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Forex Correlation Table: Are You Doubling Your Risk?

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An accurate Forex correlation table is a tool every Forex trader needs. It doesn’t matter if you’re a technical trader, fundamental trader or a combination of the two. If you’re trading currencies, you need an accurate Forex correlation table in order to properly manage risk.

In this article, I’m going to share the correlation table I use. I’ll also explain how you might be doubling your risk without even knowing it, and what you can do to correct it.


Why Are Forex Correlations Important?


Because the Forex market is made up of currency pairs, each pair is in some way related to another. Some currency pairs move in tandem, while others move opposite of each other.

Plainly stated, Forex correlations are important because you don’t want to make two of the same trade. Just as you don’t want to take two trades that contradict each other. These two situations can happen if you aren’t aware of Forex correlations. Here’s an example…

Let’s say you see a trade setup to go long on the EURUSD and also see a trade setup to go short on the USDCHF. If you take both trades you’re essentially doubling your risk. How? Because these two currency pairs are negatively correlated most of the time. So if EURUSD is going up, there’s a very good chance that USDCHF is going down.

There are two options if you find yourself in this situation.

  1. Only take one of the two trades
  2. Cut your risk in half on each trade

Although option two is feasible, it isn’t altogether logical in my opinion. Because the two currency pairs are almost exact opposites, both trades are essentially the same. Why manage two identical trades? It’s usually best to simplify things and take just one of the two trades.

You also don’t want to contradict yourself. Using the same example, let’s say you see a trade setup to go long on the EURUSD and at the same time see a trade setup to go long on the USDCHF.

What should you do?

One of those setups is likely to fail, right? We know this because the two currency pairs are negatively correlated. If you find yourself in this situation it’s probably best to go back to the drawing board and reevaluate your trade setups.

Now that we’ve discussed the importance of Forex correlations, let’s take a look at how we can control our risk using a correlation table.


What is a Forex Correlation Table?


A Forex correlation table makes life easy for a Forex trader by comparing correlations between various currency pairs. This allows us to quickly identify whether two pairs move in tandem or opposite of one another.

An example of two pairs that move in tandem (or close to it) are the AUDUSD and NZDUSD. This is because their economies share much in common, among other things. This doesn’t mean they move “pip for pip”, but at the time of this writing these two currency pairs have an 85% positive correlation on the daily time frame.

An example of two pairs that move opposite of one another are the EURUSD and USDCHF, as we discussed in the example above. At the moment these two currency pairs have a 94% negative correlation on the daily time frame.

One thing to keep in mind when it comes to Forex correlations, is that they do change over time. So while the AUDUSD and NZDUSD have shared an 85% positive correlation on the daily time frame over the past 50 days, that correlation drops to 38% over the last 300 days.


Time Frame Matters


Not all time frames are correlated the same. In fact the correlation between two time frames may even be opposite for the same two currency pairs.

Here’s a snapshot of the correlation between AUDUSD and NZDUSD across four time frames (going back 50 periods):

  • 5 Minute: -39.2%
  • 1 Hour: 14.3%
  • Daily: 85%
  • Weekly: 19%

As you can see, the direction and strength of the correlation greatly depends on the time frame you’re viewing. Of course I’m only concerned with the daily time frame as that’s what I trade and what I teach as part of my Forex trading course.


The Forex Correlation Table I Use


I’ll share the correlation table I use shortly, but first I want to go through a few basic steps on how to use the tool. The table is fairly straight forward, but these steps will help get you up to speed quickly.

Step 1

The first thing you'll notice with the Forex correlation table, is that you have a guide that explains correlation strength. Become familiar with this guide and reference it often if you must. It offers a quick way to measure if two pairs are correlated or not.


Step 2

The second (most important) step when using the Forex correlation table is selecting your currency pairs. This is where you'll choose the pairs you want to show up in the correlation table.


Step 3

This is where you can enter a custom correlation period. The default is 50 periods, which is what I use. If you do decide to increase or decrease this number, just know that it could adversely effect the reliability of the correlation. I've found 50 periods to be most accurate for the way I trade.


Step 4

Once you've configured steps 2 and 3 to your liking, click “Submit”.


The Results


After you click Submit, scroll down to see the results. As you scroll down on the page, you'll notice four different time frames for the currency pairs you selected.

Tip: Use your cursor and hover over the correlation you're interested in viewing. This makes it much easier to read the chart.

Here's an image of the daily correlation at the time of this writing. A positive number means the currency pairs are positively correlated, while a negative number means they're negatively correlated. A strong correlation is anything above 80, while weak/no correlations are anything below 60.

Without further adieu, here it is - the last Forex correlation table you'll ever need. I hope it's as useful for you as it has been (and continues to be) for me.

Use the Forex Correlation Table...

 

To clear the air, I have no affiliation with the developer of this tool, ForexTicket. I simply like to give credit where credit is due, and this has been the best Forex correlation tool I've ever used.


Don't Leave Just Yet


I'm always looking for feedback, so please leave yours in the comments section below.

Have questions? Even better! Just leave your question below and I'll respond ASAP.

Leave a Comment:

8 comments
Justin Bennett says

Thanks, Colin. It really depends on where I am in the trade. If I entered middle of the week and the trade setup is starting to fall apart by Friday, then I might close before the weekend. If I’m up 100 pips and everything looks good, then I’ll typically hold.

There are also personal decisions that go into it, such as your risk tolerance.

Reply
    Colin says

    Does that hold the same for news events as well?

    Reply
      Justin Bennett says

      Yes, the same holds true. I don’t pay attention to the news, with the exception of an occasional NFP.

      Reply
R says

The link to correlation table is broken….

Reply
    Justin Bennett says

    Thanks for the heads up. It should work now.

    Reply
Roy says

excellent table. thanks coach.
I was recently in two trades with the JPY.

luckily both markets move the same way, so was able to increase my overall profit. I will bookmark this table from now on.

Reply
Oluwadamilare says

About the correlation,I need to know if what it ,a only does is to help you understand d currency pairs to focus more attention to….
And oplease Justin do u have any article on currency strength and how to know the right pairs to trade

Reply
shuaibu isah says

After identify the positive pairs correlation currencies with 85%above in ur table. How do I know the trade is going bearish or bullish.

Reply
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