Correlation strategy forex trading
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Correlation is a statistical measure of how two securities move in relation to each other. If you place two highly positively correlated pairs on top of each other, it will look like almost two identical plots. Alternatively, perfect negative correlation means that if one security moves in either direction, the second security that is perfectly negatively correlated will move by an equal amount in the opposite direction.
If one security moves up or down, there is as good a chance that the other will move either up forex correlation pairs strategy dubai down, but the way in which they move in tandem is totally random. What is 'Time Dependence' and 'Period Dependence'? In order to be an effective trader, forex correlation pairs strategy dubai is important to understand how different currency pairs move in relation to each Other. Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to know the correlation between various currency pairs and their shifting trends.
This will allow you to discover current correlation and the historical data on the correlation you have chosen. What forex correlation pairs strategy dubai the Deal with Currency Correlation Why Bother With It?
What it comes down to is that currency correlation should be part of your overall money management strategy, as well as you how approach risk management. Let's say you have a choice of mutual funds in a You wouldn't want to pick out five high tech stocks as the only mix in the portfolio does the dot-com crash ring any bells?
But, when it comes to trading, most traders see each trade independently, and that can be dangerous. You enter a buy. Do you take it, or not? Of course, the time frame you are trading must be considered. But, if your first trade is still exposed you have not cleared your stop loss into profitthen you still have risk at play. Now here's were correlation comes into play. If the Aussie is highly correlated to the Euro, that means it will essentially be making the same move.
You say, " Great, twice the profit ". Yes, if forex correlation pairs strategy dubai trades are successful. It could mean twice the loss, too!
Why enter a second trade of the exact same move? That's not diversification of risk at all. If you feel so inclined, and the currencies are highly correlated, maybe it would be easier to add to the existing position of your Euro trade. After all, then you only have to track one chart, one currency pair, etc. Or better yet, let the risk you have in that Euro trade play itself out.
Successful traders know they don't have to take every trade, and there will always be "another" trade. FOMO " Fear Of Missing Out " is the psychological driver of our uncomfortableness in thinking we are missing a trade, and it's one those emotional head-game things that must be overcome in order to be a successful trader In addition to risk doubling when trading two highly correlated pairs either positive and in lock step, or negative and mirror imagethere is forex correlation pairs strategy dubai the time management consideration.
If I have some sort of alert mechanism from a technical trading perspectivehighly correlated pairs will sound-off at nearly the same time.
Let's say you are trading minute charts, and you have two highly correlated pairs. And, you have an alert for when RSI reaches a certain level It's not possible from a logistics standpoint to attempt to deal with opening two separate trades on two separate charts. Likewise, as mentioned, if they have a high degree of correlation, the risk is that they will be both win or lose as a set, and so if exposure is there stop loss not yet at Break-Evenforex correlation pairs strategy dubai, you are doubling your risk.
The odds of one winning and one losing is against you, it's not a hedged situation. Now, when you have uncorrelated pairs in your curreny-pair mix, the odds are you won't be getting alerts at the same time, and thus one trade will most likely clear it's stop to break even before you get forex correlation pairs strategy dubai alert on another pair. Currency Correlation is Not Static Currency correlation changes within the time period being measured. Never look just once and forex correlation pairs strategy dubai the correlation remains the forex correlation pairs strategy dubai Here are some Currency Correlation Table sources: If you prefer that visual over a table, merely ensure you choose the time period you are trading.