fifteen-minute chart puts in a higher low, and you go long with a stop under 187.14 and a target at the previous high near 189.16. The short side mirrors it, again with illustrative numbers. USD/JPY breaks down through a range, leaving a void from 151.84 down to 150.93. The bounce stalls around the 151.38 midpoint during London, structure rolls over on the five-minute chart, and the short targets the low at 150.62 with a stop above 151.94. In my experience, patience is the entire edge here. Nothing about this setup rewards speed; the market either comes back to your level or it doesn't, and my own results only settled down once I stopped negotiating with that. And on risk: the process tilts the odds, nothing more. Position sizing and stop discipline still come first, on every single trade. Jumping in while the displacement is still running costs traders more money than anything else in this topic. Here's what actually happens to the account that tries it. I learned this one with real money. When the soft US inflation print landed in November 2023 and EUR/USD went vertical, I bought straight into the surge, into a candle that looked unstoppable. The spread had stretched to almost three times its usual size at the moment I clicked. The refill began about a minute later and took my stop out 43 pips below my entry — and the move then carried on without me. The direction was right. The entry was still wrong. So when you watch a void form in real time, box it, set an alert at the midpoint, and walk away until price comes back. This concept earns its place in a toolkit, and it also has edges you should know before you rely on it: Use the void alongside trend, structure and sensible risk control. On its own it was never meant to carry a whole system. A liquidity void is the low-volume imbalance left when price runs one way across several candles with no internal retrace, usually after a breakout or news release. Price tends to return later and refill part of that stretch, which is why traders track voids as future reference zones. In forex, a liquidity gap is a thin stretch of resting orders that lets price jump between levels, producing the same chart picture as a void. The institutional term of the same name, a bank's asset-liability mismatch, is unrelated to chart trading. Not quite. A fair value gap is a single three-candle imbalance where the outer wicks fail to overlap, while a liquidity void is the larger multi-candle displacement that often contains several fair value gaps inside it. Think of the FVG as the unit and the void as the container. No, a fill is never guaranteed, and voids inside strong trends can stay open for a long time. The most common outcome is a partial refill to around the halfway point, and a useful warning sign is fresh consolidation building beyond the void, which suggests the market has accepted the new level and may not come back. Look for consecutive long candle bodies, wicks that barely overlap and no retrace during the move, ideally on a one-hour chart or higher. The most common mistake is labelling any big candle a void, so check the middle of the move: if price paused and traded back through part of it, it does not qualify. Yes, the logic carries across forex, gold, indices and crypto because every liquid market leaves imbalances when one side overwhelms the other. The deeper the market's liquidity, the cleaner the signal tends to be. A liquidity void and a liquidity gap are two names for the same thing: the stretch of chart where nobody was on the other side of the trade. Price runs through it fast, tends to come back for at least part of it, and rewards the trader who mapped it in advance. If you keep only three things from this guide, keep these. Recognise the void by its long bodies and barely-overlapping wicks. Let price come back to you before you act. And put your stop on the far side of the void, at the level that actually proves the idea wrong. For me, the void mostly changed my timing. I still trade the same pairs in the same sessions; I just spend more of the day waiting at levels I marked in advance, and far less of it reacting to candles that have already left. From here, the natural next step is to study where price is usually headed when it leaves a void: the pools of buy side and sell side liquidity above old highs and below old lows, and the liquidity sweep that so often marks the turn. Read those alongside this guide and the whole liquidity playbook starts to fit together. The RADEX MARKETS editorial team consists of seasoned financial professionals and market observers. Dedicated to delivering objective market summaries, macroeconomic insights, and educational content, the team strives to keep traders well-informed in a fast-paced financial environment. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment. Deeper into liquidity: Related concepts:

Crude oil prices are plummeting this morning as reports emerge that the United States has paused strikes on Iran after a two-week long string of attacks. The US ambassador to the UN has claimed that diplomatic efforts ramped up over the last few days, while President Trump has signalled a willingness to allow talks to take root. The development has raised hopes of a potential peace in the Middle East, although markets have been here many times before over the past few months and are understandably sceptical. Brent Crude shot down immediately this morning, falling to $91 per barrel, while WTI contracts sank down to $84. Even Murban Crude futures have fallen back below $100, crumbling 10% upon hearing of the respite in hostilities. A predictable gap higher graced the charts for precious metals this morning, with gold rising to $4,090 per ounce and silver exploring highs of $60. Cryptocurrencies are likewise responding positively, with Bitcoin reclaiming $65,000 