Assets with high correlation move in a similar direction. This is why it is not a good idea to open multiple positions using pairs that are high in correlation. You are basically making the exact same trade twice. If the market is against you, this can put you in a very vulnerable situation. Forex traders who place long positions on the AUDCHF/AUDJPY or EURJPY are at risk of double exposure if they have high correlation.
Professionals recommend using a forex strength meter for additional confirmation.
Currency Strength Meter Supreme Edition - This currency strength indicator plugin is free for Admirals members. It contains 16 new indicators including the Forex correlation matrix. This allows traders to compare various currency pairs and view them in real-time.
You may need to consider other time frames depending on how you trade Forex. You will need more current data if you trade intraday. Monthly values are required for long-term traders.
A Forex correlation matrix shows you which currencies are closely related. You can then avoid making trades with these currencies and reduce your exposure to weaker currencies.
It is important to remember that the timeframes you give for a currency's strength will determine its strength. EUR, for example, can be strong in today's timeframe but is among the weakest on the monthly analysis.
Correlations between different currency pairs can indicate risk to trade strategy. For example, if EUR/USD and GBPUSD are positive correlated pairs, there is a possibility of double risk if one of them is strong.
The strength meter can be viewed as a "filter" for decisions. It can be used to determine whether the US Dollar is strengthening or falling, which is an essential fact.
You should dig deeper to see that the above positions expose you to double the risk of AUD and JPY. This can lead to trade losses if the movement is not in your favor.
Trade in the trend direction if you want to trade in the strongest currency pair. You can trade within a range by choosing currencies with slight differences in strength.
Traders can avoid unnecessary hedging by knowing the correlation strength between pairs in advance. A negative correlation between EUR/USD or USD/CHF can indicate that the pair is moving in different directions. Thus, if you trade long on either one or the other, you are likely to win on one but lose on the others.
Our site monitors forex data in real time and determines its strength. Refresh the page to see any changes.
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There are many ways you can use the currency strength meter to your trading. It all depends on your trading style.