What is Correlation in Forex Trading?
Forex trading includes the trading of different currencies that are of different nationality with one another. Simply correlation means the link between the two identities which comes to be in between the currencies when we are dealing with forex trading. The two possibilities here are that either both moves in same direction showing positive correlation or in opposite direction showing negative correlation.
Correlation coefficients ranges from -1 to 1 showing perfect negative and perfect positive correlation respectively. But as this correlation value equals to 0 means the currency pairs are not correlated with each other.
By using Currency Correlation we can find out best setup of technical analysis. In short we can pick a refined setup from different currency pairs. We will show you with examples. Below are the three charts of different currency pairs and positive correlation due to USD as Base currency. They are moving in same direction.
Watch above setups deeply. Which one is forming a clear pattern? Which one is easy to trade? In which setup breakout is very clear? Either all the correlated pairs moving in same direction or it is just a false pattern? Ask yourself
I hope you understood what I meant. Correlation in forex matters a lot to refine best trading setups from different currency pairs.
Trade on correlated forex pairs
Key to maximize the profit you earning or minimize the loss you expecting in forex trade is that you are going with two same positions. Just suppose you are taking out a pair that ultimately gives a negative correlation will move you towards loss but if you are taking out two pairs the negative correlation in one can be compromised with the positive correlation in the other pair. In the same way if your selected pairs have three currencies then your profit or loss can be compromised as the one currency in the individual pair matches.
Decrease in Risk Factor
I will teach you with examples. Take above three examples. Like if you put a buy order after trendline break in all the three pairs then in the two pairs your takeprofit will hit and in one pair your stoploss will hit. You have decreased your risk factor using correlation. Very simple!!!
Forex Trading is not difficult but one should stay disciplined. Without discipline and Risk management we cannot profit in this business. Become a Smart Trader and Trade Like a pro instead of flowing with the trend.
There is no correlation between happiness and amounts of money.
Note: All the viewpoints here are according to the rules of technical analysis. we are not responsible for any type of loss in forex trading.