So i looked up info about EURUSD, GBPUSD and USDCHF pairs.
eurusd and usdchf are almost totally opposite of each other. Therefore when i buy one pair i will sell the other and vice versa and this works like for i think 100% of the trades i made on these 2 pairs. When i buy/sell one pair and if it goes down the other one is sure to go in the opposite direction.
Anyway i looked at eurusd and gbpusd pairs and they both have a postive correlation of probably around 60-80% so this means they pretty much go in the same direction.
Therefore i buy for the eurusd and gbpusd thinking that both would rise in the same direction.
What happens next shocks me. It seems that the gbpusd is moving in the opposite direction of the eurusd so when i’m making money on the eurusd pair the gbpusd pair is losing money. it’s acting like the usdchf pair which always goes in the opposite direction of eurusd.
I’m just curious what went wrong with the gbpusd pair why did it suddenly go off in a -ve direction to eurusd.
Price divergence. They correlate 60-80% of the time which is strong correlation. It the 20-40% of the time that a ture opportunity is born. Most likely was a stop raid on one of those pairs. Also Check out AUD/USD and NZD/USD for correlation.
Also you might want to watch this video. I think you will be interested in what you find
I look at it this way. EUR/USD is linked to GBP/USD by the EUR/GBP pair. So there are actually 3 pairs involved. When will EUR/USD and GBP/USD move in 100% correlation? Only when there is no movement in the EUR/GBP pair. If there is small movement in the EUR/GBP pair [U]relative[/U] to EUR/USD and GBP/USD, we will see a strong correlation between EUR/USD and GBP/USD, perhaps like the 60-80% that you were talking about. So what happens if the movement for the EUR/GBP pair becomes large compared to EUR/USD and GBP/USD? This previously strong correlation between EUR/USD and GBP/USD would be thrown into chaos, becoming weak correlation, no correlation or even negative correlation.
Yes, if I’m seeing signals to trade EURUSD and GBPUSD, I’ll refer to it. For example, at the moment EURGBP is looking distictly bearish on the weekly and daily charts. So if I get a sell signal on EURUSD and GBPUSD, I’ll trade the Euro, it being the weaker of the two pairs. If I get a buy signal across those pairs, I’ll go for the Pound, it being the stronger.
AUDNZD can be used in the same way when trading AUDUSD and NZDUSD.
You have had some good answers here already, so I won’t overlap, but to add one thought: if you trade two correlated pairs at the same time - for instance, going long EUR/USD while also going short USD/CHF, or going long GBP/CHF while also shorting EUR/GBP etc - then unless you place both trades at half risk (or at two risk levels which add up to your normal risk) then you are actually doubling your risk on one move. For traders who trade a number of pairs this is an easy mistake to make, hence I mention it here. If I find myself in this position I tend to take the purer setup (the charts are never [I]identical [/I]opposites) and leave the other.