# forex pair corelation

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hai.... I need information about forex pair corelation... anyone can help me?...thanks!!

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Some currencies tend to move in the same direction, some — in opposite. This is a powerful knowledge for those who trade more than one currency pair. It helps to hedge, diversify or double profitable positions

Statistically measured by performance, currency pairs are given so called "correlation coefficients" from +1 to -1.

A correlation of +1 means two currency pairs will move in the same direction 100% of the time. A correlation of -1 means they will move in the opposite direction 100% of the time.

A correlation of zero means no relation between currency pairs exists.

The example of strong positive correlation between two currency pairs is: GBP/USD and EUR/USD. They have a correlation coefficient of over +0.90, which means that when EUR/USD goes up, GBP/USD also goes up.

A well known sample of two opposite moving currency pairs is EUR/USD and USD/CHF, they have very high coefficient of over -0.90, which means that they move inversely almost 100% of the time!

Examples of same direction moving currency pairs are:

EUR/USD and GBP/USD

EUR/USD and NZD/USD

USD/CHF and USD/JPY

AUD/USD and GBP/USD

AUD/USD and EUR/USD

Inversely moving pairs are:

UR/USD and USD/CHF

GBP/USD and USD/JPY

GBP/USD and USD/CHF

AUD/USD and USD/JPY

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How a trader can use this information?

1. A very simple use is avoiding trades that cancel each other. For instance, knowing that EUR/USD and USD/CHF move inversely near-perfectly, there would be no point to go short on both positions as they eventually cancel each other (loss + profit).

1.a. However, there is a strategy of hedging one currency pair with another. Lets' take the same pairs: EUR/USD and USD/CHF. For example, a trader has opened long positions on both currency pairs. Since they move in opposite directions, if EUR/USD is making some losses, the other pair will go in profit. Hence, the total loss will not be as bad as if it would be without the second "backup trade". On the other hand, profits here are not large either.

2. When confident, a trader may double position size by placing same orders on parallel (moving in the same direction) currency pairs.

3. Another option would be to diversify risks in trade. For instance, AUD/USD and EUR/USD pairs have the correlation coefficient of about +0.70 which means that pairs are moving mostly in the same direction but not as perfect (which is what we need here). If we decide that USD is going to weaken, for example, we will go long and place half of buy order on AUD/USD currency pair, and half on EUR/USD. Splitting the orders will preserve trader's positions from sudden losing rallies (sudden "jumps" in price); and as these currencies move not 100% identical a trader will have some time to react adequately. Different monetary policies of different countries' banks also create an impact: when one currency will be less affected than the other and therefore will move slower.

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wow... thanks Zalina... your information is very important for me.... thank you so much....

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The positive correlation denotes that two units moves in the same direction. In additions, high correlation implies that the movement are becoming more closely matched.