Hello dear friends.
In analytical articles, I have repeatedly focused your attention on the correlations between trading instruments and how you can make money on it. I believe that thanks to earlier published charts with examples, you already have some idea of what it is. But still – this may not be enough, so I propose to consider this phenomenon in more detail in a separate note. By tradition, we start with terminology.
Correlation (from lat. Correlation “correlation, interconnection”) or correlation dependence is the statistical interconnection of two or more random variables (or quantities that can be considered as such with some acceptable degree of accuracy). Moreover, changes in the values of one or more of these quantities accompany a systematic change in the values of another or other quantities.
Consider the example of currency allied pairs AUD / USD and NZD / USD.
The figures clearly show the movement of currency pairs in one direction, i.e. there is a correlation of trading instruments.
Therefore, correlation is a multidirectional movement of trading instruments.
How can this knowledge be used in trade?
Very simple. If we know that some trading instruments repeat the movement of each other most of the time and at some point signs of correlation appear, then in the future with a high degree of probability this deviation will be leveled and they will again begin synchronous movement.
Those. during trading, we should monitor the allied currency pairs or other trading instruments for signs of correlation.
For example, recently I have already described the correlation between light oil and the Canadian dollar.
As you know, the Canadian economy is oil-dependent and the Canadian dollar rate very often follows the movement of oil quotes. Those. with a decrease in oil, the Canadian dollar should fall, and the USD / CAD currency pair should rise. But now the opposite situation is observed. Those. in the near future we should expect one of the most likely scenarios:
- flat oil and the growth of USD / CAD;
- oil and flat USD / CAD growth;
- oil growth and USD / CAD growth.
Therefore, you can open purchases on USD / CAD and #CL. However, it must be borne in mind that this technique does not provide for the use of stop orders, therefore, to limit losses, you need to trade on an account with a maximum leverage of 1:10 and gradually increase positions.
I want to note that I sometimes use the correlation between instruments during trading on my accounts, but I use this technique only as an additional filter to determine the most probable direction of movement.