A successful forex trader knows his financial limits and understands the sensitivity of his portfolio in the market and the fact that currencies are priced in pairs, and no single pair trades completely free of another. Once - as a forex trader you are conscious of these correlations and how they revolutionize, you can use them to manage your overall portfolio's disclosure quite easily.
What is Correlation?
The reason why a currency’s independence in pairs is easy to see is because, when a trader compares one currency to another, and brings in a third currency, it becomes evident that the currency must be somewhat correlated to one if not both of the other currency pairs. The trader also needs to realize that the interdependence among currencies comes from much more than the simple fact that they are in pairs, where some currency pairs move in a repetitive cycle, other currency pairs may repel, due to external, complex forces.
Changing Correlations
After thoroughly studying and understanding currency correlation tables you will realize that correlations do tend to change and thus, the shifts in the correlations are imperative. The world is constantly changing and the correlations that you see right now will be nowhere in sight in the near distant future, thus it would be best for the trader to look at the six-month trailing rather than just contemporary correlations. A six-month trailing will provide the trader with a clearer perspective on the average six-month relationship between the two currency pairs accurately.
Uses of Correlations
The most important advantage of correlations is that they can help you avoid entering two positions that cancel each other out at once, which might be the same thing as having virtually no position. A trader can use also different point values for his or her advantage while trading.
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