Learning Currency Correlations
Currency pairs are interrelated in the forex markets. As a forex trader, understand that the price action of each currency pair is not independent of other.
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.
Knowing how strong this relationship is and its direction can help you a lot in developing your trading strategies. Correlation analysis has 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 make it clear with an example. Suppose USD/JPY and USD/CHF had a positive correlation of +0.83 last month. This number is close to +1 and means that both pairs are moving 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.
When investing in two pairs at the same time, try to choose such pairs that have correlations close to zero. This will make the two pairs almost independent of each other and you can invest in both of them safely.
Dont forget that currency markets are constantly changing. The correlations between pairs also keep on changing. It would be good to calculate the correlation numbers between pairs on a monthly basis. - 23221
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.
Knowing how strong this relationship is and its direction can help you a lot in developing your trading strategies. Correlation analysis has 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 make it clear with an example. Suppose USD/JPY and USD/CHF had a positive correlation of +0.83 last month. This number is close to +1 and means that both pairs are moving 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.
When investing in two pairs at the same time, try to choose such pairs that have correlations close to zero. This will make the two pairs almost independent of each other and you can invest in both of them safely.
Dont forget that currency markets are constantly changing. The correlations between pairs also keep on changing. It would be good to calculate the correlation numbers between pairs on a monthly basis. - 23221
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. 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 @ 3:27 AM
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