Currency pair correlations

Hey guys! I just read this article about currency pair correlations, the author stated that EURUSD and GBPUSD are highly correlated and are inversely proportional to USDJPY and USDCHF. I would like to hear peoples thoughts on this and also advice about this. 1 thing I’m positively sure about is not to trade EURUSD and GBPUSD at the same time or USDJPY and USDCHF at the same time because it increases risk!

Another striking thing the author wrote was that Downward movement of often stronger than upward movement, how true is that?

Generally speaking, you want to look at the currencies you are trading. EUR/USD and GBP/USD are positively correlated in large part because they both included USD. Same with USD/CHF and USD/JPY. The first two are negatively correlated to the latter two because the USD is in opposing positions in the pairs.

Downward movement is often stronger in asset markets (like stocks or real estate), but that doesn’t work as well with relational markets. Forex is a relational market.

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What is a relational market and how does it differ to other markets?

A relational market is one where you are trading on the value of one thing in relation to another. Forex is totally relational. When you trade EUR/USD you are trading the relationship between the euro and the dollar.

As I noted previously, the stock market is an example of a non-relational market. The value of a stock is expressed in point terms, not in terms of another stock.

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There is some excellent profit potential in trading the correlations, there are indicators to show it on charts. A most interesting way to trade.

Which indicators are these? Are they available for free download?

Currency correlation can be split into three groups,
Europe ( GBP, EUR and CHF)
Commodities ( AUD, NZD and CAD)
Safety ( USD and JPY)
These will normally move together as a group , see how well they lineup in a recent Strong Weak ranking

Currencies will also correlate with other markets for example Yen has an inverse relationship to US stocks, CAD will normally get stronger as oil prices rise, and NZD moves with gold. But do to market manipulation by central banks you cannot always count on these correlation to hold.

Also watch for divergence, example EURO and CHF these two move together, if you see them open a wide gap from each other on my SW rankings, expect that gap to be short lived

Yes, correlation exits here. But you can’t open a buy trade directly on GBP/USD when you get a buy trading setup on EUR/USD! Personally I have 4 trading systems for 4 different trading pairs! In addition, I mainly use correlation strategy during news session! Otherwise, during technical sessions I use specific trading system in order to my plan!

Of course, there is a correlation between the EUR/USD and GBP/USD pair. For example, if there is significant economic data released in the U.S. then the pair will be affected the same. On the other hand, if there are news in Eurozone then the GBP/USD pair will not be affected directly.

Right now, I am using GBPUSD especially there have been a lot of news in the market that GBP is slowing down.

Hi,

Recently you can see value of the dollar is decreased. It creates impact on USD pairs. In EUR/USD value of Euro is above 1.09 level. After the French presidential election, you can see the constant uptrend in EUR/USD pair. But in USD/JPY pair buying USD by selling JPY increases inspite of decreasing dollar value. In USD/CAD also, we can see the same uptrend but EUR/USD does not. There are lot of factors such as SocioEconomic, Geopolitical issues, war which affect each and every pairs individually. So you have to constantly watching these factors also. Sometimes it’s correlated, mostly not.

-Jim

Thanks for your information

The best website to track correlation ishere.

Anything above 80 is positively correlated and anything below -80 is negatively correlated.

GBPUSD and EURUSD have in the past moved in tandem but since Brexit was announced last year they have had bouts of moving independently of each other. In January this year their correlation slipped to -10.

I am not sure, how currency correlation can helps me in my trading! Because, when I get a good entry point on EUR/USD then I am not going to open another trade for GBP/USD, same case on GBP/USD! So, I believe in different trading system for each and every trading pair! For me, entry point is very important that I verify by support and resistant levels, so no way with Correlation strategy!

Currency correlation is not necessarily a tool which is there to allow you to double down positions in pairs with the same currency drivers. More so, it is used as a overlay tool.

For example, assuming pair ‘A’ and pair ‘B’ are highly correlated.

If Pair A breaks higher and pair B has not yet done so then you may consider going long Pair B as this ‘should’ happen due to the correlation.

Some traders use this approach and find a lagging pair which is highly correlated to a pair which is driving the move. Hence, you are trading divergence between the two correlated pairs. I believe the correct term is ‘cross currency divergence’.

While an older replied to thread this is my main trading strategy with the addition of the DXY as my indicator. Dennis above makes a great comment on the correlated pairs and has a great thread about currency strength and weakness.

I trade a basket of the USD crosses while observing the DXY.
By using the basket approach I am assured of high probability traders due the correlated price action. Keeping the trades lot size small almost always assures no big losses that can not shortly be recovered from. Also place multiple trades per pair traded scales the profit with further limiting any risk.

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I am unsure that this comment is applicable to Forex since it depends on whether you are short and long, but may be made with respect to "the move against the recent trend can be stronger than the move (rate of change) of the market when you stake with the trend. If this is the case, it is linked to FEAR and GREED. Greed (going with the trend) is nowhere near as fast as FEAR (feeling the need to FOMO when the trend reverses). That would make psychological sense to me but I am interested in what other folks think