When you know the currency pairs the risk gets minimized, the hedging gets improved and you will understand the forex trading strategies in more depth. In this article, we will see how forex trading aligns with other assets. So let’s see the details:
Currency Pair Correlation:
Correlation is a measure that sees the relationship between two different assets. It will tell you to which degree two pairs of currency haveproceeded in the same or opposite ways at specific time.Cm trading minimum deposit is best for beginner forex traders.
Correlational coefficient :
It will tell you two toughly or weakly two pairs of currencies are lined up in aparticular period.
+1 is a sign for two pairs of currencies proceeding in the same direction. This will make the best positive correlation. The example that sets on it is the pair EUR/USD and GBP/USD. If one will increase the other will go in the same direction.
-1 is an indication that two pairs of currencies will proceed in contrasting directions all the time. The pair having a negative correlation is EUR/USD and USD/CHF is one of them rises the other will go down.
Zero correlation shows that two currency pairs don’t have any link with each other.
Correlated currency pairs:
The currency pairs that are strongly related are EUR/USD and GBP/USD. These two sometimes proceed together because of the financial relationship in the region in which they present. In this scenario, GBP and EUR are very closely related because they share the same proximity. And USD is a counter currency for both,meaning that results of change in the dollar will be seen on them. Morepairs that arealso strongly correlated includeEUR/USD,AUD/USD,EUR/USD and NZD/USD.
Influence of Currency correlation on forex trading
- When you understand the currency correlation it will protect the liability of your forex market.
- It will help you to form basis for high and better fx strategies.
- It will explain the proportion of risk that you can have on your accounts. If you have buy all the pairs that are strongly correlated then you are at higher risk.
- If you want to safeguard a position you can choose position in pair that are negatively correlated.
Strategies in forex trading that base on correlation
- When you chose pairs that are highly correlated one of them will act as major indicator of price fluctuation for the other one. If you notice any sharp change in the positive correlated pairs you can predict a possible change in other.
- You can do price reversal. For example if two negative correlated paired currenciesand one of the pairsface price reversal upwardly you will predict a downward reversal in the other pair.
Commodities correlated with currency:
- Crude oil and the Canadian dollar have a strong positive correlation.
- Australian dollar and gold share a positive correlation.
- Gold and the US dollar share a negative correlation.
Conclusion :
In the development of high trading strategies, currency correlations act as a strong tool. the risk management would be aided by this. All details are given in this article. Hope u would like it.