per coin and a number of the major alts climbing to prices not seen since early June. On the face of it, last week’s treatment of Alphabet (GOOG) seems a little harsh. According to its latest earnings report, revenue and profit for the company both beat expectations, cloud growth was on point, and yet, by the end of the week, shares were down by almost 8%. As poor as the performance was, investors in Google could at least console themselves with the even worse price action over at Tesla (TSLA), which fell almost 18% on the week after failing to beat its own respective expectations. Last week also saw the publication of the latest earnings card from Intel (INTC), which posted blowout second-quarter earnings after the bell on Thursday. As with Google and Tesla however, the semiconductor giant plummeted during the following session, losing the better part of 8% last Friday. In all three cases the selloff can be explained by the worrying amount of capital being spent on various infrastructure investments. Markets are not impressed with the huge figures being thrown around and are being increasingly critical of big tech companies’ spending habits. The back-to-back losses do not bode well for the those scheduled to report over the next few days. The earnings calendar kicks into overdrive this week, with a number of tech titans ready to publish, including newly listed SK Hynix and no fewer than four of the magnificent seven. As mentioned above, earnings season kicks into high gear this week, as huge names line up to be scrutinised. Coca-Cola (KO) reports before market open on Tuesday, while Visa (V) will report after market close later in the session. Concurrently, SK Hynix will release its first earnings report as a US-listed public company early on Wednesday morning South Korean time. Microsoft (MSFT) and Meta Platforms (META) both publish late on Wednesday evening, while Apple (AAPL) and Amazon (AMZN) follow on Thursday, as do Mastercard (MA) and Shell (SHEL). The oil companies continue on Friday with Exxon Mobil (XOM) and Chevron (CVX). The economic calendar meanwhile has a few notable events of its own to offer. US durable good orders are worth paying attention to later today, as are tomorrow’s ADP employment figures. On Wednesday, all eyes will be on the Fed, which is scheduled to deliver one of the more unpredictable verdicts in recent times. A rate hold was almost a foregone conclusion at the end of last week, but interest rate traders are no longer so sure of themselves. The Federal Reserve, under the stewardship of Kevin Warsh, has been much more tight-lipped as of late, leaving markets with an increasing amount of guesswork to do. As it stands there is a rough 65-35 split in favour of a rate hold; a delicate balance that could tilt significantly before the due date. Thursday is no less busy, with US and European GDP growth figures, an interest rate decision from the Bank of England, as well as the PCE Price Index report for June. The Bank of Japan will chime in with a rate decision of its own on Friday, followed by the latest on European inflation data later in the day. A lot to keep an eye on this week. #IRAN #OIL #BTC About the Author Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment.

Two currency pairs that normally move almost in step suddenly begin drifting apart. One races ahead, the other lags behind, and a trader spots an opportunity to profit if they eventually come back into line. Pairs trading is a market-neutral strategy that involves going long on one closely correlated asset and short on another. The aim is to profit from the gap between them, known as the spread, returning to its usual range, rather than trying to predict whether the wider market will rise or fall. I've always found that appealing because it shifts the focus away from making heroic market predictions and towards measuring a relationship. This guide explains how pairs trading works, why traders use it, how to select a suitable forex pair, and how experienced traders fine-tune and manage the strategy. Grab a coffee and let's begin. Pairs trading is a market-neutral strategy involving two historically correlated assets. A trader buys the underperformer and sells the outperformer, expecting the spread between them to return to its normal range. The potential profit comes from their relative performance, not from correctly predicting the market's overall direction. Ready to explore a strategy built around relative value rather than outright market direction? Pairs trading is a market-neutral, relative-value strategy in which a trader simultaneously buys one asset and sells another closely correlated asset. The objective is to profit when the spread between the two returns to its historical range, rather than from predicting the direction of the wider market. The strategy is considered a form of statistical arbitrage because the trading decision is based on a measurable relationship between two markets. It also uses mean reversion, although it is the spread between the assets that is expected to revert, not necessarily the price of either asset on its own. Read more: What is arbitrage trading? How beginners profit from it Read more: What Is Mean Reversion and How Can Traders Use It? The traditional version of pairs trading often involves two shares from the same industry. In forex, however, the same principle can be applied to two highly correlated currency pairs, such as EUR/USD and GBP/USD. These pairs frequently move in a similar direction because they both measure a European currency against the US dollar. If GBP/USD suddenly outperforms EUR/USD by an unusually large amount, a pairs trader might sell GBP/USD and buy EUR/USD, expecting the difference between their movements to narrow. In my experience, this is where the strategy becomes particularly