Forex Trading Knowledge of Currency Correlation 4 - How to profit in trading using currency correlation strategies

forexbrokerrebateprogram 2023/2/25 7:47:48 3Views

Use the table below as a guide to forexrebatebestterpreting the forexbrokerrebateprogram coefficients between different currency cashback forex - 1.0 fully inverse correlation - 0.8 stronger inverse correlation - 0.6 strong inverse correlation - 0.4 moderate inverse correlation - 0.2 weaker, low inverse correlation 0   no correlation completely r forex broker rebate programom 0.2  nbsp;Weak positive correlation, irrelevant0.4 Weak, low positive correlation0.6 Moderate positive correlation0.8 Strong, high positive correlation1.0 Completely positive correlationNow that you know what currency correlation is and how to interpret the data in the charts I bet youre wondering how currency correlation makes trading more successful? Why should you have this wonderful skill in your trading tool bag?1. Eliminate trades contrary to expectationsUtilizing correlations can help you stay out of positions that cancel each other outAs explained through the previous tables and examples, we know that 100% inverse moves in autorebateforex and USD/CHF respectivelyIt makes no sense to go long on EUR/USD and USD/CHF, sometimes at great The cost in addition to having to pay the spread twice, any movement will move one group of currency pairs up and the other group down We want to be rewarded for our hard work! 2. Leverage gains…… or losses You have the opportunity to double the size of the position to expand gains Lets look at the relationship between EUR/USD and GBP/USD in the previous example These two currency pairs have a strong There is a strong positive correlation between these two pairs, with GBP/USD essentially moving step by step with EUR/USD Opening a long position in each of the two pairs is effectively the same as opening a long position in EUR/USD, doubling the size of the position you are actually using leverage! If everything goes well, there will be a lot of gains, if it goes wrong, there will be big losses.3. Diversifying risk Knowing that correlations exist will also allow you to use different currency pairs as you see fit You can diversify your risk by trading two pairs that move in the same direction, instead of always trading only one pair Choose a pair that has a strong (around 0.7) positive correlation For example, EUR/USD For example, EUR/USD and GBP/USD tend to move in the same direction. This does not give you the opportunity to diversify your trades and helps reduce your risk. 4. Hedging risk Although hedging brings smaller gains, it can also help you minimize losses if you open a long EUR/USD position and it starts to deviate from your setup, by opening a smaller long position in a currency pair that moves inversely to EUR/USD, such as USD/CHF major losses are avoided! You can take advantage of the difference in value per pip between currency pairs For example, although EUR/USD and USD/CHF are perfectly negatively correlated, they have different values per pip Suppose you trade a $10,000 mini lot and EUR/USD is worth $1 per pip, while USD/CHF has a value per pip equal to $0.93 If you buy a mini lot of EUR/USD, you can hedge your position by buying a standard lot of USD/CHF If the EUR/USD falls by 10 pips, you will lose $10 but your USD/CHF trade takes a profit of $9.30 Now you only lose $0.70 instead of $10 Although hedging sounds like the best thing ever, it has its drawbacks If the EUR/USD rises, your gains will be limited due to damage in the USD/CHF position In addition, correlations can weaken at any time 5. Confirm breakouts and avoid false breakoutsYou can use currency correlations to confirm trade entry and exit signalsFor example, if EUR/USD seems to be testing an important support level and you notice this price behavior, and you intend to trade on a breakout to the downside, you can use the currency correlations to confirm trade entry and exit signals. Behavior and intend to go short on a breakout to the downside Since you know that EUR/USD is positively correlated with GBP/USD and inversely correlated with USD/CHF and USD/JPY, you can check your judgment by watching the movements of these three currency pairs to see if they echo EUR/USD You notice that GBP/USD is also trading near an important support level, while USD/CHF and USD/JPY are both trading at important resistance levels This This tells you that the recent move is related to the dollar, thus confirming that a breakout in EUR/USD is possible because the other three pairs are moving in line with it, so you decide to trade on a breakout. The price may slip below the support level you are monitoring, but since the other three pairs are not moving in proportion to the EUR/USD, the price movement lacks persistence and the price will return above the support level, leading to a false breakout if you still want to trade this setup because you are not getting much correlation certainty from the other pairs. You can reduce the risk and trade wisely with a smaller position size
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