Hello colleagues, I wanted to share my experience and ask for your thoughts. I would appreciate any insights you might have! Do you incorporate correlation into your trading strategy? I mainly trade GBP/USD using Price Action and would like to introduce correlation to reduce or spread risk.
The major currencies v’s USD are all pretty well correlated, so if you see a sell signal on GBP/USD but buy signals on AUD/USD, EUR/USD, NZD/USD and a sell signal on USD/CHF and USD/JPY, I would be suspicious.
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Thanks for the tip, will check it out on demo. If everything works out as I plan it will be plus to deposit and minus to risk.
Based on my observations and tests on a demo account, I found that the currency pairs AUD/USD, EUR/USD, NZD/USD, USD/CHF, and USD/JPY are positively correlated, while EUR/GBP and USD/CAD show a negative correlation. Therefore, if AUD/USD, EUR/USD, NZD/USD, USD/CHF, and USD/JPY are rising, it is recommended to sell GBP/USD. Conversely, if EUR/GBP and USD/CAD are falling, it is recommended to buy GBP/USD.
What do you think about this matter, my friend?
It can be confusing when looking at pairs and trying to identify correlation - a simpler starting point is the constituent currencies - so if USD is bullish in 6 pairs and bearish in the 7th, I would probably not be selling USD. I use currency strength as a confirmaiton for trades, not an entry signal.
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It always strikes me that one of the important points about currency-pair correlations, which is not discussed often enough, is that they’re very changeable from month to month and sometimes even from week to week.
There’s actually a very good lesson on this subject in the Babypips forex course.
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You’re absolutely right that correlated currency pairs can be volatile! However, I’m still excited to try and identify a stable pattern in their application.
Would you mind sharing the link to this lesson? I’ve been eager to learn how to correctly apply correlation for some time now.