interesting. You are not simply deciding that the dollar will rise or fall, a prediction that markets occasionally enjoy making look rather foolish. Instead, you are asking whether the relationship between two currency pairs has moved too far away from its normal trading range. For this reason, pairs trading is best understood as trading the relationship between two markets rather than trading either market in isolation. Pairs trading works by tracking the spread between two markets that have historically moved together.When that spread moves unusually far from its average, the trader buys the underperforming asset and sells the outperforming one, expecting the two to converge. A simple way to express the spread is: Spread = Price A − Price B Some traders use a price ratio instead: Spread = Price A ÷ Price B In practice, forex prices often need to be standardised or weighted before they are compared because different currency pairs have different price levels and volatility. The basic principle remains the same: measure the relationship, identify an unusual divergence and trade the expected return towards normality. Think of the two markets as a motorway and its service road. They follow roughly the same route, but the terrain may occasionally push them further apart. Provided they are still heading towards the same destination, the two roads eventually move closer together again. The spread measures the distance between them. Pairs trading is described as market-neutral because the long and short positions are intended to offset much of the broader market movement. If both currency pairs rise, the long position may gain while the short position loses. If both fall, the opposite may happen. The result depends mainly on whether the gap between the pairs narrows, not on whether the entire forex market moves higher or lower. "Market-neutral" does not mean risk-free or perfectly hedged. If the positions are sized badly or the historical relationship breaks down, the trade can still become directional and lose money. Suppose EUR/USD and GBP/USD have been moving closely together, but GBP/USD suddenly climbs much faster. A pairs trader may: I prefer to think of this as trading the elastic band between the two markets. A stretched band may snap back, but if it keeps stretching, there is usually a reason, and blindly adding to the position is rarely a clever response. Ultimately, the success of the trade depends on convergence between the two legs, not on correctly calling the direction of the US dollar or the wider forex market. Pairs trading appeals to traders because it does not depend entirely on predicting the market's next direction. In simple terms, the strategy can: However, pairs trading is not a holy grail. It only works as intended while the relationship between the two markets remains reasonably stable, and even a well-researched pair requires disciplined risk management. Choosing the pair is usually the most important, and most time-consuming, part of the process. Get this stage right and everything that follows becomes easier; choose two markets simply because their charts look vaguely similar and the strategy can unravel rather quickly. High correlation means that two assets have historically moved in the same direction to a similar degree. Traders commonly look for a strong, stable positive correlation of approximately 0.80 or higher, although the appropriate threshold depends on the timeframe and method being used. EUR/USD and GBP/USD are a familiar forex example. Both pairs often respond similarly to changes in US dollar sentiment, so their price movements can be closely correlated. Correlation should be measured across multiple periods rather than accepted from a single snapshot. A reading of 0.90 today is useful, but it does not guarantee the relationship will remain that strong next week. A shared driver is an economic or market influence that helps explain why two assets move together. Correlation is generally more convincing when there is a genuine reason behind it rather than a relationship that has appeared by chance. EUR/USD and GBP/USD share the US dollar as their quote currency. Both may therefore respond in a similar way to Federal Reserve policy, US inflation figures and changes in demand for the dollar. Other pairs can be connected through related economic forces. AUD/CAD, for example, is influenced by commodity sentiment, although the currencies do not respond identically: Australia has strong links to metals and Chinese demand, while Canada is particularly sensitive to oil. A shared driver does not guarantee that the relationship will continue, but it gives the correlation a more credible foundation. Cointegration tests whether the spread between two markets has remained relatively stable and mean-reverting over time. This differs from correlation, which only measures how closely their prices have moved together. Two currency pairs can show a high correlation while their spread steadily drifts further apart. Cointegration is designed to identify a longer-term equilibrium relationship, making it especially useful when testing whether a divergence has a realistic chance of reversing. Research by Carrasco Blázquez, De la Orden De la Cruz and Prado Román concluded that cointegration was the most efficient of the methods they examined for structuring a pairs trading strategy. The study compared several approaches, including correlation, distance and cointegration, although no statistical method can guarantee a profitable trade. (Pairs Trading Techniques: An Empirical Contrast, 2018) For beginners, the key distinction is simple: correlation asks whether two markets move together, while cointegration asks whether the spread between them tends to return to a stable relationship. Liquidity refers to how easily an instrument can be traded without