As mentioned earlier, since this is a long-term chart, the trade has the potential to give higher returns. Part II of the commodity correlation strategy seeks to take advantage of the negative correlation between the dollar index and gold prices.

Forex Correlation Strategy (TRADE FOREX CORRELATION)

However, the interest rates announcement by the Federal Reserve will try to keep the inverse relationship between the U. This strategy is ideal for traders around the world who do not have time to watch the markets on a daily basis. The strategy can also be used to look for investment opportunities in Gold. Save my name, email, and website in this browser for the next time I comment. Forex Academy. Please enter your comment! Please enter your name here.

You have entered an incorrect email address! Popular Articles. Academy is a free news and research website, offering educational information to those who are interested in Forex trading. A correlation of zero takes place if the relationship between currency pairs is completely random, which means they have no link at all. Impact of currency correlations on Forex trading They can form a basis of a statistically high probability Forex trading strategy.

HOW CURRENCY CORRELATION HELPS YOU TRADE PROFITABLY

They can illustrate the amount of risk you are exposed to within your Forex trading account. For example, if you have bought several currency pairs with a strong positive correlation, then you are exposed to higher directional risk. You can avoid positions that effectively cancel each other out. Understanding correlations can allow you to hedge or diversify your exposure to the Forex market. If you have a directional bias for a given currency, you can spread your risk using two strongly positive correlated pairs, in terms of diversification.

If you are looking to hedge a position holding it with low risk of losses you can take a position in a negatively correlated pair.

Forex Correlation

Forex Trading strategies based on correlation When two pairs are highly correlated, one can serve as a leading indicator of the price movement of the other. If you see a sharp move in one of the two positively correlated pairs, you can anticipate a probable move in the other.

Meanwhile, gold and the U. Currency correlations change in Forex Be aware that currency correlations are continually changing over time due to various economic and political factors. Start livechat. This strategy will allow you to capture and mitigate for small divergences as the asset pair stays highly correlated overall.

As the divergence of the asset prices continues and the correlation begins to weaken, you need to carefully examine the relationship to find out if the correlation is deteriorating. If so, you should exit the trade or take on a different trading approach in reaction to the change in the market.

Undoubtedly the most well-known, and most traded, asset correlation is that between the U. This is a negative correlation that sees gold rise when the USD falls, and vice versa. When you hear the term inverse correlation it is simply referring to what is also known as negative correlation. This is when two assets move in opposite direction from each other, so that when one rises the other falls.

Recent Posts

Even when there is a strong inverse correlation between two assets it does not mean that there is any causal relationship between the two. Probably the best-known inverse correlation is between gold and the U. Just because there is a correlation between two assets, whether positive or negative, does not mean that there is any causation between the two. Correlation is simply a relationship between two assets. When you trade each of these assets, you might succeed in any market condition , by avoiding the steep climbs and large dips expected with a single asset type. In the same way, positively correlated assets could enable you to profit from both assets if the price moves in the direction that you speculate.

Join financial markets with AvaTrade today or test your trading strategy with our risk-free demo account! Still don't have an Account? Sign Up Now. What Is Correlation? What is Arbitrage?