What are currency pair correlations? It is simply a measure of how similarly one currency pair moves in comparison to another. Just as an example, let’s say that the EURUSD goes up 500 pips in a month. During that same month, let’s say that the GBPUSD goes up 1,000 pips. We are not too concerned about how many pips the pairs moved but how similar the moves were. If the prices went straight up, then they are highly correlated. If the EURUSD went straight up and the GBPUSD stayed in a range then shot up, they would be less correlated. When they move in the same direction at the same time, up in this case, they are positively correlated.
Negative correlation is when one pair goes up and the other goes down. In this example, if the EURUSD went up at approximately the same time the GBPUSD was going down and to a similar degree, then there would be a high degree of negative correlation.
How does this us help as traders? If there is a high negative or positive correlation, there may be times when one pair moves before the other highly correlated pair and can serve as a forecast or a confirmation of a move in the pair we are trading. In addition, you might want to stay away from taking trades that are two highly correlated because that increases your risk that the same move will affect all your trades in a similar fashion. Here is a great free resource that I found that has up to date correlation numbers.
http://fxtradeinfocenter.oanda.com/charts_data/fxcorrelations
Of course this information should not be taken as the primary means of entering a trade, but keeping an eye on correlations can be a tremendous secondary indicator that can give you more confidence in a trade.
Hope that helps!
Hugh
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