read the tutorials and some threads, but would like a bit of practical advice on how to go about it. As a beginner, i’d like to be able to avoid trading more than 1 currency that is highly correlated (avoid increasing the risk ). say i’m trading on the 15min time frame, and I look at a correlation table for 2 pairs i’m interested in. should I use 1 week (lowest time length in the tutes) correlation coefficient, or maybe the 1 hour coefficient (i’ve seen correlations for this time value on websites)? Or what if i’m trading on a daily timeframe, then which coefficient time length in the table do I look at? I don’t know which time length in the table to look up out of 1 week, or 1 month, or 6months, or year, or even lower like 1 day etc, and WHY we are using that length of time for the coefficient.
I have my thoughts about it but i’d like to be more certain. Thank you all
The only sure fire way to avoid doubling your risk is to only trade 1 pair. The choice of time frame depends on what type of trader you are and your trading plan-I hold trades for long periods so use 4h and 1h to spot and confirm a trend, then m5 for the exact spot to enter but a scalper may use m5, m1 or smaller
i probably didn’t explain myself well enough. i mean, when looking at correlation coefficients, which time length do you choose ? there are coefficients for e.g. 1 week/month/3month/6month/1year, and smaller duration coefficients too. which one do you choose and why?
I am trading in single currency pair at a time as i know that at any time risks could increase and this means that instead of getting profits i will get losses which i have to avoid.
I agree that looking at longer-term correlations might make more sense, but maybe you could also base it on the current time frames you are looking at for your trades (ex: If you’re trading EUR/JPY, EUR/GBP, and EUR/CHF based on the 1-hour chart then you could check the 1-hour coefficients also). A good rule of thumb as some of the folks mentioned here is to just stick to one or two pairs with the same currency in order to reduce your correlation risk or maybe hedge it with a small opposite position.
once again thank you everybody for your advice, especially the more experienced people. I’ll keep reflecting on all this in the future again when it’s time to use it, but will only trade 1 currency pair for now. it’s quite complicated.
Harpoon
It is good way for reducing the risk in trading when you’re using currency correlation for learning new pair in trading. With pair correlation, traders could make analysis with main pair and then looking from correlation as consideration to open position in new pair. Example : you’re expert in trading with EUR/USD and you want to learn new pair so you could choose pair which has close correlation, such as : USD/CHF which had negative correlation, GBP/USD which had positive correlation or any other pairs which has close relationship with EUR/USD.
Good call! Currency correlation is definitely a factor to keep in mind when you’re looking at multiple setups but it could be a good way to press your advantage when trends are strong, too. Good luck in your trading and see you around!