If you have been trading forex for a while and paying a closer look into how currency pairs move, you will notice that most of currency pairs are related to each other somehow.
In this article i want to focus on currency correlation: what is it, and how you can benefit from it.
It is essential that i start by explaining what currency correlation is, then later in this article you will learn the importance of currency correlation and how can it help you to make your trading decisions and avoid making the same mistakes most traders do.
Let’s get started…
What is currency correlation
Currency correlation is a relationship between two or more currency pairs that either move in the same or different direction at the same time.
Currency correlation is divided into two groups: positive and negative correlation.
Currency pairs that move in the same direction at the same time are called positive correlation.
For example, EUR/USD and GBP/USD tend to move in the same direction most of the time
meaning if EUR/USD go up, GBP/USD will also go up, just the direction and level slight differ, otherwise they both move in the same direction, therefore they positively correlate.
currency pairs that move in the opposite direction at the same time are called negative correlation.
For example, EUR/USD and USD/CHF:
When EUR/USD goes up, USD/CHF take the opposite direction, and vice versa.
Understanding currency correlations can help you avoid making careless mistakes that can cause you to blow up your trading account.
When i was novice trader, i didn’t know what currency correlation was and I would Sometimes sell or buy EUR/USD and USD/CHF at the same time not knowing that these two pairs negatively correlate.
One pair would be in profit and the other will lose and i would end up with a negative in my account because i have to pay spread as well.
Even worse, i would sometimes take multiple trades that positively correlation each other and if one pair goes against me,they all end up doing against me and end up with a huge loss in my forex account.
How correlation of pairs can help you
Currency correlation can also help you predict the direction of currencies.how?
We already know that if EUR/USD and GBP/USD go up, USD/CHF and USD/JPY will take the opposite direction, or vice versa. So if you see a sell signal on EUR/USD and on GBP/USD, you can also check USD/CHF and USD/JPY, if they both also show a buy signal too,then your analysis is more reliable.
However, it’s advisable to not take them all at the same time because if you take all 4 of them and 1 go against you, the other pairs are most likely to go against you as well.
By so doing you’re putting your account at risk, you could end up losing more than you intend to. However, if you’re correct on 1 pair, you are most likely to be correct on the other pairs too.
Currency correlation don’t stay the same
Currencies are very dynamic, they change overtime. Pairs that strongly correlate today might change tomorrow, next week, or few months, or even next year.
Because correlation of pairs tend to change, you might think you will grow your account fast by investing in different pairs, not realizing that most trades corrolate. if you like trading multiple trades at the same time, it’s prudent that you learn to calculate currency correlation yourself.
Or you can also visit websites like myforexbook.com. I hope this article is helpful to you.
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