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Using movement discrepancies inverse correlation , traders sell one pair and buy another at the same time, or use cross-rate currency correlation. In this case, the number of points by which the two assets have diverged becomes the trader's profit when their movement coincides again and the correlation is restored. In both cases, the quoted currency is the Japanese yen. It's strengthening on the market price increase will lead to the euro and the Australian dollar moving in the same direction synchronously.
So there is a positive correlation between the euro and the Australian dollar. Typically, correlation is used to confirm the correctness of the analysis. You can observe the behavior of a particular currency pair and, based on it, draw a conclusion regarding the currency pair correlating with it. The more trades move in the same direction, the higher the likelihood of establishing a new trend, which means that the chances of a successful trade also increase.
This way you get additional confidence regarding simultaneous trades. Correlation of currency pairs can double both your profit and your loss. Let's consider an example of a positive correlation. However, the amount of profit will also double.
Trading with Forex correlation pairs is pretty straightforward. Depending on which currency pair you are trading, pay attention to other currency pairs whose quoted currency is the quoted currency of your financial instrument. You will need to carefully examine the price charts of currency pairs correlating with each other. If you clearly see that the price will fall in one of them, do not buy the currency correlating with this pair.
Using this method, you can reliably filter out false signals. The US dollar is a special currency, as it affects the exchange rate of many world currencies. Also, do not forget about the news. Although you are trading in the pound, important data on the European currency can have a great effect on the British pound. This will be the true manifestation of currency correlation.
Always pay attention to what happens with currencies that correlate with your trading instrument - this is the essence of trading with Forex correlation pairs. There are many currency correlation indicators for MT4 and MT5. For example, OverLay Chart Correlation MT4 will help you determine if there is a correlation between currencies or other instruments.
Both can be downloaded free of charge from the official MetaTrader website. Links are attached. In this case, when using entropy, we get indicators that allow one to understand which signals of the two assets are leading:. You can carry out a thorough correlation analysis yourself. You can download a full package of correlation indicators for MT4 here. If you have done everything correctly, you should see something like that is displayed in the figure above. At the bottom of the chart, there will be a Forex correlation matrix.
It analyzes the correlation for seven popular currencies in the period of 50 bars. The default settings are for the night mode. To make the information easier to read, set the chart to a colour scheme with a black background. Make sure that the matrix contains the currency trading instrument you need.
For example, I brought completely different trading instruments from LiteFinance to the top 7 lines. To start the analysis, select your working timeframe—the matrix updates when you switch between different timeframes. The above figure displays an updated correlation matrix, where the seven trading instruments listed above are compared. The correlation coefficient of more than 0.
Pick up the instruments that have the biggest by the module correlation coefficient. Open the price chart of one of the currency pairs and activate the OverLayChart that we pasted from the archive. Next, we open the Inputs tab and type in the SubSymbol line the pair, whose chart we want to overlay on top of the chart displayed in the window, and click on the OK button. If you have done everything correctly, you will see something like this on your screen.
Now, we can apply a hedging strategy to forex trading. What is hedging and correlation trading strategy? In our case, it means cross hedging. You can learn more in the article Hedging Forex: how to hedge Forex trades? Professional Forex traders often use hedging strategies to reduce the risks and make a good profit at the same time. Hedging is most commonly employed in trading currencies, as there are always negatively-correlated currency pairs, whose trends are progressing in sync, but the direction is opposite.
To effectively use the hedging strategy in the foreign exchange market, we need to trade such instruments, whose correlation is close to 1 or It means that they have a very strong negative correlation, so entering trades for these currency pairs will make a good hedge. Using the principle of cross hedging, we open a sell position for the main currency pair and, at the same time, a sell position for the negatively correlated USDJPY pair.
This factor should be considered when calculating the risks. The key to the successful hedging strategy is that the currency correlation is not a constant value. It changes from time to time. As a result, the cross hedge helped us reduce the risks and make profits simultaneously. From this example, you can see that the primary source of the profit when using a hedging strategy arises when the correlation coefficient changes.
However, it is quite difficult to anticipate in advance such changes, especially for beginner traders. There is a risk that you will have to wait for the right moment for a long time, and the swap will take away a significant part of the profit. To avoid such a situation I mean paying too much for the swap , choose a broker with low commissions charged for rolling your trades over!
Another flaw of the hedging strategy is the risk that a change in the correlation module will be against you, resulting even in a greater loss. Suppose you want to use hedging to your advantage. In that case, you will have to explore and analyze each of the correlated trading instruments to know for sure that the negative correlation is regularity, not a coincidence.
