Currencies correlation in forex market is something that forex traders need to understand. Today's article will share about this.
You know, there are different currencies in the Forex market. Each currency belongs to a different country. And of course, the economic strength of each country is different. So obviously the strength of each currency is also different.
You also know that currency pairs in the forex market are the comparative values of two currencies.
And, as the previous article that CaPhiLe.Com shared (https://www.caphile.com/2022/11/best-currency-pairs-to-trade-forex.html), the major currency pairs in the market forex is divided into 2 groups: xxx/usd and usd/xxx. And cross currency pairs are a combination of 2 currencies together, which does not include USD.
So, when the USD strengthens (roughly, the US economy grows stronger), the xxx/USD currency pairs will have a common expression that will decrease together, and the USD/xxx currency pairs will increase together.
However, the most important thing here is that when the prices of all the currency pairs in the group move, which pair moves more? And which currency pair will move less?
In other words, if based on 1 parameter is the USD currency, when the USD fluctuates (stronger or weaker), how will other currencies change? with different amplitude of change (increase or decrease)?
If we know that well, we can predict the direction of movement of 1 of the currency pairs in the group, with a high probability of accuracy.
Here are some experiences when trading with the correlation analysis method between currency pairs:
- Normally, when the USD increases in price (the Dxy index increases), the group of currency pairs Usd/xxx will increase, including Usd/Jpy, Usd/Cad, Usd/Chf,... And the group of currency pairs xxx/ Usd will decrease, including Eur/Usd, Gbp/Usd, Aud/Usd, Nzd/Usd,...
- When USD decreases in price (Dxy index decreases), on the contrary, the group of USD/xxx currency pairs will decrease in price, and the group of xxx/Usd currency pairs will increase in price.
- There are 2 methods to trade when analyzing correlation, including:
1. Choose the leading currency: When a group of currency pairs increase in price, choose the strongest currency pair in the group to BUY. Conversely, when a group of currency pairs falls in price, choose the weakest currency pair in the group to SELL. This method is based on the idea: If it is strong, it will be stronger, if it is weak, it will be weaker.
For example: USD is weakening, and xxx/Usd group are both increasing in price, but Eur/Usd is gaining the most in the group, so buy Eur/Usd. Or then, Usd/xxx group is all decreasing and Usd/Jpy is dropping the most in the group, so let's sell Usd/Jpy.
2. Choose a balance: When a group of currency pairs goes up, see which is the most volatile and which is the weakest, then trade the cross - a combination of the two coins against each other, with the expectation that "the gap in the strength of those two currencies will narrow"
For example: USD is weakening, the volatility of the Eur is the largest (Eur/Usd increases with the largest margin), and the volatility of the Aud is the smallest (Aud/Usd increases with the least amplitude) , then SELL the Eur/Aud cross, expecting the gap "in strength" of the Eur and Aud to narrow.
- There are many methods for statistical correlation of currencies or currency pairs, such as: Using multiple parallel price charts to compare, using formulas and functions to create technical indicators, using Features are available on major specialized information sites, such as: tradingview, cmegroup, Bloomberg,...
Here is an example chart of the correlation of the currency pairs:
With the chart above, corresponding to the 2 trading methods mentioned above, it is easy to see:
- Method #1: Choose a currency pair whose moving line on the chart is at the top to buy, and at the bottom to sell.
- Method #2: Choose a cross-currency pair - pairing 2 currencies with the top and bottom moving lines to trade, with the expectation that these 2 lines will close the gap.
You can also use this method to analyze 2 currencies, for example in the image below, 2 currencies Eur and Gbp.
You can also use this method to analyze 2 currency pairs (or 2 currencies), for example in the image below, 2 currency pairs Eur/Usd and Gbp/Usd.
Similar to choosing 1 of 2 trading methods as above, with these 2 currency pairs you also have 2 ways to trade:
- Method #1: Eur / Usd is stronger than Gbp / Usd, so if you buy, choose Eur / Usd, if you sell, choose Gbp / Usd.
- Method #2: Wait when the distance of the 2 lines moves far apart, if Eur/Usd is stronger than Gbp/Usd (Eur/Usd price line is above and far from Gbp/Usd price line), then choose to sell cross currency pair Eur/Gbp to expect the 2 lines to shorten the distance, if then Eur/Usd is weaker than Gbp/Usd (Eur/Usd price line is below and away from Gbp/Usd price line), then choose to buy cross currency pair Euro/Gbp.
Above are some sharing about the correlation of currency pairs (or currencies) in the forex market, hope the article is useful to you.
Best regards,
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