causing a meaningful change in its price. Because pairs trading involves opening and closing two positions, both currency pairs need sufficient liquidity and consistently competitive spreads. Poor liquidity can create: This is one reason major currency pairs are often more practical candidates. EUR/USD and GBP/USD generally offer deeper liquidity than exotic pairs, although spreads and execution conditions can still change around news releases and quieter trading hours. A pair is only genuinely tradeable when the relationship is statistically credible, and both legs can be entered and exited efficiently. Read more: What is liquidity in Forex and how is it measured Read more: What is slippage and how to avoid it in trading The following example is hypothetical and provided for illustration only. It does not represent live market prices, guaranteed results or a recommendation to trade these currency pairs. Suppose EUR/USD and GBP/USD have maintained a rolling correlation of approximately 0.90. Over the period being analysed, the ratio between their prices has normally remained close to 1.175: Spread ratio = GBP/USD price ÷ EUR/USD price GBP/USD then begins outperforming EUR/USD, pushing the ratio well above its recent average. At the entry point, the ratio has widened from its usual level of around 1.175 to 1.200. The trader interprets this as an unusually large divergence and opens two positions: The pairs then begin converging. EUR/USD rises to 1.0900 while GBP/USD falls to 1.2840, bringing the ratio back to approximately 1.178, close to its historical range. The trader closes both positions: This is a particularly tidy illustration because both legs make money. Real pairs trades are rarely so obliging. One position may lose while the other gains more, and the trade can still produce a positive net result if the spread moves in the expected direction. I find it more useful to judge these trades by the combined position than to become emotionally attached to either leg. Closing the profitable side early while leaving the losing side open would dismantle the hedge and turn a relative-value trade into an unplanned directional bet. The potential profit in this example comes from the two currency pairs returning to their usual relationship, not from correctly predicting the direction of the wider forex market. A pairs trading strategy becomes far more useful when it is turned into a repeatable process. As you become more proficient with this strategy the easier it will become. The following six steps take the idea from pair selection through to the final exit while reducing the temptation to improvise halfway through the trade. Setting your selection criteria means deciding what must be true before two currency pairs qualify for consideration. This is often the hardest and most time-consuming stage because it provides the framework for every decision that follows. Before searching for a trade, define: Establishing these rules in advance helps prevent traders from adjusting the criteria merely because a particular chart looks tempting. A candidate list is a shortlist of currency-pair combinations that meet your initial requirements. You can screen the market manually or use trading software, a spreadsheet or a statistical model to compare multiple relationships. For example, a trader might begin with liquid major and minor pairs before filtering for correlations above 0.80. Any pair that passes the first screen can then be tested more thoroughly for spread stability and cointegration. How frequently the list needs updating depends on the strategy. A trader holding positions for several weeks may screen less often, while someone using shorter timeframes will need to regenerate candidates more regularly. Applying additional analysis means examining the shortlisted pairs before committing capital. The statistical relationship identifies a possible opportunity, but technical and fundamental analysis can help refine the entry, profit target and stop level. A trader might look at: This extra layer should confirm the setup rather than provide an excuse to ignore the original rules. Executing a pairs trade means opening the long and short positions as close together as possible. Both legs should ideally reach the intended prices or target spread without leaving the trader exposed to an unexpected directional move. If one position fills while the other is delayed, the trader temporarily holds what is known as legging risk. Instead of having a hedged relative-value position, they have a naked long or short trade until the second order executes. Forex traders do not usually face the share-borrowing constraints associated with short-selling stocks. The main concerns are timing, liquidity and fill price. Limit orders and, where supported by the trading platform, linked or OCO-style order management may help coordinate execution, although an OCO order does not automatically guarantee that both legs will fill together. Slippage on each position may appear small, but pairs trading starts and ends with two legs. Every additional cost reduces the available edge. Managing a pairs trade means monitoring the combined position against the rules established before entry. The spread is the main focus, but traders must also watch for news or economic developments that could affect either leg. If the spread reaches its target earlier than expected, the trader may: Psychology becomes important here. It is tempting to give a losing spread "a little more room" or hold a winning trade indefinitely because it seems to be behaving nicely. Markets have a habit of becoming less polite once the original plan has been abandoned. Closing the trade means exiting both positions when the spread reaches the profit target, hits the stop-loss level or exceeds the maximum holding period. With clear