Currency Correlations are
an Indispensable Trading Tool

A solid understanding of how currency correlations work is a very important part of Forex trading. Certain currency pairs will often move together, while others seem to move in opposite directions.

There are different reasons why this happens, but the main thing you need to know is there are relationships between the different pairs. Once you understand these relationships, you can use this information to help control your trading exposure.

Currency correlations are expressed on a scale between -1 and +1. A correlation of -1 means that the two currency pairs move in opposite directions 100% of the time, while a +1 implies the pairs will move in the same direction 100% of the time.

The chart below shows the correlations between the EUR/USD and the other six main pairs.

If you look at this chart, you'll notice USD/CHF moves opposite to EUR/USD most of the time, while GBP/USD moved the same as EUR/USD 35% of the time over the last month.

These relationships are constantly changing, and are usually shown in 1 month, 3 month, 6 month and one year periods. If the shorter periods are significantly different from the longer term relation, there is usually a change brewing, so beware.

If you are interested in calculating your own correlations, drop me a note from the About the Author page and I'll send you the instructions of how to perform the calculations yourself.

Use Correlations to Help Manage Your Exposure

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You should avoid entering trades where two different pairs would cancel each other out, although this can be used to hedge a position that you don't want to close.

By the same token, trading two pairs that move together is much like doubling up on your trade... watch your leverage!

You can use correlations to diversify your trading. Entering two positions which move somewhat in the same direction helps reduce the risk associated with trading only one pair. Rarely do the same economic factors exactly affect two different pairs to the same degree.

current currency correlations

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