Correlation of currency pairs, table and indicator for calculating the indicator
Many people often hear the statement that exchange rates have a stable relationship.
However, almost nowhere there are precise practical recommendations for applying the acquired knowledge in practice. To understand this, you should consider the concept of correction factor.
Currency pair correlation is a relationship or relationship. In the understanding of traders or investors, this concept refers to the coefficient of interdependence of financial assets.
This indicator is very often used in many trading strategies, and it should be noted that there is a connection not only between exchange rates, but also a stable correlation between assets included in different groups.
The most striking example of correlation at the moment is the dependence of cryptocurrency rates; when the price of Bitcoin changes, the rates of other cryptocurrencies begin to change almost immediately.
It is known that all currency pairs depend on each other to a certain extent, since they often include the same assets or are influenced by similar factors.
Forex currency pair correlation table
The table provides a list of the most liquid financial instruments.
The level of interdependence is displayed in numerical terms: 1 – absolute coincidence of price fluctuations, and -1 – the opposite.
You can find several strategies online based on this relationship.
The basic idea behind most of them is that some highly dependent assets lag a little. Such assumptions are absurd, and if you understand the fundamental principles and structure of the financial market, this will become obvious.
How to use the currency pair correlation coefficient
It is important to understand that currency is practically the most sought-after asset.
Significant volumes of purchase/sale provoke high volatility, which in turn leads to market noise. All existing analytical tools were developed during the 20th century and were used solely for the purpose of determining the dynamics of development of the value of stock assets.
Stocks and government bonds are easier to predict than national currencies, the current price of which depends more on volumes and the psychological sentiment of large trading participants than on macroeconomic indicators.
The NYSE is the largest trading platform, the index of which is calculated using the average value of the shares of American companies.
The fact is that this index actually reflects the current state of the US economy.
Thanks to this, you can judge the psychology of market makers and apply the acquired knowledge in Forex trading. You should know that a positive trend in stock markets attracts investment, and a negative one ensures an increase in investment in government bonds, which strengthens the national currency. The correlation coefficient between NYSE charts and currency pairs in which USD is the numerator averages -0.87. In other words, the stock index chart is built in a mirror manner from the mentioned instruments.
Relationship between the NYSE index and the USD/CHF currency pair chart
Stock indices are easier to predict using candlestick and technical analysis, and the result obtained should be applied to trading currency pairs.
For example, if a pin bar has been formed at the local NYSE level, indicating a change in trend from upward to downward, then you should open a By order on the chart of the USD/CAD pair.
In this case, setting up safety orders is not practical.
The transaction should be closed at the current price at the end of trading on the American stock exchange. The necessary tools for the practical application of this tactic can be found in the articles:
- Currency pair correlation indicator - http://time-forex.com/indikators/indikator-korrelycii
- Correlation strategy - http://time-forex.com/strategy/strategiy-korrelycyy
If used correctly, correlation of currency pairs can significantly improve the financial results of trading.