A lot of news circulating about the world about forex lately that is offensive about the relationship between currency pairs and how you can use the currency pair to earn a profit. Though I personally have never download or read the report "secrets" about it, I think it would be very useful to discuss this topic and gives some examples of how I use the correlation of currency in the trade I am doing.
"Correlation" is a measure to calculate the statistical relationship between two variables. Correlation here calculate how big and how small a currency pair moves follow the direction of movement of the other currency pairs. Currency pairs always move in opposite directions to each other. However, generally, two base currency from two pairs of currencies will move correspondingly.
For example, the EUR/USD pair has a high correlation with EUR/USD. This weeks, both are moving in the same direction, even 95% they move in the same direction. The correlation coefficients are both equal to-1.0 to + 1.0. A negative number means more currency pairs often move in opposite directions to each other, are a positive number means a currency pair moves in the same direction. So when a POPs number correlation coefficient of-1.0 then the two currency pairs move in opposite directions to each other as much as 100%. The correlation coefficient is + 1.0 means both spouses were moving in the same direction as much as 100%.
To know currency correlations, you can conduct research and monitor the movement of both on the daily closing price then calculate korelasinya. Alternatively, you can also find other ways that can do this for you.
OANDA provides currency pair correlation calculation for a week, a month, even up to two years. From Oanda be known also that the AUD/USD and NZD/USD EUR/USD is correlated with in these last weeks. Calculation of the correlation of this variable is, but over time, knowledge of this correlation will be embedded with in yourself so that you are able to make use of them result in Forex trading.
How to utilize correlation?
There are several ways in utilizing correlation between currencies. In General, the correlation coefficient calculated on the closing price, so you will come to the conclusion that such a calculation is not useful for them the intra-day traders. However, if a currency pairs correlate to each other during a week or a month, then the currency pair tends to move in tandem throughout the day.
Confirm Entry Signals
For example, if I have a trade system which showed at me buying signals on the currency pair EUR/USD, but I'm not fully convinced, then I will see how the movement of the currency pairs, such as EUR/USD, NZD/USD, GBP/USD even. This I do to check if the same signal is also emerging from the couple, also to find out if there is little resistance to price rises.
Often there is the appearance of resistance level on AUD/USD which makes me hesitant to do the buying. However, if a little or even no resistance on the correlated pair, then I am so sure to use such signals and will enter the trade. If EUR/USD is able to move up significantly, I am increasingly convinced that the AUD/USD also will move up.
Avoid False BreakOut
I also use a currency pair correlation in the European session, i.e. false breakout happens when the pair GBP/USD. If the GBP/USD started moving and I'm ready to go, then I would check the movement of the AUD/USD. If the AUD/USD is moving in the same direction, I am so convinced to enter the GBP/USD. AUD/USD currency pair is more stagnant than the GBP/USD, though both are correlated very closely. So, frequent-often AUD/USD will not be breakout when GBP/USD reached a point of support or resistance. Thus I so know that the movement of the GBP/USD is merely a false break-out so I did not go straight.
Market Diversification
If you take a long position on the two currency pairs, AUD/USD and EUR/USD, this means you are entering the same trade with two risks. Remember that the calculation of the risk of two percent for each trade is not really good enough. Then you need to be assured that you won't be risking too much on two pairs of currencies correlated. If you enter a trade, it is strongly recommended you to diversify by going to the EUR/JPY and USD/CAD (two pairs that do not correlate at all).
Hedging Your Trade
Hedge appears contrary to my advice above. However, I myself often do so for the sake of my own. If you find the right signal to enter a trade that has generally opposed korelasinya, then it's good you take a position on the two currency pairs. For example, the pair EUR/USD moves the opposite direction against the USD/CHF. If my trading system gives the signal for the doing the buying on the pair EUR/USD and USD/CHF, then I will enter them with conviction.
This I did because the worst possible of the existence of the correlation factor is one trade generates profits and other losers. But this I do with a note that the advantage that I can should be greater than the level of risk which I set earlier. Thus, I still get the advantage.
Even if you just want to enter the single currency pairs only, then try a look on currency pairs which are correlated to see how the movement of both and will it support or resistance emerging from them or not. Take a look at the correlation of the currency pair will give you the confidence to get in or out of a trade. Know currency correlations also will assist you in managing risk in Forex trading.
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