Welcome! Dear Traders,you are reading my forex trading experiences. Forex trading is a very profitable and very risky business opportunity. If you are a beginner, calm down,have a cup of coffee, and convince yourself that you need to study hard to win in forex trading. Obviously, the task is not easy as the statistics claim that only 5% traders win in forex trading. If you are determined, serious,and hard working, you can surely be included in the group of winners.

APPLICATION OF CURRENCY CORRELATION IN TRADING FOREX

We already know the basics of currency correlation ,and now we are going to focus on the application of currency correlation in trading forex. Still today I actually do not know the reasons behind the currency correlation, but I think currency pairs are correlated because of the international trade and commodity market. Traders should emphasize on currency correlation to manage portfolio, maximize profit, to manage risk, to conduct fundamental analysis of a currency. 

Source: mayurfinserv.com
In case of currency trading, a portfolio consists of the orders on more than one currency pairs. Some traders are not interested in placing orders on more than one currency pairs rather they only trade a single currency pair. If a trader decides to manage a portfolio in currency market, he/she first has to define the goal of managing the portfolio. 

If a trader want to manage a portfolio to minimize risk, he or she has to find the currency pairs that have zero correlation. This will maximize profit and minimize the risk of managing the portfolio. That is why knowledge of currency correlation is very crucial to have maximum output from the portfolio. If a trader put a buy order on EUR/USD and a buy order on USD/CHF, these actually do not have any value.

Traders who are trading single currency pair needs to know the currency correlation for successful fundamental analysis of the currency pair. For example, AUD/USD and USD/CAD are negatively correlated currency pairs. So, a good fundamental news for AUD will push the AUD/USD up and USD/CAD down. So, we can see the fundamental of AUD can affect the strength of CAD. Here, AUD giving weight to CAD, and we can understand it as the USD/CAD going down. 

I know so many forex traders who only focus on the economic events of the base and counter currencies, and forget the other currencies. But it is a wrong strategy of trading forex. We should understand the currency correlation and design our fundamental analysis technique.

We see traders manage risk by wisely managing a portfolio, but some traders protect them from the moves of a currency pair against their order. If a trader place a buy order on EUR/USD and see a risk on his/her whole capital, he/she may place a buy order on USD/CHF to protect the capital. Mentionable, EUR/USD and USD/CHF are 100% negatively correlated. 

Currency correlation can also be used to maximize profit. For example, If  EUR/USD and USD/JPY are to go up, traders can place a buy order on EUR/JPY to maximize the profit. You will understand this technique easily, if you understand this simple formula EUR > USD > JPY. This technique can be used to find highly volatile currency pairs to maximize profit.

If you have any questions, you can drop a comment below.

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