What is correlation in Forex Trading?

A foreign exchange correlation is the connection between two currency pairs. There is a positive
correlation when two pairs move in the same direction, a negative correlation when they move in
opposite directions, and no correlation if the pairs move randomly with no detectable relationship.
A negative correlation can also be called an inverse correlation.

Currency correlation is important for traders to understand because it can have a direct impact
on forex trading results, often without the trader’s awareness.

As an example, assume that a trader buys two different currency pairs that are negatively
correlated. The gains in one may be offset by losses in the other, which is often used as a hedging
strategy. Meanwhile, buying two correlated pairs may double the risk and profit potential, since
both trades will result in a loss or profit. They are not fully independent since the pairs move in the
same direction.

Source:- CMC Markets BLOGPOST

Highly Correlated Currency Pairs in Forex

Examples of strong positive correlations Examples of strong negative correlations

(under the annual time frame): (under the annual time frame):

EUR/USD and GBP/USD (+0.89) EUR/USD and USD/CHF (-0.85)

EUR/USD and AUD/USD (+0.81) USD/CAD and AUD/USD (- 0.88)

EUR/USD and EUR/CHF (+0.93) AUD/NZD and NZD/SGD (- 0.78)

AUD/USD and Gold (+0.75) USD/JPY and Gold (- 0.78)

Correlation is usually measured on a decimal number scale, from -1 to +1, giving you a figure called
the correlation coefficient.

o A +1 correlation indicates that two currency pairs will move in the same direction 100
percent of the time. This is a perfect positive correlation. The correlation between EUR/USD
and GBP/USD is a perfect example of this. If EUR/USD is moving up then GBP/USD will also
be moving up.

o A -1 correlation indicates that two currency pairs will move in opposite directions 100
percent of the time. There is a perfect negative correlation between EUR/USD and USD/CHF.
If EUR/USD is rising, USD/CHF will be falling.

o A correlation of 0 indicates that the relationship between currency pairs is random, which
means there is no link between them.
Source:- OCTA FX BLOG POST

DXY {Dollar Index} Correlation With Currency Pairs

The DXY, or US Dollar Index, measures the value of the US dollar against a basket of foreign
currencies. Here's a list of correlations between the DXY and some common currency pairs:

1. DXY and EUR/USD: -0.95 (95% negative correlation)

2. DXY and USD/JPY: 0.70 (70% positive correlation)

3. DXY and GBP/USD: -0.90 (90% negative correlation)

4. DXY and AUD/USD: -0.80 (80% negative correlation)

5. DXY and USD/CAD: 0.85 (85% positive correlation)

Also, here's the correlation between XAU/USD (gold) and the DXY (US Dollar Index):

XAU/USD and DXY: -0.70 (70% negative correlation)

This indicates a moderately strong negative correlation between the price of gold and movements in
the US Dollar Index.

>>These correlations indicate the relationship between movements in the US dollar index and the
corresponding currency pairs. Again, it's important to note that correlations can fluctuate over time
due to various market factors.

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Correlation Filter

>>>This document is created and put together by:- @youthfxrising Instagram page.