Correlation between currencies and stocks
Correlation between currencies and stocks
A moving relationship between one currency and another or other stock is called currency correlation.
Currency markets have played a huge role in the financial markets, especially Forex, and are popular among senior market analysts.
The main importance of this discussion is to examine closely whether or not one currency is moving in the opposite direction. This knowledge helps users, analysts and traders in financial markets to get the best reaction in the process and move in the direction of profitability.
The correlation is calculated as the correlation coefficient between the numbers -1 and +1
A positive correlation with a correlation coefficient of +1 indicates that two currency pairs will move in the same direction 100% of the time.
A positive correlation with a correlation coefficient of 1 indicates that two pairs of currencies will move in the opposite direction 100% of the time.
When the correlation coefficient between two currency pairs is zero, it indicates that these two currencies have no movement dependence and move completely randomly.
Advantages of Currency Correlation in Forex and Stock Trading:
1- Eliminate inverse transactions
Using solidarity helps you avoid trades that neutralize each other. As the table and the previous example explain, We know that EUR / USD and USD / CHF move 100% in the opposite direction.Opening a buy position in "EUR / USD and" also buying, USD / CHF will be in vain and sometimes heavy. In addition to having to pay twice, Every move in the price raises one pair and lowers the other. We want to benefit from all our hard work .
2- Incremental profits Or incremental losses
You have the opportunity to maximize profits, Double the position. Let's look at the relationship between EUR / USD and GBP / USD over the course of a week from the previous example.The two currencies have a strong positive correlation in which the GBP / USD follows the EUR / USD step by step. Opening a buy position in both currencies is like trading the EUR / USD and doubling your trading. You are actually using the Leverage lever. If it goes in the right direction, it will make a lot of profit, and if it goes in the opposite direction, you will suffer a lot of losses.
3- Risk distribution
Understanding that there is a correlation between currencies allows you to Which used different currency pairs And it increases your vision. Instead of always trading on a pair, You can split your risk between two currency pairs moving in the same direction. Select pairs of currencies with strong to very strong correlation (between) 0.7. For example, EUR / USD and GBP / USD tend to move along. The incomplete correlation between these two currencies allows you to reduce your risk. Suppose you believe that the value of the USD will rise. Instead of opening two sales positions in EUR / USD you can have one EUR / USD one sale and another GBP / USD which can act as a shield against some risks. And diversify your overall business. When the US dollar lose sits value, the euro may be much less affected by the pound.
4- Capital protection
Although protecting capital can lead to smaller profits being realized, it can also minimize losses.If you have opened a EUR / USD trading position and the transaction is moving in the opposite direction, open a small trading position in a pair moving opposite the EUR / USD direction such as USD / CHF .Most of your losses will be compensated! You can use the difference of the value of each pip in each currency pair. For example, while EUR / USD and USD / CHF have full negative correlation of - 1.0, their pip value is quite different. Suppose you have 10,000 mini-lot trades, a pip from EUR / USD equals $ 1 and a pip from USD / CHF equals $ 0.93. If you buy a EUR / USD mini-lot,you can protect your deal by buying a USD / CHF mini-lot. If the EUR / USD falls by 10, you will lose as much as $ 10. But the deal Your USD / CHF will go up to $ 9.30 . Instead of lowering $10, you only lost $ 0.70. Although capital protection has long been considered a great achievement, it has its disadvantages. If the EUR / USD goes up, your USD / CHF profit will delimited due to trading losses. . Also, solidarity may weaken at any time. Suppose if the EUR / USD goes down by 10 pips, and the USD / CHF only 5 pips rise or move or even fall! Your trading account will suffer a greater loss. So be careful when investing in hedging .
5- Price breaks confirm breakouts resistance and avoids unrealistic Takeouts breaks
You can use currency correlations to confirm your trading signals. For example, the EUR / USD seems to currently have an important support level. You Reaction Price You see Action) and you are looking to sell below the price breakdown. Since you know that EUR / USD is positively correlated with GBP / USD and is negatively correlated with USD / CHF and USD / JPY, check whether the other three currencies are moving at EUR / USD. You will find that GBP / USD is in an important support level position and both USD / CHF and The USD / JPY is at key resistance levels. This tells you that the recent move is in the US dollar and confirms the probable price breakdown for the EUR / USD as the other three currencies are moving similarly. So you decide to trade when the price is broken. Now let's assume that the other three currency pairs are no longer EUR / USD strong. GBP / USD is constant, USD / JPY is not rising, and USD / CHF is moving forward. This is usually Avery strong signal that the EUR / USD fall is not dependent on the US dollar and is probably due to some negative euro news. The price may move below the key support level you're looking for but since the three other pair will not move as EUR / USD, the move will not be followed and the price will return above the support level Eventually, it leads to breakdown of unrealistic prices. If you still want to make this deal because there is no confirmation of solidarity from other currencies Understandably, you can act smart and open a small deal and reduce your risk .
EURUSD Correlations ( H1 )
EURUSD Correlations ( D1 )