Correlated Forex Pairs Currency Pairs
Correlation currency pairings with close economic links are often the most heavily connected. EUR/USD and GBP/USD, for example, are frequently positively linked due to the tight association between the euro and the British pound, including their geographic closeness and standing as two of the world’s most commonly held reserve currencies
Correlation Currency Pairing Tabular
How to Make Money Trading Forex Pair Correlations
You may profit from forex pair correlations by determining which currency pairings have a positive or negative correlation with one another. If the correlation was positive, you would open two of the identical positions, and if the correlation was negative, you would open two opposing positions.
This is because if the USD/CAD and AUD/USD had a perfect negative correlation, having a long position on both pairs would effectively cancel each other out because the pairings would be anticipated to move in opposite directions. Separate long positions on various pairs, on the other hand, may assist to raise your earnings – or may increase your losses if your projections are erroneous.
Traders would often take positions on linked pairs to diversify their portfolios while retaining the same overall direction – up or down. This might be to shield themselves from the danger of a single pair going against them, since they will still be able to profit from the other pair if that happens. It should be noted that completely linked currency pairs are extremely unusual, and there is always some level of unpredictability when trading financial markets.
Forex Pair Correlations
It can also be used to hedge your risk on active currency trading. For example, you may open a long position in USD/CHF to offset any losses on an ongoing long EUR/USD position. This is due to a substantial historical negative association between these two currency pairings.
Assume you’ve staked £10 per point of fluctuation on EUR/USD. You invest £8.50 per point of movement on USD/CHF to hedge your exposure, and both currency pairings move 10 points. The EUR/USD pair falls 10 points, resulting in a -£100 loss, but due to the negative correlation, the USD/CHF pair increases 10 points, resulting in an £85 gain.
While the net loss is still -£15, the £85 profit from the USD/CHF position ensured that the loss was not -£100 as it would have been if you had just initiated the EUR/USD trade. Alternatively, you might establish two opposing positions on two positively linked pairings, with the profits on one offsetting the losses on the other.
If you felt the EUR/USD and GBP/USD were going to break their positive connection, it would be an example of a positively correlated hedge. This might be because the Bank of England is predicted to drastically change interest rates, or because the eurozone economy is expected to slow. If this is the case, you may want to consider taking a short position on GBP/USD to balance any losses on your long EUR/USD position
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