What Is Forex

Recently there has been a big hype among traders in the forex market about correlations. The question, however, is what the term correlations actually means? Well, it comes down to whether two different securities move in similar or opposite directions. Lets use a few examples. The EUR/USD usually has a correlation of between -0.9 and-1 with the USD/CHF. What this means is that they have a near perfect negative correlation, meaning that when the EUR/USD goes up, the USD/CHF goes down, pretty much at the same rate. The correlation between the EUR/USD and GBP/USD on the other hand usually has a very strong positive correlation, between 0.8 and 1. Again, this means tht when the one goes up, so does the other. A correlation of close to 0, whether positive or negative, means that the two securities are not correlated at all.

So, now that we know what correlation means, how can we apply it. The first thing to do is to gather historical data and work out the correlations over a certain period of time. Then when plotting those correlation on a graph, you can see where the two securities’ movements diverge and converge in terms of correlation. This would be a great aid in developing a strategy of capitalizing on the corrections inherently ocurring in the market all the time. 

I hope this article sheds some light on the term correlations.

Deon van der Westhuizen

Bookmark It

Hide Sites

2 Responses to “The Forex Market and Correlations”