Forex correlation, currency pair correlation table, special indicators
It has long been noted that the movement of currency rates on Forex in various pairs can be interconnected; this relationship is called correlation.
Forex correlation implies a stable relationship between the rates of various currencies in the foreign exchange market. In practice, they usually use the dependence of currency pairs, which greatly simplifies the trading process.
The strategy is quite common and has managed to win the trust of more than one generation of traders on various world exchanges.
When trading on the foreign exchange market, you have probably noticed more than once that as soon as one currency goes up, others follow suit, or vice versa, as soon as a trading instrument begins to fall in price, some other monetary units only strengthen their position.
It should be noted that currencies or currency pairs will not necessarily move in only one direction. Correlation in Forex can be either direct or reverse.
If the trading instrument and the selected reference move in the same direction, they say that there is a direct relationship. If rates move in the opposite direction, then we are usually talking about reverse Forex correlation.
Coefficient
In order to organize online trading on several currency pairs, it is customary to use such a concept as the Forex correlation coefficient.
It allows you to determine how closely currency pairs are related to each other. If the price of a currency moves in one direction throughout the entire time, then the Forex instruments are assigned a coefficient value of +1, which corresponds to 100%.
But this does not mean at all that if EURUSD rises in price by 10 points and EURGBP will also rise in price by 10 points, if there is a 100% relationship between them. The coefficient characterizes not the magnitude of changes, but the amount of time during which this relationship between rates is observed. At the same time, the plus or minus sign indicates which type of interaction is present, direct or reverse.
A plus indicates that the pairs are moving in one direction, and a minus, respectively, in the opposite direction. An example of the correlation of currency pairs is given in the table, the first table is for the hourly chart, the second is for the daily chart.
Correlation of Forex currency pairs - practical application.
There are two options for using this parameter; in the first case, it is used for multi-currency trading. Knowing that certain two instruments most of the time move in different directions, there is no point in opening trades on them in one direction. Is it possible that a similar approach can be used for hedging in Forex .
When correlation makes it possible to reduce risks, assets that react completely differently to news or events are often used for these purposes.
An entire strategy is built on the second option; its essence is that one currency pair usually reacts to an event a little faster than the other.
This means that, focusing on the first, you can open trades on the second. Forex correlation is not a constant parameter; there are special scripts for calculating the variable.
Here are examples of some of them: The PRICE CHANNEL OSCILLATOR indicator - http://time-forex.com/indikators/price-channel-oscillator displays correlation graphs of two currency pairs and shows how strong the coefficient is.
The correlation indicator - http://time-forex.com/indikators/indikator-korrelycii reveals patterns in the movement of currency pairs.