One of the most interesting aspects of Forex trading is that some currency pairs and even commodities are highly correlated with each other. Here we are dealing with two cases. Firstly, we have securities that have strong positive correlations. This means that those currency pairs tend to move in the same direction. There are also some currency pairs and commodities with a negative correlation. This means that they tend to move in opposite directions.

One of the pieces of advice many experienced professional traders give to beginners is that market participants should avoid opening the same positions with highly positively correlated currency pairs. On the other hand, traders can utilize negatively correlated currency pairs for hedging strategies. This is because in those cases losses with one currency pair are likely to be compensated by gains from the other one.

Finally, traders can utilize the positive correlation of certain currencies with commodities in order to make more accurate predictions in the market, which makes currency correlation as one of the most useful tools to use when trading.

For example, it is a well-known fact that the Canadian dollar has a strong positive correlation with the oil price. This is because Canada is one of the largest producers and exporters of this commodity in the world. Consequently, if oil prices rise, then CAD is likely to make some gains against other currencies. Therefore, traders might consider opening long positions for the Canadian currency.

Now let us go through each of these strategies in greater detail. One of the first things experienced traders mention about positively correlated currencies is that traders should avoid opening the same positions with those. In order to better understand this, let us take a look at two charts. At that time the AUD was in a solid downward trend, suffering a steady depreciation against the US dollar during the subsequent months. Actually, this trend has accelerated after the outbreak of the COVID pandemic.

One of the main drivers of this move was the fact that so far, the interest rate differential was in favor of the US dollar. The Reserve Bank of Australia has also reduced rates to 0. Consequently, from March , the US dollar has lost the advantage of having higher interest rates.

In reaction the Australian dollar began to recover from the recent losses and regain ground against the US dollar. However, just like in the previous case, from that point onward the Australian dollar began to recover. Consequently, opening long or short positions with both of those pairs makes very little sense, since in those cases traders would be increasing their risk exposure for no good reason.

Therefore, it is always helpful to avoid opening the same positions with highly correlated currencies. As mentioned earlier, besides positive correlation, we also have currency pairs that are negatively correlated with each other. During the subsequent months, the single currency has made steady gains against the AUD. In each case, the losses with one pair is likely to be offset by gains with another pair. The correlation between currencies and commodities does have another use. The fact of the matter is that some currencies are highly positively correlated with commodity prices.

For example, the exchange rates of the Canadian dollar, the Russian ruble, and the Norwegian krone are highly impacted by oil prices. The reason behind this is that Norway, Russia, and Canada are one of the largest producers and exporters of oil in the world.

Consequently, when the price of this commodity rises, the oil companies and governments in those countries tend to benefit from higher revenues. On the other hand, when oil prices decline, those companies and governments suffer the loss of revenue, hence the likely depreciation of these currencies.

Here it is also worth noting that oil is not the only commodity that has an influence on the Forex market. For example, the Australian dollar is highly correlated with gold and silver prices while the New Zealand dollar is tied to dairy prices. Consequently, by observing the commodity prices, traders might get some trading ideas. For example, let us suppose that the dairy prices are falling, while the silver makes some notable gains in the market.

Now, as one of the largest exporters of dairy products, the falling dairy prices can have a negative impact on the producers of this commodity in New Zealand. Lower dairy prices can translate into the loss of revenue of those firms. The fact of the matter is that those companies still have to pay salaries to their employees while covering the cost of utilities and making other necessary expenditures.

As a result, the New Zealand government will receive less income from taxes. It goes without saying that this will have a negative effect on the value of the New Zealand dollar. Since New Zealand's economy is taking a hit because of lower dairy prices, then it might be a good time to capitalize on the likely depreciation of the NZD. On the other hand, the appreciation of silver prices can be beneficial for the Australian dollar.

This could lead to Australian mining companies earning higher revenues. As a result, the profitability of those firms might improve considerably, resulting in higher tax revenues for the Australian government. In this way, traders can earn some decent payouts from the likely appreciation of the Australian dollar. It is true that the positive correlation between currency pairs and commodities can last for years or even decades.

However, in some cases, those relationships can be disrupted by events or other factors. For example, as mentioned above the Australian dollar is highly correlated with gold and silver prices. However, from Summer until Spring , the gold prices have made some notable gains, yet, at the same time, the Australian dollar has lost ground against USD, EUR, GBP, and other major currencies. The main reason for this was the fact that at that time the Reserve Bank of Australia has started cutting rates, eventually reducing them to 0.

It goes without saying that this made the Australian dollar less attractive for the market participants, because it reduced the rate of return for carrying traders, investors, and savers, investing in the Australian dollar. However, once the series of rate cuts ended, the AUD stopped depreciating and even regained some of the recently lost ground. So the old relationship between the Australian dollar and gold price was restored. So as we can see, when trading highly correlated currencies, traders should take a look at several fundamental and technical indicators before making any trading decisions.

This can certainly help the market participants to improve the accuracy of their trades, when trading positively or negatively correlated currency pairs and commodities. We can see from the chart the two pairs move in opposite directions. And our analysis confirms the price direction. Trading currency correlation seems like a profitable strategy; however, it is not as simple as it looks, and you have to consider additional risks. We will list a few pros and cons of correlated trading pairs.

Currency correlations can be another good strategy to use. However, you need in-depth knowledge of price action or technical analysis. It is not as simple as buying or selling based on the correlation. If you get it wrong, it can cost you and damage your trading portfolio. Therefore, we need to take careful consideration and trade with minimal risk so that if we need to exit the market, we can do so without significant losses. Your email address will not be published.

