How to take advantage from the correlation between different pair currency rates

There are many traders in the financial industry making a huge amount of money just by trading the financial instrument. Trading the forex market successfully is not an easy task. Those who are trading the live currency rates of the different financial instrument have a very solid understanding of the forex industry. In order to master the art of forex trading, you must have a clear understanding of the financial instrument. In the forex, market currency is traded in pairs which means you will trade two country’s currency simultaneously. Before you start live currency rate trading you must have a trading platform where you can buy and sell the certain financial instrument. Most of the trading platform uses currency abbreviations to quote the live currency exchange rates. For instance, the popular trading platform like Metatrader use the currency abbreviations to quote the EURO and U.S dollar pair. Traders find it in the format of EURUSD in the market watch list in their trading platform. Similarly, all the major and exotic pairs have their own form of currency abbreviations so that the trading space can utilize in more efficiently. Now we will see how the professional traders use the currency correlation in their trading strategy.

Positive correlation

In the forex market, there are three major types of correlation in the Currency rates of different pairs. These correlations are based on the similarity of the price movement in different pairs. For instance, let’s say that a professional trader trades only the GBPUSD and EURUSD pairs. For the last couple of years, the movement of the two pairs was pretty much similar. That means if the EURUSD moved in the north then the GBPUSD pair also moved in the north. To be precise the live currency rate fluctuation and direction were confined in a similar harmonic pattern. This type of similar type of movement in the currency pairs is known as positive correlation.

Negative correlation

If the movement of two currency pair is totally opposite in nature then it is said negative correlation in the forex market. For instance, the movement of the USDCAD pair has a negative correlation with the movement of the EURUSD pair. If the USDCAD market price is high then the EURUSD pair is in the bearish move. Most of the time negative correlation is used to trade the synthetic pairs in the market. The negative and positive correlation factors can also be used to identify the potential reversal zone of an existing trade in the market by multiple pair analysis. We will clearly discuss this section after finishing the major three part of the live currency rates correlations.

Zero correlation

Understanding the Zero correlation factor is very important in forex trading. If there are no similarities between the live currency rates movement between two different pairs then it is said to have zero correlation. The significant of zero correlation is closely related to major economic news releases in the market. For instance, most traders stay in the sideline during the FOMC meeting minutes. But the professional traders carry their simple trading routine even during the FOMC meeting minutes by using the zero correlation factors. To choose a suitable trading pair which has zero correlation with the USD pair in order to avoid the extremely volatile conditions of the market.

Help to identify the suitable pair in the market

If you are trading the financial instrument for a long period of time then you have often seen two or more golden trading opportunity at the same time. To be precise most of the perfect setup forms at the same time in many different pairs. In the eyes of trained professional trading, too many pairs at the same time increase the risk and trading performance of the traders. So what do the professional traders do? The answer is pretty simple. They use currency pair correlation to identify the best trading assets in the market. For instance, if let’s say that traders find a suitable trading opportunity in the EURUSD and GBPUSD pair but he can only afford to execute on order in the market due to strict money management plan. So how will he decide which pairs to trade? Professional traders use the live currency rates of another pair which has a positive correlation with both of them. Let’s say that the traders use EURGBP pair to assess the best trading pair. After analyzing the EURGBP pair traders find that the pair is most likely to go up which means EURO is stronger against the Great Britain pound. Knowing that the EURO economy is much better compared to Great Britain Pound traders go long in EURUSD pair instead of GBPUSD.

Summary: Trading the financial instrument successfully requires an extreme level of patience and skill. All the professional traders in this industry have a very strong foundation in the basics of the forex market. Understanding the live currency rates of the different currency pair is extremely important since it allows you to pick the best trading assets in the market. Most of the traders often ignore the importance of currency pair correlations in the live market. But to be honest this is one of the key areas that you need to develop yourself as traders. In the eyes of expert traders, understanding the live currency rates along with the currency correlation allows the traders to extract the best possible trading assets in the live market. Most importantly this also allows to trade safely in the event of high impact news releases in the market and keeps your trading account safe and secure from the unexpected spikes.

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