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Summary: Currency Correlations
Abstract：Some currency pairings move in lockstep, much like synchronised swimmers. Other currency pairings travel in opposite directions, like magnets with the same poles that contact.
Some currency pairings move in lockstep, much like synchronised swimmers.
Other currency pairings travel in opposite directions, like magnets with the same poles that contact.
When trading numerous currency pairs in your trading account at the same time, the most essential thing is to be aware of your RISK EXPOSURE.
You may feel that trading in different pairings spreads or diversifies your risk, but you should be aware that many of them tend to move in the same way.
By trading highly linked pairs, you are just increasing your risk!
Pairs' correlations might be strong or weak, and they can persist for weeks, months, or even years. However, keep in mind that they can alter on a dime.
If you want to leverage, hedge, or diversify your transactions, being up to speed on currency correlations might help you make smarter judgments.
A few things to remember
The daily closing prices are used to determine the coefficients.
Positive coefficients imply that the two currency pairings are positively linked, which means they move in the same direction most of the time.
Negative coefficients imply that the two currency pairings are negatively linked, which means they move in opposing directions most of the time.
The two currency pairings are significantly associated if the correlation coefficient is around or equal to +1 or -1.
Correlations can be utilised to hedge, diversify, leverage up holdings, and avoid positions that would cancel each other out.
Currency Pairs that Typically Move in the SAME Direction
EUR/USD and GBP/USD
EUR/USD and AUD/USD
EUR/USD and NZD/USD
USD/CHF and USD/JPY
AUD/USD and NZD/USD
Currency Pairs That Typically Move in the OPPOSITE Direction
EUR/USD and USD/CHF
GBP/USD and USD/JPY
USD/CAD and AUD/USD
USD/JPY and AUD/USD
GBP/USD and USD/CHF
If you find yourself wishing to trade two strongly correlated pairs, it's fine to use both setups.
Simply make sure you have guidelines in place when trading linked pairings and that you follow them at all times!
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
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