When it comes to the world of finances, correlation is a statistical measure of how two currencies move in relation to each other. Consequently, currency correlation discovers whether two currency pairs move in the same direction, opposite direction or randomly. Since currencies are traded in pairs, there’s not a single pair that’s completely independent of the others. That’s why you should learn as much as possible about the forex currency correlations! Keep reading and find out all you need to know!
Forex Currency Correlations | Correlation Types
We’ll first list the types of forex currency correlations. They are computed into correlation coefficient which can range between -1 and +1. Perfect positive correlation is the one with a correlation coefficient of +1. It means that the two currency pairs will move in the same direction 100% of the time. If a correlation coefficient is -1, this means that the two currency pairs will move in the opposite direction 100% of the time. This is called the perfect negative correlation. When two currency pairs are completely independent of each other, the correlation will be 0.
Forex Currency Correlations | Six-Month Correlations
When we talk about forex currency correlations we have to emphasize that these correlations change, so you have to follow the shifts very carefully. Sometimes, due to global economic factors like Oil and Gold, they can even change on a daily basis. Other reasons can be related to changes in monetary policies, pair’s sensitivity to commodity prices or some unique economic factors. That’s why it’s very important to take a look at the six-month trailing correlation: you will have a clearer and more accurate perspective.
Forex Currency Correlations | How to Use Them
When it comes to using forex currency correlations, there are a couple of rules that need to be followed. First, you have to eliminate counterproductive trading, meaning you need to stay out of positions that cancel each other. Furthermore, you have to be careful with the leverage, since you have the opportunity to double-up on positions. Hedging is another element that is necessary to highlight when talking about forex currency correlations because it can result in realizing smaller profits. On the other hand, however, it helps to minimize your losses. For example, if you open a long position and it starts to go against you, you can open a small long position in a pair that moves opposite from the first one. Also, you should use currency correlations to confirm your trade entry and exit signals.
Forex Currency Correlations | Conclusion
Forex currency correlations can definitely be a very helpful thing in trading. Currencies are usually related to each other and any trader can take advantage from that notion. In this article we suggested some ways of using them in trading. But the most important thing is that you keep an eye on the changes in currency correlations. This simple principle will significantly increase your chances to win. Also, if you need more tips, don’t forget about our other articles on this website!