Know 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.
Different currency pairs move relative to one another. You need to understand that different currency pairs are correlated. Correlation 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 take an example. Suppose USD/JPY and USD/CHF had a positive correlation of +0.83. This number is close to +1. It means that both the pair move together most of the time.
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.
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. - 23217
Different currency pairs move relative to one another. You need to understand that different currency pairs are correlated. Correlation 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 take an example. Suppose USD/JPY and USD/CHF had a positive correlation of +0.83. This number is close to +1. It means that both the pair move together most of the time.
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.
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. - 23217
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 @ 3:25 AM
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