HOW TO TRADE CURRENCY CORRELATION STRATEGY
Traders often do not pay attention to currency correlation when trading and most times when they have two positions open they wonder why they have a winning trade and a losing trade running at the same time. This forex currency correlation strategy that you are about to learn is based on a behavior between two currency pairs going in the same direction or opposite direction. In this article, I will explain how to trade using currency correlations to profit from your trades and how to avoid canceling a winning trade due to lack of currency correlation knowledge.
WHAT IS CURRENCY CORRELATION?
Positive Correlation and a Negative Correlation in Forex Trading
Currency correlation is the relationship between two currency pairs moving in the same direction or in opposite direction at the same time.
There are two types of correlations, a positive correlation and a negative correlation in forex trading.
A positive correlation is when two or more currency pairs move in the same direction at the same time. Some traders often ask why are there relationship or correlation between two currency pair, the answer is simple because currencies are traded in pairs, and the correlation are not constant, they sometimes change from +1 to -1 or 0.
If you notice as a trader you will know that the EUR/USD and GBP/USD do move in the same direction most of the times, which means when EUR/USD is going down, you will also notice that GBP/USD is going down.
Negative correlation is when two or more currency pairs trade in opposite direction at the same time. An example of a negative correlation is EUR/USD and USD/CHF or GBP/USD and USD/JPY. Which means when EUR/USD is trading down, you will see USD/CHF trading up and when GBP/USD is trading down, you will see USD/JPY trading up. So, when one currency pair is trading down the other is trading up in the opposite direction, that is negative correlation. Take note that in trading it is not all currency pairs that are correlated to each other, some currencies have no correlations at all, that means price movements are random in relation to others.
HOW TO TRADE MULTIPLE CURRENCY PAIRS
Since you have learned about currency correlation in this article and knowing that the positive correlation is the currency that move in the same direction at the same time and the negative correlation is the currency that move in opposite direction at the same time.
If you are planning to trade multiple currency pairs at the same time then you should consider studying the currency correlation table to know which currency correlate positively or negatively to each other to avoid canceling your winning trades. When you trade currency pairs that are negatively correlated, you are then exposing your capital to risk because of the opposite direction but on the other hand if you trade currency pair that is positively correlated then you stand the chance of boosting your profit
HOW TO READ CORRELATION COEFFICIENT TABLES
A correlation coefficient is a number that qualifies a type of correlation and dependence, meaning statistical relationships between two or more values in fundamental statistics. In terms of forex, it is not difficult to find the relationship between two currency pairs, all you need to do is to find the correlation coefficient. Sometimes correlation between two currency pairs is rarely absolute. For example, a positive/negative correlation may move in opposite directions at a period.
Coefficients are usually listed in a table between the numbers -1.00 and +1.00
- 100% negative correlation = -1.00
- 100% positive correlation = +1.00
- 0% correlation = 0.00
Trading with currency pair correlation can be confusing and difficult for many traders out there, sometimes you will see currency correlation displayed in percentages and not numbers and sometimes numbers, vice versa. You now know that we do have positive, negative and zero correlation so when trading you will put this into consideration before taking a trade. Looking at the currency correlation you will observe that sometimes it is not up to +100% (+1) or -100% (-1) you might see something like +0.90% (+90%) or -0.90% (-90%) which +90% represent positive correlation and that means that the two currency pairs will move in the same direction +90% of the time and vice versa when it is -90% the two currency pairs will move in the opposite direction -90% of the time.
It is advisable for a trader to avoid trading pairs that have a coefficient close to -1 at the same time. In fact, if you have multiple positions open in the same session trading session, you will ensure that they have a coefficient as close to +1. Check your coefficients for different timeframes to give you a bigger picture of your setup.
CURRENCY CORRELATIONS TABLE
You can find free currency correlation tables online. This is going to help you when making your trading plan.
If you are trading on MetaTrader 4 platform, you should have access to widgets which update currency correlation coefficients in real-time. This can be very useful in live trading sessions.
HOW TO TRADE CURRENCY CORRELATION
You can apply currency correlation to your trading by implementing it in your trading plan so that it is going to help you in your risk management and give you an edge in the market to stay in profit. Here below is how you can apply currency correlation to your trading plan.
First, I will say find a currency correlation table online and save it on your computer or print it out, whichever way works for you, fine.
Second, identify from your trading plan the pairs you intend to trade in the same session
Third, use your currency correlation table to find the correlation coefficient of the pairs you intend to trade in the same session, relevant to the timeframe of your currency pairs.
Fourth, you can adjust your trading plan if you find pairs that have negative correlation from your currency correlation table.
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