16 May 2019
How to Effectively Use Currency Correlation in Forex Trading
Forex trading requires a solid understanding of fundamental events and technical indicators. Most traders focus on these two things to improve their chances of turning a profit. However, to be a successful forex trader, risk management is crucial. One concept that can be of immense help in risk management is currency correlation. Currency correlation, also called forex correlation, is the extent to which one currency pair is interrelated to a different currency pair, in terms of price movements. Given that forex trading is done in pairs, no single pair is ever completely isolated. So, you need to understand how one pair moves in comparison to others so you can make informed trading decisions.
How to Calculate Correlation?If you want to keep tabs on the strength and direction of the currency pairs you wish to trade in, the best thing is to calculate the correlation yourself. The strength of correlation always lies between +1 and -1, where the the former is the maximum postive correlation and the latter shows maximum negative correlation. Here are some simple steps to obtain correlation data between currencies:
- The first thing you need is a computer that has Microsoft Excel loaded on it.
- Look for charting packages on the internet that provide you with past or current currency prices.
- Export this price data to Excel.
- Make two columns with the names of the currency pairs under observation.
- Fill in the historical prices for the currency pairs under the respective column.
- Below one of the columns, in an empty cell type =CORREL (
- Now, highlight the entire data in one of the price columns. You will get a range of cells in the bracket of the CORREL formula
- Enter a comma symbol
- Repeat Steps 6 to 8 for the next currency pair
- Put a closing bracket at the end of the formula
- The value that is shown is the level of correlation between those two currency pairs