Why do currency pairs have a relationship?

Beginner Questions
1

Hi Guys,

Long time lurker, first post.

I started in forex about 3 months ago using a system that was handed down to me from a very successful veteran trader.

I initially saw a lot of early success, however I know that in order to really win long term I really have to deep dive & invest. It’s fair to say I have a long way to go.

Ok so the pairs I trade (in order of preference) are as follows:

[ul]
[li]XAUUSD
[/li][li]GBPJPY
[/li][li]AUDUSD
[/li][li]EURUSD (just started to look at it)
[/li][/ul]

I’m in australia so we can trade metals at 1:100 leverage. I find that XAUUSD delivers consistently for my system and it’s a pair that I want to master.

I have just noticed that price has agressively shot up past resistance by around 150pips. This happened almost instantly. I got in on the 4hour chart on the uptrend about 50 pips below resistance. I cut the trade off at break-even because it was looking like the price was struggling to rise any higher. It sat at around -35 pips for an hour or so and I caught a small spike which bought me out at break even. Timing exits is still a challenge which is compounded by the pairs recently tight trading range.

I have a lot of exit anxiety so I goes you could say I’m still learning to tame the psychology elements.

An hour or so after I exited the trade, price shot up & at the same time so did EURUSD. My question is how do you define the relationship between currency pairs?

There’s the obvious paring of the currency with others, however what can I do to learn which currencies are related to one and other and how to best leverage that relationship in my trading?

Thanks in advance.

2

One example is Gold and the Aussie dollar. Australia is a big exporter of gold, so the price of gold will effect the AUD. The 2 often move similarly.
Same with Canada and Oil.

Pound and Euro often move similarly as they are both affected by Euro zone news.

Also do a search for ‘currency correlation table’. See which currencies are correlated.

3

A big factor to currency pair correlation is to realize that most pairs that you are going to trade have the USD in them. Considering that conservatively 50% of each of these pairs price movement is attributed to the USD, and they all have the USD in common, you are going to get correlation to some degree or another caused solely by this.

4

Completely agree with Banker928. The other way of looking at it is some pairs fall in a risk on bucket and others in risk off ie if there is risk appetite, traders tend to drop the US and JPY (safe havens) and gold to some degree and invest in “exotic” currencies like GBP, AUD, NZD. Some people use the EUR/JPY for example as a barometer for risk sentiment …

5

best way…
familiarize yourself with the interrelationships and the cause-effect

6

Try this - Correlation Concepts - Inner Circle Trader - YouTube