Forex Pairs Correlation and how to trade it?

When trading in forex, it becomes important to completely understand the portfolio’s sensitivity to market’s ups and downs. As we know that two currencies are usually priced in pairs, so knowing their correlations can help the investors to control their portfolio’s exposure. The forex trading brokers help the investors to invest by understanding the sensitivity of market volatility. This post aims to explain what correlation of currency pair is and how can we trade it?

What is Forex Pairs Correlation?

The Forex Pairs Correlation indicates the relationship between the values of two forex pairs. It indicates a positive or negative relationship between the values of two forex pairs. When it shows a positive correlation, then it means that both the currency pairs move in the similar direction, but if it shows a negative relationship, it means that both the currency pairs move in opposite directions.

The forex pair correlation is crucial as it can provide investors with the opportunities to earn greater profits and hedge the exposure of risk. Correlation between two currency pairs ranges from 1 to -1; 1 represents a perfectly positive correlation between currency pairs and -1 represents a perfectly negative correlation. But, if the correlation comes out 0, it shows that the prices of two different currency pairs are not correlated.

Trading on forex pair correlation

• Before you trade on the forex pair correlation, first you should identify the currency pairs which have a positive or negative correlation to each other.
• If the correlation is positive, you will choose the currencies of the same position, and if the correlation is negative, you will choose the currencies having an opposing position.
• Traders are always likely to hold correlated pairs so that they can diversify themselves and also maintain the same overall direction. This can protect them from the risk as the traders still have the option to make on other pair’s profit.
• The traders can also trade to hedge their risk on their active currency trades. Let’s take an example; there are two currency pairs USD/CHF and EUR/USD, a trader is holding a long position on USD/CHF for hedging any loss he/she may incur on active currency, i.e. EUR/USD. It is so because these are pairs that have a strong negative correlation.
• The trader can go for two opposite positions with two pairs of positively correlated currencies as the gain on one would eventually offset the losses on the other. For example- there are two positively correlated currency pairs, i.e. EUR/USD and GBP/USD. The Euro zone is expected to suffer from economic slowdown; in that case, a temporary short position on GBP/USD can offset losses on a long EUR/USD position.

Conclusion

To sum up, the correlation between the currency pair can be both positive and negative. The positively correlated currencies move in the same direction, whereas the negatively correlated currencies move in opposite directions. Both positive and negative correlation allows realizing greater profits and hedge risks. Traders can go for forex online trading in the above-said manner to earn profits or hedge exposures. But if you need an expert’s guidance, you can contact us via phone (+44 800 0418471) or email at enquiry@capitalxtend.com. We are available 24×7.