Randy Moore on Foreign Currency Pair Correlation
30/04/2013 17:09
If you want to be a successful forex trader, you have to understand market volatility and how it affects your forex portfolio. Forex trading involves foreign currency pairs and there is co-independence between each pair. Therefore, it is expected from you as a forex trader to understand how your currency pair relates to each other. Once you understand the foreign currency pair correlations and how they move, you can take advantage of the information in order to have more successful forex trades.
What Is Foreign Currency Pair Correlation
Basically, all foreign currency pairs are dependent on how each pair relates to the US dollar. Therefore, if you’re trading GBP/JPY, you are actually trading GBP/USD & USD/JPY pairs. Although the interdependence may be easy to see, there are currency pairs which may move in different directions especially when more difficult forces are forcing the currency pair to move that way.
Correlation is a number to signify the relationship of two entities. It is a statistical measure between -1 and +1 with +1 implying that the 2 foreign currency pairs will move in the same way and -1 implying that the pairs will move in opposite direction. A correlation coefficient of 0 implies that there is a random relationship between the currency pairs.
Forex Correlation Changes
Correlations change from time to time. Therefore, forex traders must make it a point to follow the changes every time. Changes can occur because of global economic and sentiment factors. As such, it is possible for the foreign currency pair correlations to change direction. Most traders follow a 6-month correlation of the forex pairs because it’s pretty accurate. Changes in the country’s monetary policies and the currency’s reaction to commodity prices, and political and economic factors can also change the coefficient of correlation. Although it is possible to compute the coefficient of correlation of foreign currency pairs, some traders may find it difficult to do so. Thus, it is best to take advantage of auto charting methodologies because these can be of great help in ensuring that forex traders become successful in their trading activities.
The above is a guest post on Daveys Forex InfoBlog by Randy Moore.
Thanks Randy!
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