rules, the mechanics are usually straightforward; following those rules is the more difficult part. One of the classic mistakes is refusing to close a modest loss after the trade has exceeded its expected duration. The trader assumes that waiting another few days will allow the relationship to recover, but a slow or absent reversion may indicate that market conditions have fundamentally changed. I have found that a time-based exit can be just as valuable as a price-based stop. If the reason for taking the trade has not played out within a sensible period, continuing to hold it is often hope dressed up as patience. A repeatable pairs trading process therefore depends on objective selection, coordinated execution and the discipline to close both legs when the original conditions no longer apply. Once you have the basic process in place, a clean pairs trade comes down to three measurable judgements. This is where "the charts look as though they have drifted apart" becomes "the spread has moved far enough for me to act." Each measurement addresses a different weakness in the basic strategy. A z-score measures how many standard deviations the current spread sits above or below its historical average. The basic formula is: Z-score = (Current spread − Mean spread) ÷ Spread standard deviation A trader first chooses a lookback window, such as the previous 20 to 60 bars. The rolling average and standard deviation of the spread are then calculated across that period. A straightforward rules-based approach might be: Suppose the spread between EUR/USD and GBP/USD reaches a z-score of +2. This indicates that it is two standard deviations above its recent mean. The trader sells the relative outperformer and buys the underperformer, then closes both positions if the z-score returns towards zero. However, a z-score moving beyond +3 or −3 should not automatically be treated as a better bargain. It may indicate that the underlying relationship is breaking down due to a policy shift, economic surprise or broader change in market conditions. Adding repeatedly to a widening spread can turn a controlled trade into a rather expensive lesson. A hedge ratio determines the relative position size of each leg. Market neutrality does not necessarily mean placing the same monetary amount on both sides; it means balancing the positions so their exposure to shared market movements is as close as reasonably possible. The ratio may be estimated using: Suppose GBP/USD has been approximately 1.3 times as volatile as EUR/USD over the chosen period. Using a simplified volatility adjustment, the GBP/USD position might be reduced to roughly 77% of the EUR/USD exposure: 1 ÷ 1.3 = 0.77 If the strategy calls for buying EUR/USD and selling GBP/USD, the trader will therefore use a smaller position on the more volatile GBP/USD leg. The exact lot sizes would also need to account for pip value, account currency and the trader's maximum permitted loss. The hedge ratio can change as volatility and market relationships evolve. It should be recalculated periodically because an outdated ratio may allow what began as a balanced trade to acquire an unintended directional bias. The half-life is an estimate of how long the spread normally takes to travel halfway back towards its mean. It provides a practical measure of mean-reversion speed and can be estimated from the spread's mean-reversion coefficient using a model related to the Ornstein–Uhlenbeck process. The mathematics can become fairly involved, but the trading idea is straightforward. Half-life can help a trader: Imagine that the EUR/USD and GBP/USD spread has an estimated half-life of three trading days. The trader would expect a meaningful portion of the convergence to occur within that general period. If the spread remains wide after several half-lives, the original assumption deserves serious reconsideration. Holding the trade for three weeks because "it normally reverts in three days" is not patience; it is evidence that the model may no longer describe the market. Used together, the z-score, hedge ratio and half-life turn pairs trading into a more structured decision process by defining the entry, balancing the exposure and placing a sensible limit on the time allowed for convergence. Experience with pairs trading usually changes what you pay attention to. Beginners tend to concentrate on spotting a wide spread; after doing it for a while, you spend far more time asking why the spread widened and whether the relationship is still valid. This is a common mistake traders make. These are the risks I would keep firmly on the watchlist: Read more: What Is the Spread in Forex? Learn to Calculate and Trade It Pairs trading rewards careful research, regular monitoring, clear exit rules and the discipline to act on them. It may be market-neutral, but it is certainly not set-and-forget. Ready to explore correlated forex pairs while managing both sides of the trade from one account? A pair in pairs trading consists of two related assets traded simultaneously. The trader buys the relative underperformer and sells the outperformer, aiming to profit if their historical price relationship returns to normal. A pairs trading strategy is a non-directional, relative-value approach that identifies two historically related assets whose spread has moved outside its usual range. The trader goes long on the underperformer and short on the outperformer, expecting the spread to converge. If EUR/USD and GBP/USD normally move together but GBP/USD begins significantly outperforming, a trader might buy EUR/USD and sell GBP/USD. Both positions are closed if the spread returns towards its historical average. Yes. The main risk is that the historical relationship permanently changes and the spread continues widening instead of reverting, potentially creating a loss across the