Happy Friday, ladies and gents, and welcome on our another educational post for the day. Today, we are gonna talk about positive currency correlations and examine how they impact our trading. But to begin with, what is currency correlation? Currency correlations are a statistical measure of the extent that currency pairs are related in value and will move together. If two currency pairs go up at the same time, this represents a positive correlation, while if one appreciates and the other depreciates, this is a negative correlation.
As it can be clearly inferred from the graph, the charts of EUR/USD and GBP/USD have been chosen to be scrutinised. These two currency pairs are highly correlated and are moving in the same direction. As we can see, 2 major similarities have been identified on the Daily timeframe charts of both currency pairs. However, there are a lot more than just 2. As it can be inferred from Similarity #1, the price managed to leave a long wick in late February 2020 for both pairs. Looking at Similarity #2, we can observe that the price is forming a top for both pairs and preparing to reverse and continue its move to the downside.
Now that we have talked about the basics, let's move on and talk about some problems faced by currency correlations. Most of the time, new traders do not pay attention to this basic concept and make false decisions without noticing. I have seen hundreds if not thousands of traders that ignore the rule of currency correlations and make irrational conclusions like the following: opening Buy positions on EUR/USD and opening Sell positions on GBP/USD. Of course, you can do that as well, depending on the timeframe that you are trading and depending on how long you are planning on keeping the trades open. However, on the longer term trading, you won't be able to succeed. Furthermore, most of the new traders open buy or sell positions for both of the trades, which results in increasing their risks. If you open BUY or SELL positions for both trades at the same time, and the price moves in the opposite direction of your bias, you are gonna lose both of the trades. Again, not in all cases, but 80-90% of the time, as the two pairs are highly correlated.
What can be done to avoid being the victim of the highly correlative pairs and keep it safe? There are two strict rules that we follow, which have always worked for us:
-Open positions for the trade with the better setup
or
-Open positions for both trades but cut the lot sizes by half
So in the first case, we compare the two setups that we have, in our case it's either EUR/USD or GBP/USD. For instance, let's say that EUR/USD gives us more confluences for opening a transaction. Therefore, what we do is, we ignore GBP/USD and trade EUR/USD. For the second case, let's say that we use 1.0 lot size to open transactions. What we can implement, is using 0.5 for each trade and opening positions for both EUR/USD and GBP/USD.
I hope you liked this educational post, family! If you have any suggestions on what we should post next as an educational post, feel free to let us know in the comment section below. Have an awesome upcoming weekend, everyone!
As it can be clearly inferred from the graph, the charts of EUR/USD and GBP/USD have been chosen to be scrutinised. These two currency pairs are highly correlated and are moving in the same direction. As we can see, 2 major similarities have been identified on the Daily timeframe charts of both currency pairs. However, there are a lot more than just 2. As it can be inferred from Similarity #1, the price managed to leave a long wick in late February 2020 for both pairs. Looking at Similarity #2, we can observe that the price is forming a top for both pairs and preparing to reverse and continue its move to the downside.
Now that we have talked about the basics, let's move on and talk about some problems faced by currency correlations. Most of the time, new traders do not pay attention to this basic concept and make false decisions without noticing. I have seen hundreds if not thousands of traders that ignore the rule of currency correlations and make irrational conclusions like the following: opening Buy positions on EUR/USD and opening Sell positions on GBP/USD. Of course, you can do that as well, depending on the timeframe that you are trading and depending on how long you are planning on keeping the trades open. However, on the longer term trading, you won't be able to succeed. Furthermore, most of the new traders open buy or sell positions for both of the trades, which results in increasing their risks. If you open BUY or SELL positions for both trades at the same time, and the price moves in the opposite direction of your bias, you are gonna lose both of the trades. Again, not in all cases, but 80-90% of the time, as the two pairs are highly correlated.
What can be done to avoid being the victim of the highly correlative pairs and keep it safe? There are two strict rules that we follow, which have always worked for us:
-Open positions for the trade with the better setup
or
-Open positions for both trades but cut the lot sizes by half
So in the first case, we compare the two setups that we have, in our case it's either EUR/USD or GBP/USD. For instance, let's say that EUR/USD gives us more confluences for opening a transaction. Therefore, what we do is, we ignore GBP/USD and trade EUR/USD. For the second case, let's say that we use 1.0 lot size to open transactions. What we can implement, is using 0.5 for each trade and opening positions for both EUR/USD and GBP/USD.
I hope you liked this educational post, family! If you have any suggestions on what we should post next as an educational post, feel free to let us know in the comment section below. Have an awesome upcoming weekend, everyone!