The hedging strategy is popular for currency trading for this reason. There is usually a stable relationship between the correlated currency pairs, and so, the use of a hedging strategy will be relatively safe. The problem of quasi-arbitrage of currency pairs with the US dollar as the quoting currency is the lack of reliable signals about when to sell one and buy the other pair in order to capitalize on the discrepancy.
There is a discrepancy between the trends of the pound and the Australian dollar, which began in the summer of and lasted about two years. Traders who entered the market when an inverse correlation between the pairs occurred could not calculate a deposit that could withstand the drawdown from such a difference in rates. When calculating the profits and the deposit required to maintain the position, the feasibility of trades of this kind remains a big question. With direct correlation, the chart of one instrument must not contradict the chart of the second one;.
With an inverse correlation, we need the expected direction of further movement to be the opposite. With a strong correlation, it makes no sense to open additional trades in the 2nd instrument if you already have open positions in the first one, because this will be equivalent to opening one trade-in double volume.
With a weak correlation, you can consider the 2nd instrument for opening positions in order to diversify trade. Summing up, I should note that the correlation between financial instruments is not a constant factor. It features a huge number of currency pairs — from famous to exotic ones. The most popular currency pairs which constitute the biggest volume of world trade are called major pairs.
They are most often used for trading. Major currency pairs in Forex and the pairs that consist of the most popular currencies of the world economy. Apart from major pairs, traders actively use cross-courses currency pairs without the US dollar :. Many traders wonder how many currency pairs they should use in trading.
I think, there are two approaches to the issue depending on your trading style:. This approach is based on the fact that each currency pair is peculiar, and the nuances of its behavior may be studied if you focus on one or two pairs.
Spending some time on mastering one pair, learning the factors that influence it important news, macroeconomic statistics , you may get a certain advantage. This approach is based on the use of certain trading patterns , Price Action patterns , candlesticks , etc.
Having learned to find some pattern on the price chart and having made sure of its efficacy, we may start trading. For this approach, using a lot of currency pairs is reasonable: you scan the charts, find patterns, and get started. Certain criteria and characteristics of currency pairs will help you pick up the most suitable ones. The peculiarity of the currency market is its extremely high liquidity; hence, this parameter may be neglected as there is always supply and demand. To me, the following three criteria seem the most important:.
Each currency pair has the time when it is most active. This is the time when trade volumes are the largest, and the price might move significantly. This is the time when the news that may influence the rate is published. If you trade only for a certain period intraday, better choose the pairs that are most active during the period available to you. Volatility is the fluctuation range of a currency pair during a certain time.
Most often, we evaluate it on D1. So, some currency pairs trade in a relatively narrow range, while for others, the range is wide. The higher the volatility of a pair, the larger the possible profit; however, Stop Losses must also be high. This is for everyone to decide individually, which suits them better: high volatility with large SLs — or low volatility with equally moderate SLs.
Another important criterion for choosing currency pairs is the cost of a trade. In Forex, normal expenses are the spread — the difference between the rates of a buy and sale. On advanced ECN accounts , the spread is minimal, but they feature a small commission fee for operations.
As a rule, major pairs have minimal spreads, the spread of cross courses is a bit higher, while exotic pares feature increased spread. I advise beginners to start with major pairs. Depending on your trading style, focus on one pair, or trade several. Three important criteria — volatility, cost per trade, and activity time — will help you with your choice. Has traded in financial markets since The knowledge and experience he has acquired constitute his own approach to analyzing assets, which he is happy to share with the listeners of RoboForex webinars.
Timofey Zuev. Frederick Dixon. Plz were can I find more of your blogs Victor Gryazin. Wilberforce Nsabiyumva. It is high time to look around while there are not much statistics around. The pair can be traded by fundamental or tech analysis and with the help of indicators. This article explains what NFTs are and shares a Top 5 list of companies connected to non-fungible tokens. This new exchange market week will be full of statistics. Investors will keep analysing global economies and geopolitics.
There are still too many emotions in quotes. The article describes the way of combining the EMA and Awesome Oscillator on H1, peculiarities of this medium-term trading strategy, and money management rules. Every week, we will send you useful information from the world of finance and investing. We never spam! Check our Security Policy to know more. Try Free Demo. Contents What is a currency pair? The characteristics of major currency pairs How many currency pairs do we use in trading?
What is a currency pair? The characteristics of major currency pairs Major currency pairs in Forex and the pairs that consist of the most popular currencies of the world economy. It is the most popular currency pair.