Learn 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 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.
So, if you are trading USD/JPY and USD/CHF at the same time, it will double up your position if you take long positions or short positions on both simultaneously. What it means is this that 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 to elaborate more. EURUSD and USDCHF both have a negative correlation of -0.92 in the last month. Both the pairs are moving in opposite directions recently. If you take long position on EURUSD, it is not a good strategy to take short position on USDCHF. It will only double up your position with increased 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. - 23208
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.
So, if you are trading USD/JPY and USD/CHF at the same time, it will double up your position if you take long positions or short positions on both simultaneously. What it means is this that 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 to elaborate more. EURUSD and USDCHF both have a negative correlation of -0.92 in the last month. Both the pairs are moving in opposite directions recently. If you take long position on EURUSD, it is not a good strategy to take short position on USDCHF. It will only double up your position with increased 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. - 23208
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 @ 3:37 AM
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