If the price of EURUSD falls, you might have noticed that the price GBPUSD also falls. Have you ever thought about why this happened? It occurs because of correlation. It shows us that different pairs move in two opposite directions or the same or randomly during a specific time. In Forex, the currency is used in pairs. So, there is no chance of a single staying alone. If you are trading not with one currency, it would always be helpful to know about the relationship between each other.
Currency correlation may affect the risk of trading. It seems one must be aware of this connectivity to keep their account safe. If you use multiple currencies at one time without knowing the correlation, ideally, it will be regretful.The range of connectivitylies between -1 and +1. -1 refers to the positive connection; +1 means negative connection. When two currencies price goes in the same direction during the time frame, it is positive.
If the two go exact in the opposite way during a time frame is called negative. If it becomes zero (0), there will be no relativity. In today’s lesson, the discussion is all about being a responsible and efficient traderwith the knowledge of currency pair’s correlation. Moreover, the core concern is to know how it improves “better risk management selection.”
Since the pair don’t always move in the same direction, but they move together. The most traded pair is EUR/USD and GBP/USD. Correlation allows traders to invest with other currencies when the chart shows the possibility of reaction. For example, if the EUR/USD and AUD/USD make a powerful connection between them, it will create a partial hedge while buying the EUR/USD and selling the AUD/USD.
Raw materials or commodities also have connectivity like currencies. Suppose a particular country is a powerful importer of raw materials like Gas/ Oil or anything else. In that case, that currency pair influences the other one which country is the consumer of those raw materials. For example, if Japan and Canada areprominentin oil, the USD/CAD andCAD/JPYhave a strong connection. To know more about the commodity trading business, you may visit the official website of Saxo Bank. Go through the free resources and try to develop your skills in a strategic way.
There are many options to use correlations in Forex trading strategies like hedging, commodity, and pairs trading. You may follow the steps:
- Create a live account. Also, it is possible to use a demo account
- Please do your research and improve the knowledge of different currency pairs and how others affect them, such as interest rates, inflation, and economic data.
- Choose a trading strategy. It is more effective to build an innovative and intelligent trading method.
- Be an explorer of risk management facts and tools. Stop loss, target profit which may be necessary for risk management in volatile markets.
- After placing your investment, think wisely about when to buy and when to sell (the time frame) and determine the entry/exit.
Some pairs have historical positive or negative correlations. To be sure, you need to collect the data and analyze it properly. There are so many indicators and tools to analyze the correlation of currency.It would be best if you follow some way of calculating the interconnection.
- Install Microsoft Excel on your laptop
- Search on the internet about the packages of charting which provide the current and past prices
- Export the data into an Excel sheet
- Now highlight the whole data in particular columns.
- One month, six months, one year of research data will provide a clear idea of correlation.
Though it frequently changes no need to update daily. It will be enough to update the sheet once a month. Once you get to know the way of calculating correlation, it is time to use the data for your strategy. Ignore the conflict positions. Sometimes it predicts unnaturally. It will be either positive or negative. Do not get confused instead of going as per research.