How To Prevent A Double Exposure Trap: Currency Correlation Pairs

You've just entered a trade, you soon realise you're winning and there is another trade opportunity coming up that looks quite similar. Ask yourself, is it too good to be true?

Understanding whether two currency pairs are going to behave and move in a similar way or not represents a basic tenet of Forex trading. Access to currency correlation data allows traders to evaluate risk around a combination of positions more effectively. A correlation tool is an essential resource for measuring the real-time relationship between two currency pairs.

The correlated values on our embedded currency correlation are constantly updated and are a simple guide for traders assessing the level of risk on any given pair. Correlated currency will move in the same direction if they have a coefficient close to 100 and will move in opposite directions if the value approaches -100; a correlation value close to, or at, 0 means movements between two currency pairs are unrelated.

How you use the data depends on whether you’re managing risk or looking for modifications and changes in any given currency market.

Market sentiment is important

It may be prudent to understand whether the open positions in a portfolio are correlated. Traders with open trades across multiple currency pairs with strong correlations will clearly benefit from visual data that indicates the position of each pair. Should one currency pair reach its stop-loss position, for instance, it’s likely the other pairs will be exposed and an adjustment in the size of the positions will be required in order to avoid serious losses.

Long-term modification of the currency correlation typically suggests the market is experiencing a change. Should a currency pair de-correlate after several months of strong correlation, the currency correlation tool will visibly demonstrate how market sentiment has changed and traders can quickly and easily spot the beginning or end of any trend in the currency pairs and act accordingly.

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