CORRELATION
What is trading currency correlation?
Correlation is how we would describe one pair compared with another.
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As a trader or market analyst, when you understand price correlation you will be able to understand price movement between different pairs better. They may move in a random direction, opposite direction or in the same direction. But this can be used as another confluence to add further probability to your trade.
A perfect negative correlation would mean two pairs have a correlation coefficient of -1 which implies the two currency pairs will certainly move in the opposite direction all the time.
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A perfect positive correlation would mean the two pairs have a correlation coefficient of +1 which implies the two currency pairs will certainly move in the same direction all the time
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A correlation of 0 shows that the two currency pairs lack correlation between each other, which implies that the two pairs move completely randomly and independent from each other.
This table represents the correlation between the various pairs of the Forex market. The correlation coefficient highlights the similarity of the movements between two parities.
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If the correlation is high (above 80) and positive, then the currencies move in the same way. If the correlation is high (above 80) and negative, then the currencies move in the opposite way.
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If the correlation is low (below 60) then the currencies don't move in the same way.
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(Source: https://www.mataf.net/)
Why do you need to know about correlation?
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The correct use of correlation will enable you to add an extra confluence to your trading. So studying different pairs and comparing how they move will help your trading and understanding of the markets.
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Analysts and currency traders also need to be aware that currency based correlation does not stay the same forever due to the constant change of the world climate and fundamental impacts such as; major news and even how currency pairs react to changes in commodity pricing.
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For example, EURUSD and USDCHF move in the opposite direction. When one is bullish the other is bearish. But there are times when they aren't correlating in the opposite direction, so just like you wouldn't use a trendline on it’s own when placing a trade, you would treat correlation in the same way and it should be used as one of many confluences.
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It’s very useful to make a note of all of these correlations and have them up around your computer or office as a constant reminder. You need to become an expert in this field so the more research and back testing the better.
