Correlated Forex Currency Pairs

Matthew Jackman

Head of Operations

Matthew is the Head of Operations at AudaCity Capital. He graduated from The University of Hertfordshire with a distinction in Finance and Investment Banking (MSc) and has dedicated his post graduate life to the FX markets.

In forex trading, currency movement tells a lot about the market condition. It allows traders to know whether they should open or close a trading position. This means understanding forex correlation pairs is crucial as it helps you see the level of risk in the market.

When you understand how to use correlated pairs and how they affect the market, trading will be easier for you.

Unfortunately, most traders still find it hard to understand them. This is why this article is here to help you understand forex pair correlation, how to trade using them, and the best tips to use while dealing with correlated forex pairs.

What Does Correlation Mean In Forex Trading Pairs?

Correlation in forex trading means a connection between two currency pairs. There are usually two types of currency correlation; positive correlation pairs and negative correlation pairs. The positive correlation means that two forex pairs are moving in the same direction.

On the other hand, a negative correlation means that two pairs are moving in the opposite direction. They are also known as inverse correlation pairs.

Forex pairs correlation is usually important to traders because they might affect trades without a trader’s knowledge. This is why traders follow them keenly to maximize their profits and find forex hedging opportunities. If you know a particular forex pair will move against each other, you can open both positions to maximize your profits.

However, you must be very keen when using currency correlations. If you miss-predict the market, you might incur huge losses. Your hedging will also not be very effective as you had thought it would be.

Understanding Correlation Coefficient in Forex Currency Pairs

Correlation is usually computed into a correlation coefficient. This represents how weak or strong two forex pairs are. They are expressed in numbers or values that range from -1 to 1 or -100 to 100.

A positive correlation of +1 means that two currency pairs will identically move in the same direction. While a negative correlation of -1 means that the two forex pairs will identically move against each other.

Reading charts and currency pairs correlation table is also crucial as it helps understand how correlation functions. A reading that is less than -70 and more than 70 means a strong correlation.

On the other hand, if a reading ranges in -70 and 70, it means that currency pairs are not strong or less correlated. The formula below explains well how the correlation coefficient is calculated.

The upper part of this formula is covariance, and the downer part is the standard deviation. The formula uses x and y and compares them to the average readings in the forex pairs.

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The Most Correlated Forex Currency Pairs

In this section, we will look at both the forex pairs that move together (Positive correlation) and those that move against each other (Negative correlation).

Apart from that, you will also understand why the pairs are considered positive and negative and how you can use them when trading.

Positive Correlated Forex Currency Pairs

Highly positive correlated pairs are considered to have the same economic ties. They include;

EUR/USD and GBP/USD

This is one of the many forex pairs that correlate. The forex pairs increase and decrease are often viewed as equals. They correlate so well because of their relationship with the US dollar, the pound, and the Euro. All three currencies are intertwined by their strong economic ties.

When trading with this two currency pair correlation, you can open two long positions since both currencies move in the same direction. If both the EUR/USD and GBP/USD increase in price, you can potentially make better profits with the two forex correlated pairs.

Alternatively, you can go short if you predict one currency pair will fall earlier than the other. If one fails, most likely, the other will follow alongside the previous currency pair.

Other Positive Correlated Pairs
  • EUR/USD and AUD/USD
  • USD/CHF and USD/JPY
  • AUD/USD and NZD/USD
  • EUR/USD and NZD/USD

Negative Correlated Forex Currency Pairs

These are pairs that usually take the opposite direction. One familiar pair is;

EUR/USD and USD/CHF

When it comes to this forex currency pair correlation, the USD/CHF usually moves against the EUR/USD. Its negative correlation ranges below -0.70 and sometimes goes further below -0.97. Effective traders typically take advantage of this negative correlation and hedge in one of the present pairs.

A good example is when you go long on both the EUR/USD and USD/CHF, despite their negative correlation. This helps protect you against the short-term volatility that may occur in the market. Again, any gains in the long position will offset the losses that might happen in the other opposite currency.

Other negative correlated pairs
  • GBP/USD and USD/CHF
  • USD/CAD and AUD/JPY
  • USD/JPY and AUD/USD
  • GBP/USD and USD/JPY

How To trade Correlated Forex Currency Pairs

Forex correlation pairs offer a lot of trading advantages. Wise traders can use them to hedge and in commodity correlations. All you need to do is differentiate the positively correlated pair and negatively correlated pairs before using them in your trade.

The following steps will help you trade confidently using correlated pairs;

  1. Find a Trading Platform and Open a Live Account. The first thing you need to do to trade with correlated pairs is to get a live trading account. You can use your preferred trading platform. Alternatively, you can begin with a demo account to understand how they work before using a live account.
  2. Do Your Research on Forex Pairs. There are several forex pairs, which can sometimes be confusing, especially if you are a beginner. Do your research and make a correlated forex pair list to know which ones are highly correlated. Also, try to find out what affects them and how you can use that to your advantage.
  3. Choose the Best Correlation Strategy. Building a trading plan before proceeding is a wise thing to do. The good news is that there are so many strategies to use in forex. Find or build one that favors your trading and stick to it while finding other better methods to grow your profits.
  4. Take Advantage of Risk Management Tools. With risk management tools, you can easily avoid loopholes while trading. It helps you manage the risk that comes with high market volatility or sudden price changes. Seek advice from professional traders to know the best risk management tools to use when dealing with forex currency pair correlation.
  5. Open a Trading Position. After figuring out the above things, place your trades. You can either sell or buy, depending on the current market condition. Remember to use indicators as they help a lot in signaling entry and exit positions.
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Frequently Asked Questions About Correlated Currency Pairs

  • Should I trade correlated pairs?

    Yes, you can trade with correlated pairs so long as you understand how they work. Also, you can practice using them before switching to live accounts.

  • Can I make good profits with correlated forex pairs?

    You can make better profits with correlated pairs if you apply them appropriately.

  • Are there any forex pairs that correlate with commodities?

    Forex pairs do not only correlate with other pairs. They also correlate with commodities such as gold, crude oil, etc.