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Correlation, in the financial world, is the statistical measure of the relationship between two securities. USD had a very strong positive correlation of 0. CHF had a near-perfect negative correlation of -1. Yet correlations do not always remain stable.
95, they had a strong positive correlation over the past year, but the relationship deteriorated significantly in the previous month, down to . Correlations Do Change It is clear then that correlations do change, which makes following the shift in correlations even more important. Sentiment and global economic factors are very dynamic and can even change on a daily basis. Strong correlations today might not be in line with the longer-term correlation between two currency pairs.
That is why taking a look at the six-month trailing correlation is also very important. Calculating Correlations Yourself The best way to keep current on the direction and strength of your correlation pairings is to calculate them yourself. This may sound difficult, but it’s actually quite simple. To calculate a simple correlation, just use a spreadsheet program, like Microsoft Excel. Make two individual columns, each labeled with one of these pairs. How To Use Correlations To Manage Exposure Now that you know how to calculate correlations, it is time to go over how to use them to your advantage. Diversification is another factor to consider.
A trader can use also different pip or point values for his or her advantage. 24 for the same number of units. Regardless of whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to be aware of the correlation between various currency pairs and their shifting trends. This is powerful knowledge for all professional traders holding more than one currency pair in their trading accounts. The Bottom Line To be an effective trader and understand your exposure, it is important to understand how different currency pairs move in relation to each other.
Some currency pairs move in tandem with each other, while others may be polar opposites. Learning about currency correlation helps traders manage their portfolios more appropriately. For more, check out our Forex Tutorial. Want to learn how to invest? Get a free 10 week email series that will teach you how to start investing. Delivered twice a week, straight to your inbox. Talks End With China Warning Trade Benefits at Risk if U.