Forex Correlation Indicator Guide
Forex correlation MT4 indicator calculates the correlation between currency pairs. To explain, it is a statistical measure of how closely two different instruments or currency pairs are related in terms of value and movements together. In fact, currency pair fluctuation in forex trading reveals a lot about the current market situation. Because Forex currency pairs are often correlated. Moreover, the correlation indicator for MT5 reveals that there are three types of Forex currency pair correlations. A positive currency correlation signifies that two pairs will pursue the same direction. Whereas a negative currency correlation is an indicator that two forex pairs will follow the opposite direction in the Tradingview terminal. In short, this forex correlation strategy is a type of forex hedge.
Forex Correlation Indicator FAQ
What is a forex Correlation Indicator ?
The forex correlation strategy shows if there are patterns between two different assets classes or two different currencies. However, it is an important tool for traders to better understand correlation and apply it to their trading strategies. There are two sorts of forex correlations strategy :
- A positive forex correlation where the correlation value is 1. This means that the price movement of two variables follows the same direction.
- A negative forex correlation where the correlation value is -1. This means that currency pairs tend to move in opposite directions.
- No forex correlation if the values of two variables move randomly with no evident relationship.
Thus, Forex correlations are essentials for traders to understand and analyze the impact of their strategy on their forex trading results.
How does Forex correlation indicator work ?
The steps below will assist you in trading correlated forex pairs :
- Open a real account in a trading platform, you can also start with a demo account to get an idea of how they work before moving on to a real account.
- Make a list of correlated forex pairs to see which ones are strongly correlated. Moreover, seek to figure out what influences them and how you may use that information to your benefit.
- Adopt the most appropriate forex correlation strategy: It is important to create a trading plan before getting started. In forex, there are a variety of strategies to choose between. To increase your profits, choose or create a trading strategy that helps you.
- While working with forex currency pair correlation, try to figure out what the best risk management tools are and how to use them. It assists in the management of risk associated with excessive market volatility or unexpected price swings.
- Execute your trades when you have established out the above. So based on the prevailing market situation, you can sell or buy.
Importance of Currency Pair Correlation
Investing in a well-diversified portfolio prevents you from the impact of bad performance. Diversification main purpose is to reduce the impact of volatility on a portfolio which means minimizing the forex risk by making investments in a wide variety of assets within a portfolio. Thus, for better diversification, it is preferable not to use highly correlated pairs. Moreover, uncorrelated pairs might assist in portfolio diversification and risk management.
How to use correlated forex pairs when trading ?
The calculation below demonstrates how to calculate the currency pair correlation coefficient:
The covariance is at the top of the equation. Whereas, the standard deviation is at the bottom. The table below shows the correlation between some of the most traded currency pairs around the world:
Positive correlation example
EURUSD correlations and GBPUSD correlations are the ones that are most strongly correlated. Because of the economic ties that exist between the regions they represent, they frequently move together. However, if one of the two positively correlated pairs makes a large move, you may expect the other to follow suit.
On the EURUSD correlations and GBPUSD correlations currency pairs, you might open two long positions since both currencies move in the same direction. As a result, You could greatly enhance your earnings if the price of the pairs increased. You might also open two short positions on these pairs if you anticipated one was going to drop in price.
Negative correlation example
AUDCAD correlations and EURAUD correlations are one of the most uncorrelated forex pairs. In fact, on the AUD/CAD and EUR/AUD currency pairs you could go long, regardless of their negative correlation identified by this forex indicator. This may protect you from short-term market volatility. For example, if the price of AUD/CAD dropped by a specified amount per point, however, the price of EURAUD correlations climbed by a specific amount at each point. The gains on the EUR/AUD long position would compensate for the losses on the AUDCAD correlations short position.
Download Forex Correlation indicator for MT4
The MT4 forex correlation indicator is an extremely useful trading tool in Metatrader 4. It displays the current correlation between the instrument you are trading and other instruments. In fact, it increases your risk management and trade efficiency on all timescales. So, this MT4 Forex correlation indicator performs a statistical analysis of which currency pairs are moving together, against each other, or randomly. This is an example of a Negative correlation (AUD/CAD and EUR/AUD) :
Download Forex Correlation indicator for MT5
MT5 Forex correlation indicator indicates the degree to which two currency pairs have progressed in Metatrader 5. Either they are positively correlated and moving in similar directions. Or they are negatively correlated and moving in opposite directions to each other. Also, the currency direction can be completely random compared to another pair. Indeed, he MT5 platform does not provide the forex correlation indicator by default. As a result, you will have to do it yourself.
This is an example of a Positive correlation ( EUR/USD and GBP/USD ) :
Download Forex Correlation indicator for Tradingview
Forex correlation indicator for Tradingview helps traders anticipate price fluctuations and understand the relationship between two different instruments or currency pairs. Indeed, a lot of them use the Forex correlation indicator which is available for free on the Tradingview platform.
Here is the TradingView function of presenting the correlation coefficient :
- Open the indicator box.
- Search for the “Correlation Coefficient” indicator.
The forex Correlation indicator for Tradingview is employed in statistics to calculate the correlation coefficient between two currency pairs. To explain, the correlation in the forex market is simply the degree to which two forex pairs are related. Moreover, it scales from -1 to 1. First, the nearer the coefficient of correlation to 1, the stronger is the positive correlation. That is to say, both pairs will move higher and lower jointly. Second, the closer the coefficient of correlation to -1, the stronger is the negative correlation. In other words, both currencies will move in opposite directions. Third, a correlation value around 0 suggests an absence of correlation.
EUR/USD and GBP/USD are one of the most highly correlated forex pairs using the Tradingview correlation indicator.
Conclusion
To conclude, the forex correlation indicator is a statistical measure of how closely two trading instruments are correlated. However, this indicator can assist traders to understand the forex market movements and help them taking their decisions. Moreover, It allows users to lower their portfolio risk while increasing its return.