Understanding Currency Correlations
All the currency pairs are interrelated in the forex markets. They keep on affecting each other. As a forex trader, you need to understand that the price action of each currency pair is not mutually exclusive.
Most pairs move relative to one another. Understanding that different currency pairs are correlated is important for you. These correlation numbers can be positive or negative.
Knowledge of the strength of this relationship and its direction can help you in developing your trading strategies. Correlation numbers have the potential to become a great trading tool for you.
Correlations are numbers ranging between +1 and -1 that are calculated based on past pricing data between different currency pairs. These numbers can provide you with information that can maximize your trading returns, minimize risk and help avoid counter productive trading.
Lets take an example. Suppose USD/JPY and USD/CHF had a positive correlation of +0.83. This number is close to +1. It means that both the pair move together most of the time.
Now, if you are trading USDJPY and USDCHF at the same time, it will double up your position if you take long positions or short positions on both at the same time. If you lose a trade on USDJPY, the chances are that you will also lose the trade on USDCHF 83% of the times.
Lets take another example to elaborate more. EURUSD and USDCHF both have a negative correlation of -0.92 in the last month. Both the pairs are moving in opposite directions recently. If you take long position on EURUSD, it is not a good strategy to take short position on USDCHF. It will only double up your position with increased risk.
If you are investing in two currency pairs simultaneously, try choosing such pairs that have correlations near zero. Zero correlation means the two pairs are independent of each other in price action.
Always keep this in mind that currency markets are constantly changing. The correlation between currency pairs also keep on changing. It would be a good idea to calculate the correlations between pairs on a monthly basis. - 23218
Most pairs move relative to one another. Understanding that different currency pairs are correlated is important for you. These correlation numbers can be positive or negative.
Knowledge of the strength of this relationship and its direction can help you in developing your trading strategies. Correlation numbers have the potential to become a great trading tool for you.
Correlations are numbers ranging between +1 and -1 that are calculated based on past pricing data between different currency pairs. These numbers can provide you with information that can maximize your trading returns, minimize risk and help avoid counter productive trading.
Lets take an example. Suppose USD/JPY and USD/CHF had a positive correlation of +0.83. This number is close to +1. It means that both the pair move together most of the time.
Now, if you are trading USDJPY and USDCHF at the same time, it will double up your position if you take long positions or short positions on both at the same time. If you lose a trade on USDJPY, the chances are that you will also lose the trade on USDCHF 83% of the times.
Lets take another example to elaborate more. EURUSD and USDCHF both have a negative correlation of -0.92 in the last month. Both the pairs are moving in opposite directions recently. If you take long position on EURUSD, it is not a good strategy to take short position on USDCHF. It will only double up your position with increased risk.
If you are investing in two currency pairs simultaneously, try choosing such pairs that have correlations near zero. Zero correlation means the two pairs are independent of each other in price action.
Always keep this in mind that currency markets are constantly changing. The correlation between currency pairs also keep on changing. It would be a good idea to calculate the correlations between pairs on a monthly basis. - 23218
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading; stocks and forex. Read about Trend Forex System. Best Forex Signal Service. Download Forex Scalping Cheat Sheets!
posted by X - Men @ 3:40 AM
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