Currency pairs and the correlations between them
In this article we will talk about what is behind the term "currency correlation" and what currency pairs are. Let's begin in order.
Correlation is the connection of values which mutually influence each other.
It should be noted right away that the relationship is statistical in nature. For example, the weather caused the loss of crops, and this led to an increase in the price of bakery products.
However, it is not as simple as that. Through the policy of state regulation additional grain stocks are allocated, which stabilises the price. This is where the static correlation comes in. You can't look at correlation as a fixed value, especially when we are talking about currency trading.
Currency Correlation in Forex Trading
So there we go smoothly into the issue of currency pairs. Very often we hear in the news that the currency of a certain country is either decreasing or increasing. The notion of a change in the value of a currency can be associated with anything, but the simplest comparison is another currency. The currency in relation to which the currency in question is rising or falling.
Interestingly, one currency can rise in one pair and fall in another. This is the essence of currency pair correlation. If you know the relationship between the various pairs, you can make predictions in order to deal more effectively with the selling or buying of currencies later on. To evaluate this criterion, the appropriate coefficient is used, which can vary from one to minus one.
The correlation coefficient for currencies
If the correlation coefficient = 1, then the currency pairs exhibit synchronous behaviour, they behave in the same way. If the coefficient is close to -1, pairs move in different directions, which causes mutual losses and profits.
It should be remembered that a negative correlation value is also beneficial. If you know the trend, you can make forecasts about the currency pair behaviour and work with opposite contracts for the analyzed pairs.
If the correlation of a currency pair is near 0, the relations between them will be built in randoms, in other words statistics does not work here.
Finally, it should be noted that correlation of currencies under almost no conditions reaches extreme values, it is constantly changing.