What such currency correlations and as their traders do use?

With the selection of strategy for the trade on the market For forex it is necessary to remember that not one currency pair is isolated. In many instances economic situation abroad, the interest rates and the fluctuations of commodity prices influence more than one pair of currencies. Everything is interconnected on the currency market to a certain degree, and, knowing direction and degree of the interrelation between some pairs, trader can use this in its interests. The relationship between the currencies can be the very useful tool of trade. If you intend to accomplish operations more than with one pair, then for an increase in the profit it is necessary to consider the motion of one currency pair relative to another. the analysis of correlations is used for this. Correlations between the currencies are calculated on the basis of the exchange rates, and with the aid of the obtained numbers it is possible to determine the interrelation between the pairs. These data will help trader to diversify briefcase, to double positions without the additional investments into one and the same pair or simple to estimate risk on the currency transactions. With the correct use this method will help to maximally increase profit, to estimate risks and will safeguard from the unproductive, unprofitable trade.

Positive and inverse correlations: what they indicate and as to use them

Calculation of correlations between the currency pairs in your briefcase - outstanding method to estimate investment risk. Investing into the different pairs, you, possibly, think that you diversify your briefcase, but in reality many of them can in parallel change in one or opposite directions. Currency correlations are strong and weak and can last by weeks, months and even for years. The size of correlation shows, how closely or how oppositely moved the courses of two pairs within the specific period. Correlation value is represented in the decimal form, and the nearer it is to 1, the stronger the interdependence. For example, correlation between EUR/USD and NZD/USD is equal to +0,94. If it is inconvenient to use decimal fractions, then it is possible to express correlation in the percentages, after multiplying the number by 100 (in our case correlation between EUR/USD and NZD/USD it is equal to 94%). High correlation means that the courses of currency pairs change more or is less synchronous. Low correlation speaks, that the courses change differently. Consequently, high correlation between EUR/USD and NZD/USD indicates that the investments and into these pairs lead to the doubling of positions. Furthermore, it is not necessary to open long position on one pair and short on another, since an increase in the course of the first pair can provoke an increase in the course of the second. In the final analysis, the sum of your profits and losses will not be equal to zero, because courses of both pairs in the points differ. However, they move so equally that the discovery opposite positions can lead to the decrease of profit or even to the losses.

The motion of currency pairs is evaluated not only with the aid of the positive correlation; inverse correlation also can be very useful. As with the positive correlations, the nearer the number to -1, the more strongly the course oscillations of two pairs are connected, but this time they change in opposite directions. As an example it is utilized to vapor EUR/USD. During the strong positive correlation between NZD/USD and EUR/USD simultaneously EUR/USD has the strong inverse correlation with USD of/[SNR], which in the year composed -0,98, and per month -0,99. These numbers show that the pairs of currencies in question have strong tendency to change in opposite directions. Consequently, the discovery opposite positions to subject pairs is analogous with the discovery identical positions on the pairs with the strong positive correlation, i.e. it indicates the doubling of positions that also it is possible to lead to an increase in the risk of briefcase. But long or short position on both pairs, will be most likely, unproductive and it will lead to the almost zero sum of profits and losses, since courses of both pairs change oppositely. If one side of transaction brings profit, then another - losses.

It is important: correlations change

Everyone, who sometimes dealt to Forex, knows that the currencies are very dynamic. Economic situation, mood of market and price change each day. In connection with this with the analysis of currency correlations it is necessary to remember about the fact that they can change in the course of time. Strong correlations today in the following month can [oslabnut]. If you decided to use this method in the trade, then you must constantly track the interdependence of currencies. For example, for one month correlation between USD/[SA]D and USD/JPY composed 0,06. This is the very low index, which speaks, that a change in these currency pairs is practically in no way connected. But if we look to the index in three months, then let us see, what correlation was above - 0,12, on the sums of six months it was equal to 0,59 and in the year - 0,80. Thus, from this example it is evident that the connection between two lares became considerably more weakly in the last month. Prolonged strong correlation practically completely disappeared in short time.

Another example - pair USD/CHF and AUD/USD. As show data, the connection between them recently was strengthened. Correlation in the year is equal to -0,78, and on the sums of last month it composed 0,94. This it indicates that if the transaction on one pair will be profitable, then transaction on another, most likely, will lead to the losses. Even as a more significant example of correlation change serve pairs GBP/USD and AUD/USD. According to the data in the year, the correlation between them composed -0,87, i.e. in the long-term outlook their courses changed in opposite directions. However, in January - March 2005. correlation was positive (+0,24). Significant economic events, for example a change in the interest rates come out as the basic reason for a change in degree and direction of currency correlations.

Independent calculation of the correlations

Since the connection between the currency pairs usually changes in the course of time, their independent calculation is the ideal method to track direction and degree of correlations. At first glance this seems complex, but calculations can be simplified. More easily entire of correlation to obtain with the aid of the program Of [m]icr[o]s[o]ft Of excel: it is necessary to introduce into Excel the currency pairs, whose correlation must be calculated during the specific period, and then use special function. The most precise idea about the motion of currency pairs give data in one year, half a year, three months even one month. But you independently can solve, it is how much and you will analyze what indices.

The process of calculating the correlation for GBP/USD and USD/CHF will be the following. It is first necessary to gather the course data of two pairs. Then to organize them into the table: one column GBP, by another - CHF, in the cells are given the values of the weekly courses (it is necessary to use a last rate of change in the week with respect to the US dollar regardless of the fact, what period is examined). At the end two columns in the empty cell enter =CORREL. Then you will isolate data in one column, place comma and you will isolate the second column. The obtained number is the desired correlation. It is not necessary to renew data in the table each day, it is better to make this of times in two weeks or, at least, once per month.