Forex Currency Correlation

Currency Correlation

A professional trader to achieve stable earnings in the Forex market should understand the laws of currency movements relative to each other. All processes are interconnected, and knowledge of one can predict fluctuations change the other. There is no independent currency pairs. Knowing these correlations increase the guarantee of effective activity of the trader.
Currency Correlations - a very easy method of forecasting. There are two types of direct and inverse correlations. The first is a stable difference between the two units in the pair, the second is that the growth of a single component reduces the other. The correlation coefficient can be calculated automatically, for example using program MicrosoftExcel and other applications based on the statistics. The index varies in the range from +1 to -1. The first value - a direct correlation when the currency pairs are in the same direction, the second points to the opposite direction.

The calculation of the correlation is performed on the following schedule:
- Select the currency pair.
- Time correlation counting process.
- Score column numbers in the dynamics of change of currency pairs for the selected period.
- Select the function CORREL to one of the columns, and select the range in which the need to evaluate the relationship.

The result is a number which is the correlation coefficient.

-1.0 Perfect inverse correlation
-0.8 Very strong inverse correlation
-0.6 Strong, high inverse correlation
-0.4 Moderate inverse correlation
-0.2 Weak, low inverse correlation
0 No correlation. Totally random.
0.2 Very weak, insignificant correlation
0.4 Weak, low correlation
0.6 Moderate correlation
0.8 Strong, high correlation
1.0 Perfect correlation

The resulting figure should be used correctly. This indicator enables not apply equally to each other unit. For example, if the currency pair there is an inverse correlation, then its use of sustainable means no difference, as opposed to the direction of their movement. An important indicator is the lowest price of the pair (pip), different values ​​which a trader may apply.

Proper money management requires the use of as a tool for risk diversification. This factor must be taken into account. The challenge of diversification to reduce the risk of loss of funds investment portfolio without affecting its profitability. It can not be used in the work, but you need to know the correlation between currencies. The required information will help increase their profits, to use the tools of diversification and hedging. Thus, before trading Forex you need to navigate to the consistent changes of currencies relative to each other.