Knowing Currency Correlations
Everything is interrelated in the forex markets. It is important for you 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 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 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 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.
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. - 23196
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 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 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 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.
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. - 23196
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 @ 2:59 AM
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