Forex trading includes the trading of different currencies that are of different nationalities 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 move in the same direction showing a positive correlation or in opposite direction showing a negative correlation.
Correlation coefficients range from -1 to 1 showing perfect negative and perfect positive correlation respectively. But as this correlation value equals 0 means the currency pairs are not correlated with each other. if the correlation is 1 then both currencies will move in the same direction either bullish or bearish. on the other hand, if the correlation is -1 then both currencies will move in the opposite direction. zero correlation means there is no relation between them. In forex, the pairs which usually have quote or base currency in common are correlated.
forex correlation strategy
By using Currency Correlation we can find out the best setup of technical analysis. In short, we can pick a refined setup from different currency pairs. Correlation is the only way to filter false breakouts in the price. We will teach 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 the same direction.
Watch the 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 the same direction or it is just a false pattern? Ask yourself. This is a simple strategy to refine the best setups and increase the probability of a trade.
How to avoid false breakout
let’s start with USDJPY. at this price is respecting the trendline and it’s moving downward peacefully. but in USDCHF, there is a breakout in price after two swings. In USDSGD, price is also respecting the trendline and moving downward. So it’s cleared that the early breakout in USDCHF was a false breakout. we have to wait for a breakout in every correlated currency pair. At least two pairs must show the same behavior.
This is a very simple technique to avoid false breakout in price. This is how to read the price action.
I hope you understood what I meant. Correlation in forex matters a lot to refine the best trading setups from different currency pairs.
Learn more in detail by watching YouTube video
forex correlation pairs
Currency pairs that usually move in the same direction and mostly in correlation with each other are following.
|CURRENCY PAIR||IN CORRELATION|
Below is the correlation correlation of the above five currencies. 100% means 1 and -100% means -1
how to trade correlated forex pairs
Trading correlated forex pairs are very easy and safe in terms of risk management. filter out at least three pairs in correlation and then apply your forex strategy. strategy can be based on chart patterns or support and resistance. Pick the best pair with a clean environment. Look for your confirmation in at least two pairs. confirmation can be a pin bar candle or engulfing candle. Then enter in the currency pair chosen already by following risk-reward rules. I mean the setup must give you at least 1:2 RR. Simple is that.
Manage risk factor
Using Correlation, risk can also be managed. like in the above example, three pairs were in correlation. i will surely place order in USDCHF after trendline breakout. but if i place order in two pairs USDCHF and USDSGD by dividng Risk. if stoploss occur is USDCHF and USDSGD hit TP then overall we will be in profit. This is technique to decrease Risk Factor.
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.
I hope you will like this Article. For any Questions Comment below, also share by below links. Use Tradingview for technical analysis instead of mt4.
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.