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Understanding the Correlation in the Forex Market

The correlation in the Forex Market is the measured relationship between two units during a sequence of time. It is normally measured on a range of -1 (perfect positive correlation) to 1 (perfect positive correlation). Be sure to check out both types of correlation explained in this article before you test it on your nex Forex trading bonus.

Positive correlation:

When you have a positive correlation, it means that the two units react in the same way to upcoming changes. In this case, if you have a higher correlation, those moves will be closer and more accurate.

Negative correlation:

When you have a negative correlation, you have opposite movements with a lower and more negative number representing a well-established relationship between the opposite movements.

Negative correlation

While implementing correlation coefficient into your Forex trading, you have to bear in mind that currency pairs are traded as the single instrument. When we trade any currency pair, the trade consists on two operations. So, if you were making an EUR/USD trade, for example, we would will be buying the EUR and selling the USD. Therefore, it is more convenient that you take currency pairs as two separate trades than as a single unit. If you follow this tip, it will help you to comprehend how the relationship between other currency pairs is. Besides, you will understand why there seems to be a notable number of correlations within the Forex trading. The reason for this correlation is that the causes that drives prices movements on different economies are frequently the same, and even some currencies are tied to others, as in the Chinese Yuan case.

Creating Well-established Forex Relationships

When you prepare to use Forex trading bonus, it is advisable to compare some of the most important pairs in the Forex market. While doing so, you will probably observe that most of them have an uncommon similarity in their patterns. Here you have an example of the EUR/JPY vs. EUR/USD:

Forex Relationships

As you may notice, the two pairs are moving in a similar way and both of them show a high level of correlation. In this case, you will find that in both the EUR/JPY and EUR/USD you are buying the EUR and selling other currency in a long trade. This is what you are actually comparing in a mathematical form for the strong correlation:

correlation

 

Take the example of the USD/JPY and EUR/USD:

USD-JPY

 

In this example, you will observe a high negative correlation. Just like the previous example, here you will have an increased appearance of a specific currency. However, in this case, the difference is that you will have the currency on both ends for each trade. It is important that you consider that you have caused a negative relationship, since one pair is buying and another one is selling. If you want to have a better idea, imagine that the only currency that moves is USD, and the two other currencies (JPY and EUR) remain horizontal. In that case, you will be comparing the relationship of USD to the inverted USD. Here you have the comparison in equation form:

comparison in equation

Correlation in the Forex Market-Conclusion

If you want to compare pairs before trading with your Forex bonus, it is convenient that you have a currency represented more than once. Besides, when you are comparing two currency pairs, you will have four currencies modifying the relationship. You must consider that it is important that the four currencies appear only once, no matter if you are buying or selling one of them. Following this advice, you will be able to make an excellent relationship that will provide a valuable understanding of the whole process.

 

Using correlation comparison will allow you to find many trading chances and unique trading methods. Then, if you want to fully understand and take advantage of this method, keep studying about what it’s really happening on, and behind the comparison itself.

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Peter Daniel - Peter Daniel
Peter has written 16 awesome articles.

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