The Bull

Thursday 16

August, 2018 6:37 AM



DICTIONARY : A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Currency correlation

What does it mean?

Sometimes the charts of different currency pairs follow each other’s movements, and sometimes they seem to move as opposites. This phenomenon is known as positive or negative correlation and many traders use it to their advantage.

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TheBull says...
Most forex traders stick to the ‘majors’, which are USD based exchange rates and are therefore the most heavily traded. The majors are EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD. The EUR/USD and the USD/JPY are typically the most popular.

Because the majors are based on the USD, in a normal market, particular currency pairs exhibit fairly strong correlation, either positive or negative. For instance, the EUR/USD and the USD/CHF normally move in opposite direction and the AUD/USD is generally positively correlated with the EUR/USD, so when one rallies, the other tends to do the same.

Experienced traders, although aware of these patterns, don’t expect currencies to act accordingly all of the time. Monetary policy and other economic variables can alter the relationship between two currency pairs and lead the trader astray.

However, an understanding of how currencies normally respond in unison will assist when combining positions. For instance, going long the AUD/USD and EUR/USD could be effectively like leveraging the same position. Or taking a long position on both EUR/USD and USD/CHF is like being 100 per cent hedged, since one position could almost cancel the other out.

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