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Currency Correlation
Correlation in the Currency world defines the
relationship between one Currency pair and another. The relationship is
measured using the Correlation (co-efficient) which has a range from +1 to -1.
The Correlation Scale
1.00 = Perfect Positive Correlation – Meaning the Currency pairs move in the same direction 100% of the
time
0.80+ = Very Strong +ve correlation
0.60+ = Strong +ve correlation
0.40+ = +ve correlation
0.20+ = +ve but weak correlation
-1.00 = Perfect Negative Correlation – Meaning the Currency pairs move in the opposite direction 100% of
the time
-0.80 = Very Strong -ve correlation
-0.60 = Strong -ve correlation
-0.40 = -ve correlation
-0.20 = -ve but weak correlation
-0.20 to 0.20+ = Little or No correlation
This means that, for example if EURUSD
and USDCHF had a Very Strong negative correlation (say -0.97) – When EURUSD rises there is a 97% chance that USDCHF will fall.
By contrast, if EURUSD and GBPUSD had a
Very Strong positive correlation (say 0.91) – When
one rises expect the other will rise too (91% of the time).
Why Is Currency Correlation
Important?
Risk Management!
If you are currently Long EURUSD and
considering going Long USDCHF – With a -0.97
negative correlation you are effectively taking a neutral position in the
market.
Conversely, if you are currently Long
EURUSD and considering going Long GBPUSD – With a 0.91
positive correlation you are effectively doubling your current risk in the
market.
The Forex Useful Correlation Indicator shows you
instantly the current correlation of the instrument you are trading against any
4 other instruments AND works on all timeframes.
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