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![]() | As many have said about Forex trading, it isn’t rocket science, but it isn’t easy. There are so many moving parts to learning to trade the Forex market. And even beyond the basic skills every trader needs to learn, each trader will have their own preferences and nuances in how and why they make the trades they do. But for someone learning to day trade, any time they can pick up tips or pieces of advice that help them qualify good trades then it is worth the time to learn it. submitted by These-Raccoon to Forex_AI [link] [comments] How to Use Forex CorrelationCorrelation is measured on a range from 1 (perfect positive correlation) to -1 (perfect negative correlation).A positive correlation denotes that two units move in the same direction. In addition, high correlation implies that the movements are becoming more closely matched. In contrast, negative correlation suggests that bodies move in opposite directions with more negative values indicating greater divergence. You must realise that when you open a new Forex position that you are, in fact, trading currency pairs as a single unit. In addition, you must appreciate that you are activating two transactions when you back a currency pair. For instance, if you trade the EUUSD short (to go down in price), then you are selling the EUR and buying the USD. As such, you must not view your trades just as a single operation. In contrast, you must appreciate that you have entered into commercial relationships with two currencies. You must understand this important point in order to comprehend the relationship and correlation of the two currencies in question. You can use correlation to help you determine the strength of a currency trend and the possibilities of it continuing in the same direction. For instance, the USD/JPY and the EUUSD have a tendency to move in opposite directions. If the EUUSD is falling, then the USD/JPY is rising. Assume that you want to short the EUUSD because it has just broken an important support level. However, you are well-advised to examine the USD/JPY to determine if this pair resides just below a major resistance level. If so, then you should postpone opening your new EUUSD trade until you witness the USD/JPY breaking above this level. You should also realise that there is a strong correlation between Forex and the stock market. For example, if the Dow Jones Index falls, then the higher yielding currencies such as the EUR, GBP and CHF tend to fall in union against the low yielding USD and JPY. The opposite is true if the Dow Jones rises. You will soon recognize similar movement patterns for many currency pairs. For instance, the EUJPY and the EUUSD exhibit high correlation because they both move in the same direction. This is because in both cases, you are buying EUR whilst selling the other currencies. In addition, you should also observe that both the USD and JPY move in the opposite direction to the EUR. Related: Calculating Forex Lot Size Understanding Correlating Forex PairsThere are actually a number of correlating Forex pairs that move together, or in opposition to one another. This is helpful when confirming trades, and looking for indications of how a particular pair is about to move. If the EUUSD moves the opposite of the USD/CHF, then when there is a buy signal on the EUUSD, then there should also be a sell signal on the USD/CHF.There will be some differences based on the time frames being traded, so make sure you pay attention, especially if you tend to switch back and forth to multiple time frames. The charts below show some of the relationships between various pairs: (Positive means the pairs’ movements are closely linked. Negative means they move in an opposite direction) 5 MINUTE CHARTS HOURLY CHARTS DAILY CHARTS Be aware that this is like many things in the Forex market; it is a common probability, but never 100% sure thing. There will be times when the EUUSD moves one way and the GPB/USD moves another. Typically this is due to more isolated news or special events, and they will eventually come back into synchronization. But sometimes you may never completely know the reason. Usually, you will notice that most of the correlating Forex pairs share some geographical and economical closeness and similarities. This is much of the reason for the correlation. Knowing these relationships can help you make a final decision when looking at a trade, but they will not, and should not replace a solid trading plan. When you have a set up that you are 70% sure of, then use this knowledge to help confirm your trade. An additional note on correlating trading relationships is that of the Forex market and the commodities market. There are three Forex pairs that correlate nicely with certain commodities. The AUD/USD and NZD/USD correlate positively with the movements of gold. If gold goes up, then so will the NZD/USD and the AUD/USD pairs, because the USD would be weakening. The USD/CAD is connected to oil prices. So if oil moves in a particular direction, then the CAD should follow the same direction. These little tips can help you along your road to becoming successful as a Forex trader. If you take the time to get to know the pair you are trading and are aware of its nuances and correlations, then you will have a better chance at being successful with your Forex trading. But remember, correlating Forex pairs should only be used as confirmation to a profitable trading system, and should never be substituted for a trading system in and of itself. Recommend for you: |
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