Learn 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 of the currency pairs move relative to one another. Understand that different currency pairs are correlated. These correlations can be positive or negative.
Knowledge of how strong this relationship is and its direction can help you in developing your trading strategies with a new perspective. This has the potential to become a great trading tool for you.
Correlations are numbers that range between +1 and -1. These numbers are calculated based on past pricing data between different currency pairs. They can provide you with information that can maximize returns, minimize risk and avoid counter productive trading.
Lets use an example to make it clear. Suppose USDJPY and USDCHF has a positive correlation of +0.83 last month. This number is close to +1. It indicates that both pairs move together most of the time in the same direction.
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.
Take another example. Suppose EUR/USD and USD/CHF have a negative correlation of -0.9 in the past month. Both the pairs are moving in opposite directions. If you go long on one, it is not a good strategy to go short on the other. It will only double up your position and increase your 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.
Keep this in mind that forex markets are constantly changing. These correlation numbers also keep on changing. It is a good idea to calculate the correlations of the pairs that you invest in on monthly basis. - 23199
Most of the currency pairs move relative to one another. Understand that different currency pairs are correlated. These correlations can be positive or negative.
Knowledge of how strong this relationship is and its direction can help you in developing your trading strategies with a new perspective. This has the potential to become a great trading tool for you.
Correlations are numbers that range between +1 and -1. These numbers are calculated based on past pricing data between different currency pairs. They can provide you with information that can maximize returns, minimize risk and avoid counter productive trading.
Lets use an example to make it clear. Suppose USDJPY and USDCHF has a positive correlation of +0.83 last month. This number is close to +1. It indicates that both pairs move together most of the time in the same direction.
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.
Take another example. Suppose EUR/USD and USD/CHF have a negative correlation of -0.9 in the past month. Both the pairs are moving in opposite directions. If you go long on one, it is not a good strategy to go short on the other. It will only double up your position and increase your 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.
Keep this in mind that forex markets are constantly changing. These correlation numbers also keep on changing. It is a good idea to calculate the correlations of the pairs that you invest in on monthly basis. - 23199
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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