Forex Correlation : How Currency Correlation Is Used During Forex Trading
In order to become a successful trader, we need to understand forex pair ditradingkan and how its position in the market. Not just about fundamental analysis, but also the correlation of currency. This is very important because in forex, all currencies are traded in pairs, so no single currency can move by itself. by understanding the correlation of currency, the trader can avoid the relationship between the negative pair and optimize the positive.Understanding Currency Correlation
Currency correlation can be interpreted simply as a relationship of interdependence between different currency pairs. For example, if you are trading GBP / JPY pair, then in reality you are trading the derivative of the pair GBP / USD and USD / JPY; therefore, the movement of GBP / JPY should correlate with either or both of these pairs.Currency correlation does not necessarily mean that different currency pairs move in the same direction, but can also move in the opposite direction. If two forex pairs move unidirectional, it will not be profitable for you to open a sell position in one pair and buy in other pair. Meanwhile, if two forex pairs tend to move opposite, then is something silly when we open the same position (buy and sell) in both at the same time.
Kinds of Currency Correlation
The currency correlation in statistical measure is usually expressed in terms of coefficients between -1 and +1. The closer the +1 coefficient indicates that two forex pairs tend to move in the same direction, while the closer the coefficient of -1 denotes two forex pairs tend to move in different directions. Here are the details:+1.0 = Perfect currency correlation, 100% moving in the same direction.
+0.8 = Height.
+0.6 = Medium.
+0.4 = Low currency correlation.
+0.2 = Very weak to be considered insignificant.
0 = There is no correlation between the movement of two forex pairs.
-0.2 = Very weak to be considered insignificant.
-0.4 = The weak currency correlation.
-0.6 = The inverse relationship of two forex pairs is intermediate.
-0.8 = The inverse relationship of two forex pairs is quite high.
-1.0 = The perfect inverse relationship, 100% moving in the opposite direction.
Data on the correlation of this currency will be quite complex if we calculate it ourselves, because it can keep changing from time to time. Forex Pair with a high positive correlation today, could be weaker to 0.8 or 0.6 next week, or something like that. Therefore, it is better to look for data or Currency Correlation calculator that is already provided in the internet, if you want to know the correlation of currency that you are trading.
How to Use Currency Correlation
- Avoiding futile trading.
As has been pointed out above, it would be fruitless to buy two forex pairs of perfectly negative correlates, because when one goes up, the other tends to go down. If you profit in one pair, eat would lose in the other pair again.
- Avoidance of risk doubling.
If trading two pairs is positively correlated, one buy, one sell, then it is useless because it is difficult to profit both at the same time. However, if you open one position type (buy only or sell only) on two pairs of high positive correlated at the same time, then it means your risk is doubled. If the profit can be double, but if the loss was swollen.
- Hedging Strategy.
Hedging can be done on the same currency, but can also be on different currencies. If applied to a different forex pair, then Hedging is a trading strategy that utilizes the correlation of currency, both positive and negative. Usually mentioned as a hedging strategy of two pairs or hedging three pairs.
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