Currency Correlation

Many currency pairs are correlated with other currency pairs. It is important to understand this concept as it will impact on your risk management with trading. Correlation occurs when two or more different currency pairs tend to move in the same direction within the same trading environment. This would mean that if you traded both of those currencies then your risk would be double for that particular trade in that environment.

Correlation is not permanent or fixed by any means. You do get periods where correlation patterns are tested when there is particular market volatility or during major global economic events.

Dean Malone, from Compass FX, has posted 4 videos that deal with the subjects of both Risk, and the Risk On/Risk Off concept (RO/RO), and Correlation. I have advised him that I have quoted these on my site and he is fine with this. I think that these videos are worthy of their own ‘post’ so I have listed them here.

 

Please note that during ‘Risk On’ or ‘Risk Off’ periods that many of the pairs will move in a synchronised, or correlated, pattern.  For example, in a ‘risk on’ period it is not unusual to see the AUD, CAD, GBP, SGD and EUR all increase similarly relative to the USD. Thus, in a ‘risk on’ phase, the EUR/USD and AUD/USD will often move in the same direction.  We say then that these pairs are ‘correlated’.   

Forex Correlation Website:

Please remember that you can check for the correlation ratio of FX pairs at the free site, Forex Correlation.