Broker Imperial Wealth International about the correlation of currency pairs

 

Currency correlation is a significant aspect in the work of any trader. He should know how to work with it, because profit and successful trades depend on it. It is described in more detail in the article, written with the participation of the broker Imperial Wealth International.

What is it?

Exchange rate correlation is a statistical measure of how strongly two Forex pairs are moving in the same or opposite directions. It is considered one of the important analytical indicators of the market.

Can be of the following types:

• positive (movement in one direction);
• negative (opposite);
• zero (motion independent of each other).

There is a special coefficient to determine the degree of correlation. It is based on the Pearson formula. The process is automatic because all calculations are done by the software. The experts of the broker Imperial Wealth International recommend that beginners pay attention to the values:

• 1. Indicates movement in one direction;
• from 0.9 to 0.5. The interdependence of the pairs is displayed. The level of the index indicates the level of unidirectionality;
• from 0.5 to 0.1. This is an indicator of decreasing correlation and increasing pair dependence;
• 0. There is no correlation, and financial instruments are independent of each other;
• from 0.1 to -0.5. Mutual influence and increasing dependence of pairs;
• from 0.5 to -0.9. A change in the movement in the opposite direction. This also indicates an increase in the correlation;
• -1. This is how the inverse relationship is displayed, where the bottom price gets higher, and the other goes down.

Beginners often make the same mistake. They reduce investment risks by opening positions on different Forex pairs. But since the mutual dependence is not fully tracked, the wrong strategy can cause significant losses.

Why does the correlation change? Imperial Wealth International broker explains

New economic events affect the state of the market, so calculating the statistical measure is important because it is volatile and it can affect the outcome of the transaction.

For example, if oil and other commodity prices rise, currencies of exporting countries may strengthen. Also, economic fundamentals of inflation, unemployment, and central bank decisions affect exchange rates. When one economy is stronger than another it leads to correlations between the currencies of these countries.

Technical factors can also change the statistical measure. This occurs when traders begin to use the same method to analyze the market. This results in similarity in trading decisions and as a consequence, a connection between currency pairs.

Independent calculation of the correlation of currency pairs. Recommendations from Forex Imperial Wealth International

A trader can use programs, but for a better understanding it is worth doing this:

• choose two currency pairs for which the calculation will be carried out. Let's call them A and B;
• collect historical data for each of them, marking the same time period;
• Calculate the percentage change in the exchange rate for the selected Forex pairs for each day in a given time interval. This requires calculating the difference between the previous rate and the current rate and dividing it by the previous rate and multiplying by 100%;
• make a table with the percentage change in the rate of each pair for each day;
• calculate the correlation for currency pairs A and B;

For convenience, the experts at Imperial Wealth International broker recommend using Excel or other statistical tools. At the end, interpret the obtained data. The coefficient can range from -1 (complete inverse correlation) to +1 (direct correlation). If its value is 0, there is no relation between exchange rates. 

How to use a Forex instrument? Says broker Imperial Wealth International

Traders can apply it to analyze the relationship between two or more currency pairs. This allows them to make the right decision regarding the trade. Also, correlation can be useful in the following cases:

• when confirming trade signals. If the trader received an indication of buying one currency pair, he can check the connection with another to make sure there are no contradictions between trading opportunities;
• for diversification. You can use your knowledge of the correlation between forex pairs to allocate assets in your portfolio;
• when determining the direction of the market and identifying a trend. For example, if two currencies with a strong positive correlation, the movement of one may serve as an indicator for the other. If one goes up, it is worth opening a position on the other;
• for trading on the news. For example, if an important economic news release is expected that affects one pair, you can check its connection to other pairs to understand how it might affect them.

Experts at Imperial Wealth International broker age note that this tool does not guarantee success, but it can help in making an informed decision. When opening a deal, it is worth considering risk levels, investment goals, fundamental and technical analysis data.

Trading tips from broker Imperial Wealth International

Correlation is volatile. And the same results do not need to be used repeatedly. To reduce trading risks, you can develop a personal strategy using the various tools offered by the forex broker Imperial Wealth International. Here are some more useful recommendations:

• you need to study the relationship between the pairs. To do this, it is worth using correlation charts and more;
• there is no need to open positions that cancel each other out. A currency cross in the opposite direction can complicate things and result in a loss of profit;
• To reduce risk in Long run it is better to invest in two assets whose index of interdependence of quotations exceeds zero. It is also possible to use hedging of two currency pairs that have an inverse correlation;
• The link between the rates is worth using to diversify the portfolio.

You should not rely only on this tool. It cannot replace fundamental and technical analysis data, so the experts at Imperial Wealth International forex broker recommend using it as an additional resource.

 

 

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