If you are not using correlation of some type you are probably finding that some of your trades are working and some are not. This simple trick in forex is used by so many professionals. Although it is not shared very often it really should be the extra decision point for all traders as standard. What do i mean by correlation exactly? Well i am referring to confirming a trade by looking at an opposing trade or by looking at a supporting pair.
Below are the Common Supporting Currency Pairs
Supporting currencies are pairs which do relatively the same thing when another pair does the same thing. So if you see a good sell signal on the aud, if you see the same on the Euro or Gbp or Nzd then that most likely is a great trade. If not then the trade can have less reliability.
- Aud / Usd
- Nzd / Usd
- Euro / Usd
- Gbp / Usd
By seeing the same confirmation on another pair it increases the probability of success. If one says sell they all should say sell.
Below are the Common Opposing Currency Pairs
These opposing currencies can also be used for confirmation as well. Let’s say we see a good sell on the Australian vs Usd, say a good a good pin bar sell at resistance. If on the the Usd vs Canadian you see a buy signal at a good support what does this tell you? This tells you that this sell on the Australian is very high probability. It gives that extra edge for entering that trade and i tell you any edge in forex is needed to create gain each month.
- Usd / Cad
- Usd / Chf
Okay so back to my point, by using these as support or opposing decisions we can better our trading styles. It is important to see these swings as well as not only can it improve your style on one pair but also once tuned you can start to take some trades blindly as well. What do i mean by blindly. I mean that when enough correlations exist all correlations will follow suit at least to some extent as well. That way if Usd / Cad is indicating a big sell, and the Aud / Usd is indicating a good buy we can then blindly take a buy on the Nzd in general. If you look through the charts you can see what i mean.
Usd / Cad Ranging up above would mean that the Nzd Dollar would be ranging down to be an opposing correlation. Let’s see..
Nzd Dollar ranging down on the 1 hour chart, the opposite to the Usd / Cad Chart.
Another example, being the Euro / Usd, it is dropping very quick due to the economic crises, it is ranging down strong as seen above.. Would that mean that the Usd / Chf is rocketing up..? Let’s have a look hey..
I think so, look at those strong peaks and then look at the Euro chart above, each move is very correlated so that means each chart can be used as confirmation for each other.
Above – Some examples of correlation in action
You now maybe asking why correlations work?
They work overall because they all have a common denominated currency between them and that is the US. This currency moves the market in general patterns, just look at the charts, when the Usd / Cad goes into a up range generally 9 times out of ten the Aud / Usd moves down into a range. They are the opposite in a way.
So not only by using correlation you will get better at trading, you will also improve overall because you will be able to predict better complete market moves on multiple pairs. This is a very important aspect to anyone’s success in this business.