Did you know that one currency pair holds certain information about another currency pair? The relationship between currency pairs is called currency correlation. When trading in the foreign exchange market, you can use it to your advantage.

Did you know that one currency pair holds certain information about another currency pair?

For example, with the Gopher, or the currency pairs GBP (or Great Britain Pound) and JPY (or Japanese Yen), the pair is said to have a correlation with another currency pair, the USD (or US Dollar) and JPY. As it follows, a market movement that involves USD/JPY may influence GBP/JPY.

Currency Correlation

The relationship between currency pairs is called currency correlation. When trading in the foreign exchange market, you can use it to your advantage.

Here's a list of facts:

  1. The reliability of currency correlation varies; the significance of the inter-dependence is describable upon the determination of the correlation coefficient. The figure ranges between positive 1 and negative 1; when it leans toward a positive value (i.e. a value around 0.4 to +1), it is indicative of a strong correlation. Conversely, when it approaches a negative value (i.e. a value around 0.3 to -1), it is indicative of a weak correlation.
  2. The currency correlation is a technique that privileges a trader to define the mutual dependence of 2 sets of currency pairs; in cases when describing eventual movement in a currency pair is virtually impossible, the solution is to turn to its correlated pair. Other than help him make better predictions, it can entitle him to promising trading opportunities.
  3. Currency correlation describes a currency pair's sensitivity to various market elements and economic conditions, as well as the overall trading behavior. In this regard, if the currency pair's value is depreciating, chances are, the value of its correlated currency pair is appreciating.
  4. As mentioned, the currency correlation co-efficient ranges between positive 1 and negative 1; the figure can be equal to 0. With 0 as the co-efficient, it means that there is hardly any movement between the currency pairs.
  5. With currency transactions, a trader is somehow pursuing 2 different trades. For instance, with the example above (i.e. with the GBP/JPY and the trader is based in the US). While he is trading the GBP/JPY, he is actually trading with the derivative (or the correlated pair) GBP/USD and USD/JPY.
  6. Most forex traders can use currency correlation to maximize trading profitability, but only if they are updated. It's recommended to check the latest releases regarding currency correlation since values can change frequently.

The possible advantage can really help a positional trader since the correlation variable can be employed to make more accurate forecasts. It can also prove useful to guerilla traders, momentum traders, scalpers, intra-day traders, and short-term traders of sorts.