combined position. Yes, pairs trading can be applied to highly correlated currency pairs such as EUR/USD and GBP/USD or AUD/USD and NZD/USD. The principle is the same as with stocks: trade the expected reversion of the spread rather than the direction of one market. Pairs trading is on the more advanced side because it requires an understanding of correlation, short-selling, position sizing and the costs of managing two legs. Beginners should learn the fundamentals of risk management first and practise the process on a demo account, with no assumption that profits are guaranteed. There is no universal minimum, but two simultaneous positions both require margin and incur trading costs. Position sizes should reflect your risk tolerance, and the account should retain a sufficient margin buffer for adverse price movements. Pairs trading offers a market-neutral way to seek profit from the changing relationship between two correlated assets rather than from predicting the market's overall direction. Its potential edge comes from careful pair selection, coordinated execution and measurable controls such as z-scores, hedge ratios and half-life estimates. Research and discipline matter far more than making a dramatic market call. Start by testing the relationship, define the conditions that would prove the idea wrong and practise managing both legs as a single position. Lee W. is a seasoned professional trader with over 10 years of experience. Passionate about sharing valuable expertise and unique market insights, Lee W. now serves as an external and independent market analyst for RADEX MARKETS. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment. Trading strategies: Related concepts:

A decisive risk-off movement swept through financial markets on Thursday, as developments in the Middle East pushed crude oil prices back into three-figure territory. The US military has concluded its 13th consecutive night of strikes against the Iranian regime; neighbouring countries have reported retaliatory missile and drone attacks originating from Iran; Yemen’s Houthi rebels have targeted Saudi ships in the Red Sea and fears continue to grow that the attacks may escalate to a wider regional conflict. The Persian Gulf being closed off is bad enough for global trade, but if the Red Sea follows suit, then the world will have lost not one but two vital shipping lanes. Oil markets were certainly shaken, as the Brent Crude benchmark pushed north of $100 for the first time in two months after rising 6% on Thursday, while US oil contracts jumped to $93 per barrel. Meanwhile, in Abu Dhabi, Murban Crude futures exploded higher yesterday, briefly reaching $114 per barrel before settling lower at $108, nevertheless a 20% daily rise for the local benchmark. The surge in oil prices has spooked markets into more defensive positions as the threat of inflation rears its ugly head once again. Capital flowed away from riskier assets and back into the safe hands of the US dollar, pushing the DXY as high as 101.5 on Thursday. Precious metals suffered, with gold falling 2% and retreating back to $4,050 per ounce, while silver sank back down to the $57 range after shaving more than 3% from its tally. Bitcoin likewise succumbed to the fear, enduring a $1,000 haircut to slump back to $65,000 per coin, dragging the broader crypto markets down with it. US stocks were also hit hard, but more on that later. The fact of the day in currencies is that the Japanese yen has officially hit a 40-year low against the dollar, with the pair peaking as high as 164 during yesterday’s session. The move has prompted all the usual questions as to when the Bank of Japan will intervene to defend its currency, but the fact is that the central bank has already done so multiple times over the last four years and has failed to achieve anything other than a fleeting respite to the seemingly inevitable decline. The US Treasury said much of the same, claiming that the only answer was for the BoJ to hike rates on the yen, thereby narrowing the interest rate differential even further and limiting the undesirable volatility that has plagued the pair since 2021. Tesla and Google both reported quarterly earnings after the bell on Wednesday, and shares in both companies shot down the following day. While Google managed to beat estimates, with cloud revenue increasing 82% year-over-year and overall revenue growing by 24%, investors were concerned about the company’s plans to increase capital expenditures this year and the next. It was much the same problem over at Tesla, which is expected to burn $25 billion in capex this year, while the beleaguered car manufacturer also had to justify the additional misfortune of falling short of revenue estimates. Shares in Alphabet (GOOG) fell 7% on Thursday, which was only half the drop incurred by Tesla (TSLA), which plummeted 14.5% over the same time frame, bringing the stock down to a miserable 29% year-to-date loss. Markets are not happy about the colossal amounts of money being thrown at AI infrastructure and Wall Street is becoming less keen on dishing out blank cheques to companies with even the flimsiest of artificial intelligence aspirations. Investors are starting to ask uncomfortable questions regarding return on investment, and so far, many of the big names have not been able to provide satisfactory answers. The worrying earnings reports triggered a wider selloff in the Magnificent Seven, each component of which performed dismally yesterday, dragging the Nasdaq 100 (NDX) down 1.9% when all was said and done. The Nikkei appears to have latched on to the negative momentum this morning, falling 3% within the first hour of the opening bell in Tokyo. Potentially rough day ahead for big tech. #OIL #TSLA #GOOG About the Author Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment.

