The word currency correlation in forex is a statistical indicator that highlights either a positive or a negative association between the two currency pairs. If the connection is positive, it means that all pairs shift at the same time. A negative correlation illustrates the fact that they move either in different directions or randomly.

As traders, people must still be mindful that currencies operate only in pairs. This implies that no currency pair can stay separated. So, aside from the case where you just want to exchange one pair at a time, you should certainly know the relationship between the various currency pairs. This is a short guide about how forex currency correlation functions.

Forex currency correlation

Trading on forex pair correlations can be achieved by selecting currency pairs that are either positive or negative. So, if you have a strong correlation, you can open two of the very same positions. In the case of a negative one, you can open up two competing positions. You can also minimize losses and avoid uncertainties by combining currency pairs. There are a number of things you can do using currency correlation. However, all these conditions require preparation and knowledge. The two most closely related currency pairs are EUR/USD and GBP/USD. The USD/CHF and USD/JPY are trailing closely behind.

Pairs trading is typically based on a correlation coefficient of 1 and-1. For those who don’t understand yet, 1 is a positive correlation, -1 is a negative one, and 0 is no correlation between currency pairs whatsoever.

The most common currency correlation coefficient in forex is Pearson. Rank correlation and intraclass correlation are two other established coefficients of this kind.

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By Ricardo Martinez

Ricardo Martinez has been active in the financial markets for around 10 years. In the early days in his career he was a trader and worked as market analyst in different online brokers advising clients on key decisions of trading instruments in foreign exchange and commodity markets. Ricardo is currently working as independent trader with diversified portfolio over different markets. His writing for LearnMarketonline is part of his commitment to share knowledge with traders.