How to make profit using forex correlation?
Are you familiar with the concept called “correlation”? In simple terms, correlation is a mutual relationship or connection between two or more things. You can see a correlation in financial markets. Let me show you one simple trick with it!
So, guess, what Google and Facebook have in common? Yes, both are the top companies in the USA, but also they are huge advertisers. That’s why the dynamic of their stock prices are so similar. Therefore, looking at their price charts you see almost identical pictures. Here is the trick: when one is lagging, you can predict with a great possibility its future movement simply by looking at its twin. In other words, if the Facebook stock rises and the Google stock doesn’t rise yet, the Google stock could go up soon.
This trick also works for currencies! You will find a useful table below where you can see positive and negative correlated pairs. To make it clear, positive means they move in the same way and negative means they move in the opposite way.
Sometimes, the correlated charts can diverge. However, even in this case, you can also use the correlation to reduce your risks or even double your profit. Let’s say you decide to buy the AUD/USD currency pair. The secret is that you can take one or two correlated currency pairs and buy them too. In this example, you can buy NZD/USD and GBP/USD. If two of them go up and the third one goes down, you will be in plus anyway. Easy? You can compare charts by yourself and find other correlated stocks and currency pairs!
