Making Use of Currency Correlation for Your Advantage
If you aimed to become an effective trader, you must understand your overall portfolio sensitivity so that you can market volatility. Since currencies are always priced in pairs, you will notice that once the other pair falls, the other one will immediately follow. Currency correlation moves that way. If you were able to determine how it moves and changes, it will be easy for you to control your entire portfolio.
Defining Currency Correlation
As define in financial world, it refers to statistical measure of relationship between two different securities. Its coefficient ranges from -1 to+1. If the correlation is +1 it connotes that the currency pairs will surely move to one direction while if it is -1, it means that currency pairs will do to opposite direction. If the correlation of two pairs becomes zero it simply means that the relationship of currency pairs is random. Because correlation always runs in pairs, therefore no currency will be isolated.
Does Currency Correlation Changes?
Definitely yes, that is why a trader must learn how to follow the shift of correlation pairs. Global economic and sentiment factors are said to be too dynamic and can change on daily basis. Today, strong correlations may not line with longer- term pair of correlations as well as of two pairs of currency. Traders should be aware of the relationship of two pairs of currency for six months since, it seems to be accurate. Correlation changes for several reasons, among of these reasons is because of the sensitivity of currency pairs to the prices of commodities and other political and economic factors.
Learning how to calculate correlation by yourself can help you to become an effective and successful trader. Here are the steps that you should master;
- Be able to get the data prices of two currency pairs.
- Make use of the spreadsheet to make two columns. Fill the columns with its daily prices that happened for both pair within the period you opt to analyze.
- At the bottom of the column type CORREL
- Highlight the entire data you typed on the column for pricing, be able to get the right cell
- Put a comma (,)
- Perform 3-5 steps for the next currency
- Close formula =CORREL (B1:B20,C1:C20)
- The answer that will appear is the correlation of the currency pairs
A trader must know how to calculate correlations. Through it, you will be able to determine how to make use of the correlations to your own advantage. For you to become a successful and effective trader, it is necessary to know and understand how two different pairs of currency move and change, through this, traders can be aware of its exposure. Learning how its moves in relation with its pair will help the traders manage their portfolios appropriately. Observing how it moves in tandem, in opposite direction or the same direction will let you determine the shifting trends that the currency pairs undergo.
It is indeed important that traders must be aware of the shifting trends, correlation between two different pairs because this powerful knowledge can be tool for Forex traders to double up their profits.