Many experienced traders are using the term currency correlation as another tool for making accurate predictions for the markets. A positive correlation means that the two currency pairs are moving in tandem and a negative correlation means that they are moving in the opposite direction.
Any trader who does not have a basic understanding of currency correlation and how it relates to risk management is going to expose their trading account. Most traders do not know this, but they get destroyed trading multiple pairs at the same time without knowing what to do.
Currency Correlation for USDCHF
The chart below shows the correlation between the chart symbol which is the USDCHF and 5 other currency pairs.
How To Use This Indicator
The correlation is measured by a coefficient, which can range from -1 to +1. For example, 1.00 means that two currency pairs move exactly the same way. The opposite is true for -1.00. As we can see from the chart above, the coefficient for EURGBP, EURUSD and GBPUSD is less than -0.8 which means they move in opposite directions.
The indicator will display Red for the coefficient values when the pairs move in opposite directions and green when they move in tandem in the same direction. If you want to be a profitable trader, then you must understand currency correlation in Forex.
Pairs Trading
One strategy using this type of indicator is Pairs Trading which involves looking for two currency pairs that share the same strong historical correlation, such as .80 or higher and taking both buy and sell positions for the symbols. It is possible to buy the currency that is moving down and sell the currency that is moving up and the whole idea is that they will finally start moving together again after and if this happens it may be possible to lock in some profits.
How to Use Different Symbols
The main symbol is the symbol for the chat that the indicator is attached to, in this case, its the USDCHF, you then have the option to set 5 different Forex pairs for the correlation calculations. It is also possible to define the colours for the indicator lines and symbol names displayed on the chart.
Coefficients range from -1 to +1
- +1 or 1.00 means that currencies are identical in the way how they move.
- -1 or -1.00 means that currencies move completely the opposite way.
- 0, it means there is no correlation, and the pair is moving randomly.
Settings Explained
When you first attach the indicator to a cTrader chart you will see the adjustable settings, below is an explanation of the settings which are not so obvious.
- Symbol #1, #5 - define the currency pairs to be used.
- Symbol Colors #1, #2 - define the colours to be used for the symbol names displayed on the chart, make sure they are the same as the Correlation line colours so they match and can be used for quick reference.
- Correlation #1, #5 - define the line colours and type, these match the number used for the symbol name.
- Levels - define the line type and colour for the levels -1, 0 and +1.
- Lookback - define the number of periods to look back for the calculation.
Video Overview
This is a quick video to help you see what the indicators look like before you download and install them.
* Video length: 11-minutes
How To Install & Open cBots
First, make sure you have the cTrader trading platform installed and then simply unzip the file and double-click on it to automatically install it onto the platform.
Currency Correlations Table
You may be interested in a more comprehensive correlation indicator that displays the table data as well as the indicator calculations.
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