What is the correlation of currency pairs from each other, the correlation table and indicators for MT4, as well as whether it is possible to make money on the correlation of currency pairs and strategies for working with this data – read about all this in this article on our Forex blog for beginners?
Correlation of currency pairs is the relationship between the movement of one pair in relation to another. There are positive and negative correlations.
- Positive – the charts of currency pairs move almost synchronously in the same direction.
- Negative – charts move in opposite directions.
You can check everything without installing a trading terminal and online on our online charts.
A striking example of negative correlation is the EURUSD and USDCHF currency pairs. Take a look at the screenshots.
You don’t have to look closely to notice that these graphs are practically mirrored images of each other. These are negative, or inverse correlation currency pairs.
Well, a positive correlation using the example of the NZDUSD and AUDUSD pairs Of course, point to point of the graphics will not coincide, but the overall picture is visible immediately, there is a strong relationship. There are couples less dependent on each other and the coefficient of dependence can be found out, but more on that below.
Earning on the correlation of currency pairs
And of course, all of us are interested in correlation primarily from the point of view of earnings, is it possible? Directly – no, in any case, I do not know of such a method. But this does not mean that knowledge about correlation is useless for us. In addition to information for general development, there is a way to apply the relationship of currency pairs in practice.
Correlation of currency pairs strategy
The strategy is to receive confirmation signals for their entries into the market. Let’s say our trading strategy, for example, let it be the “Guppy” strategy, gives us a signal to open a sell position on the EURUSD currency pair on the D1 time frame, but we want to make sure if this signal is not false. You can use correlation for this. We know that EURUSD has a strong inverse correlation with the USDCHF currency pair, therefore, at the latter, the price should go in the opposite direction to EURUSD. If the pairs move in one direction, this is a signal for us that it is possible that a position should not be opened and the signal for EURUSD is not strong enough. I think the idea is very clear.
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Another method is suitable for traders who prefer trading in baskets of currencies. It makes little sense to include in the basket currency pairs that have a strong correlation, anyway, with such interdependence from each other, either all pairs will go up or down. It is better to open a deal for one pair, so the costs of spread and commissions will be lower.
For example: for EURUSD we have a sell signal, and for USDCHF we have a buy signal at the same time. Since these pairs have a strong inverse correlation, opening 2 positions is almost meaningless, it is better to choose one of them.
Currency Pair Correlation Table
Fortunately, there is no need to memorize all these relationships; instead, you can use the currency pair correlation table. The most convenient and visual, in my opinion, is on the website of this broker, below is a screenshot of this table: Select a currency pair, it is highlighted with a green stripe. Further, opposite the other pairs, a circle appears, which in online mode reflects the degree of correlation and its type in relation to the selected pair – positive or negative. Click the mouse, everything is intuitive there.
Here, the closer the correlation value is to zero, the correspondingly weaker the correlation. Positive values (+ x percent) – positive correlation, negative values (-x percent) – accordingly, the correlation is also negative.
Currency Pair Correlation Indicator For MT4
In addition to the table, there are correlation indicators for Metatrader. In this article I cite two of the most famous ones, the download link is just below, the manual for the indicators is included in the archive. Read how to install the indicator in MT4, if you have any difficulties with this. The indicators are called AboutLayChart and iCorrelationTable.