What's the benefit of the knowledge of forex correlation pairs?

2022년 2월 6일

Hi everyone

A Correlation of currency within the forex consist of a positive or negative type of relationship between two

different pairs of currency. A Positive correlation indicates that two pairs of currency proceed in tandem.

A Negative correlation indicates that the two forex pairs will move in opposite directions.

Correlation ranges from -100% to +100%, where -100% represents currencies moving in opposite directions

(negative correlation) and +100% represents currencies moving in the same direction.

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at this chart table below (same as chart above) you can see just MAJOR pairs correlations:
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EUR/USD GBP/USD USD/CHF USD/JPY EUR/JPY USD/CAD AUD/USD
EUR/USD 1 0.83 -0.54 -0.09 0.79 -0.68 0.48
GBP/USD 0.83 1 -0.39 -0.05 0.66 -0.66 0.53
USD/CHF -0.54 -0.39 1 0.48 -0.17 0.20 -0.09
USD/JPY -0.09 -0.05 0.48 1 0.52 -0.11 0.15
EUR/JPY 0.79 0.66 -0.17 0.52 1 -0.65 0.5
USD/CAD -0.68 -0.66 0.20 -0.11 -0.65 1 -0.73
AUD/USD 0.48 0.53 -0.09 0.15 0.5 -0.73 1
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If we look at the row of AUDUSD (for example) we can see it is 48% correlated to EURUSD at the time of

writing this post but also it has a 53% correlation to GBPUSD!

You might notice however, there are negative correlations in there too. This generally happens when

the quote currency is on the base currency between the analyzed instruments. For example.

AUD/USD vs USD/CAD correlation, USD is on the quote (right hand side) for AUD/USD but it's on the left

(base currency) for USD/CAD. This generally creates an negative correlation as it's essentially flipped upside down!

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Traders will use a currency correlation to potentially increase their profits. For example,

since GBP/USD and EUR/USD are positively correlated a trader might place a long trade on

both to utilize the relationship.
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Advantage:
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Potentially increase returns over more currency pairs

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Disadvantage:
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Taking on more risk

On the other hand, traders may be more risk averse and opt to use currency correlations to reduce risk.

For example, instead of placing a max position size on EUR/USD the trade may split 50% of the position

size on EUR/USD and the other 50% on GBP/USD.
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Samples for EURUSD correlation:

at these charts below I give you an example correlations on EURUSD

in first sample we can see EURUSD is in positive correlation with GBPUSD, EURJPY and AUDUSD


in second chart we can see EURUSD is in negative correlation with USDCHF, USDJPY and USDCAD


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IMPORTANT NOTE:

if you check the correlation percentage in different WEBs you may notice the percentage always not the same.

the main reason is their data may be in different period of times and economical situation.

so I strongly advise you if you want to use the correlation make sure the percentage at the moment of trading

is true and check them in different WEBs before trading.
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