Learning about correlating currency pairs is one of those little tips. It is not a system, or trading method by itself, but it is the understanding that as one particular currency moves, then another pair will likely move in the same or opposite way. By definition, correlation means two things share a mutual relationship with one another. In Forex trading, that means that currency pairs which correlate with each other will move together in the same direction, or will move in the opposite direction from one another, with regularity and consistency.
For example, there is a saying in trading that ‘as the pound goes, the euro will follow.’ What this indicates is that there is some sort of relationship between the euro and the pound – that when one makes a move, the other will move in the same or similar way. It may also mean that the relationship between the pair is one of mutual opposition, and they will move opposite to each other. Much like how a set of magnets will either attract or repel each other, this is the idea of correlating currency pairs.
Understanding Correlating Forex Pairs
There are actually a number of currency pairs that correlate with each other, and either move together, or in the opposite manner. This is helpful when confirming trades, and looking for indications of how a particular pair is about to move. If the EUR/USD moves the opposite of the USD/CHF, then when there is a buy signal on the EUR/USD, then there should also be a sell signal on the USD/CHF.
There will be some differences based on the time frames being traded, so make sure you pay attention, especially if you tend to switch back and forth to multiple time frames. The charts below show some of the relationships between various pairs:
5 MINUTE CHARTS
(Positive means the pair moves in similar direction. Negative means they move in an opposite direction)
Be aware that this is like many things in the Forex market; it is a common probability, but never 100% sure thing. There will be times when the EUR/USD moves one way and the GPB/USD moves another. Typically this is due to more isolated news or special events, and they will eventually come back into synchronization. But sometimes you may never completely know the reason.
Usually you will notice that most of the pairs that move together share some geographical and economical closeness and similarities. This is much of the reason for the correlation. Knowing these relationships can help you make a final decision when looking at a trade, but they will not, and should not replace a solid trading plan. When you have a set up that you are 70% sure of, then use this knowledge to help confirm your trade.
An additional note on correlating trading relationships is that of the Forex market and the commodities market. There are three Forex pairs that correlate nicely with certain commodities. The AUD/USD and NZD/USD correlate positively with the movements of gold. If gold goes up, then so will the NZD/USD and the AUD/USD pairs, because the USD would be weakening. The USD/CAD is connected to oil prices. So if oil moves in a particular direction, then the CAD should follow the same direction.
These little tips can help you along your road to becoming successful as a Forex trader. If you take the time to get to know the pair you are trading, and are aware of its nuances and correlations, then you will have a better chance at being successful with your Forex trading. But remember, correlating Forex pairs should only be used as confirmation to a profitable trading system, and should never be substituted as a trading system in and of itself.