Save my name, email, and website in this browser for the next time I comment. Forex Forex Analysis. Top 3 Forex Correlation Strategies: Simple to Use for Traders By manager. September 13, Brief about currency correlation? The degree of the similarity determines how strong the correlation is between the pairs. This way, you hedge the position by offsetting your losses with the other trade.

What is the correlation coefficient? A pair with a value above are almost identically moving in the same direction. Strategy 1. Hedging forex pairs It is a technique you can use to offset your losses by buying one pair and selling another pair. From the chart, we can see the price broke out from the channel and is moving downwards.

Correlated commodities The second strategy is unique and yields more profit as it involves higher volatility assets, i. In this scenario, you can buy or sell both pairs at the same time. By following this strategy, you can hedge your position and make a profit from both pairs. Pros Cons Increase profits You can increase your chances of profiting significantly by trading correlated pairs since you benefit from more than one pair in a particular direction.

Losses due to bad analysis The risk of a poor technical analysis can cost you since you will rely on this to enter the trade. If both pairs move in the opposite direction than you anticipated, you might find it challenging to hedge your positions. Minimize risk by hedging You can reduce your losses by hedging negatively correlated pairs.

One pair can move up by 50 pips, while its counter pair can move down by pairs, even for closely correlated pairs. Benefit from trading correlated commodity pairs Gold and silver pairs are highly profitable, and if you identify an opportunity to trade both simultaneously, you can even profit much more.

So what you need to do as a trader is you need to do one of few things. But also you then need to look at your strategy and how these are likely to play out. Where are you going to put your stop losses? Where are your profit targets? Where are they bouncing? What part of the chart are they in? All those types of things, and you might then do your analysis and go, do you know what? Trades from last week and how I traded the correlated pairs. Last week, I had three Euro related trades at the same time on the daily charts.

So what do we do? But at the time all three were showing very, very high quality, A grade setups. But what I ended up doing is reducing my risk slightly, because I knew that all three were highly dependent on the Euro.

My account is up another plus 3. So Pattern Trader right now has been only made available to my coaching clients. So in a few weeks time, we are going to be increasing the price for non-clients.

We obviously need to look after our coaching clients and keeping the price to a minimum for those people who are already on board with us as coaching clients is going to be paramount for us. com I will put a link to that site on this video podcast page. Make sure you have a look at that. You can start it for free. So right now take advantage of that lower price. The link will be on here, but like I mentioned again so far this week, plus 3. So amazing results there, especially when you consider what else is happening in the world of investments right now.

So once again, this is Andrew Mitchem, at the Forex Trading Coach. Bye for now.

by Andrew Jun 22, Weekly Trading Updates 0 comments. Podcast: Play in new window Download. Subscribe: Apple Podcasts Google Podcasts Spotify Android iHeartRadio Stitcher Blubrry TuneIn RSS. Should you trade correlated Forex pairs? Hey traders, Andrew Mitchem here, at the Forex Trading Coach with video and podcast number Trading correlated pairs and the TFTC Pattern Trader results update. And I want to talk all about Forex pairs and trading correlated pairs and also, I want to give you an update on the autopilot feature for the trade results this week for our fantastic software called Pattern Trader.

Can you help me out on a future video and podcast? You would notice that a lot of currency pairs are quite highly correlated. For example, the Euro and the Swiss Franc are highly correlated. dollar related and the Euro and the Franc are related. You get other correlations acting like the Euro and the Pound, both are very similar markets, same time zone, et cetera. They tend to move quite similar, tend to. You get other correlations such as the commodity currencies. So in other words, the New Zealand dollar, the Australian dollar and the Canadian dollar, they all tend to move in correlation most of the time.

And of course you get exceptions to that. Now, of course, there are exceptions again, you have to trade what you see and you have to have a trade plan in place. So if your plan is to take those two trades, regardless, then you do so. So what you need to do as a trader is you need to do one of few things. But also you then need to look at your strategy and how these are likely to play out. Where are you going to put your stop losses? Where are your profit targets?

Where are they bouncing? What part of the chart are they in? All those types of things, and you might then do your analysis and go, do you know what? Trades from last week and how I traded the correlated pairs.

Last week, I had three Euro related trades at the same time on the daily charts. So what do we do? But at the time all three were showing very, very high quality, A grade setups. But what I ended up doing is reducing my risk slightly, because I knew that all three were highly dependent on the Euro.

My account is up another plus 3. So Pattern Trader right now has been only made available to my coaching clients. So in a few weeks time, we are going to be increasing the price for non-clients. We obviously need to look after our coaching clients and keeping the price to a minimum for those people who are already on board with us as coaching clients is going to be paramount for us.

com I will put a link to that site on this video podcast page. Make sure you have a look at that. You can start it for free. So right now take advantage of that lower price. The link will be on here, but like I mentioned again so far this week, plus 3. So amazing results there, especially when you consider what else is happening in the world of investments right now.

So once again, this is Andrew Mitchem, at the Forex Trading Coach. Bye for now. Episode Title: Should You Trade Correlated Forex Pairs? Your email address will not be published. This site uses Akismet to reduce spam. Learn how your comment data is processed. Click Here to Download my The Forex Trading Coach Mobile iOS App.

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The degree of the similarity determines how strong the correlation is between the pairs. I have been trading Forex and Cryptos for over 5 years now. Avatrade Review 2. May 6, Differences Between Support and Resistance vs Supply and Demand. Most Popular JSE Shares. Here we are dealing with two cases. JSE Top 40 JSE All Share JSE Top Industrial Index Industrial 25 Index Financial Index Financial 15 Resource 10 Index.

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