Continue reading...What is the correlation between different FX pairs and how can it be measured?
As a Forex trader, it is necessary to be constantly aware of the characteristics of the currency market. Without knowledge of the basic tendencies of any given currency pair, traders are exposing themselves to excessive amounts of risk. One of the most beneficial pieces of knowledge for a Forex trader to be armed with is the historical correlation between currencies. Understanding this relationship will not only allow traders to hedge positions, but it may also give them an edge when it comes to entering a trade.
The term correlation is used to describe the relationship between two related variables and can be expressed as an integer between +1 and ?1. A correlation of +1 is referred to as a perfect correlation and suggests that a 1-pip move in one currency should also see a 1 pip move in another currency in the same direction. A ? 1 correlation implies that the two currencies move in the same...
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