Managing risk is critical. It is what determines whether you will continue in this highly volatile market or you will be kicked out early, also it distinguishes between a successful trader and an unsuccessful one. A rational investor is the one who maintains a well-diversified portfolio to mitigate the overall risk. In theory, any well-built portfolio should not contain highly correlated instruments so as a loss in one instrument should not lead to a loss in another instrument, that is why there is a concept called Correlation. Correlation by definition is the strength of the relation between two instruments it concerns about how two instruments move in relation to each other. Not only it gives positive "Moving in the Same Direction" or Negative "Moving in Opposite Directions", moreover it measures how strong this Positive or negative relation on a scale from -1 or -100% to +1 or 100%. Correlation Calculator Indicator calculates the correlation between any two instruments of you choice on the market watch easily and quickly. Therefore, you can avoid opening two positions of highly correlated instruments because if you do so, you simply double your risk.
How to use
- Add the indicator to your chart and the indicator interface will be there
- Select main instrument from the drop-down list and select the related instrument that you want to calculated the correlation with
- Select the timeframe (H1, H4, D1, W1, MN) used in calculating the correlation. Default - D1
- Enter the period of the correlation (by default 20). * Note: Period cannot be less than 10
The Figure that is shown next to the arrow is the strength as percentage +100% means they are extremely directly correlated and -100 means they are extremely inversely related, 0 means no relation at all.
Ideas for Using
- When you see two highly directly correlated instruments (>=65% "Green"), you can open two opposite positions, for example EURUSD and AUDUSD. One is buy and another is sell (disguised hedge)
- When you see two highly inversely correlated instruments (>= -65% "Red") you can open two positions in the same direction, for example EURUSD and USDCHAF. Both buy or both sell
- You may also use the traditional method not to open highly correlated positions together
Please note that the product cannot be used as a standalone indicator. It does not give buy/sell signals. Use it along with you strategy to manage your overall risk exposure.