What is the Correlation Table?
The Correlation value measures the strong relationship between two prices when they move, it is a value that must be between -1.0 and +1.0, so it measures if they move in the same direction, opposite direction, or if they don’t move together at all. More information about a correlation can be found here.
The correlation formula gives 3 important values:
- Positive Correlation: prices move together, for example, Gold and AUDUSD
- Negative Correlation: prices move directly opposite to each other, for example, EURUSD and USDCHF.
- Flat Correlation: prices don’t have any relation to each other, for example, USDMXN and EURGBP.
How Does It Work?
Once the indicator is loaded, a table or spreadsheet-like display will be shown, each cell value is a button that can be clicked, this will display on the bottom three series, which are the correlation (in red), and the two prices (blue and green) for the two pairs normalized which are to be used for reference.
Only the blue and green line are normalized from -1.0 to +1.0 which is the correlation range, this helps visualize the three values easily.
How to use for trading and risk management?
There are two primary ways to use it:
- Manage your exposure, having too many trades in different pairs but highly correlated is risky and should be avoided, therefore if you have two trades open, check their correlations.
- For example, going long EURUSD and short USDCHF is pretty much doubling your exposure, since the two pairs are negatively correlated.
- Another example would be going long BTC and ETH, since these two are cryptocurrencies, often they rise and fall together.
- Check historical correlations and place correlation trades, for example:
- Clicking on GBPUSD/EURUSD, it is seen that historically they’re very positively correlated, when there’s a high correlation they’re above 0.9
- However, the table shows that currently, the correlation is flat
- This becomes an opportunity to Sell the one that has increased the most and buy the one that has increased the least, like GBPUSD and buying EURUSD.
Configurable Settings
Symbols
- This is a list of symbols that you wish to get into the table, must be in CSV format, i.e. EURUSD, GBPUSD, USDJPY.
Take Last # Bars
- Select how many bars are used for correlation, this affects considerable the calculations.
- Choose a small number of bars (i.e.) the last 10 bars to get a very responsive signal.
- Choose a big number like 100 bars to get a more reliable signal.
Refresh Time (Seconds)
- Tells how frequent the values are updated, all the cells are to be updated at the same time.
Highlight Positive Correlations
- Switch to have highlights off if needed
- Define the minimum acceptable value for a correlation, a recommendable value would be 0.90 or higher
- Define the colour of the positive correlations
Highlight Negative Correlations
- Switch to have highlights off if needed
- Define the maximum acceptable value for a correlation (-0.90 is recommended)
- Define the colour of the negative correlations
Highlight Flat Correlations
- Switch to have highlights off if needed
- Define the acceptable range value for a correlation, a value between -0.20 and 0.20 is recommended.
- Define the colour of the flat correlations
Telegram & Sound Alerts
Alerts will send notifications when one cell has turned positive, negative or flat, the alerts are a pop-up message on the screen, an audible sound that you can configure yourself a free instant telegram message.
Install the Telegram App on your mobile phone and receive free instant messages.
How To Install
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.
