Hello there fellow traders,
I was browsing through my charts yesterday, and I seemed to have noticed an oddity when I compared the EUR/USD and USD/CHF charts.
It almost seemed as if one chart was the inverse of another, for the time frame I was viewing (20 minute I believe).
Is this what is termed correlation in trading jargon? If so, why does it occur with that particular currency pair?
Thanks,
xXTrizzleXx
Look at what the two charts you mentioned represent
Euro to Dollar
Dollar to CHF
You can see what both charts have in common is the US Dollar. The US Dollar is a powerful currency, it is the worlds reserve currency, so the US Dollar is often the controlling factor in what happens on the forex markets.
Take this scenario: US Dollar is rising in value against other currencies, what will happen on those two charts ?
On first chart you will see the price go down because your Euros are going to be worth less US Dollars as the US Dollar increases in value.
On the second chart the reverse will happen, as the US Dollar rises in value against The Swiss Franc your US Dollars are going to be worth more Swiss Francs so on that chart you will see the price rising.
So if you put those two charts side by side you will often see as one goes up the other goes down.
This doesnt always happen for instance if there was some unusually strong activity on the Swiss Franc for some reason you might see this inverse pattern does not occur as strongly.
A common mistake by new forex traders is to unwittingly open short positions at the same time or long positions at the same time on two currency pairs that are trading opposites such as the two you mentioned. If you do this your profits on one are going to be wiped out by close to equal losses on the other.
Having said that there is a trading system based on the idea of opening positions on opposing/inversly corrolating currency pairs I believe it works on the basis that one of the pairs is going to slightly out perform the other because they are never going to be exactly identical opposites, so if you open equal positions on both, whichever way the market goes one of those pairs should make you a profit, dont quote me on that I’m not too sure about it. There is a recent thread about it on this forum though. You might find it on the first or second page.
They are looking like so because EURCHF has been trading in a very tight range for some time now. ~20 pips. So therefore, whatever that caused the movements in the 2 pairs you mentioned is the relation of the USD against these two currencies (Swiss Francs and Euro)
The EUR/USD to USD/CHF has a correlation of 94.5% … don’t cancel your trades out.