A statistical indicator of the extent to which currency pairs are related in value and will move together is called currency correlation or forex correlation. A positive correlation represents when two currency pairs appreciate at the same time, whereas a negative correlation occurs when one appreciates while the other depreciates.

Since it might impact their degree of risk while trading in the forex market, understanding and monitoring currency correlations is crucial for traders. This article will examine how forex correlation is determined and calculated, how it impacts trades and trading, and what tools may be used to track currency correlations.

## What is a correlation in forex trading?

The connection between two currency pairs is known as a foreign exchange-correlation. When two pairs of objects move in the same direction, there is a positive correlation; when they move in opposing directions, there is a negative correlation; and when the objects move randomly, there is no detectable relationship. An inverse correlation is another name for a negative correlation.

Due to the potential for a direct impact on forex trading results, frequently without the trader’s awareness, currency correlation is crucial for traders to comprehend.

As an example, let’s say a trader buys two distinct currency pairs that are negatively correlated. A common hedging strategy is to utilise losses in one to balance gains in the other. As both trades may result in a related loss or profit, buying two correlated pairs may quadruple the risk and profit potential. Because the pairs travel in the same direction, they are not independent.

## What is the correlation coefficient?

The correlation coefficient between two forex pairs represents the correlation’s strength or weakness. The range of correlation coefficients is -100 to 100 or -1 to 1, with the value reflecting the coefficient. Correlation coefficients are presented in decimal form.

Anything in the negative pair range of -100 indicates that the pairs travel almost identically but in opposite directions. In contrast, anything above 100 indicates that the pairs move almost identically in the same direction. “Almost equally” is a key distinction since correlation only considers direction, not magnitude. For example, one pair moves up 100 pips (percentages in point), while another pair moves down 70 pips. Even if the amount of movement differs, both pairs may have a very strong inverse correlation.

A reading is said to have a strong correlation if it is below -70 and above 70 since the movements of one are primarily mirrored in the movements of the other. The pairs are less correlated if the readings fall anywhere between -70 and 70, on other hand. Both pairs have minimal or no correlation relationship, with forex-detectable coefficients close to zero.

### Pairs trading

The correlation coefficient between two forex pairs represents the correlation’s strength or weakness. The range of correlation coefficients is -100 to 100 or -1 to 1, with the value reflecting the coefficient. Correlation coefficients are presented in decimal form.

Anything in the negative pair range of -100 indicates that the pairs travel almost identically but in the opposite directions. In contrast, anything above 100 indicates that the pairs move almost identically in the same direction. “Almost equally” is a key distinction since correlation only considers direction, not magnitude. For example, one pair moves up 100 pips (percentages in point), while another pair moves down 70 pips. Even if the amount of movement is different, both pairs may have a very strong inverse correlation.

A reading is said to have a strong correlation if it is below -70 and above 70 since the movements of one are primarily mirrored in the movements of the other. The pairs are less correlated if the readings fall anywhere between -70 and 70, on other hand. Both pairs have minimal or no correlation relationship with one another, with forex-detectable coefficients close to zero.

## What do non-correlated forex pairs mean?

When they move independently of one another, currency pairs are said to be non-correlated. This can occur when the currencies involved in each pair are different or when the currencies involved have distinct economies.

For instance, the US dollar is present in both the EUR/USD and GBP/USD currencies, and the economies of the Eurozone and Great Britain are closely tied. As a result, they tend to go in the same direction, but this is not always the case, as will be shown later in the article. There are no matching currencies for the EUR and JPY. In actuality, the US, Japan, Australia, and the Eurozone economies are all unique. As a result, the correlation between these pairs tends to be lower.

## The Bottom Line

Understanding how various currency pairs move about one another is important for becoming an effective trader and managing your exposure. While some currency pairs move in tandem, others may be opposites. Understanding currency correlation helps traders manage their portfolios more effectively. Regardless of your trading plan and whether you are trying to leverage your holdings or locate alternate currency pairs to diversify your view, it is crucial to consider the correlation between various currency pairs and their alternate views. These are __prevalent during session overlaps__. Keep an eye out for it.