Markets collectively decided that the selloff in semiconductors had gone on for long enough earlier this week, as dip buyers stepped up to the mark on Monday, killing the downward momentum that has plagued the sector since the end of June. Buy side pressure overwhelmed the books completely the following day, pushing a number of companies to double-digit gains – companies that had been on the other side of the equation just days prior. SanDisk (SNDK) and SK Hynix (SKHY) both surged 14% on Tuesday; Micron (MU) and Western Digital (WDC) were not far behind with 12% rises of their own; Seagate (STX) gained 11%, while AMD and Intel (INTC) both closed yesterday’s session 8% higher. The euphoria spread to Asian markets early this morning, pushing SK Hynix on the South Korean stock market to a 9% rally and lifting the wider Kospi index 5.5% higher within the first hour of the opening bell. Over in Japan, the Nikkei 225 showed a little more restraint, but nevertheless rapidly added 2% to its tally as trading got underway. How long the rally will last is anyone’s guess, but for the time being semiconductors, and particularly memory stocks, are back on the menu. The broad move higher comes ahead of major earnings reports this week and the next, including Alphabet (GOOG) and Tesla (TSLA) later today. Both companies will undoubtedly provide updates on their latest AI ambitions and new infrastructure requirements, which will send a clear message to chipmakers about what to expect in terms of demand over the coming months. If the major tech companies continue to push for larger data centres and greater computing power, the long-term outlook for semiconductors will be confidently reinforced. Cryptocurrencies may be undergoing a momentum shift of their own. Yesterday, Bitcoin closed at its highest level since early June at $66,500 per coin. The wider crypto sphere is likewise attempting to halt its endless slide into irrelevancy which has dominated the industry since the October 2025 peak. While risk appetite has returned somewhat this week, lifting precious metals by the same token, cryptocurrencies can point to a number of specific reasons as to why the field can afford to be cautiously optimistic. The first is that Treasury Secretary Scott Bessent told viewers in an interview on Tuesday that the Clarity Act was “on the 1-yard line” to pass through the US Senate. The bold claim was received with open arms by the crypto space as a whole, including companies such as Coinbase (COIN) and Circle (CRCL), which rose 9.6% and 8.6% respectively upon hearing the news. Furthermore, BlackRock CEO Larry Fink made some very interesting comments last week, stating that the crypto markets had been carrying far too much leverage, which has now been washed out, leaving cryptocurrencies in a more stable position than the one previously occupied. Other commenters have said much the same; the catastrophic fallout from last October’s record high was indeed a result of too much leverage, but according to Coinglass and other sources, much of this leverage has since been removed from the market. Institutional flows are also cause for jubilation. Bitcoin ETFs suffered horrendous outflows in June, but the trend abruptly reversed last week, which saw over $700 million in inflows instead. Crypto bros could do with some good luck after the past ten months of dismal price action. #SOXX #BTC #GOOG About the Author Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS. Reviewed by RADEX MARKETS Risk Warning: Trading derivatives and leveraged products carries a high level of risk, including the risk of losing substantially more than your initial investment.