Many people like to trade multiple things at once, but if you don’t know the correlation between pairs, it can backfire and increase your investment risk.
Associated?
What are the risks of currency linkages?
How can investors make better use of currency linkages?
Let’s look at them one by one.
1. What Is Currency Correlation Currency correlation literally means that there is a certain correlation between the movement trends of two currency pairs.
Specific relationships can be divided into three categories: co-direction, reverse direction or completely random direction.
So how do you judge the link between currency pairs?
Use the correlation coefficient, which is a number between -1 and +1.
The correlation coefficients are close to or equal to +1, indicating that the two pairs have a strong positive correlation and that they move in the same direction.
The correlation coefficient is close to or -1, indicating that the two pairs of currencies have a strong negative correlation, causing them to move in opposite directions.
The correlation coefficient is close to or zero, indicating that the correlation between the two pairs of currencies is very weak or that their movement trends are usually random.
We can use a currency correlation calculator to calculate the correlation coefficient of two currency pairs over a specific time period.
It is important to note that the relative coefficients of currencies are not static.
There are many reasons why the correlation between strong and weak currency pairs may change over days, weeks, months or even years, including changes in a country, changes, or any political or economic event that affects the sentiment of currency traders.
2. What are the risks of currency linkages? Currency linkages are closely related to risk management.
Make sure you understand your exposure when you trade multiple currency pairs in your trading account at the same time.
You might think you can spread your risk by trading multiple currency pairs.
However, many currency pairs tend to move in the same direction.
However, when you buy two negatively correlated currency pairs at the same time, it does not mean that the risk can be offset to zero because of the differences in different currency pairs.
In this case, you may not only have to pay twice the spread, but also struggle to minimize your income, or even your loss, as one pair of currencies eats into the benefit of the other.
(1) Eliminating Transactions with Strong Negative Correlations When trading multiple currency pairs, it is important to avoid trading two pairs with strong negative correlations at the same time.
The two currencies move in opposite directions and it makes no sense to take a long position at the same time.
Sometimes there is even a price to pay.
Any change in price is a rise in one currency and a fall in the other, and you would have to pay twice the difference.
(2). Use Strong positive correlation trades to increase leverage Trading two strong positive currency pairs simultaneously can double your position and expand your profit.
But if you are wrong, you must take multiple risks.
(3). Diversifying Risk through Positively Correlated Trades With currency linkages, you can diversify risk into two currency pairs that move in the same way, rather than always trading a single currency pair.
(4) Confirm breaks and avoid false breaks. Use currency correlations to confirm entry and exit signals for trades.
Canadian dollar falls on hold;
The new rules sent the pound to its lowest level in nearly a year.
Please pay attention to the specific operation, the market is changing rapidly, investment needs to be cautious, the operation strategy is for reference only.
