What is Currency Correlation?
Correlation
Forex Trading Glossary
Quick Answer: Currency correlation measures how pairs move relative to each other, with values near +1 moving together and -1 moving opposite. Traders use correlation to manage exposure, hedge positions, and confirm market themes.
What is Correlation in Trading?
Correlation measures the statistical relationship between two assets. Positive correlation means they tend to move in the same direction, while negative correlation means they move in opposite directions. Understanding correlation is crucial for diversification and risk management.
Correlation Types
- +1.0 (Perfect positive): Assets move identically together
- +0.5 to +1.0: Strong positive correlation
- 0 (No correlation): Independent movement
- -0.5 to -1.0: Strong negative correlation
- -1.0 (Perfect negative): Assets move perfectly opposite
Common Forex Correlations
- EUR/USD vs USD/CHF: Strong negative correlation
- AUD/USD vs NZD/USD: Strong positive (commodity currencies)
- USD/JPY vs Nikkei: Positive correlation
- Gold vs USD: Generally negative correlation
Correlation changes over time based on market conditions. Monitor correlations to avoid overexposure to the same directional risk.
Related Terms
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