Assets that have high correlation tend to move in the same direction. It is not recommended to open multiple positions with highly correlated pairs, since you will essentially be making the same trade twice. If the market turns against your position, this puts you in a vulnerable position. Forex traders who trade long on the AUDCHF or AUDJPY and EURJPY risk double exposure if they're highly correlated.
A forex strength meter is recommended as an additional confirmation by professionals.
A Forex correlation matrix allows you to see which currencies are correlated at a glance. This will allow you to avoid making trades and avoid double exposure to weak currencies.
There are many methods to use the currency strengths meter in trading. Each method is dependent on your trading style.
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If you're trading in the trend-direction, make sure to choose the pair that has the strongest and the weakest currency. Trades can be made in a range if you choose currencies with slight differences in strength.
If the movements are not in line with the trader's expectations, these positions can cause trade disruptions.
Also, keep in mind that the timeframes set for a particular currency will affect its strength. EUR can, for example be solid today but may not be as strong as it was in monthly analysis.
The level of risk in a trade strategy can be indicated by the correlation between different currency pairs. If we go long on EUR/USD or GBPUSD and they are both positively correlated, it could signal a double risk from the same position, especially if one currency is strong.
The strength meter's basic concept is to be considered a "filter" when making decisions. It allows us to tell, for example, if the US dollar has strengthened or fallen. This information is vital.
It is possible that one pair indicates a strong move while the other is just range. This signals traders to stay clear of trades with pairs that are correlated in the opposite direction. If EUR/USD is in a downtrend and GBP/USD is ranging traders should not trade GBP/USD as it carries higher downside risks due to USD strength.
It depends on your Forex trading style if you have to look at other times frames. You need the most recent data if your trades are intraday. If you're a long-term trader you will need monthly values.
A trader can avoid excessive hedging if the correlation strength of different pairs is known beforehand. If there is a negative correlation in EUR/USD and USD/CHF you will know that the pairs are moving in opposite directions. If you open long trades on both pairs, you will likely win one and lose the other.
Our site analyzes currency data daily in real-time, and determines strength. All changes to the page will be visible when you refresh it.