When treading stocks traders can take advantage of volume which is very usefull when trading technically, forex do not have volume, you maybe saw tool which shows volume on charts for example meta trader has such option but it is only diffrence between close and open price, but fortunetly when trading forex, we can use something diffrent and even more usefull then volume, currency correlation.
Most (if not all) currencies pairs are correletated in some level, it is mainly because of Forex structure, in fact it can be called dollar and anti dollar market, face it dollar (despite it is getting weaker and weaker every day) is still the most important currency, so US economic news has impact on all currencies, but that is not even a point.
When trading forex we trade two currencies, let's make it EUR/USD for sake of example, if we predicted it is going up and we are always right :> then what about USD/CHF? If there are US news that move dollar price down, then at the same time when EUR/USD is going up USD/CHF MUST go down, i think it is logical no more explenation needed.
So how to take adventage of currency correlation?
First of all go to www.mataf.net and checko out how much and which currencies are the most correleated ones (i can tell you know that it will be EUR/USD and USD/CHF but shhhh check it out by yourself) at the diffrent days diffrent cross pairs can have diffrent correlation value, pick the ones with value about 80 or -80, and remeber to use timescale which is suitable to your trading style, if you trade intraday then it will be stupid to look at 20 day correlation are you with me here?
Second, egzamine the charts. If you choosed XXX/USD, YYY/USD and USD/ZZZ and from your technical analysis it looks like first to will go down and third will go up then ther is very high probability that very strong and quick move in your direction wil occur, enough said.
Now you proboably know what to do, check correlation, check charts and set your positions :)
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One link that really beats mataf: UnderstandMarket - Correlations in graphical form
But, don’t try to use correlation strategy directly when all of trading instruments move here according to its own principles! By the way, usually I like to use correlation strategy onEUR/USD and GBP/USD! In addition, I found proper guideline on currency correlation from exclusive beginners training course of TradingBanks broker! But when I get different trend into these two pair, then I never use EUR/USD and GBP/USD as well!
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Correlation is a statistical measure that indicates the extent to which two or more variables fluctuate together. A positive correlation indicates the extent to which those variables increase or decrease in parallel. A negative correlation indicates the extent to which one variable increases and the other o9ne decreases. I am trader of Trade12 broker is fulfilled with several facilities like high security level, low spread, no set up fees and the highest security level.
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