Correlation between EUR/USD & USD/CHF?

Other day I received an email from some trader and he said to remember that if EUR/USD is down, then USD/CHF will be up. having checked charts about this, I find it to be quite true. what do you think? good tip?

since USD is common, and EURCHF has the floor set in (effectively linking EUR to CHF with a very very short chain), i’m not sure if that’s all that groundbreaking.

Normally EURCHF appears as a mirror image of EURUSD. This is because the basic datas of EUR and CHF are severely common.

You can see the EURCHF charts going in a straight line without any variation.

Similarly you can find the same effect between EURAUD and AUDCHF, EURGBP and GBPCHF, EURNZD and NZDCHF etc.

(Thanks, Bijoymj for the info on correlated pairs…)

I’ve seen discussions of this here and elsewhere, and it seems like good info to know. But being a newbie, I’m not sure yet how we use this information to our benefit in trading? I can see that it may be a way to hedge (my platform won’t allow opposite trades on same pair), but at the same time, hedging would just cancel out the concurrent gains/losses, so there’s not much reason to do that, right? (wrong?)

Thanks in advance.

If you were back in the markets pre-2008 crisis, all lot of this Theories will run true. But now it may /may not work out that way. For example, with the current Euro crisis, US debt problem, China slowing, it seems gold prices are falling instead of rising.

and While euro has debt problem as we know, US has an even larger debt! The size of the public debt alone is 100% of its GDP. So which pair is supposed to rise or fall in this situation?

So I would maybe recommend of looking at trends overall in the forex, Dow jones, commodities to check for bullish/bearish sentiment. To my opinion, it is a better gauge as it is not necessary when one rises, the other will fall (it might be when one pair rises, the other would be ranging, depending on how risk appetite of the market)

The School of Pipsology has a course on currency correlations: undergraduate, senior year. There’s even a step-by-step guide on how to use Excel to calculate correlations. Or if you can’t be bothered, Oanda’s news and analysis site has correlations already calculated for various time periods.

Knowing correlations is important for risk management more than a way to hedge positions. The simple fact of the matter is that if you see a short setup on EURUSD and a long setup on USDCHF, you are actually playing the exact same setup which will have the exact same outcome. So if you normally risk 2% of your account on a trade, then you either have to choose one or the other pair (i.e. EURUSD or USDCHF but not both) or split the risk between them (i.e. 1% each).

I only recently created my correlation table on Excel and I was quite surprised by some of the correlations to be found, e.g. AUDCAD and GBPAUD are around -0.95 even going as far back as two years.

1 Like

Yes, historically there has been a very strong correlation between the two, so much so that I would never go long one and short the other as it really just doubling the risk on the same trade. There has traditionally been a lot of correlation across a number of currency pairs - even Fiber and Cable often track one another, the economies are, after all, very tied in to many shared fundamental factors - but for a number of reasons the correlations have been far less reliable over the past couple of years, one of the many reasons that even experienced traders are being caught out more in the current climate than they would have been a while back. The current crisis has caused lots of previous ‘givens’ to become much less reliable. There are some obvious examples of why - for instance the SNB putting a floor under the Swiss Franc - and many not so obvious. But my overall view would be that that that is a great tip that, like many other Forex ‘rules’, is currently not as useful as it once was. Let’s just hope it comes back, as if one can trades successfully through the current climate, then if things get back to ‘normal’ it will suddenly become a doddle…!

‘Train hard, fight easy’.

ST

you do not need to care. You just trade on one pair will do. So what if EUR/USD goes up ? Are you going to trade USD/CHF? If that’s the case, why not just trade EU/USD? See what I mean?

EUR/USD and USD/CHF has a close correlation of around 98%.You may check the currency correlation chart here:
Forex Trading

1 Like

Yupp i would prefer trading only one pair instead of trading both.