How to calculate correlations

Calculating the correlation between currency pairs might seem difficult. However, doing this is not as difficult as it seems. All you need to do this is Microsoft Excel and historical data. Historical data is available for free in most charting platforms. Many data vendors also provide the data for a fee. Once you have calculated the data, you need to download it and export it to Excel. The best data to use to calculate correlation is a combination of 1 year, 3 month, and one month data. You can also narrow it down to weeks and days. In Excel, you should use the =CORREL (range 1, range 2) function. Since the correlation data changes, you should update it on a regular basis. Another strategy to get the correlation data is by the use of websites and brokers who provide the information for free. In Google, just search for currency correlations and you will find the information.

Interpreting the correlations

Having the correlated data is not enough. Interpreting it is the most important aspect in trading. The table below will help you a great deal in interpreting the data. In the table above, you can see three main areas: Perfect positive correlation, perfect negative correlation, and no correlation. In perfect correlation, the two currency pairs are most likely to move in the same direction. When the correlation is a perfect negative, the two currency pairs will move in different directions. If the correlation is 0, then no correlation exists. The following table is an example of an automated correlation table.

From the above table, a number of things are evident. One, the correlation figures are never the same. In the AUDCAD pair, the 1 hour correlation figure shows a negative correlation while the daily, 1 week, and 1 month pairs are positive correlations. In addition, it is evident that a perfect correlation of 1 is never possible. Therefore, it is very important to understand how currency pairs move in relation to one another. This will help you understand the exposure of each trade that you enter. Some pairs move in tandem with one another while others move in direct opposites. By having a good understanding of these issues, you will be at a good position to achieve success by avoiding mistakes that are common to traders.

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