Learn 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 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 calculations based on past pricing data between different currency pairs. It is always a number between -1 and +1. These numbers can provide you with a lot of information that can maximize returns, minimize risk and help you 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.
Since both the pairs move together, if you are trading USD/JPY and USD/CHF at the same time, it will double up your position if you go long or short on both at the same time. In other words, if you lose a trade on USD/JPY, the chances are that you will also lose the trade on USD/CHF 83% of the times.
Lets take another example. EUR/USD and USD/CHF both have a negative correlation of -0.9 in the last month. It means both the pairs were moving in opposite directions last month. If you take long position on one, it is not a good strategy to take short position on the other. It will only double up your position again and increase risk.
While investing in two currency pairs simultaneously, try to choose such pairs that have correlations close to zero. Zero correlation means the two pairs are almost independent of each other and mutually exclusive.
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. - 23222
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 calculations based on past pricing data between different currency pairs. It is always a number between -1 and +1. These numbers can provide you with a lot of information that can maximize returns, minimize risk and help you 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.
Since both the pairs move together, if you are trading USD/JPY and USD/CHF at the same time, it will double up your position if you go long or short on both at the same time. In other words, if you lose a trade on USD/JPY, the chances are that you will also lose the trade on USD/CHF 83% of the times.
Lets take another example. EUR/USD and USD/CHF both have a negative correlation of -0.9 in the last month. It means both the pairs were moving in opposite directions last month. If you take long position on one, it is not a good strategy to take short position on the other. It will only double up your position again and increase risk.
While investing in two currency pairs simultaneously, try to choose such pairs that have correlations close to zero. Zero correlation means the two pairs are almost independent of each other and mutually exclusive.
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. - 23222
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 @ 3:13 AM
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