Awareness of currency correlation can help to reduce risk, improve hedging, and diversify trading instruments. In this article, we will introduce you to Forex trading using intermarket correlations. Correlation is a statistical measure of the relationship between two trading assets.

Currency correlation shows the extent to which two currency pairs have moved in the same, opposite, or completely random directions within a particular period. Analysis of two asset relationships using past statistical data has predictive value. By utilising the correlation coefficient, we can understand the relationship between two values and help manage risk. Naturally, the stronger a positive or negative correlation, the higher a predictive value is drawn from the analysis.

More extended time frames used for a technical analysis display more precise information compared to relationships over one minute, which have a little value. Monthly and yearly data generally provide the most reliable insight. Correlation can be even a more powerful Forex tool for analysis in conjunction with other Forex indicators. For instance, if one pair breaks out above or below a significant technical level of support or resistance, the closely positively correlated pair has a high probability of the following risk.

If you notice two negatively correlated currency pairs and a significant upward price reversal in one pair takes place, then you can anticipate a potential downward reversal in the other pair. This is a price reversal. Wait for an abnormal divergence between two highly correlated currency pairs and buy one and sell the other, with the expectation that they will converge in price movement again. This is a non-directional arbitrage exploiting currency correlations. The Canadian dollar and crude oil have a positive correlation because Canada is a significant oil producer and exporter.

Similarly, the Australian dollar and gold have a positive correlation because Australia is a significant gold producer and exporter. Both gold and the Japanese Yen are viewed as safe havens in times of uncertainty, and these two are also positively correlated.

When the U. dollar starts to lose its value amid rising inflation, investors seek alternative stores of value such as gold. Be aware that currency correlations are continually changing over time due to various economic and political factors. Given that strong correlations can change over time, it highlights the importance of staying up to date in shifting currency relationships. But there are negatively correlated pairs too, which move in opposite directions to each other.

The image below is an example of such. But whether they are negatively or positively correlated, the benefits remain the same.

You can do your analysis on one and carry it on to another for the most part. You can also let your sentiment on one pair guide your sentiment on another correlated pair. But first, we have for you a table containing the list of all the correlating currency pairs in forex and how they correlate.

The table includes all the minor and major currency pairs in forex. For instance, you can make an analysis of the EURUSD pair. And because it positively correlates with the EURJPY, your technical analysis becomes a little easier for EURJPY. This is because you know what to expect, and you only need the analysis of the EURJPY to confirm that of the EURUSD.

PS: Correlation is not an excuse to be lazy. What correlation merely does is that it helps you to know what you expect from both pairs. Another great thing about forex currency pair correlations is that you can use your sentiment on one to confirm the other.

You still have to make a careful analysis of each pair and time your entries based on the data of each pair. Overexposure in the forex marketis when you have too many active trades involving a particular currency.

An example is trading NZDJPY instead of AUDUSD. These two correlate positively.

Correlation in FOREX trading is essentially the practice of trading based on the existing relationships between relevant currency pairs. There are some currency pairs that tend to move in the same direction, with similar momentum, while there are other forex pairs that tend to move in opposite directions. The pairs that move in the same direction, are said to be positively correlated while those that move in opposite directions are negatively correlated. Correlation in the Forex market exists because economies are often related, and affected by each other.

Forex traders can capitalize on correlated pairs in order to increase their profitability ratios. The key is to find the pairs that are correlated and to trade accordingly.

Regardless of whether a pair is positively or negatively correlated, a keen forex trader should be able to use that knowledge to his advantage. The first logical step to take when trading correlated pairs is to identify that a correlation exists.

This correlation is easily identified by taking a look at these forex pair charts and recognizing that there is a relationship between the two pairs. An example of negative correlation between AUDUSD green and USDCAD purple — Notice how tops in one currency pair tend to happen almost simultaneously with bottoms in the other currency pair dotted vertical lines. Some relationships between the currency pairs are stronger than others, and even some are completely uncorrelated, nor positively nor negatively.

Once a correlation between currency pairs has been identified, traders can establish solid trading strategies that will allow them to improve their profitability. If the trader makes a winning trade in one market, if the pairs are positively correlated, he is highly likely to make winning trades in the correlated currency pair as well. On the other hand, if he was wrong about one market, he may be wrong about the other market as well and may end up making two times the losses.

So it is important to take this in mind in your risk management when placing the orders. Nevertheless, once correlation is identified, it can give the trader another point of view on any particular trade he is considering.

Another way that traders can benefit from correlation trading is identifying times when there are changes in the correlation of any forex pair. For example, a trader may notice that in a pair that is usually strongly positively correlated, that one pair is rising, but that the other pair is falling.

This is a clear indication that something is happening in the market that is not normal. This is an opportunity for the trader to make winning trades since he knows that sooner or later, the pair is likely to resume its original correlation pattern. So even though the market may seem to be out of whack, often times this can present a great trading opportunity for the forex trader.

An example of positive correlation - Notice how closely correlated are AUDUSD green and NZDUSD blue. Correlation trading presents a few key advantages to forex traders.

These include improved trading efficiency, the ability to leverage profits, the ability to diversify risks, hedge against risks, the ability to confirm breakouts and also to avoid fakeouts.

When conducting correlation trading, it is best to use the higher timeframes since those tend to be more reliable. In other words, only use timeframes of 15 minutes or longer since anything less than 15 minutes is less likely to give reliable signals. Since the various world economies tend to be related in some way or another, there tends to also be correlations in the forex markets between currency pairs.

Pairs may be either positively correlated or negatively correlated. Sponsored by. BACK TO ARTICLES Correlation Forex Trading. Close X.

All Rights Reserved. They can illustrate the amount of risk you are exposed to within your Forex trading account. This feature is available for registered members only. But first, we have for you a table containing the list of all the correlating currency pairs in forex and how they correlate. Terms Privacy Site Map Site Map Calendar. OctaFX gives you the EDGE Trade confidently with.

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