Currency correlations: what are they and how can you trade them?
Published on: 12/07/2022 | Modified on: 31/01/2023
Currency correlations or forex correlations are a statistical measure of the extent that currency pairs are related in value and will move together. If two currency pairs go up at the same time, this represents a positive correlation, while if one appreciates and the other depreciates, this is a negative correlation.
Understanding and monitoring currency correlations is important for traders because it can affect their level of risk when trading in the forex market. In this article, we will look at how forex correlation is determined and calculated, how it affects trades and trading systems, and what tools can be used to track currency correlations.
- Forex pairs can move together in a positive or negative correlation
- The correlation coefficient formula represents how strong or weak their connection
- A reading below -70 and above 70 is considered strong, whereas a readings between -70 and 70 is considered weaker
- Traders may choose to hedge their positions by purchasing negatively correlated forex pairs, hoping that the gains in one may be offset by losses in the other
- Commodities may also have a correlation with each other, as well as with forex